There are lessons to be learned from Tesco’s Fresh & Easy effort

by Morton Sosland
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If the need arises to cite an excellent example of how difficult the retail food marketplace in America is, the withdrawal of U.K.-based Tesco from its U.S. operations is about as good as it gets. While the exit is still under way and may last another several months, the decision to shut down, revealed as the new fiscal year began, the prolonged negotiations with potential buyers and the disclosure that the U.S. unit will have caused a cumulative loss of $1.8 billion add up to a sorry chapter in the history of a company long ranked as one of the most successful of global food retailers. Tesco’s entry in 2007 into America, where it eventually operated 200 stores in California, Nevada and Arizona, prompted no little worry on the part of U.S. chains familiar with Tesco’s standing behind Wal-Mart and Carrefour as the world’s third largest retailer.

While many reasons are cited for Tesco’s decision to give up on establishing a retail food presence in America, several deserve particular attention. None is more striking than the way the company’s entry strategy proved wrong-headed. Success, the company indicated, was going to be based on offering consumers in the nation’s fastest growing states warm, prepared meals through small size retail stores. Named Fresh & Easy to reflect that product and marketing plan, the stores quickly encountered the reality of western food consumers who resisted the new products. Along with the general economic downturn that began soon after the start and a location model that did not recognize the importance of building familiarity among consumers as to where its stores may be found, the business never caught on in face of the Tesco effort.

In revealing its entry into the U.S. retail food business six years ago, Tesco emphasized how much study and strategic thinking preceded this move. Describing the U.S. market as “potentially very significant” for the company, which at that time already was operating more than 1,000 stores in 12 countries beyond Britain, it said it would be using a carefully researched approach. It is a strategy built from scratch, the announcement said. Also stressed was the intention to draw on the full range of Tesco skills, especially in sourcing products as well as a strong and experienced management team. How frustrating it must be to look back on those early assurances that the entry most definitely was not a trial, but a full-scale launch into what Tesco said was a fast-growing market.

These statements speak to confidence gone awry. It is fascinating to wonder what this says about the viability of internationalization of food retailing. Yes, U.S.-based Wal-Mart has enjoyed impressive growth via its aggressive positioning in food retailing in Latin America and Germany-based Aldi has carved a global presence. But Tesco’s withdrawal is mirrored by Carrefour, with the France-based chain selling this year six fairly large stakes it had acquired to build in developing countries. While Tesco will now focus on expanding its domestic market, which has become hotly competitive, Carrefour aims to expand its presence in nearby European neighbors. All of this has prompted one commentator to opine, “There are few international synergies available in food retailing.”

In explaining its American decision, Tesco said that when it entered the United States, it had not anticipated the rapid growth of on-line retailing, especially in the U.K. That part of its business is now growing faster than its store-based operations, leading to a conclusion it should not just to devote increased resources to the needs of the business, but also to slash its own inventory of undeveloped retail sites. What emerges is rapidly changing food retailing that has sharply reduced its international reach, cut investments in stores of all sizes and locations, and increased reliance on the Internet as the path to volume and earnings growth. Hardly any three moves could have a greater impact on the evolution of food manufacturing than these.

MORTON SOSLAND
editor@sosland.com

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