The new British invasion

The British invasion has begun – again! But this time it is not led by four mop top musicians from Liverpool or Redcoats armed with muskets but by a supermarket chain with money to spend, a new format to spend it on and a reputation for shaking things up.
Elsevier Food International, Vol. 11, Number 1, February 2008
Len Lewis

The ‘invader’, of course, is Tesco and its weapon of choice in the US is the 10,000-square-foot Fresh & Easy Neighborhood Market, slated to have 200 locations in California, Arizona and Nevada by the end of 2008. Meanwhile, the recent purchase of a second warehouse in Northern California indicates far more aggressive growth and the capacity to open 1,000 stores in that state alone.
“If Fresh & Easy is successful, it could be the fastest growing retailer in the world,” said Tim Mason, chief executive of US operations and, until recently, the frontrunner to succeed Tesco chief executive Sir Terry Leahy.
For the past year, speculation over Fresh & Easy’s entry has run rampant and the pre-opening publicity in November was enormous and opening week drew nearly as many industry executives as it did shoppers. Opinions about the stores varied. Some observers feel it is a new competitive dynamic that could change the competitive landscape in the hotly contested California market. However, the general consensus is that the stores are nice, clean and convenient, but unexciting and really did not live up to all the hype.

Multi-format assault
However, long-time Tesco-watchers are convinced that this is only the tip of the iceberg for the chain, which has been studying the US for nearly a decade and whose plans call for Fresh & Easy to be national in scope. As such, the chain is already looking for distribution centres in Florida and Chicago. In fact, Fresh & Easy represents a five-year, US$2 billion initial investment and may be the launching pad for Tesco’s multi-format invasion of the western hemisphere from Canada to South America
“We are on the threshold of becoming one of the few successful international retailers and there’s plenty to do,” Leahy recently told the Financial Times, noting that revenue from international markets, now at 27 per cent, will double over the next ten years. Retail analysts have said the company is expecting a 15 per cent return, which would enable US operations to finance expansion internally and overcome saturation at home where it has over 30 per cent share of market.
Knowing Tesco’s track record, investment analysts are very positive. Citigroup retail analyst James Anstead has said Fresh & Easy could “revolutionise the underdeveloped US retail market” and be a US$100 billion opportunity – 20 per cent higher than last year’s revenues from the 12 countries where Tesco already operates.
Although Mason said there were no plans to bring successful formats like Extra hypermarkets to the US, Dan Jones, co-founder and chairman of the Lean Enterprise Academy in Herefordshire, United Kingdom, and one of the architects of Tesco’s ‘lean’ supply chain system noted: “Tesco believes in multiple formats. It’s the most effective way of getting close to many consumers quickly and building up a customer base. It’s something most competitors can’t match.”

Redefining convenience
Fresh & Easy stores, measuring about 10,000 square feet and carrying some 3,500 SKUs are clearly patterned on Tesco’s Express and Metro stores in Britain with the focus on ready-to-eat meals under the store brand. Many of the prepared items are located near the front of the store, along with salads, sandwiches and sushi.
Some see the stores as direct competition to Whole Foods and Trader Joe’s. Stores even sell Cabernet-Shiraz wine for US$1.99 a bottle under the name Big Kahuna, which some believe is a response to Trader Joe’s Two-Buck Chuck. However, Fresh & Easy also carries a fairly complete assortment of such staples as bread, detergent, meat, vegetables and seafood, putting them in competition with mainstream retailers like Stater Bros., Ralphs and Wal-Mart.
The difference is that Fresh & Easy is neither a price operator nor a gourmet store. It is a hybrid with a focus on convenience and a new generation of meal solutions, which are often grouped to include a salad, entrée, dessert and a suggested bottle of wine. A Kitchen Table kiosk, one of the stores few service departments, does a lot of sampling and helps customers with menu suggestions. Pre-packaged meals are prepared at the 80,000-square-foot Fresh & Easy kitchen located in the distribution centre. Nearly half of the ingredients are supplied by 2Sisters Food Group and Wild Rocket Foods that invested about US$100 each in processing plants about four miles away from Fresh & Easy’s facility.
“The Fresh & Easy format is intended to fill a gap in West Coast retail between small convenience stores and traditional supermarkets,” said Ben Miller, international programme manager for IGD, UK-based consultant.
Moreover, much of the excitement surrounding Tesco’s launch stemmed from its promise to build stores in the lower income areas of the Los Angeles market. These areas, suffering from urban blight have become ‘food deserts’ when the major chains all but abandoned these areas over a decade ago. The only negatives have come from organised labour since Fresh & Easy is a non-union operation.

Mixed signals
Bryan Roberts, senior analyst with Planet Retail, London, noted: “We’ve heard mixed reports, but leaning to the positive. The project was shrouded in massive secrecy. Some people are underwhelmed. But the stores pretty much do what was intended. They are simply not everyone’s taste,” he said.
“Basically, Fresh & Easy is fairly typical of Tesco – not the most charming stores in the world but clean, stylish and relentlessly efficient,” said Roberts, noting that the small footprint enables the stores to be easily and inexpensively rolled out. “If it flies on the West Coast, it can work anywhere. Trying to put in supercentres at this point would be slightly more problematic in that they would be going up against Wal-Mart.”
On the other hand, Wal-Mart is in the process of assembling a team to look at alternative formats and hiring Tesco people with that expertise. “Tesco has experience in supplying supercentres and small footprint stores which require a completely different supply chain discipline than Wal-Mart which is skewed to big box operations with lots of general merchandise.”
The key to Fresh & Easy’s success on the West Coast, as well as its potential expansion in eastern US, lies in its ability to adjust a relatively small product mix to individual markets. “We’ve seen Tesco do that in small geographic areas like the City of London where they adjust pricing, ethnic products and the overall product mix to a variety of formats,” said Roberts. “They are very good at exploiting demographics.”

Intensive research
To adapt in the US, Tesco did its homework, going so far as to have researchers live with families in California to see how they live, shop and cook – a tactic similar to Japan where Tesco did three years of intensive research and developed a small store format that would conform to relatively small Japanese homes.
“Our forecasts indicate that by 2012, and based on exceeding 500 stores, annual gross revenue for the US could approach US$7 billion,” Roberts noted. Fresh & Easy is also an important experiment for Tesco in that it is the first organic market entry in history. “In other markets their entry has been through acquisitions of minority stakes in companies followed by full ownership or control.”
Other analysts are a bit more conservative. Credit Suisse said the chain could be profitable by 2010 with sales in excess of US$2.5 billion. Estimates by TNS Retail Forward, a Columbus, Ohio-based consulting firm, place revenues at US$4 billion by 2011 and US$10 billion by 2015. This would position Fresh & Easy as one of the top ten retailers in the country, analysts said.
While industry observers debate the potential of this new format and its impact on the hotly contested Southern California market, the real story may be Tesco’s expertise in production and distribution (see related article on lean production, page 30).
“Everything is based on sales from the register. Continuous orders from the store to the distribution centre form the basis of continuous replenishment from their own truck fleet which delivers mixed temperature loads to the stores,” said Jones. So, Fresh & Easy is able to synchronise inbound and outbound shipments from the distribution centre as well as from nearby suppliers.
Efficiency in distribution will also cut costs per item; thereby lowering prices to consumers – much as Tesco has done in the UK, said Jones. This hyper-efficient distribution system may also be the basis for Fresh & Easy’s entry into home shopping, another area in which Tesco excels.
“Don’t underestimate the potential of integrating home shopping in convenience stores,” said Jones, noting that Tesco has done the same in countries like Taiwan and Korea as well as in the UK with the Express and Metro stores.