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Tesco Comes Clean: “Less Loyalty
In American Market”

We really should give out a lot of hat tips because Pundit readers from around the world — from top London investment bankers to California farmers to industry members on vacation in Anguilla and at work in their wholesale and retail operations, plus industry friends in South Africa and Australia — sent us copies of this article, simultaneously stunning and predictable, from The Sunday Times of London.

These readers knew, of course, that we have been the leaders in bluntly assessing the efforts of Tesco to open its Fresh & Easy division in the US. A body of thought and critical assessment that now exceeds one hundred articles, plus presentation on the BBC in London, conference calls with investor groups and a presentation at the Citicorp Annual Retail Conference in London, as well as commentary presented in dozens of newspapers and magazines from Los Angeles to London.

Now, after two-and-a-half years, in which Tesco tried to dismiss our critique, the admission finally comes:


By William Kay, Los Angeles

THE head of Tesco’s US operation, Fresh & Easy, has said its early market research was mistaken and it may make big changes to the stores.

“We may have assumed that certain elements of the Fresh & Easy brand would do the work for us and we would not have to go down and dirty on price. That may have been a mistake,” said Tim Mason, head of Tesco’s US business.

Ahead of Fresh & Easy’s launch in November 2007, Mason trumpeted the in-depth research that was done to identify a gap in the West Coast grocery market.

Marketing director Simon Uwins said: “We went into people’s houses, talked to them about food and food shopping. We went into their kitchens and poked around pantries.”

Unfortunately, Mason now admits, they did not poke around their garages, where they would have found huge freezer chests bulging with stockpiled meat bought on special offer.

“There’s less loyalty in the American market,” said Mason. “A Brit has to hear it a few times before you accept that people make up their minds where to go each week when they check out the special offers around the kitchen table.

“In a key moment at a focus group, one man told them that he had stopped shopping at Fresh & Easy because they no longer sent him a flier promoting the latest special offers.

“We came out of that meeting and said we had better make sure we hit everyone in the area with fliers.”

Recession has slowed expansion. There are 113 Fresh & Easy outlets, and plans to have 200 branches have been put back at least six months.

Acknowledging a problem is often the first step in solving it, so we commend Tim Mason and Tesco for coming clean. As we have since the beginning, we wish them well. The supply sector could use a vibrant and growing customer.

Unfortunately, the article gives every indication that Tesco is misdiagnosing the problem.

After initially thinking that Americans would be wowed by elements of the Fresh & Easy brand, Tesco executives now think that only getting “down and dirty on price” matters. In truth, the problem is this search by Tesco executives for the “one thing” that American consumers want.

We once wrote a piece in which we explained that Tesco’s biggest challenge was that we speak English in America. As a result, the same executives, who realize they must understand foreign cultures by deferring to their colleagues in other countries that do not speak English, think they personally know what to do and how to do it in America only because we speak the same language.

We’ll do some translation for them and save them a lot of research money by letting them in on the great secret to American retailing: It’s a big country! There is no “one thing” that Americans want.

The presentation of a uniform product assortment and merchandising offering before consumers diverse in income, ethnicity, age and other demographics is going to be a failure.

There are three known ways of dealing with this:

1. Micromarketing

This is the Wal-Mart “store of the community” concept. Same store, same brand, but customize the assortment and marketing based on the locality.

2. Multiple Banners

This is Aldi and Trader Joe’s model… it also is the model of Publix, Publix Greenwise and Publix Sabor. It is HEB and HEB Central Market. The concept or banner itself differentiates and is only built in appropriate locales for the demographic and psychographic mix the retailer is looking to attract.

3. Specialization

Whole Foods specializes in certain types of shoppers and certain types of neighborhoods. Even a Safeway Lifestyle store needs a certain type of neighborhood to make it work.

Right now, Fresh & Easy is dead in the water if it doesn’t make some drastic changes. It cannot ever be a profitable chain with its small-store count and low volume. It simply cannot defray the large costs associated with the large distribution center, the dedicated British transplant suppliers and the expensive British executive team.

So how does Fresh & Easy start to grow again? Well, we have suggested many times that Tesco should consider splitting the chain into a Trader Joe’s clone and an Aldi clone. These are the two most successful small formats in America and would both help Tesco focus its offering and provide two platforms for national expansion.

Presumably it could also intensively micro-market or shutter many stores and, in so doing, define Fresh & Easy as a more specialized concept serving certain types of consumers.

Tesco’s US consumer research shows a focus on price, partly because of the current economic environment but also because Tesco has been using coupons as its big draw. People who use coupons are a particularly price-focused group of shoppers. So its own marketing methods have made the Fresh & Easy consumer base more price-sensitive and promotion-driven than the average US consumer.

But the US is so big that any retailer who worries about the average shopper will soon have no shoppers.

The key is a specialized offering for each type of consumer.

In light of the difficulty of appealing to the diversity of American consumers, the question is: Does Tesco even want to try or will it just give up?

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