The British are coming. Or are they?
A slew of reports out of the United Kingdom in recent months have suggested that Tesco - the U.K.'s largest grocer and a growing power player in the global retail scene - has set expansion sights on the United States. But thus far, those reports have produced little more than flat denials from U.S. retailers, and no comments from Tesco itself.
Analysts and observers contacted by SN said that while a deal between London-based Tesco and a U.S. retailer is a likely outcome of globalization at some point in the future, they would be surprised if Tesco felt any pressure to make a deal - particularly a big one - immediately. Just as likely, they said, talks between Tesco and U.S. chains such as Meijer, H-E-B and Wegmans - all mentioned as possible Tesco targets in trade reports recently - could be as much about sharing knowledge as sharing headquarters.
And, they added, considering that strategies developed by Tesco have been adopted by U.S. retailers such as Safeway and Kroger, there's a feeling the U.S. needs Tesco more than vice versa.
"Tesco's skill set is what the U.S. needs," said Burt P. Flickinger III, managing director, Strategic Resource Group, New York.
According to David S. Rogers, president of DSR Marketing, Deerfield, Ill., Tesco could realize benefits of a U.S. investment primarily to yield knowledge the company could use as it competes on a global stage with Wal-Mart, Bentonville, Ark. Tesco has fought off Wal-Mart's Asda chain successfully in the U.K., but battles between the giants in places like Japan and China are just beginning.
"I know of nothing concrete about the rumors we've been hearing," Rogers said. "All I would point out is that the companies you hear [Tesco] have talked to are the same sort of companies you'd talk to if you wanted to know general information about dealing with Wal-Mart or improving ways of doing things."
The list of U.S. companies with proven success against Wal-Mart is a short one, Rogers said.
"If you wanted to know how to compete with Wal-Mart, you wouldn't want to talk to Winn-Dixie - they could only tell you how fast to put the white flag up," Rogers said.
With annual sales in fiscal 2004 of around $44 billion, Tesco is admired for its innovation in areas such as Internet shopping, customer research and expanding product offerings and store formats. Founded as a grocery chain in England, Tesco today offers a range of clothing, home goods, financial services and mobile phones in a variety of store formats in countries throughout Europe and Asia.
A recent report from analysts at Credit Suisse First Boston's offices in London argues that speculation regarding where Tesco will go as it expands internationally overlooks the point that its 10-year-old globalization strategy appears to be working successfully and methodically: "In our view many column inches are wasted [on speculation] and miss the main point on international [expansion] - namely its increasingly mature capital base and its likely growth in returns."
Credit Suisse noted that Tesco's expansion has been similar wherever it goes - it seeks partners with experienced management and superior infrastructure that value local marketing and a multi-format approach. Generally, it has favored entering new markets via a small acquisition or joint venture, allowing the local leadership of the company to continue. Wal-Mart, by contrast, often puts U.S. executives in charge of operations in foreign countries, as it did recently in naming Ed Kolodzieski its chief executive in Japan.
Tesco's foreign investments begin as a "trial" and tend to grow deliberately through development of multiple formats, the report added, with its more mature international markets supporting investments in newer geographies.
"Tesco's international investment should be seen in the context of a very long-term plan," the report said, noting that, while possible, any U.S. expansion would likely follow the same deliberate path. "That said, we think Tesco could consider the U.S. attractive and could be a highly successful operator, particularly in the Northeast and Western Seabord."
Other observers acknowledged that trade reports suggesting Tesco interest in a company like Meijer pass the common-sense test, whether or not overtures to a business combination were made. (When a British trade journal in late November reported Tesco was close to announcing a $4.5 billion joint venture with Meijer, the story was quickly dismissed by the Grand Rapids, Mich.-based retailer as "completely not true.")
"I think it's true that Tesco has a team in the United States and they have been looking," said Neil Stern, senior partner at McMillan/Doolittle, Chicago. "Tesco has a lot of nonfood strengths, so picking up someone like Meijer, that has a significant nonfood operation, makes a lot of sense. But I don't think they have to do anything if they don't want to."
One analyst, who asked not to be identified, said a Tesco U.S. investment might not necessarily be with a supermarket company. "They operate everything from clothing stores to gas stations and maybe those would offer better growth prospects," the analyst said.
Flickinger said he could envision a future where Tesco merges with Kroger, saying such a partnership could provide an "exit strategy" for shareholders of the latter. But such a combination, he acknowledged, could be a long way off. "It would be an absolute perfect fit," he said.