Why Tesco Finds U.S. More Challenging Than Expected

In 2006 and 2007, Tesco's every move toward the United States was closely tracked by American retailers hungry for competitive information. Retailers were told to expect the worst from the savvy British operator and its new Fresh & Easy small-store format. Tesco evoked the image of a battleship making its way here from Europe. Upon arrival there would be heavy firepower in the form of major capital spending for a quick rollout of stores and distribution centers in the Western U.S.

Other international retailers might have chosen to test the U.S. waters with a slower buildup, eschewing the battleship approach in order to stay more nimble. Not Tesco, which opened 59 locations in California, Arizona and Nevada since its arrival here in November 2007, with plans to unveil an additional 150 by year-end and at least 37 in Northern California in 2009.

Tesco's fast buildup carried risks, which have now become more magnified, as performance is reportedly not going according to plan. A story on Page 12 this week notes the retailer's U.S. sales are reportedly well below expectations — with some observers putting weekly sales at $50,000 to $60,000 a store compared to the $200,000 that was anticipated. As always, when goals aren't met, there are plenty of outsiders offering opinions on how to improve things. Tesco isn't showing signs of reversing its commitment, but is reportedly considering a range of changes to Fresh & Easy's operations and format.

Some of those considerations would have been better mulled earlier. The retailer chose to roll out stores rapidly, and consequently delayed focusing on local-market customization. However, it's hard to get shoppers to revisit your format if they didn't feel the experience was right the first time. One observer noted that Tesco was missing the mark in communities with Hispanic shoppers. Tesco also chose to launch without a loyalty card program, which was a surprise, given its global reputation for loyalty marketing and knowing the local customer.

Even if you put aside the local shopper, what about understanding the U.S. market in general? Tesco engaged in extensive research into this country, but some of its decisions are puzzling, such as initially not accepting credit cards (a move now partially reversed) and focusing only on self-checkout. American consumers are fond of their credit cards, and many still want service options at the checkout.

Tesco's arrival may also be plagued by bad timing. In a recessionary economy, consumers often seek out one-stop shopping venues — which fits the description of supermarkets, but not Fresh & Easy and its 3,500 SKUs.

Meanwhile, U.S. food retailers that had forecast little competitive impact from Tesco, and were sometimes accused of underplaying the threat, now seem prescient. Some retailers, in particular Safeway and Wal-Mart, plan to counterattack by launching small formats of their own.

Ultimately, only Tesco knows its own timetable and metrics for success. The retailer has a storied record of global success and doesn't discourage easily. It probably views this period as the early days for its U.S. venture. Tesco's challenges now are to become more nimble and quickly absorb the lessons from its first months here. That's the only way this battleship can hope to steer back on course.