VideoIt's too early to say whether Tesco's other international experiences will help Fresh & Easy succeed. There's certainly no shortage of pressure. In Shopping for a Market: Evaluating Tesco's Entry into Los Angeles and the United States, staff from the Centre for Food and Justice (CFJ) in Los Angeles suggest that the launch comes at an important moment in the development of food stores in America. "Tesco's entry into the United States is the latest and perhaps most vivid example of the globalisation of the food system," says the CFJ's report. "For the first time, a global company is taking on what had once been a pre-eminently local segment of the American food system: the neighbourhood market."
Higginson insists there's "plenty of room for everybody" in the US food-retail market. And in 2007, Citigroup noted that in focusing on small stores for local neighbourhoods, Tesco is "not setting out to compete formally with hypermarkets or supercentres, but is looking to meet a demand that is currently not filled. It is looking to seize on an opportunity that US retailers have chosen to pass over." Some, such as Jim Prevor, suggest it's been passed over only because other retailers don't believe there is a "lucrative opportunity" there.
Entering with an entirely new brand is a daring move, although it's possible that Tesco did not want customers to associate its US stores with the Tesco name, viewed by some in other countries as a behemoth capable of crushing local competition. The group must hope to make Fresh & Easy as recognisable a brand in the US as Tesco is in the UK, where it uses its name across different product ranges and store formats to create a sense of continuity.
Time Will Tell
Some analysts give Fresh & Easy a nod of approval. London-based Blue Oar Securities was one of several firms invited to visit the first West Coast stores a few weeks after they opened. In a December research note published after the trip, it said the concept was well thought out and could be "hugely scalable."
Tesco will invest up to £1.5 billion in Fresh & Easy and considering the company's size, that's not a bank-breaking sum. "If it all goes horribly wrong, even if you assume there's no residual value — and of course with shops there's always residual value — a billion-and-a-half is something the company could afford," Higginson says. "I'm not sure our careers could, but the business could certainly afford it."
Higginson goes so far as to muse that if the strategy works, Tesco will have "a business that could go national in the United States, [generating] billions and billions of shareholder value." That's a tall order, but as Citigroup noted in a September report, "few observers would have imagined that, within a decade, Wal-Mart would have gone from selling almost no food to become the biggest food retailer in the US. The opportunity is huge."
Domestic food retailers certainly have good reason to look over their shoulders. "While the US supermarkets could copy the format, they will not have the infrastructure — systems, depots or fresh-food supply chain — to be able to compete in this segment of the market in the short term," reckon Blue Oar Securities. "The traditional supermarkets (Kroger, Safeway and Albertsons) should be very worried if the format takes off."
Indeed, other analysis suggests that some of Tesco's competitors should already be concerned. Nielsen, a consultancy, has studied the California, Arizona and Nevada markets and analysed the areas where Fresh & Easy stores will compete with incumbents for the same customers. It says that Kroger stands to lose up to $6.7m a week to Fresh & Easy, while SuperValu, Safeway, Bashas and Wal-Mart could lose $4.3m, $4m, $2.4m and $1.5m respectively.
The group won't report sales figures for Fresh & Easy until 2009. That could be a controversial decision, although Higginson says there would be nothing to compare the early figures to, regardless of whether they appear good or bad. At the company's trading statement in January, there was little mention of the US, only a claim that customers' reaction to Fresh & Easy has been "very encouraging."
The finance chief estimates that Tesco will need at least 18 months before it can say with any certainty whether Fresh & Easy is a hit. It took nearly 80 years to build the UK business, he quips, so it will take a little time to get off the ground in America. But he's confident that the past ten years of growing Tesco around the world will stand the group in good stead for the challenges ahead. "We're bringing a lot of learning, a lot of cuts and bruises from the mistakes we've made," he says. "And hopefully we'll avoid making some of them twice."
Tim Burke is senior staff writer at CFO Europe.
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