CONVENIENCE, U.K. STYLE

MARK HAMSTRA / NINA JONES / ELLIOT ZWIEBACH

Americans and Britons may speak the same language, but the term "convenience store" has evolved to mean two different things on either side of the Atlantic.

Now that London-based Tesco has revealed its plans to enter the U.S. with a convenience store format, retailers here might be wondering whose definition of convenience the global company is using.

In the U.K., the concept of convenience food retailing has come to be represented by a type of store not widely seen in the U.S. - small-footprint stores at train stations, in town centers and along roadways that specialize in prepared, heat-and-eat meals and fill-in grocery shopping. They carry wine, produce and sometimes feature fresh-baked breads. Tesco is expected to open something similar on the West Coast next year, although the company has not yet disclosed details about the precise format it plans to create for the U.S. market.

Unlike the U.S., the U.K. has evolved a significant convenience model in which these small-format stores are owned and operated by their larger supermarket parent companies and leverage their brand equity.

In the U.K. and several other countries, Tesco operates a concept called Tesco Express, which is smaller than 3,000 square feet - larger stores are regulated to limited trading hours - and in the cities, a larger banner called Tesco Metro, which measures around 10,000 square feet. The No. 2 supermarket operator, Sainsbury's, London, has similar formats in its Sainsbury's Local and Sainsbury's Central. Tesco has about 546 Express stores in the U.K. and 800 in all the countries where it operates, while Sainsbury's operates about 250 such stores.

"That's not much in terms of the context of 40,000 grocery stores in the country, but it's an increasingly important element in the mix," said Richard Perks, director of research, Mintel, London, which recently released a study of the convenience industry in the U.K. "You wouldn't expect to go there for your primary shop, but you can get fresh food, milk, ready meals - something to eat that evening."

Marks & Spencer, the London-based department store retailer whose stores feature a significant grocery offering, has also been at the forefront of offering small-format stores featuring prepared foods. With the recent acquisition of 28 convenience stores from retailer Iceland, M&S will operate 171 M&S Simply Food locations. The company recently described the stores as "very profitable" and said it plans to add another 100 locations in the next two years.

The Mintel study found that the convenience store sector in the U.K. grew by about 31% from 2000 to 2005, and it estimated that last year about 19% of all sales by food retailers were made by their convenience outlets. The U.K. grocery market is estimated to be about $178 billion.

The traditional North American convenience store - exemplified by 7-Eleven - has not evolved as a significant competitor to the traditional supermarket, but instead as a traveler's aide for motorists. The channel generated about $395 billion in sales in 2004, the most recent year for which it has released statistics, and much of that was in gasoline, according to the National Association of Convenience Stores, Arlington, Va.

"The U.S. model of convenience is smokes and Cokes, some candy and beverages, but really not in any substantive way in the fill-in grocery business," said Neil Stern, senior partner, McMillan Doolittle, Chicago. "Our evolved convenience stores are a traditional convenience store with a bolted-on food-service model. With that as a model for convenience stores in the U.S., it's not much of a factor for the grocery business."

Some exceptions include the Wawa and Sheetz chains, which feature extensive prepared-food offerings. Others, including 7-Eleven, have sought to expand their perishable offerings. Drug stores, too, have increasingly served to provide fill-in grocery shopping.

Stern argues that traditional supermarkets in the U.S. have to some extent filled the role of providing convenience in the form of quick fill-in trips, especially as they add more self-checkout lanes and experiment with placing prepared foods and fast-moving products like milk and bread closer to the entrance to offer a speedier alternative to a full-store shop.

"The grocery stores themselves get a significant number of transactions that are convenience-based," he said.

Some U.S. supermarkets have experimented with small boxes designed to cater to fill-in shopping needs and offer the convenience of prepared meals for same-day shopping. Harris Teeter has tried building some Harris Teeter Express stores, Ukrop's has its Joe's Market, and Publix and Giant Eagle opened convenience stores that leverage their own brands.

Stern said part of the challenge in operating small-format stores is determining what products to offer.

"The people who have been successful in small formats haven't gotten there by editing - they have gotten there by creating different propositions, like Trader Joe's," Stern said. "Trader Joe's is not taking a 50,000-square-foot grocery store and making it 10,000 square feet. They have really created a different kind of animal for the eating proposition. I suspect that is more like what we will see from Tesco in the U.S. instead of a shrunk-down box.

"Tesco in a sense has said, 'We have found a need in your market that you guys haven't exploited.' Regardless of what that need is, I don't think you are going to see a 3,000-square-foot version of Tesco Express, like they have over there. I don't think it's possible in that sort of space to offer the selection that you will need to satisfy U.S. consumers."

He estimated that U.S. supermarkets carry more than double the assortment found in typical British supermarkets.

Some U.S. supermarket companies - including Kroger, Ahold USA and Marsh - operate traditional convenience stores, although those are all managed independently within the companies and follow the typical U.S. model.

"The distribution needs of running a convenience store, which are small package sizes and small loads, are very different from the distribution model of running a grocery store," Stern said.

In the U.K., third-party vendors supply Tesco with store-brand prepared meals, which Tesco then distributes itself from its warehouses.

Lifestyle Differences

The disparity between the way convenience stores have evolved in the U.S. and the U.K. may be based in part on lifestyle differences between the two countries. In the U.K., convenience food retailing has sprung up around the country's mass transit system - in fact, one of the most common places to find a Tesco Express is at train stations. In the U.S., convenience stores have evolved instead along the roads where commuters are traveling in their cars.

"In the U.K., you've got these convenience locations that are driven by that consumer who's coming home from work, vs. people in the U.S. who are on the road," Stern said. "The need states are very different. That's a fundamental driver behind the format that's emerged in the U.K. vs. what exists here."

As a result, convenience stores in the U.K. may not be competing against traditional supermarkets so much as they are competing against restaurants, according to Perks of Mintel.

"It's certainly my belief that the distinction between a convenience store and a fast-food restaurant is going to become very blurred indeed," he said. "When you come home from work, you can either go to a convenience store and get something, or you can nip out for a pizza."

In some locations, the stores offer sandwiches and other lunch fare to capture business during that daypart, but to a great extent U.K. retailers focus on complete, prepared dinners. Breakfast items are minimal - another difference from U.S. convenience stores, which capture a significant portion of their sales in the morning.

In addition, the limited availability of land for expansion the U.K. may be forcing the supermarket companies to innovate in smaller locations.

"Rather than build a bigger store, they have found a way to increase the peak capacity of the smaller stores," said Bill Bishop, principal of consulting firm Willard Bishop, Barrington, Ill., who noted that often these small locations have many more checkout lanes than typical U.S. convenience stores, allowing for high traffic during peak periods.

The U.K. stores do little or no food preparation on site, but rely on high sales volumes to keep prepared products moving through the stores. The U.K. convenience stores, for the most part, do not offer hot foods.

Prepared foods at stores like Tesco Express and Sainsbury's Local can include a variety of choices, but usually encompass a complete dinner with side dishes, boxed and refrigerated.

"They have quite a range of offerings - you might find a chicken dish with some type of sauce, or you might find Chinese or Indian dishes," Perks said. "The important thing is that they can control them. That's why [high-volume locations are] so important - without the volume, you can't control ranges like that."

The U.K. convenience stores have been able to leverage their brand equity, analysts said.

The Mintel study found, for example, that consumers were more likely to believe that a convenience store operated by a supermarket company would offer a better range of products than a convenience outlet that was not affiliated with a supermarket chain.

"Tesco and Sainsbury's both have these multiple formats, so whenever you walk into a Tesco or a Sainsbury's, it's always the same experience," Bishop said. "These stores are geared to provisioning busy people who are familiar with the Tesco brand."

The affiliation with their larger siblings also allows these small-format stores to price competitively with traditional supermarkets.

Private label is a key component of the success of the small-footprint formats in the U.K., analysts pointed out. Tesco offers a variety of private-label brands, from Value at the low end to Finest at the high end, with specialty brands for organic and natural products.

"It's an economics issue," Stern said. "Because these boxes are small, they are expensive to run from a labor standpoint and from a distribution standpoint. It's not a matter of running the stores on a 20% margin rather than a 40% margin - they just can't get their price points to be competitive. The way around that in the U.K. is to increase the penetration of private label."

Adopting European Practices in the U.S.

Despite the differences in the lifestyles of the two countries, analysts said there might be some opportunities to borrow from the U.K. convenience model.

"There's some fair transferability there," Bishop said. "Probably the greatest potential is the use of different forms of checkout - when you see people roll mobile checkouts to the seasonal display area, those are examples where you actually adjust the capacity."

Bloom, the experimental banner opened by Food Lion in Charlotte, N.C., in 2004, was designed with influence from Food Lion's European parent, Delhaize.

"The idea of personal self-scanners, for example, was adopted from European supermarkets," said Karen Peterson, a Food Lion spokeswoman. "In addition, we have horseshoe-shaped seated registers that allow faster customer flow (two lanes and two cashiers) and are much more efficient in terms of space. One bagger can assist two cashiers. This idea came from Delhaize as well."

One of the cart designs, which includes several compartment areas and a place to hold the personal scanner, also came from Europe, she said.

Personal scanners also have been tested at Stop & Shop, another U.S. chain with European parentage.

Bishop said the U.S. has been unable to replicate the prepared-food success of the U.K. convenience stores, however.

"When you get the ready-chilled meals at Sainsbury's or Tesco, you've got a plated, ready-to-eat, high-quality product, and they put it in proximity to where you live or where you work," he said. "The U.S. has tried several times, but I think one of the conflicts we have is that is has been very difficult for branded people to innovate with refrigerated prepared meals, and we haven't had that much effort on the part of retailers to do it. When it comes to prepared meals, you see people in the U.S. kind of throw up their hands and say, 'Well that's a different geography, and we can't do it.'"

Another aspect of convenience that the Europeans have excelled at, Bishop said, is fresh-cut fruit. In Europe, retailers have developed attractive snack products incorporating multiple, fresh-cut fruits in convenient packaging.

"They have really taken immediate consumption products to the next level," he said.

Models of Convenience

LONDON - Tesco is set to stake its claim on the U.S. grocery market, but with a smaller footprint than many previously anticipated.

The company has said its first stores will be modeled on its successful U.K. convenience formats, Express and Metro. The number of these stores has grown rapidly in the U.K. in recent years to make up 12.3% of the company's retail space here. According to analysts, this has been partly due to a limit imposed on its larger stores.

"Tesco has been increasing its smaller store formats in the last five years, as it's had trouble getting planning permission for its larger stores," said George Wallace, chief executive at Management Horizons Europe, a retail analysis firm. "I'm sure Tesco would rather have 100 hypermarkets, as the economies of scale in a large store are much more attractive, but there are limits to how many superstores it can build."

Tesco currently has about 600 Express stores and about 100 Metro stores in the U.K., many of which were opened after it acquired the 1,000-strong T&S convenience store chain for around $911 million in 2002. It converted 450 of these stores into Express formats and still operates 500 stores under the T&S One Stop banner. What was born out of necessity seems to have been a boon to Tesco - its sales from convenience store outlets, including Tesco Express and Tesco Metro, rose by $350 million to $4.2 billion in 2005, giving Tesco a 5.4% share of the market, second only to the Spar chain, according to a Verdict Research report in December 2005.

A Tesco spokesman attributed their success not to targeting a specific demographic, but to tailoring the stores' offer to the demands of their diverse locations.

"Our Express stores can be in affluent or less advantaged areas, but what we try to do is customize the offer to that community," said the Tesco spokesman, who added this was done through a combination of analyzing loyalty card data, analyzing sales patterns by stores, and through question-and-answer sessions with customers.

"The clever trick [with Tesco's Metro and Express stores] is that it can tweak its assortment to cater to different customer bases, in areas that range from Knightsbridge to Southall [a multicultural area of south London], where the customer demographic is completely different," Wallace said.

Neil Gladding, senior retail analyst at London-based Verdict Research, said Tesco's broader success in the U.K. is down to its customer focus. "They're good at providing what people want, and its Express and Metro stores are carefully customized to their [operating] area."

While the Express and Metro stores, which the spokesman said have about 30 employees each, don't target a specific demographic, the investment power of Tesco means that the stores are in prime retail spots, whatever area they're in.

"Their locations tend to be higher profile and higher rent," Wallace said. "They'll be in places such as a mainline train station, or a high-traffic road, and will be better merchandised and cheaper than local convenience stores."

Express stores, which the company spokesman describes as being located "in the heart of neighborhoods," focus on providing a combination of about a third fresh foods, a third convenience and ready-to-eat meals, and a third groceries - for "top up" trips between visits to a supermarket. Metro stores, located in city centers, are made up of around half ready-to-eat and heat-and-eat meals, and half groceries, to cater to city workers. Tesco's private-label range, including its premium range Finest, makes up about half the offer in Express and Metro stores, while the other half is branded products, although the spokesman said the mix would vary from store to store.

Wallace predicted that Tesco will transplant the fresh food focus to the U.S. stores. "Fresh food represents higher margins for Tesco. The U.S. already has extreme value stores such as Family Dollar covering the value end of the market, so I don't think Tesco would want to get mixed up in that."

He was cautious about whether Tesco would be keen to transplant its successful nonfood offerings, which include clothing and other products, to the U.S. immediately. "Tesco has got to get to know the market very well before it introduces larger-format stores," Wallace said.

"I think Tesco would only consider larger-format stores through an acquisition," he said. "They want to do their own thing first, to take a risk in a low-key way."

Richard Perks, director of retail research, Mintel, London, said Tesco can absorb the planned two-year, $870 million investment if the U.S. venture fails.

"Tesco is prepared to admit they made a mistake, and if it doesn't work, they will just pull out," he said. "It's not a large amount, and if it works, they can then go out and target acquisitions.

"Tesco is a very impressive business," he added. "They have been able to succeed around the world in the same way that Carrefour and Auchan have succeeded because it has been prepared to adapt its model to local conditions. They see what the local needs are and they market to that."

NINA JONES

Japanese Convenience

LOS ANGELES - Even as Tesco is preparing to import its version of convenience food retailing to the Western U.S., one of Japan's largest convenience store chains has recently begun doing the same.

Tokyo-based FamilyMart Co., which has a U.S. subsidiary based here, has in the last few months opened its first three stores in Southern California - one in West Hollywood, another in Westwood and a third in Santa Monica. The stores measure about 2,500 square feet and seek to combine elements of a gourmet supermarket and a quick-service restaurant.

"We want to be something like a premium grocery and also a quick-service restaurant like Baja Fresh or Panera Bread," Shiro Inoue, chief executive officer of FamilyMart's U.S. division, told SN. "We think people now don't have time to cook. They might want to relax at home, but they want to eat good food."

The stores are targeting affluent shoppers 21 to 44 years old and bill themselves in their store logo as being "The Premium Experience." They are targeting both Asian and non-Asian customers.

The U.S. model for the stores, which are called Famima!!, is similar to the format the company uses in Japan, where FamilyMart has about 6,500 locations. In Japan, the stores place a heavy emphasis on fresh offerings, and they replenish the stock three times each day. The company also has another 5,500 stores throughout the rest of Asia.

In the U.S., the stores generate about half their volume from the deli, Inoue said. Deli products include panini, salads, sushi, a variety of entrees such as meatloaf, along with side dishes like vegetables, and desserts. The stores also offer hot soup, and have self-serve espresso machines that grind coffee beans to order. Most of the company's business in the U.S. is conducted during the lunch daypart, he said, although he noted that business from 6 to 10 p.m. is on the rise.

The stores offer a limited selection of GM items, which Inoue described as "one-of-a-kind" items, like pens and stationery from Japan.

"We want our customers to have fun in the store," Inoue said.

SN recently visited the Famima store in Westwood, a few blocks south of the UCLA campus. It features a service counter for soups and sandwiches; a refrigerated case featuring pre-made salads at the front; and six low-profile gondolas of about 8 feet each. There was also a small dining area with tables in the front of the store, along with a magazine rack.

One gondola included fresh baked goods, organic breakfast cereals, and candy, including Toblerone and organic varieties. Another gondola had lavish bread; soups, including organic Health Valley and other brands, cereal bars and gallons of bottled water on one side and various salted snacks on the other.

Another gondola had American and Japanese candies and snacks, and another offered a wide variety of The Republic of Tea flavors and teapots on one side and, on the other, HBA items. Another gondola had batteries, audio tapes and light bulbs, with some Japanese and natural HBA on the other side.

A refrigerated case offered milk, Japanese juices, Sobe energy drinks, Naked juices, vitamin water, bottled water, Coca-Cola and Japanese drinks.

ELLIOT ZWIEBACH AND MARK HAMSTRA