Why US chains should be concerned about Tesco
Jim Prevor

How will a supermarket compete that has a Wal-Mart Supercenter nearby serving the paycheck-to-paycheck crowd, a Target supercenter attracting a more upscale clientele, 10 Tesco’s Fresh & Easy Neighborhood Market stores stealing the “top-off” shoppers with their convenient neighborhood locations and generous assortment of perishables and prepared foods?

A new research report by analysts at JP Morgan entitled "Supermarket Industry Review and Outlook: Is There Room for Two More Giants?" reminds us that Tesco must be viewed as a long term strategic competitor and not evaluated solely on its Fresh & Easy concept. Tesco is a multi-format operator. As it learns more about the US market, we would not be surprised if it looks to add larger supermarket formats, or even hypermarkets. This flexibility has worked well in other markets and lets Tesco avoid a “one size fits all” mentality.

If successful, Tesco will probably drive some competitors out of certain markets. Based on its initial choice of markets, Kroger, Safeway, SuperValu, Stater Bros., and the privately held Basha’s chain all are exposed to market-share loss from Tesco’s entry. All of these markets already have more large competitors than the average US metropolitan area. Tesco gaining a significant share in any market over the next few years, would force another retailer to exit due to the competitive pressure.

We don’t know what market share Tesco needs to make a good return on its investment, but only a small market share is necessary to affect the competitive balance. If Tesco is right, and some new concept of small stores is the way to sell perishables and prepared foods, well there is then nothing left.

The supermarket will be finished.