Tesco Sees Potential for Substantial U.S. Chain

ELLIOT ZWIEBACH

EL SEGUNDO, Calif. — Although its Fresh & Easy Neighborhood Market locations will be small, Tesco is apparently thinking big.

Sir Terry Leahy, the company's chief executive officer, told analysts that Tesco's planned U.S. banner, Fresh & Easy, has the potential to eventually rival Tesco's 1,900-store presence in the United Kingdom, the Financial Times of London reported last week.

He also said the reason Tesco is establishing a U.S. base is that “the U.S. is clearly an enormous part of the world's spending power. The U.S. economy is seven to 10 times bigger than the U.K., so it is one of the markets that can contain a business the size of Tesco in the U.K.”

In comments on the company's corporate website, Leahy said Tesco is excited about its plans for the U.S. “We intend that we'll grow as rapidly as we can, and if we're right and the thing is as successful as we expect it to be, then we have the potential to develop, in Tesco terms, a very substantial business in the United States.”

Leahy's comments about the potential size of Tesco's U.S. presence were made in response to analyst's question and are not necessarily the company's formal goals, a Tesco spokesman told SN.

The company has not indicated when it will open its first U.S. store, though it has said previously it will not happen until construction is completed on an 820,400-square-foot distribution center in Riverside, Calif., that is scheduled to open sometime during the third quarter. The Fresh & Easy Neighborhood Markets will be about 10,000 square feet and are expected to focus on fresh, convenience and private-label prepared foods.

During a conference call with analysts last week to discuss financial results for the year, Leahy implied the company may open several stores at once across its four-city target area — Los Angeles, San Diego, Phoenix and Las Vegas — when he said it will open “a significant number of stores at launch,” adding, “We have made good progress in obtaining quality real estate for those openings.”

Tesco has also reportedly scouted sites in Sacramento, Calif., and Colorado for future expansion.

For the year ending Feb. 24, Tesco sales were up 10.9% to $77.1 billion (U.S.) and profits rose 20.5% to $38.1 million. Sales in the United Kingdom increased 9% — with same-store sales, excluding fuel, up 5.6% — and international sales were up 17.9%.

Tesco said it will begin formal reporting of U.S. performance “separately within our international operations from opening.”

The company said the cost of recruiting and training store associates in the U.S., combined with other prelaunch costs and initial losses, will result in a planned increase in estimated start-up costs to around $130.4 million in 2007. “Thereafter, we expect initial trading losses to diminish and the business to move into profitability during its third financial year of operation.

“Our intent remains to commit some 250 million pounds [$501.5 million] of capital per annum to the U.S. going forward, although given the phasing of our investment and the higher leasehold element of the early stores, capital invested last year was lower, at 89 million pounds [$178.5 million].”

Leahy said Tesco is following the same pattern of format development in the U.S. it followed in opening Express stores in Central Europe, Thailand, Japan and South Korea.

“These formats have certain principles in common — what they offer is local, designed by local teams for local customers,” he pointed out.

Commenting on legal challenges Tesco faces in California, where an environmental group is seeking to block construction of its warehouse, Leahy said, “I think it's part of doing business in the U.S. that you get these various legal challenges and claims, particularly in California. [But] we have got experienced people, and we are dealing with them very well.

“I don't think they will go away [because] from speaking to most big firms that operate in that part of the world, it's part and parcel of doing business.”

Tesco officials said recruitment and training of staff for its U.S. stores will begin soon. To recruit employees, the company is using the website it launched two weeks ago — www.freshandeasy.com — as well as a newsletter, in English and Spanish versions, that is being sent to potential customers in some of the areas where the company plans to open stores.

On the page headed, “A Great Place to Work,” the newsletter says Tesco is looking for people “who can work well in a team and understand that it's important to offer the friendliest shopping experience along with the freshest foods.”

The website and mailer also describe the Fresh & Easy format, saying: “Smaller than the usual supermarket, our 10,000-square-foot shops will be easily accessible and offer everything from everyday staples to gourmet items. Lots of fresh and delicious food choices, including pre-prepared and organic foods, will make healthy eating convenient and affordable.

“In particular, our own Fresh & Easy line of products will have no added trans fat and no artificial colors or flavors.”