Dissecting Tesco's U.S. Gambit

Published in CSP Daily News

Wall Street Journal: Fresh & Easy "failed to capture imagination of American consumers"

Philip Clarke

LONDON -- Tesco PLC is poised to leave the U.S. after spending five unprofitable years and one billion pounds ($1.61 billion) on an ill-timed American gambit that now ranks among the British retailer's biggest failures, said The Wall Street Journal in a report headlined "The $1.6 Billion Grocery Flop."

(See Related Content below for recent CSP Daily News coverage.)

Tesco CEO Philip Clarke said last week that the company will likely sell or close its 199 Fresh & Easy stores. The U.S. chain, which Tesco unveiled in 2007, sought to lure American shoppers with a novel store format that is bigger than a convenience store but smaller than a supermarket, and focused on fresh-food offerings.

"It's likely, but not certain, that our presence in America will come to an end," Clarke said, speaking from Fresh & Easy's headquarters in El Segundo, Calif. "This is a very major change for the business."

In addition, Tesco said that Fresh & Easy CEO Tim Mason--the son-in-law of former Tesco CEO Ian MacLaurin--is leaving the company after 30 years, marking the latest in a string of high-profile departures by Tesco veterans since Clarke took over in March 2011.

Many Tesco investors have been frustrated over mounting losses at the U.S. unit. Clarke said a U.S. exit would allow Tesco to focus on "growing, more-profitable, better-returning businesses." Tesco left Japan earlier this year and is increasingly struggling in other markets, including Poland and the Czech Republic.

Clarke declined to comment on what went wrong at Fresh & Easy. Brendan Wonnacott, a spokesperson for Fresh & Easy, provided this comment to CSP Daily News: "Our focus remains on our people and our customers. It is business as usual in our stores, and we look forward to bringing our neighbors the same delicious, wholesome and affordable food they have come to expect from Fresh & Easy."

Tesco powered into the United States with the idea that it could revolutionize shopping for Americans with smaller stores of approximately 10,000 square feet, about one-fifth the size of a standard supermarket, said the report.

"Our team went over to live in the U.S. We stayed in people's homes. We went through their fridges. We did all our research, and we're good at research," former Tesco CEO Terry Leahy told the Journal in 2007. He said the result would be "the perfect store for the American consumer in the 21st century."

While it attracted a few loyalists, Fresh & Easy largely failed to capture the imagination of American consumers unaccustomed to British-style ready meals, self-service cash registers and unorthodox store layouts.

[To read CSP Daily News guest columnist Gerald Lewis' take on Tesco's U.S. adventure, including his 2007 column predicting Fresh & Easy's failure, click here.]

Many of Tesco's ideas--which found great success in Britain--were lost in translation. For example, the stores featured a large portion of Fresh & Easy own-brand products, even though American shoppers are far more brand-conscious than their British counterparts. The shops also opened in cities where people drive, meaning the journey to a larger supermarket--with all the national brands and a wider selection--was in many cases only a few extra minutes down the road.

"The main thing is that they underestimated how Americans shop," Natalie Berg, global research director at Planet Retail, told the newspaper. She said Fresh & Easy stores are "too clinical," with too much automation, for American tastes. "They didn't have a very clear proposition," she said. "Are they a convenience store? Are they a discount store?"

A May report by Morgan Stanley & Co. analyst Edouard Aubin cited by the paper outlined other shortcomings: Fresh & Easy stores had too narrow a product range; they initially didn't have bakeries, which American shoppers like; the stores were physically too cold; the flower departments weren't prominent enough; and the marketing was too focused on price. The report also noted that Tesco didn't roll out its loyalty-card program to the United States until last year.

Tesco's stumble shows how physical retailing is one of the few industries that has struggled to globalize. Food and general-merchandise retailers looking to enter new markets tend to succeed when they buy local companies that already have robust businesses, such as when German discounter Aldi Nord bought Trader Joe's in 1979 or when Wal-Mart Stores Inc. purchased British supermarket Asda in 1999. When supermarkets try to set up in foreign markets from scratch, they face an uphill climb, said the report.

Berg said the Fresh & Easy stores are likely to be sold piecemeal to multiple buyers, with possible suitors including Family Dollar Stores Inc., Dollar General Corp. or Aldi Sud.

Clarke said he didn't feel it was appropriate for Mason to lead the review process. "I wanted a fresh pair of eyes to run the process," he said.

As recently as June, Clarke said there was "great value" in the U.S. business," but he halted further investment in October and on Wednesday concluded: "I don't think there's any more that we could have done."