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News and analysis on the global poultry
and animal feed industries.
on May 12, 2011

Tesco still committed to the US

A review of the company’s involvement is appropriate after the retirement of CEO Sir Tom Leahy.

In November 2007, a commentary was prepared in this series welcoming UK food retailer Tesco to the U.S. After extensive research, Tesco elected to initially open 122 locations in urban Southern California, Arizona and Nevada using the UK High Street Metro Store as the U.S. model with locations of 12,000 ft.2 in extent. The brand identity “Fresh and Easy Neighborhood Market” was intended to appeal to locavores and foodies competing with Whole Foods, Trader Joes and Wild Oats.

Tesco is the world’s third larger retailer of food with sales for fiscal 2009-2010 of $92.5 billion generating a pre-tax profit of $5.02 billion. On the occasion of the retirement of CEO Sir Tom Leahy, after a 14-year tenure, it is appropriate to review the Tesco involvement in the U.S.

For the most recent fiscal year, sales attained $523 million generating a trading loss of $244 million. This result elicited the comment: “We do not expect future losses to be much lower than 2010-2011; we believe they have not peaked.” By the end of 2010, Tesco operated 145 stores and anticipated opening approximately 50 more through the end of the first quarter of 2011.

It is evident that Tesco is reevaluating the initial concept of “fresh and easy”. Perhaps its evaluation of American consumers was incorrect having been influenced by the success of its domestic UK main street model. In the home market and in growth areas such as Asia and Eastern Europe where the Tesco approach is apparently successful, shoppers visit stores frequently during the week. In contrast, U.S. shoppers tend to purchase weekly requirements during a single visit to a large store which offers a wide selection.

The projections leading to the 2007 launch were based on prevailing economic conditions, especially favoring Pacific and mountain states. The severe downturn affected the Tesco marketing area disproportionately crimping the initial projection of 1,200 stores. Profit margins in Asia and Europe ranging from 5% to 6% on high sales volume might allow Tesco to continue to absorb losses in the U.S. but for how long?

Leahy was committed to an American presence, previously negotiating to purchase a moderate-sized U.S. chain such as the Meijer stores in the Midwest. It remains to be seen whether his successor, Phillip Clarke, and resident U.S. director, Tim Manson, will continue to pursue the fresh and easy concept in its present form, withdraw from the U.S., merge or divest to a larger group or radically change the scope of the venture to suit customer needs and purchasing patterns.

We may have an insight into its strategy as Tesco announced acquisition of 2 Sisters Food Group and Wild Rocket Foods on June 22. According to Tesco spokesman Brendan Wonnacott, the move will “allow the company to expand meals-to-go options”, which was a component of the original business plan. Integrating back into production may fractionally enhance margins but will not address the issue of the desire of consumers to purchase their weekly requirements in one large store offering variety and a wide selection at a competitive price.

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