VideoSouth-east of Los Angeles and known as one of America's most dangerous cities, Compton is not the first place you would expect to see British royalty. But last month Prince Andrew — the Duke of York and the UK's "special representative" for trade and industry — made the visit. The reason was to attend the opening of Fresh & Easy Neighborhood Market, a new US chain of grocery stores launched by UK retailer Tesco.
In November 2007, after covert preparation that included building a mock supermarket in a local warehouse, Tesco cut the ribbon on six such stores in southern California. The company has since continued a rapid roll-out in the west with stores in neighbouring Nevada and Arizona as well as northern California's Bay Area. A new brand for 79-year-old Tesco, Fresh & Easy will initially receive £250m (€336m) a year of investment from its parent and expects to break even sometime after 2009.
For a company focused on growth, the US is an attractive but daunting market. When Tesco announced plans to enter the US grocery sector in 2006, it estimated its worth at about $600 billion (€410 billion) and said it was forecast to grow by some 40% over the following five years. But Tesco will face plenty of challenges in a market dominated by domestic supermarket companies such as Kroger and Safeway as well as the "supercentre" hypermarkets of $345 billion Wal-Mart, the world's biggest retailer.
To add to the challenge, it is entering with its own brand, unknown to American consumers. Being the underdog is not something that Tesco is used to — in the UK it's a household name with a market share of more than 30% and stores of all sizes selling not just food but anything from clothes to car insurance. It thinks it can carve a niche for itself in the US, however, selling own-label chilled and fresh food in small shops of about 10,000 square feet (900 square metres). Furthermore, some of the outlets will be in low-income neighbourhoods where customers have little access to other grocery stores.
It's a big test for Tesco — and for Andy Higginson, who had been the company's finance director for six years when the role of strategy director was added to his remit in 2003. The dual roles give Higginson, 50, a double interest in seeing Fresh & Easy succeed — first to prove that the numbers add up, second to show that entering the world's largest, richest and most competitive food-retail market was the right decision. For companies wondering whether the finance and strategy directorships should be held by the same person, Higginson could be a high-profile test case — cracking the US will be the £47 billion group's biggest international challenge yet. But after ten years of successes — and a few failures — in other countries, Higginson thinks Tesco understands the economies of launching overseas well enough to make its Stateside venture worth a shot.
The Hard Way
Tesco isn't the first foreign food retailer to want a piece of the US market. As consolidation among domestic companies created national supermarket chains during the 1980s and 1990s, myriad European retailers entered America only to leave again. Those retailers included some of Tesco's rivals from the UK. J. Sainsbury, for example, bought into supermarket chain Shaw's in 1983 and took a controlling stake four years later. In 2004 it sold the company to US group Albertsons, citing increased competition in the market. Meanwhile, food and fashion group Marks & Spencer acquired Kings Super Markets in 1988 but offloaded it to an investment consortium after eight years, claiming it didn't fit its core business.
Other European companies have fared better. Germany's Aldi owns 850 stores in 27 states and has ties to the Trader Joe's grocery store chain. This leads Jim Prevor, founder and editor of two American magazines for the food retail industry — Produce Business and Deli Business — to wonder whether failure to tackle the US is a particularly British problem. "A common language makes it easy to assume that you understand the consumer and the business environment. But that understanding is probably deceptive," he says.
Tesco's directors don't need to be reminded of the potential downside to the Fresh & Easy venture. Sitting in his office at Tesco's headquarters outside London, Higginson says with a laugh, "We've made it as hard as we can." The company is starting a new business from scratch and will need "an awful lot" of its small convenience stores to get up to scale quickly, he explains. It would have been a "very bold step" to target the US before proving itself in other international markets.
This is familiar territory for Higginson. Apart from three years as finance director of UK retailer Burtons from 1994, all of his previous roles were in international businesses, including working as finance director of Laura Ashley and Guinness Brewing International as well as a stint with Unilever in Hong Kong. He joined Tesco's board in 1997, replacing former finance director David Reid, who had been appointed deputy chairman to oversee the company's embryonic international business.
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