At PMA, we were pulled aside by many Tesco vendors and competitors to exchange intelligence.
There seems to be less optimism on the success of Tesco in the United States than six months ago. Basic issues:
There is a notion that Tesco has just stopped listening.
Tesco is demanding certain product sizes and standards of uniformity that simply cannot be obtained without enormous waste of product. Whether Tesco realizes it or not, insisting on these standards will involve paying for a lot of product its customers won’t get value from.
- Restrictive Contracts
The contract with Wild Rocket Foods seems to restrict Tesco from utilizing its vendors’ capabilities to reduce logistics and distribution costs.
- Margin Evaporation
Efforts to come in below discounters such as Trader Joe’s on price make no sense in the context of the cost structure Tesco has built.
The facilities that have been built are so out of scale to the initial store count that Tesco will bleed red for years.
- Too Many Test Sites
Many of the stores are located in areas where they can’t possibly succeed. Tesco justifies this as a form of “market research,” but vendors doubt the budget has been set up that way.
Ironically, the biggest problem for Tesco may come if they have an instant success. We also saw sketches or heard descriptions from several retailers of their “Tesco Killers” — although “Tesco Blockers” are more accurate.
Many competitors in the areas where Tesco intends to operate have already spiffed up stores near Tesco locations. But retailers across the country are looking at small format stores. If Tesco hits a win, count on a roll-out all across the country of small format stores by retailers with the distribution already set.
When Wal-Mart rolled out its supercenters across America, supermarkets didn’t feel they could roll out comparable concepts. They didn’t have the expertise or distribution in general merchandise. But the Tesco concept is only a sub-set of what supermarkets already sell with perhaps an augmented prepared foods offer.
Kroger, Safeway, Supervalu, Ahold, Delhaize, Publix, H.E. Butt and more are not going to wait for Tesco to decide it is ready to roll into Cincinnati or Boston.
So many vendors are pessimistic about the chance for success, and many competitors are prepared to pounce if it works. It is hard to imagine the concept being worthy of the build up.