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Tesco, Part II

If a good gauge of interest is how quickly the industry responds to a piece we run, then the item we did about Tesco and its plans to enter the US market indicate that the industry is paying close attention. The item wasn’t on the web for 15 minutes before my phone was ringing, and it took just a bit longer for the first e-mail to arrive. And by early morning in London, the input was overwhelming.

We’ll be looking at comments on this subject for months but, for now, a top line response from someone in the know:

This article is an excellent synopsis. Tesco’s US approach is definitely a format that the Pundit will want to track. From the best that I have been able to determine, this store will be a morphing of Trader Joe’s with Chevron’s ‘Extra Mile’. This is almost the same way that Home Depot and Circuit City became category killers; except on a smaller scale. The intent seems to be to carve out and specialize in the most profitable sectors of the conventional supermarket. They will target the California soccer mom, whose frenetic lifestyle dictates some corner-cutting to save time in meal planning without compromising the quality of the food that she serves to her family.

Sure, the challenges will be great for Tesco. However, you cannot say they haven’t done their homework.

Their management team has been working in California for over two years. Their partnership with Safeway in and their participation with Share Groups have given them unprecedented access to market intelligence. If anything, Tesco is masters of analyzing data. The jury may be out, but the opening arguments are persuasive!

Our company is a large supplier to Tesco in the UK. We have found them to be fanatical in their systems approach and their desire to provide the ultimate consumer experience. The data sharing that we receive about consumers of our product is amazing and helps us to leverage that information to better serve the ultimate consumer in the UK.

West coast retailers have a real challenge on their hands. That’s going to make all of us, whether vendor or retailer, better. The consumer is going to be the ultimate winner, and that’s the best thing that ever hit the business.

This writer’s enthusiasm for the business is evident. However, I’m not certain everyone is as focused on how good a dramatic increase in competition is going to be for everyone.

US suppliers are also warned to shape up:

Their food safety requirements are the most stringent on the planet.

Over and over again, the Pundit is hearing from suppliers explaining how extraordinarily difficult it is to meet Tesco’s standards.

I was impressed that your article revealed their efforts at getting their UK value-added suppliers to come to California. I was wondering how they were going to handle that aspect of their business.

And those who understand what they are doing are saying that on these products, success or failure will ride.

These value-added perishables, especially prepared foods, are going to be the crucial factor in determining their course in the US. It is this higher-margined, but perishable portion, of the business that will be the bellwether of Tesco’s success. It’s no wonder that they would want to import a turnkey solution.

But even assuming execution is perfect, readers report that the concept has real risks.

My key question is whether the West coast mom will stop, get out of the car, purchase a rather expensive main dish and perhaps a few side dishes for dinner. The ease of purchase is a higher hurdle than the UK mom exiting the tube station and finding oneself at the door of Tesco Express and only being a few doors away from her London flat.

Indeed, and this is the great dilemma. Tesco is proposing to open, very quickly, hundreds of stores all built in a format that has no track record of consumer acceptance.

This is a “brilliant or bankrupt” strategy. If it works, Tesco and its executives will be hailed as pioneers and innovators and will establish a new category for food retailing in the US. If it doesn’t work, Tesco will be attacked as foolhardy adventurers so anxious to make a big splash they were unwilling to test out their concept in America.

So which will it be?

Well, there is already a substantial market for high quality prepared foods in urban areas. If they were talking about doing this in Manhattan, San Francisco or Boston, it would be uneventful. It isn’t surprising that Wall Street bachelors, midtown lady lawyers and yuppie couples stop on the way to their apartments to pick up some food

But move out to the burbs and the soccer moms and things change. Money has other uses when you have a family, so they don’t go for higher margins as quickly. And getting a couple of kids unstrapped from the car seats and strapping them in again starts to seem like a big reason not to go into a store.

If Tesco really wants to revolutionize the business, it should refuse to rent non-urban locations without drive-throughs. Drive-throughs are the American way. Retailers hate them because the retail DNA wants to drag people past items they don’t want in order to induce impulse buys. But that is not a consumer-friendly philosophy.

We talk about retail learning from foodservice. Well, the business of big hamburger chains is now going through the drive-through — 70% of business at a chain like Burger King. And the big issue is how can everyone do it faster.

The pizza business is driven by delivery. Casual dining chains, such as Outback, Carrabba’s and Applebee’s, went to curbside pickup to remain competitive.

It is very clear that in this market, it is not just the food, the quality and the location — a lot of people simply don’t want to get out of their cars.

In addition, although Tesco hasn’t disclosed the locations it has leased, if it is really true that they are going to open 400 stores in two years, it is highly likely that they will wind up with a lot of sub-optimal real estate.

Not enough new centers are built or vacancies occur to pick up all prime locations within range of one distribution center. And moving into existing centers involves complicated negotiations with existing tenants.

In fact, local retailers regularly wait years, sometimes decades, while romancing landlords and tenants to get prime space. It is just almost impossible to get hundreds of prime spots in a short order.

Our reader compares the concept to the Chevron Extra Mile concept but, in so doing, points out the real estate difficulty the chain will face. The first rule in convenience stores is that if you don’t sell gasoline, you wind up with secondary locations.

Look at any high traffic corner. It has a gas station sitting there.

Wal-Mart has been pretty lucky in this area because its initial rollout occurred in rural parts of the south, where there was plenty of land and the large scale of its stores made them a sufficient draw to make people willing to travel to the outskirts of town.

Now, as they go closer to urban areas, they are encountering the same difficulties.

Maybe Tesco has some tricks up its sleeve. If they don’t have drive-throughs, maybe they will offer curbside delivery or even home delivery. Maybe they didn’t allow their rush to build scale to lead them into bad locations. Maybe they will offer product so compelling, with such a great value proposition, it won’t matter what else is wrong.

I hope they succeed.

But in the absence of evidence to the contrary, I stick to my conclusion and repeat verbatim from yesterday:

First, Tesco is making a massive bet on changing America’s shopping habits, and changing habits is very difficult.

Second, Tesco’s bet on private label is dangerous for a company whose name has no brand equity with Americans.

Third, the substantially lower population densities in the US will make it difficult to sell at the volumes necessary to keep the fresh food, especially the fresh prepared food. It also will be difficult to keep it fresh, safe and appealing. Then the concept will face a dilemma: Keep stocking the fresh prepared foods in variety but experience unacceptable levels of shrink, or scale back the variety, which will make the stores unexceptional. It’s a Hobson’s choice, but could well be Tesco’s.

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