In June of 2007 I blogged about Tesco (the British supermarket, and the world’s third largest retail firm) and its entry into the U.S. (see Tesco’s American Foray for background). At the time, I expressed some serious reservations. I suggested that Tesco would have difficulty in the U.S. market for several reasons:
- Tesco would have trouble convincing customers to come to stores that offer more convenience simply because they are smaller. I suggested that American consumers actually prefer the variety that larger supermarkets have to offer.
- Tesco would likely end up in a classic “stuck in the middle” trap because they were targeting the middle-market (not the mass consumers and not the upscale consumers). As a result, they would have trouble appealing to the top portion of the middle market that prefers to shop at the upscale chains, and the bottom portion of the middle market that prefers to shop at the downscale, mass market outlets. In trying to broadly appeal to the middle market, they therefore wouldn’t satisfy any niche adequately. For this reason, I argued that Tesco would find itself squeezed on both sides by the likes of competitors such as Whole Foods and Wal-Mart.
- Tesco would face difficulty precisely because they were foreign. Foreign firms face difficulty because they often don’t speak the language, don’t know the culture, lack local operational experience and infrastructure, and don’t know how to navigate the legal and regulatory environment. All of this results in increased costs for foreign firms, and places them at a competitive disadvantage vis-a-vis their domestic counterparts.
- Tesco is competing as a foreign entrant in an industry with razor thin operating margins, so there’s little room for error.
Interestingly enough (you had to know this was going somewhere), I came across this article from last week’s edition of the OC Register (see Tesco’s Fresh & Easy Off to Rocky Start). This article seems to suggest that Tesco is facing many of the difficulties I identified. These issues have manifest as worse than expected results. As Nancy Luna details:
…despite developing a loyal crop of fans since launching in November under huge fanfare, Fresh & Easy [Tesco's U.S. stores] faces some not–so-easy problems, critics and industry experts say.
This week, a Piper Jaffray analyst said Fresh & Easy sales are falling short by at least $30,000 a week. The report comes only days after a Florida-based supermarket consultant told a group of British investors that Tesco has miscalculated the needs of American shoppers with its confusing grocery concept. Prevor [the Florida-based supermarket consultant] estimates that stores are generating average weekly sales of $50,000. The Piper Jaffray report was much more generous, predicting revenue of about $170,000 a week – just below Fresh & Easy’s sales goal of $200,000.
…industry watchers say Fresh & Easy has missed the mark. Among the chief problems: shoppers are put off by labels…Many also complain that the stores are bare bones with very few brand selections. “Fresh & Easy is trying to be an easy store,” said Jim Prevor…”It’s hard to be convenient, if people don’t feel (stores) meet their needs.” As a result, the 10,000-square-foot stores are often described as ghost towns with eager to please clerks often outnumbering shoppers…many [consumers] are bothered by [Tesco's] Fresh & Easy’s confusing labeling system…”It’s a catastrophe for them”…
It’s not all bad news for Tesco. In all fairness, we certainly can’t attribute all of their poor results to mis-management. We can chalk a portion of it up to poor timing – it’s not as if the middle of a credit crunch is the best time to enter the U.S. retail business. Unless, of course, you consider poor timing a result of mis-management. But I guess that ultimately depends upon whether you believe the credit crunch was forseeable to Tesco’s managers ex ante. I’d like to give them the benefit of the doubt. Nevertheless, I still believe that Tesco faces some serious headwinds in the U.S. market (a market that already faces some serious headwinds of its own).