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After years of lackluster experiences, shoppers in the Southwest Valley may have a new reason to shop at their local TESCO Fresh & Easy (F & E). F & E is getting an overdue makeover as it looks to expand its US presence and hit the 300-store mark (the break even point for their US venture) by Spring 2013.
Tesco, the UK’s largest retailer and the 3rd largest retailer in the world, penetrated foreign markets over the years with relative ease. However, its US subsidiary, F & E, which opened in 2007, fell flat-mainly due to a series of miscalculations of its strategy and fit. Tesco, with the majority of its profits being derived from the U.K., misjudged the level of ease at which their stores would translate into U.S. markets. For a six-month period ending in 2010 the company reported trading losses of $151m and they temporarily closed several stores due to market conditions.1 . Six years after its initial entry into the market, it is now clawing itself back up the retailing ladder and has plans to reach 300 stores, placed in more economical locations, by the spring of 20132. In the Southeast valley that means re-designed store interiors, giving locals what they want with a new shopping experience. F & E will drop their “sterile” image by adding more color, redesigning checkouts and interior décor. More information will be provided in the store of fresh and quick meal ideas, bridging the currently unserved market between supermarkets and convenience stores. The addition of more stores also means that the capacity of F&E’s distribution centers will be better used.
Failure to Launch
The retailer has always benefitted from best-in-class store operations, centralized logistical platforms, and has been a leader in consumer insights that localize assortments. The company has utilized these strengths well in the emerging world with the strategy of “speed to scale” in which the goal is to achieve the number one or two positions in the market within five years of entry. This has worked well in countries such as Thailand and Slovakia. Leveraging their knowledge of centralized logistics their goal has been to fill the gap between convenience store and super market with stores that are supplied from centralized warehouses.
However, the U.S. has proved more challenging
Tesco’s F & E was originally presented as a “top up” or “fill in” retailer that could satisfy consumer demand for trips where fresh foods like vegetables, fruit, and dairy items were needed during the week, but did not require a full shopping experience. This concept did not prove formidable for Tesco as they found it hard to connect with US shoppers to form any level of loyalty.
TESCO made a series of blunders in its initial strategy due mainly to lack of knowledge of its U.S. customer base. Although TESCO attempted market research when entering the U.S. by sending 50 of its British executives to live and ‘learn’ California, it failed to grasp the cultural nuances of American stores perhaps due in part to employing an all expat team. The motivation behind this was in part was to successfully transfer Tesco’s culture to the states; however, it failed to recognize the difference in taste of their new marketplace. For example, American shoppers found the interior décor- stark concrete flooring, which potentially wasn’t important to British customers, off-putting and unwelcoming.
The lack of local knowledge was made further evident by:
- Store Size and Appeal: F & E stores are 75% smaller than typical American supermarkets and do not offer bulk shopping like their core competition of big box stores. Furthermore, they were visually unappealing with cement floors and lack of welcoming aesthetics.(BBC article)
- Lack of “car culture” knowledge: Americans buy a week’s worth of groceries and load up their trunks—unlike the daily runs to the supermarket that F & E seeks to attract.
- Location! Location! Location: In California, store location has been hampered by the fact that Tesco stores were placed on the inbound side of the road—the side those suburbanites heading into the city for the work day drive on—rather than on the outbound side—where suburbanites would be more likely to pull over and buy a quick dinner on their way home. Also, the freshly prepared meals that F & E boasts may have worked if stores were located downtown—where there is more foot traffic.
- Foreign market entry strategy- When TESCO entered the U.S. it did not form a joint venture like it had in other countries; something that would have given it a leg up in understanding the US market. They also did not incorporate their loyalty cards the way they had done in the U.K. and abroad.
Perhaps Tesco was hoping to stave off competitors from the onset, but the reality is that while Tesco has been trying to right its blunders—closing several stores and delaying store openings—competitors, like Wal-Mart, were busy incorporating the good things the UK retailer brought from over the pond into their strategy.
Present Strategy
After its initial gaffe and multiple years of huge financial losses, Tesco executives were not ready to give up as the US was too attractive of a market to do so. They altered their strategy starting with the appointment of a new CEO – Tim Mason. They halted new store openings and began listening to US consumers. In January 2010, Tesco announced that it would be closing 12 stores due to poor performance. Tesco had gained key insights into what kind of store F & E was to become. They increased the number of items on shelves without increase the their footprint by adding height to the rows, they painted store walls and added new décor, and begun catering to an American clientele—through weekly specials, big colorful signs, and other marketing techniques geared at Americans. The new and improved F & E along with the company’s promise to breakeven in the next year are converting Tesco’s spot in the US market from being designated as a black hole – a highly desirable market where the company consistently dumps resources but can’t seem to find success.
Local operations
Tesco had tried to centralize its US operations, building a distribution center in Riverside County. However, the location and number of their stores was insufficient to leverage the savings. The closing of stores and reopening in new locations allowed F & E to fully realize the centralization savings. The theme of centralization extends all the way to management with Tim Mason, the British expat CEO of F & E, now taking on the roles of Tesco’s deputy CEO and chief marketing officer4. Such appointment of a successful subsidiary market executive to advise the global operation further portrays to movement of the US market from being a black hole to being more of a strategic leader. Mason appears to be looking to correct Tesco’s initial lack of localization by doing a lot of listening. Shoppers who visit the F & E website, can access a link to contact the CEO directly.
““In order for the Tesco Board to better reflect the global nature of our business, provide more focus on key areas of performance and deliver on our immediate objectives, we made additional changes in March 2011. Tim Mason has become Deputy CE O and Chief Marketing Officer in addition to his role as President and CEO Fresh & Easy.” – David Reid, Chairman of Tesco
Another thing that has helped propel F & E back into the spotlight is their focus on Green technology and organic food. Its diesel trucks run on hybrid technology. (www.freshandeasy.com)The stores use energy-saving LED lights, and refrigerator doors designed to conserve energy. The Riverside distribution center is powered, in part, by solar panels. Following recent headlines over the beef safety, a March 24th, website press release states,
“At Fresh & Easy, we have never, would never, and will never use “pink slime” in our ground beef. We believe in fresh quality products you can trust, which is also why we never use high-fructose corn syrup, added trans fats, artificial colors or flavors in any Fresh & Easy brand products. Not because we took a poll or reacted to a headline, but because we’re feeding your families and our families with that we put on our shelves.”
A Fresh & Easy Future?
In order for Tesco’s future in the U.S. to be both fresh and easy, Tesco will need to stay the course of leveraging its existing strengths and understanding its clientele better. In the past they had heavily underestimated the importance of their modification of their emerging market strategy into that of the U.S. They need to continue to focus on their niche, high quality and low cost products available in the customer’s neighborhood. The need to be aware of their clientele and if, for example, US consumers don’t like the off-putting approach of sealing ‘fresh’ produce in plastic like Tesco is known for, then they should reassess their presentation.
Initially, Tesco’s high hopes for the US F & E fell lower than expected: the year-on-year losses are continually in the decline5. Their US customers did not understand the value they could get at F & E, both in terms of the organic, custom-designed meals and in terms of the bang for your buck. However, F & E customers are more recently giving better feedback about both the products, and services offered. Moreover, manufacturing productivity has increased, as have year-on-year like-for-like sales.
Although F & E still is not expecting positive profit in 2012, this year will see the opening of 50 new stores and the company may even break even for the first time thanks to costs savings created in two recent acquisitions and its continued revenue growth.4 What does this mean for the UK based giant and its competitors? Only time can tell, but it is safe to say that F & E is not packing up and going home but looking to make a fresh start in the U.S., whether easy or not.
References
- Tesco to close 12 Fresh & Easy Stores, http://supermarketnews.com/retail_financial/tesco_close_1005/?cid=upd 13 Fresh & Easy Stores to Close
- Fresh & Easy to close six stores in Las Vegas, http://www.lvrj.com/business/fresh—easy-to-close-six-stores-in-las-vegas-104732049.html
- Fresh & Easy Exec: Tesco fills gap in U.S. Market, http://www.progressivegrocer.com/print/topstory/fresh-easy-exec-tesco-concept-fills-gap-in-u-s-market/26447/
- Tesco Annual Report and Financial Statements 2011, http://ar2011.tescoplc.com/pdfs/tesco_annual_report_2011.pdf
- Kantar Retail, Tesco Global Session Key Regional Growth Review. September 2011.
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