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NEW YORK -- What might seem like a baby step from the United Kingdom's leading retailer could have giant implications for U.S. food and convenience stores, industry observers said yesterday.
Tesco, a global multiformat chain with a long track record of success in its home country as well as other nations, said yesterday that it will enter the United States next year with a new convenience store format modeled after its successful Tesco Express concept. The stores will debut on the West Coast. Tesco is funding its organic growth with initial planned capital expenditures of up to 250 million pounds per year (US $435 million), with break-even expected by the second full year of operation.
Frank Badillo, a senior economist and director of the global research program at Columbus, Ohio-based consulting firm Retail Forward, called the move "ingenious" in light of the overbearing presence of Wal-Mart in the U.S. supermarket industry.
"It would be hard for Tesco to take on Wal-Mart head-on in the U.S.," he told Progressive Grocer. "Instead they're targeting a format that Wal-Mart isn't strong in, but one that Wal-Mart is looking to get more into -- smaller, convenience-driven stores like Wal-Mart's Neighborhood Market and other prototypes Wal-Mart has tested."
Tesco is basically "beating Wal-Mart to the punch," noted Badillo, because it will have the capability to expand faster than Wal-Mart can. The retailer might have extra confidence based on its successful performance in the U.K. vs. Wal-Mart-owned supermarket chain ASDA.
While Tesco didn't say whether it would open a supermarket format here, its entrance into the market will undoubtedly affect the U.S. supermarket industry, predicted Badillo. "It's another factor that will accelerate the trend of smaller independent supermarkets going out of business," he said. "It also spells for the convenience store industry another step in the ultimate shakeout of the industry, which, like the supermarket industry, tends to be dominated by smaller, independent chains."
Tesco Express, a format that Tesco now operates in five countries, features a large selection of takeout foods and healthy prepared foods. The retailer also has several private label lines, including a line of healthy foods.
Tesco said in a statement that its new format will be designed for the American market. The retailer added that it has conducted extensive consumer research on the U.S. market.
Tesco's chief executive, Sir Terry Leahy, said: "This is a tremendously exciting move for Tesco, which will add a new leg to our international expansion. The United States is the largest economy in the world, with strong forecast growth and a sophisticated retail market. It is a market we have researched extensively for many years, and over the last year we have committed serious resources to developing a format that we believe will be really popular with American consumers."
Not all analysts were optimistic about Tesco's plans yesterday. Some analysts noted that U.K. retailers have traditionally had a poor track record in the United States. Prime examples are Marks & Spencer and Sainsbury.
On the positive side, Neil Saunders, director of consulting at Verdict Research in the United Kingdom, lauded Tesco's "good, better, best" range of private label products, and said that the retailer is particularly skilled at developing a credible high-end food offering.
"In light of the legacy problems with traditional players, Verdict Research believes it is eminently sensible for Tesco to develop organically," said Saunders in a statement. "Tesco doesn't want to be burdened by the problems of a company it takes over, nor does it want to be encumbered by stores which are unsuited to its operation. Moreover, this route will allow the company to manage its capital expenditure and learn from experience as it expands store numbers. In short, it's the least risky route to entry. On the downside the company will need to work hard in establishing Tesco's credentials: It is virtually unknown in the U.S. That noted, providing the proposition is right, the notoriously fickle U.S. grocery consumer is one that can be won over relatively easily."
International growth is a key element of Tesco's strategy. With 2,467 stores, the retailer conducts business in 12 countries outside the United Kingdom, mainly in Asia and Central Europe. Over half of Tesco's selling space is now outside the United Kingdom.
The retailer has multiple formats, including hypermarkets, superstores, supermarkets, and convenience stores.