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Tesco’s Problems With Fresh & Easy Prompt A Question:
Why Is It So Hard For Retailers To Cross The Pond?

With all the problems that Tesco has had in making Fresh & Easy a success, and memories of the failure of Sainsbury’s when it bought Shaws, and Marks and Spencer when it bought Kings, one wonders why British retailers struggle so desperately in America.

Andrea Felsted and Barney Jopson were thinking through this question and wrote a piece in the Financial Times titled, Bridging the pond is a stern test for retailers:

Tesco’s move into the US has been far from smooth. It has racked up losses of £574m and sucked in £800m of capital, and is now embarking on an overhaul of the chain in an effort to break even by the end of the 2012/13 financial year.

While Tesco is still fighting its corner, the history of retail is littered with British store groups that have failed to crack America.

In 1988, Marks and Spencer bought Brooks Brothers, the US clothing retailer, and King’s, a US supermarket chain. Both were later sold for a fraction of their purchase prices. It joined WH Smith and Laura Ashley in retrenching from the US.

Dixons Retail bought US chain Silo in 1987. A recession followed and Silo, which had over expanded, was unable to compete with bigger rivals. Dixons sold the chain and took write-offs of more than £200m.

On the face of it, crossing the Atlantic should be simpler than entering an emerging market. After all, both countries speak the same language.

“We both speak English and that really is the problem,” says Jim Prevor, who runs the Perishable Pundit blog. When a retailer enters an overseas market, whether it is Korea, China, Brazil or Russia, “they listen more. They engage more,” he says. “Whereas when they come to the US, the similarities are so obvious, the ability to function here is so obvious, that there is tremendous temptation to think that Americans are just like Brits or Brits are just like Americans.”

It is not clear what the long term future of Fresh & Easy will be. Tesco claims that new stores in Northern California are doing better. This may be so. We have long stated that the Fresh & Easy concept would work better in more urban venues.

It is not that Fresh & Easy is so terrible a store; it is that people in car-focused places such as suburban Phoenix or Las Vegas have little need for such a concept.

Our point, that Tesco caused itself unnecessary losses by freezing out Americans, both in its executive ranks and in the vendor ranks, reads true as the article goes on to point out Tesco has been expensively learning things that any US CEO or the US vendor community could have told them before the first store opened:

Tesco found that US shoppers like to pick up and touch their fruit and vegetables, and is trialing more loose produce in stores. Mr Mason says this is a “conundrum” as the less produce is handled, the better it is. But he acknowledges that some US consumers found its prepacked fruit and vegetables “a bit plastic and a bit sterile.”

Americans like to stock up their spacious freezers with a large amount of frozen food. Consequently, Tesco has increased the number of frozen lines in stores, with products such as frozen oatmeal.

“Frozen is an area of opportunity for us still,” says Mr Mason.

There are some other differences. Dairy-based desserts such as yoghurt, are less popular in the US than Europe. However, Tesco has introduced a range of Greek yoghurts, which have become bestsellers.

It is also trying to bring quiche — not a popular dish stateside — to US consumers. “Real Americans don’t eat quiche,” quips Mr Mason.

US shoppers like brands, whereas 50 per cent of Fresh & Easy’s products are own-label. However, it is developing the Fresh & Easy brand further, introducing new products, from gluten-free foods to energy bars and tea and coffee.

At this point, as we discussed in our piece that analyzed the ramifications of Tesco’s decision to get out of Japan, it is pretty clear where we stand: Tesco values the opportunity to grow in North America. This is an important strategic goal.

Having sunk a couple of billion dollars into the US, new CEO Philip Clarke is hoping that the division can start making a few pennies. Although this will never justify the investment, that is lost money and if it can keep losses to a de minimis level or make a little, it will keep the division open, buy other operations and hope to build up a real division in North America.

But Mr. Clarke is tired of playing Margaret Mead studying the natives. If the losses aren’t restrained, and fast, he will move to close or sell Fresh & Easy.

By the way, our Vietnamese readers can find the translation of the piece here.

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