THE BRITISH ARE COMING! The British are coming!
More than 200 years after Paul Revere's famous ride, his warning was sounded again in 2006 — this time in Southern California, Arizona and Nevada — as Tesco, the London-based retailer, announced plans to open up to 300 neighborhood grocery stores over the next five years in the western U.S.
Tesco said it plans to begin opening locations late next year, with expectations of breaking even two years later, at an investment of up to $2 billion over a five-year period.
Analysts estimated Tesco could be generating more than $3.5 billion in annual sales in the U.S. by 2011.
In addition to opening stores, Tesco also plans to build its own distribution facilities — a 1.4 million-square-foot warehouse in Southern California on an 88-acre site in Riverside that it acquired in May and a 1 million-square-foot facility in Phoenix.
The company said it will also be bringing two of its United Kingdom-based suppliers — Natures Way Foods, which produces prepared salads, and 2 Sisters Food Group, a poultry processor — which are expected to establish sites in Southern California adjacent to Tesco's warehouse.
There has also been speculation Tesco may be interested in acquiring some assets in the Northeast, possibly in a deal with Ahold, “and U.S. grocers should take this threat seriously,” said Perry Caicco, an analyst with CIBC World Markets, Toronto.
Tesco said its West Coast stores will emphasize fresh products and prepared meals, along with a selection of packaged goods, mostly private label, in units averaging 15,000 square feet.
“Tesco's plan is quite ingenious,” according to Caicco. “It is attempting to exploit a distinct void in the market: the dearth of high-quality, convenient meal solutions for mobile, time-starved customers.”
Though the company has not said yet what the stores will be called, observers expect the name to be Tesco Fresh & Easy.
According to Patricia Baker, a Montreal-based analyst for Merrill Lynch, Tesco's format “is aimed at the heart of where the consumer mind-set is today. The [Fresh & Easy] brand signals a focus on fresh food, which is possibly the top differentiating factor among food retailers, and convenience, which is more important than ever. Price is also very important and something Tesco will not be able to ignore.”
The stores will reportedly be similar to the 800 Tesco Express stores the company operates all over the United Kingdom, though those stores, at 3,000 square feet each, are considerably smaller. They will also be larger than the typical U.S. convenience stores, which run 2,000 square feet to 5,000 square feet.
“The large box is a good indication Tesco is going after the conventional grocers in a big way,” Baker said. “In essence, supermarkets could lose share as Tesco attracts the grocery shopper looking for a convenient alternative.”
Caicco said he doubts Tesco's small-store format will take a large amount of sales away from conventional operators, though that possibility must be taken seriously, he said, noting that many of them did not take the threat of Costco seriously when it began opening warehouses.
“Realistically, the impact on the grocery sector is probably minimal — about $3.5 billion in sales (4.5% of the Southern California market) if everything goes right.”
Simon Uwins, chief marketing officer, Tesco USA, told SN Tesco opted to enter the U.S. in the West “because the western U.S. has a vibrant economy that's growing, and we believe we can be and do what we want there.”
He said the stores will be based on the Tesco Express format, “but the U.S. stores will not actually be the same. People's needs vary from market to market, and these stores will be a unique format developed specifically for this country, geared to what American consumers are telling us they want.”
Grocery customers tend to be fickle, ready to change shopping habits when something better comes along, said one London analyst. “If Tesco gets its proposition right, I think they can capture customers.”
According to another observer, “[Tesco] is a brand that is relatively unknown to the U.S. consumer, so its strategy has to be to create a niche, something that's different that the consumer isn't currently getting from the existing participants.”
Tesco's decision to enter the U.S. market surprised some observers, who said it marked a shift from the company's emphasis on expanding in emerging markets in Europe and Asia, including an entry into China in 2004.
“[But] they are looking to become increasingly global,” the London analyst said, “and you can't really get global unless you have some sort of presence in the U.S.”