The British Invasion
Ordinarily, the launch of a new grocery chain would be good news for packaged goods marketers. But that’s not the case with Tesco.
The U.K. retail giant, which will enter the U.S. market this summer, specializes in private-label goods and prepared meals. And that means minimal promotional opportunity for national brands.
On the other hand, Tesco might spur rival grocers to step up their meal-based merchandising. And that would be “good for everyone,” says Jon Hauptman, a retail consultant at Willard Bishop LLC.
Two chains are already doing it. Safeway has converted about 40% of its stores to its “Lifestyle” format, featuring expanded its fresh- and prepared-food departments. And Albertson’s is expanding its Meal Deals merchandising program under new parent Supervalu.
“Safeway is poised to respond because its Lifestyles store upgrade has already brought in some prepared foods,” Hauptman says.
Tesco plans to start with 300 stores in California, Arizona and Nevada and a distribution center in California. The stores, called Fresh & Easy, will be positioned as neighborhood markets, and compete against quick service restaurants, convenience stores and traditional supermarkets.
Each outlet will have roughly 15,000 square feet, and most will be located in under-served urban neighborhoods. The target audience? Women, age 35 to 54.
This format is based on Tesco’s Express convenience stores in the U.K., which have an average of 3,000 square feet and carry up to 7,000 SKUs, mostly fresh foods. But it will be tailored for U.S. shoppers, who tend to shop more frequently and in more types of stores than British consumers.
Tesco is “very good at seeing the need of local consumers and tailoring formats to suit them,” Hauptman says.
The chain said it will spend up to $438 million a year to establish itself in the U.S., or $2.2 billion over five years. It expects to break even by the end of 2009.
The U.S. grocery market is temptingly big, with annual sales topping $600 billion, and this number is projected to reach $840 billion by 2011. But it is different from its U.K. counterpart.
Tesco holds a 20% market share in the U.K. and enjoys a profit margin of nearly 6%, according to the company. U.S. grocers average 1%.
Tesco’s flagship grocery format, with private label goods accounting for about 40% of its merchandise, wouldn’t translate in the U.S., says retail consultant David Diamond. But “a convenience store kind of place that sells only private label lets them [enter the U.S.] without taking grocers head-on,” he says.
Diamond points to Sheetz, a 330-store mid-Eastern chain, as a successful fresh-food c-store format. Sheetz’s gas pumps have interactive menu boards on top; shoppers place orders for food while they pump gas, and then pick up their fresh-made items when they go inside the store to pay.
Convenience stores, with an average 10% profit margin, are a more lucrative and less competitive niche for Tesco. “That means Tesco has a very long timeline — 10 years or so — before entering [the grocery field with bigger stores] here,” Diamond says.
