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Instead of leaping into the flailing grocery industry, Tesco is going in via a more promising shortcut: the small format. Traditional grocers--think Kroger or Albertsons--have seen their share of U.S. grocery sales tumble from 69% in 1980 to 47% in 2005, according to Britain's Verdict Research, but the U.S. convenience sector is booming. Industry profits leaped 17% last year, to $5.84 billion; in-store revenues, even after stripping out gasoline sales, climbed 10%.
And Tesco is trying to establish the brand by targeting the West Coast first. While big regional players, like Pennsylvania-based Wawa and Sheetz, attract convenience shoppers along the East Coast, on the West Coast, "there isn't a dominant, large regional player," says Jeff Lenard, spokesman for the U.S. National Association of Convenience Stores. More than three-quarters of California's convenience stores are one-store operations. Tesco's $460 million initial investment, by comparison, is hardly betting the ranch (it represents about 10% of the company's annual capital expenditure), but it should buy more than 100 sites. Starting on the West Coast also allows Tesco to avoid taking on Wal-Mart in its heartland--there are more Wal-Mart stores in Texas than in all of California, Oregon and Washington combined.
Tesco won't say much about the new outlets--it declines comment on reports that it will open stores branded Fresh & Easy in Phoenix, Ariz., and Los Angeles. But it concedes that it built a mock store, reportedly in Santa Monica, Calif., and invited locals in for feedback. Analysts expect that Tesco will offer fresh produce in a quick-service format--a far cry from the grab-and-go foods in the typical convenience store. According to Neil Saunders of Verdict Research: "There is scope for a new player to carve out a niche in this market and take advantage of the weaker convenience operators."
More important, the strategy gets Tesco into the grocery market through the back door without the risk of launching a full-out, big-box supermarket assault on Wal-Mart. The British chain hasn't ruled out other formats in the future, but by building its own new concept rather than buying a U.S. chain, Tesco avoids having to shoulder the problems of an existing U.S. grocer. Of course, if it fails, it will have plenty of company. [This article contains a table. Please see hardcopy of magazine.] Tesco's Competition
Stores 2005 Sales in billions Wal-Mart Supercenters 1,929 $155.5* The Koger Co. 3,302 $57.2 Albertsons 2,476 $41.3 Safeway 1,801 $38.5 Costco 412 $31.8Source: Directory of Supermarket, Grocery & Convenience Store Chains 2006 *Grocery revenue only