Tesco: The Looming Supermarket Monster

Last Updated Aug 20, 2007 6:29 PM EDT

Tesco in the United KingdomMore than nine months have passed since Tesco announced its plans to invade the U.S. supermarket industry with an all-new convenience store format. And American chains better have some counter-strategies ready, because Tesco's betting big, and it's planning smart. Warren Buffet earlier this year raised his stake in the company to 3 percent, signaling his confidence that Tesco's U.S. venture will be well-designed and expertly executed. The U.S. supermarket industry has experienced the familiar retailing polarization into luxury and discount offerings (think Whole Foods and Wal-Mart, respectively), and the middle segment has been hard-pressed to sustain growth. That undifferentiated group includes huge supermarket chains like Safeway, Kroger, and Albertsons -- and those are the firms that Tesco's Fresh & Easy chain targets directly. A great Economist article dives into Tesco's U.S. strategy:
Tesco's offering in America will swim against this tide [the trend of polarization into either luxury or discount offerings]. It is aiming Fresh & Easy squarely at the middle market. The firm is hoping to repeat its success in attracting shoppers from all the main social groups in Britain, where social class until recently played at least as big a role in determining where people shopped as price and convenience did. Tesco will also be a pioneer in two other important ways: the size of its stores and their range of goods.
Most Fresh & Easy outlets will be relatively small, at about 10,000 square feet. Although about the same sales-floor size as the average Walgreen's, a chain of drugstores, most food retailers in America are either much bigger (six Fresh & Easy's would fit into a typical supermarket and ten into the average Wal-Mart), or much smaller (each is about three times the size of a 7-Eleven convenience store).

Convenience, however, has many dimensions. Tesco is betting that there is demand for smaller stores closer to home with fewer products, making it easier to find things. People in too much of a rush to stop at a supermarket use tiny outlets such as 7-Eleven, of which there are close to 1,200 in California alone. But their range is limited. Retail Forward, an American consultancy, reckons nearly 40% of convenience sales come from cigarettes and tobacco, followed closely by beer and wine. As for nutrition, most offer little more than snacks and frozen pizza. "The typical American convenience-store consumer would be Homer Simpson," says Ira Kalish, a retailing expert at Deloitte, an accounting firm. "No one has done convenience and quality food together."
Tesco's new retailing format will almost certainly have a big impact outside the mainstream grocery channel. Whole Foods, with its convenient prepared foods store-section, is likely to feel some hurt when Tesco enters Southern California markets later this year. And Trader Joe's may watch as customers begin to shop in smaller trips more frequently at Fresh & Easy. Any way you slice it, Tesco's entry forces U.S. groceries to think hard about their position in food retailing.

(Image of Tesco Shopper by Terinea, CC 2.0)