87-The Flexibility of a Great Retailer

Managements who perform very well in one market may stumble badly in another, even if the two markets seem quite similar. Often, poor assumptions cause expensive failures. Here is a story of three such failures and the assumptions that caused them.

Posted 3/12/09

Many people in the United States have heard little of Tesco, but it is a great retailer. In fact, it is the fourth largest retailer in the world, following Wal-Mart, Carrefour and Home Depot.

Tesco has about 30% of the total grocery sales in the U.K. There it operates with several different formats and price points. It has been very successful, both in the U.K. and in the several other countries in which it has operated.

In late 2007, the company opened its first U.S. stores, called Fresh & Easy. There are now 114 of these stores spread out through California, Arizona and Nevada. The Fresh & Easy format calls for small stores of about 10,000 square feet, focused on food, with an “Every Day Low Price” pricing scheme where prices were 10 to 25% below those at regular grocery stores.

The economy immediately presented Tesco with big problems. The Western U.S. has been hard hit by the recession. Customers have grown accustomed to “Every Day Low Prices.” As a result, while Fresh & Easy generates more sales per square foot than the industry average, the company has not been able to open as many stores as it had hoped.

The company has responded quickly and creatively. Since customers began to take “Every Day Low Prices” for granted, the company began emphasizing extra low prices on individual items. They promoted low-priced special items, using radio commercials. As an example, the company offered $9.99 Valentines Day bouquets through radio commercials. The company also began emphasizing its Buxted brands in its stores. In the meat aisle, these private label products are trimmed less well than the standard Fresh & Easy products and cost as much as 40% less.

These pricing moves are impressive. Most low-end competitors, such as Fresh & Easy in the U.S. market, could not afford to emphasize even lower priced products and expensive mass media advertising. (See the Perspective, “Turmoil Below: Confronting Low-End Competition” on StrategyStreet.com.) Few, if any, low-end retailers would do this, but Tesco did.

The company also has made changes in the look of its stores. The company repainted the walls in pastels and added a warmer color to the concrete floors after customers reported that they thought the stores were too sterile. Remember, most of these stores are less than a year old. The maintenance schedule did not call for a new paint job. But the customer did.

I am not sure whether the current Tesco concept will succeed. It is likely, however, that Tesco will find a format that works well in the United States. Their moves to date demonstrate that they are a flexible and creative company, determined to succeed.

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Update 2022:

Tesco is the biggest retailer in the UK.  It has a strong international presence with more than 6500 worldwide stores.  It’s Fresh & Easy concept failed in the United States.  It opened its first store in November 2007 and by the end of the year had 150 stores open across California.  By 2009 the US concept reported a loss of $200 million and those losses continued.  In April 2013 the company withdrew from the US market at a cost of $2 billion.

What were some of the problems?  The stores were small and designed for people who want to shop daily but the average US consumer shops much less frequently. Customers also complained about the stores having too many self-checkout kiosks.  The original plan was to focus on ready meals which people would pick up at the Fresh & Easy store.  Americans tend to order takeout and buy ready-made meals less frequently.  While the company planned to focus on middle-class shoppers, many of the stores were opened in poorer areas.  Their food focused more on British tastes than American.

The US market apparently did not need another Price Leader (Stripper) offering. Tesco was also probably discouraged from entering the Standard Leader market when facing tough competition from the likes of Kroger. This was an example of a very successful Standard Leader competitor in the UK entering the US market as a Stripper competitor and failing. It is likely that Tesco offered too many shopping benefits for its “everyday low prices”. See HERE for more perspective on this problem.

Marks & Spencer’s and Sainsbury’s entrants also failed in the United States.

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Update 4/26

The Blog cites three companies, all successful in the UK, who failed to enter the US market successfully. These companies are Tesco, Sainsbury and Marks & Spencer. Let’s take a brief look at what each of these companies attempted to do in entering the US market and seek to draw some overall conclusions based on their failures.

Sainsbury was the first to enter the US market. It acquired Shaw’s Supermarkets in 1987. It sold that investment in 2004 because the management demands of the US market distracted UK management from performing well in its own market.  The company did not lose money on that investment.

Marks & Spencer acquired Brooks Brothers in the 1980s. It paid $750 million for that acquisition, but sold it in 2001 for just $225 million. At the time of that sale, Brooks Brothers was considered somewhat outdated and overpriced. The Marks & Spencer was unable to add much value to its acquisition. Its products were too conservative for the evolving American consumer and had size offerings that did not fit an American consumer well. Aside from Function issues, the company adopted a poor Price strategy of premium pricing. Consumers felt that the company did not offer enough value to be at a premium price and, further, that it was too high-priced even for the middle of the market. Marks & Spencer also bought Kings Supermarkets to serve as a base for a much larger US operation, but faltered there as well. The company exited this investment in the US market in 2001 with the loss of 31 million British pounds.

Tesco launched Fresh and Easy stores in California, Arizona and Nevada in 2006. The initiative stumbled from the beginning. The stores were closer in size to a Convenience mart than a supermarket. Tesco assumed that the US consumer would shop daily as did the typical British consumer. It offered sparse decor, limited product offerings, European-style packaging and very limited staffing. While the chain eventually reached over 200 stores, its performance was poor and Tesco discontinued the project in 2013. The entire venture cost Tesco nearly 1.2 billion British pounds.

With a view from 10,000 feet, it seems like the major failure of each of these companies was primarily a Function failure. The companies did not offer products and services that the US consumer enjoyed with other US-based retailers. Overall, it appears that there are three management assumptions behind these failures. First, the companies assumed that they could transfer a successful British retail concept to the much larger and well-established US market. But the market did not seem to need any of these new entrants. Second, the companies showed an incomplete, or even wrong, understanding of American tastes, culture and shopping experiences. Third, investment in the US retail market was considerably more complex than assumed. Especially, the companies suffered from the logistical challenges of serving a wide geographical retail market which was already reasonably well served.

All three companies learned expensive and valuable lessons from their forays into the US market. Only one of the three, Sainsbury, has returned to the US. It did so by forming partnerships with well-established US competitors. In 2022, it formed a partnership with Target to sell food items. In 2026, it formed another partnership with Nordstrom to offer some of its womenswear products.  This is a much lower risk approach to the market, requiring little capital investment and relying on its partners to help it make its Function decisions.

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