Testing Tesco's Reach


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For years, European supermarkets have tried to crack the code of the American grocery industry. The lure--a juicy $600 billion market--is exceeded only by its peril--no other market is as cutthroat or has devoured so many players so relentlessly. Some, like J Sainsbury, bailed out after years of fruitless effort; others, like the French hypermarket chain Carrefour, lasted a nanosecond. Ahold, a Dutch company that owns the chain Stop & Shop, was bruised by an accounting scandal. Delhaize, the Belgian owner of Food Lion, holds on grimly as Wal-Mart makes chopped meat of the industry's profit margins.

So why would Tesco, Britain's biggest grocer, want to wade in among the carnivores? The answer can be found on a Friday evening in a trendy London neighborhood called Spitalfields, where the Tesco Express store's young shoppers, filing in from nearby offices, are grabbing a few items before heading home. "I'm lazy," admits Adelaide Turnbull, 23, darting in for a bottle of wine. Larger-format supermarkets might offer lower prices, but yards from her home, this format is convenient, she says. "It works."

Tesco, the only supermarket that outsells Wal-Mart's British arm, hopes "it" works well enough to export. Earlier this year, the company announced plans to open convenience stores based on the Tesco Express format on the West Coast of the U.S. in 2007. Tesco will initially commit $460 million a year to the project, in the hope of finally getting its piece of the richest grocery market in the world.

Tesco could bring with it, along with the lessons of so many failed competitors, a broad appeal to match the choice-saturated American consumer. In the hands of canny CEO Terry Leahy, known for his no-frills style ("The only personality I believe in is Tesco," he once said), Tesco has launched in-house lines of food, ranging from economy pasta to hand-stretched Tuscan pizzas, with something to appeal to the frugal and the foodie. Leahy perfected the art of pulling in customers with Tesco's low-cost reputation and then selling them high-margin nonfood items like TVs and home furnishings. And he has successfully developed both mammoth one-stop stores and more modest convenience shops. The strategy has left rivals playing catch-up: Tesco boasts a 31% slice of the British grocery market, according to research firm TNS Worldpanel. Running a distant second, with 16%, is ASDA, owned by Wal-Mart.

While this will be its first trip to the U.S., Tesco travels pretty well. Since the mid-'90s, it has opened more than 800 overseas stores, almost all in Central Europe and Asia, and they now account for more than a fifth of Tesco's total sales. International sales soared 23% in the past fiscal year, more than twice the rate of sales growth in Britain, lifting Tesco's profits 17%, to $4 billion.

Still, none of that guarantees success in the U.S. Marks & Spencer and J Sainsbury, both profitable retailers on their native turf in Britain, have limped home in recent years after failing to make good on their American ambitions. But Tesco is pursuing a carefully thought-out plan of attack, which will be executed by Tim Mason, Tesco's marketing director since 1995 and a leading figure in its bull run. Mason was the driving force behind Tesco's hugely successful Clubcard, Britain's first modern supermarket-loyalty card.

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