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Tesco’s Secret Expansion Plan?

The Times of London ran a piece entitled, Tesco Begins its American Dream By Seeking Gold In California, which reports that although the operation is not yet a month old, Tesco is planning a major expansion, including building a twin of its Riverside facility in Stockton:

Only three weeks after opening its first American stores, near Los Angeles, Tesco is looking at dozens of sites in Northern California as it seeks to extend its Fresh & Easy convenience chain. It is part of the supermarket’s expansion drive in the United States to give it 1,000 stores generating nearly $10 billion (£4.9 billion) of annual sales.

The group is also in talks about taking on a second distribution centre — in Stockton, 60 miles east of San Francisco — that could service up to 500 Fresh & Easy stores around the San Francisco Bay Area, Fresno and Sacramento.

Tim Mason, Fresh & Easy’s chief executive, said that Tesco planned to open another distribution depot further north to serve Seattle and Portland. Such a move would give Tesco the potential for its biggest overseas chain of Tesco Express-style convenience stores, stretching the length of the Western Seaboard. It operates in 12 countries outside the UK, including South Korea and Thailand.

Mr Mason said: “If you look at the scale of opportunity here, it could be transformational for Tesco. If Fresh & Easy is successful, it will be the most exciting thing in retail, bar none.”

Tesco has 15 Fresh & Easy stores around Los Angeles, Las Vegas and San Diego. It will open stores in Phoenix, Arizona, this week, backed by the company’s first marketing campaign in the US. All the existing stores are supplied by a huge distribution centre at Riverside, near Los Angeles, which has the capacity to serve a network of 500 sites.

Publicly, Tesco has committed itself to opening only 200 stores in Southern California and Arizona by February 2009, but the Stockton depot is likely to be a replica of Riverside.

At the 600,000 sq ft Riverside site, the supermarket makes its own salads and ready meals, rather than sourcing them from an American food group. Two privately owned British suppliers, 2 Sisters and Wild Rocket Foods, have set up at Riverside to help Tesco to source meat, poultry and fresh fruit and vegetables. The integration has helped to generate savings that are allowing the group to compete with Wal-Mart on price.

Fresh & Easy claims to be up to 25 per cent cheaper than its main supermarket competition. Average sales are expected to settle at up to $200,000 per store per week.

Tesco’s optimism over the American market comes despite an increasingly bitter dispute with union leaders. Like Wal-Mart, Tesco is non-unionized and industry insiders believe that the unions are worried that other retailers could follow their lead.

The United Food and Commercial Workers Union is thought to be behind Health First, a lobby group locked in a legal battle with the developers of the Riverside site. A court ruled last week that the depot did not comply with environmental law, despite having one of the largest solar panel installations in America. Health First argues that the site, on a former military air base, should have been subject to a full environmental review and public consultation. The ruling could force closure of the depot, but Tesco believes that it will be made simply to carry out more monitoring work. Mr Mason said that all necessary state approvals for the site were in place.

Tesco’s plans are still largely secret. TNS, the retail consultant, believes that the group could achieve annual sales of $10 billion in the United States by 2015. Tesco has considered launching in Denver and is expected to move to the East Coast.

We think Tesco is too smart to be this dumb. It seems highly unlikely it is going to bet everything on this small-store concept that remains completely unproven.

Tesco claims it wants stores every two miles, to be less expensive than supermarkets by 25%, to locate private label stores in poor neighborhoods that typically value branding, to pay employees more than others. And small stores are difficult from a capital investment standpoint — multiply the cost of anything you want to buy by a thousand relatively low-volume stores.

So the real question is what else is Tesco going to do with this procurement and distribution network it is setting up? Tesco has to be thinking in terms of other concepts. We already suggested acquisitions of Meijer and A&P, but if Tesco does decide to launch everything from scratch, one has to believe that designs for a Tesco supercenter are already underway.

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