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Tesco Strikes Out in the United States Essay
Tesco, United States, Essay
Tesco is the largest supermarket chain in the United Kingdom. The company’s slogan is “Every Little Helps”; it executes on that claim in various ways, including its Clubcard loyalty program and an online grocery retailing operation that fulfills more than 100,000 orders every week. Tesco’s supply chain including relationships with suppliers and distributors is one of the best in the industry.
The retailer performed solidly during the recession, and the company has pursued growth opportunities in non-grocery areas such as banking and broadband services. Tesco generates 70 percent of its profits in the United Kingdom, where it is the largest private-sector employer.
Despite these strengths, Tesco lags behind retailing giants Walmart and Carrefour in terms of global presence. To address this weakness, Sir Terry Leahy, Tesco CEO from 1996 to 2010, formulated and implemented an expansion strategy. For example, his executives initiated negotiations with India’s Bharti Enterprises about possible joint ventures. Tesco is also expanding into China and Japan. Tesco currently has operations in 12 countries.
Sir Terry Leahy’s Vision: Ubiquity in the United States
The United States represented a key expansion destination. Leahy committed hundreds of millions of dollars to open small stores in Nevada, Arizona, and California, a decision that industry observers described as “one of the most widely watched events in the global retailing sector.” The former CEO’s vision was to have 10,000 small convenience stores “on every junction, in every major city in the USA.”
The first stores had 15,000 square feet of floor space and bore the name “Tesco Fresh & Easy”; they offered a focused selection of fresh foods, packaged goods, and prepared meals (see Exhibit 12-13). Commenting on the $1 trillion U.S. grocery market, Leahy noted, “Demand for convenience shopping is very well developed there. There are lots of wealthy and busy people and it’s multicultural. You’ve got to start somewhere and it’s important to do it in bite-sized chunks.”
Tesco operated nearly 200 Fresh & Easy supermarkets in the United States. The first store opened in November 2007; as the economic environment deteriorated, Tesco was forced to adjust its strategy. To appeal to budget-conscious shoppers, Tesco used aggressive price promotions. By early 2013, however, executives decided to shut down the operation after losses totaling £1 billion ($1.6 billion).
Source: Paul Harris/padficco astnows/Newscom.
In its home market, Tesco operates more than 3,300 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 was 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 made it unlikely that Tesco would 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, noted, “We found that the [U.S.] market for convenience stores down your street is not very well served. There is more consumer opportunity and more retail opportunity.”
At the end of 2010, however, 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 questioned whether Tesco had fully understood American consumers. In a typical U.S. grocery store, 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 was cited as another drawback. As one retail executive explained, “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.”
Tesco Around the World
In other cases, the company does have an impressive track record outside the United Kingdom; Tesco has even successfully 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 more 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-Network, a small discount, convenience store chain with stores in Tokyo.
Retooling Global Operations
Back at Tesco’s UK headquarters, new CEO Philip Clarke was intent on improving operations, including making the U.S. unit profitable by the end of the 2013 fiscal year. He also took steps to respond to the incursions by Aldi and Lidl in the core UK market. Clarke announced The Big Price Drop, his plan to beat the hard discounters on price.
Industry observers who had called for Clarke to “go nuclear” believed his cuts did not go far enough. Other initiatives included opening the family-friendly Giraffe restaurant chain and Harris + Hoole coffee cafes in some of Tesco’s largest stores.
At the end of 2011, Tesco announced a shakeup in the Fresh & Easy management ranks. Chief marketing officer Simon Uwins, one of the original members of the startup 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.
As the former head of Tesco’s Asian and European divisions, Clarke also saw important opportunities to leverage the company’s online marketing expertise in China, the Czech Republic, Poland, and other key emerging markets. Explaining his strategy, the CEO noted that it’s simplistic to think about building out a store network and then simply adding on Internet services. The question, in Clarke’s view, is how to enter the grocery home shopping space.
More Change at the Top
In 2012, after £1 billion ($1.6 billion) in losses, Philip Clarke announced he was closing Tesco’s U.S. business down. Then, in October 2014, Clarke was replaced by Dave Lewis. Lewis had spent his entire career at Unilever, most recently as head of the personal products unit; Tesco had been one of his key customers.
Although many in the industry praised Lewis for presiding over a period of sustained growth at Unilever, some questioned whether his lack of retail experience would be a liability. The most fundamental issue facing the new CEO was price. These same observers noted a second important issue: Tesco had lost the emotional connection with its core customers. Could Dave Lewis make Tesco loved again?