Welcome to the USA, Tesco

Early in my career, a mentor and owner of a large broiler integration impressed me with the comment that every time he saw a new supermarket open, he said a prayer of thanks. Should we be optimistic over the entry of the UK food marketing giant Tesco into the USA?

The company is the third largest retailer in the world after Wal-Mart and Carrefour. Tesco operates in 13 countries, has nearly 3,200 stores, 400,000 employees and generated a net income of $3.5 billion on sales of $59.6 billion in FY 2005. The “ground up” initiative in the USA runs counter to Tesco practice of purchasing existing chains which are then re-modeled to conform to the “Tesco Way”. In 2005, it was rumored that the company was in negotiations to acquire the Meijer chain of 170 large supermarkets in five Midwest states, although the joint venture with a price tag of $2.5 billion did not eventuate.

Tesco then decided to pursue an independent strategy for the USA. After extensive market research involving some subterfuge and development, Tesco opened six stores in California Nov. 8 and has selected an initial 122 locations in Southern California; Phoenix, Ariz.; and Las Vegas, N.V. The company has adapted their UK High Street, Metro Store as the U.S. model with individual locations only 12,000 ft.² in extent. The brand identity “Fresh and Easy Neighborhood Market” encapsulates the mission of the enterprise which will appeal to a resident clientele favoring organic and locally produced foods. This segment is defined as urban “locavores.

Tesco, along with competitors in the UK, have a strong influence on producers, imposing high standards of hygiene, housing, herd and flock welfare and labor practices which are subject to frequent and intensive auditing. Suppliers will be expected to comply with detailed procedures manuals requiring additional management and frequently investment in upgrading facilities. In the UK, Tesco which represents 30% of the market, together with other leading food retailers such as Marks and Spencers pay a premium for products conforming to their standards.

This approach by the Tesco US subsidiary, together with liberal employee remuneration and benefits and considerable investment in environmentally friendly installations will presume higher prices to consumers than the larger, established superstores. Given the orientation of "fresh and easy", it would appear that they will compete with Trader Joe’s, Whole Foods and Wild Oats and their clones rather than with Safeway, Albertsons and Krogers.

It is possible that Tesco, with their marketing acumen and experience in developing food chains in Asia and Eastern Europe may have defined a market niche in the USA unrecognized by domestic retailers. They may however be completely off course with the small store “green” concept in the ethnically diverse areas of Southern California where variety and mobility are a way of life. Both food retailers and suppliers will be following the $2 billion experiment over the next two years. We might observe that this innovative approach is successful, or may require modification or even ultimately turn out to be an unprofitable venture. Either way the initial roll-out is underway and the existing stores and those to come will represent additional sales for specialty poultry products.