Reference no: EM131284153

Tesco Expands in the United States: The Assignment I n its home market, Tesco operates more than 2,300 stores in four formats: supercenters (large stores with a limited range of nonfood items), regular and compact supermarkets, and Tesco Express convenience stores. While the U.S. market entry has been limited to small neighborhood markets, Tesco raised eyebrows with an ambitious plan to establish its own distribution network. Management expected prepared foods such as salads and chicken-based dishes to be big sellers.

To execute its plan, Tesco brought two suppliers across the Atlantic: Natures Way Foods, which specializes in salads, and 2 Sisters Food Group, a leading UK poultry purveyor. Management was confident it had identified an opportunity. The small-store format makes it unlikely that Tesco will encounter the type of backlash that has been directed at Walmart in some communities. Speaking about the U.S. retail environment, Tim Mason, director of marketing and property at Tesco, notes, "Generally, shopping either means the big-box model, where you get in your car once a week and drive out of town to do your shopping, or the convenience store at the end of the street. We found that the [U.S.] market for convenience stores at the end of your street is not very well served. There is more consumer opportunity and more retail opportunity."

At the end of 2010, 6 years after the launch, it was clear that the Fresh & Easy venture was performing below expectations. Cumulative losses totaled more than $600 million. Only 145 stores were operating; the Tesco team had anticipated having 200 stores open by the end of 2009. Some industry observers question whether Tesco fully understands American consumers.

In a typical U.S. grocery, for example, many fresh fruits and vegetables are stacked loose in coolers in the produce section. At Fresh & Easy, by contrast, most produce is displayed in bags. The emphasis on private label brands is cited as another drawback. As one retail executive explains, "Fresh & Easy is very highly dependent on private label and the U.S. consumer likes brands. Fresh & Easy was not a known brand, so by focusing on that, there was nothing for the consumer to hang on to." The company does have an impressive track record outside the United Kingdom; Tesco has even penetrated markets that have proven to be difficult for Walmart and Carrefour.

For example, Tesco entered South Korea in 1999. Samsung Tesco, an 89-11 joint venture, operates Homeplus "value store" hypermarkets. Homeplus is known for more than just shopping: The stores also feature coffee shops and restaurants. As one analyst noted, the joint venture approach has served Tesco well. "Thanks to its local partner, Tesco has tailored its service well to local tastes, while Walmart and Carrefour have struggled to win over consumers with their focus on prices," the analyst said. In 2008, Tesco acquired E-Land, a local chain with 36 stores.

Today Tesco has more than 300 stores in South Korea; annual sales of $6 billion make Korea Tesco's most successful global market entry to date. Tesco has also been successful in Japan, although on a limited scale. Before entering the market, a team was dispatched to live with Japanese consumers, accompany them on shopping trips, and observe their food preparation customs. As David Reid, chairman and head of Tesco's international operations, explained, "In America you have big cars, you can drive several miles in 5 minutes, you can buy in bulk and store it in your double garage. Chalk and cheese compared to Japan.

In Japan we learned that some housewives shop on bikes and shop daily. They visit six or seven shops looking for deals." Armed with these insights, Tesco acquired C-Two, a small discount convenience store chain with stores in Tokyo. At the end of 2011, Tesco announced a shake-up in the Fresh & Easy management ranks. Chief marketing officer Simon Uwins, one of the original members of the start-up team, left the company. Fresh & Easy CEO Tim Mason reorganized the commercial and marketing units into a single team. The move came as the first Fresh & Easy store was opened in central Los Angeles. Tesco also introduced Friends of Fresh & Easy, a new loyalty card based on the company's highly regarded Clubcard. Back at Tesco's UK headquarters, new CEO Philip Clark is intent on making the U.S. operation profitable by the end of the 2013 fiscal year.

As the former head of Tesco's Asian and European divisions, he also sees important opportunities to leverage the company's online marketing expertise in China, Czech Republic, Poland and other key emerging markets. Explaining his strategy, the CEO noted, "I don't think you can afford to say it's all sequential, build out a store network and then do the Internet. I think what you've got to say is, ‘We've got a good store network, we've got to do grocery home shopping, what about non-food? What next?'"

Discussion Questions

1. What are the keys to Tesco's success in the competitive global retailing industry?

2. In view of the tough retailing environment, what additional changes do you think Tesco might be forced to make to the Fresh & Easy concept?

3. Which of the market entry strategies identified in the chapter is Tesco using in the United States? Do you think this is the appropriate strategy?