TESCO EYES U.S. MARKET FOR ONLINE GROCERY VENTURE

DAN ALAIMO

PASADENA, Calif. -- Executives from Tesco.com, the online grocery service of food retailer Tesco, Cheshunt, England, said the company's high level of success with its online grocery venture can be duplicated or surpassed in the United States.

The company has been actively seeking a partner for a U.S. online joint venture for six months and has tested with two unnamed North American retailers. "I think you will see something shortly," said Gary Sargeant, founder of Tesco.com and now its director of international operations, when asked if the company might soon be entering the U.S. market.

Sergeant, along with Dean Brown, Tesco.com's director of business development, spoke during the SN/Executive Technology Summit on Internet commerce here last week. Tesco.com launched in the Republic of Ireland in October and plans to be operating out of 16 stores there by May. Additionally, "we are going to Korea, where Internet penetration is far greater than in the U.K., and we think we will be very successful there," Sargeant said.

But the U.S. is the big target for Tesco.com's store-based system, "because we think it will work better here than anywhere," he said.

"We are looking for a joint venture with another retailer who has a brand and has the infrastructure, the store network," Sargeant said. "We will bring the knowledge of how to implement this inter-store network, as well as all the software and hardware that goes along with the picking solution."

Tesco said it aspires to be more than just another outsourced online systems company, and is willing to put up the money to make it work. "We are looking for a stake of 30% to 40% to 50%," Sargeant said. "So we are not only bringing capability, but we are bringing capital as well.

"We want to be a retailer with the other retailer. We don't just want to be a provider of software. We are a retail company."

Sargeant said he would like to start with a big U.S. retailer, but would be willing to work with a smaller one. "We know we have something that is going to really work. Once we show people in the U.S. that it works, they will be queuing up."

Sargeant has noted the current state of disarray among online grocery retailers in the United States, and said he believes Tesco.com can duplicate its track record here.

The company has 90% coverage of the U.K. population through a network of 240 stores. It has 300,000 regular customers, a number that is growing, according to Sargeant, and generates 72,000 orders a week with an average value of $125. In addition to groceries, the retailer also sells compact discs, videos, financial services, clothing, gift items and wine, among other products.

Meanwhile, the Tesco system is inexpensive to roll out when compared to the investments some "pure-play" Internet grocers have made, according to Sargeant. "We achieved national rollout in under 12 months in the U.K.," he said, adding that it cost Tesco $35 million to extend to the 240 stores and reach 20 million households. "This compares very favorably to the performance of some warehouse operators, whose facilities can cost up to $35 million and cover only a million or less households."

The economics for this store-based model are more favorable in the U.S., Sargeant observed, noting that assortment is the key to order size and profits. "Typically, a U.S. supermarket has 5,000 to 10,000 more SKUs than a U.K. supermarket," he said, "and that will improve your basket size.

"Profitability increases with the range [of products] offered. We believe a full range is fundamental, and absolutely key to success in this market."

Also, margins are comparable if not better in the U.S., labor costs are lower, picking productivity is greater, vehicle costs are lower, and consumer demand, because the U.S. has more two-income households, should be higher.

"There has been a consumer revolution," Sargeant said. "There is demand for grocery home shopping in the U.S. Choosing the right business model is critical. Store-based fulfillment wins hands down. It delivers the right customer offer. It capitalizes on first-mover advantage. And it is profitable.

"It worked for Tesco in the U.K. We won new customers, we drove like-for-like sales in existing stores, and we gained market share. And it can work for you in your stores in the U.S."