Tesco Enters The Usa

University of Wales MBA Induction Programme Mini-Case Study Introduction The aim of this mini-case study is to get you to think about the types of issues which you will encounter during the MBA programme. There are no right or wrong answers to the questions – the objective is to get you to think about the issues raised by the questions and to prepare possible responses. All the information you require to think about the questions is provided in the mini-case. There is no need for you to undertake further research into either Tesco or ‘Fresh & Easy’ nor do you need to have any special knowledge about either organisation. Your response to the mini-case study will not be graded and will not count towards the final award of the MBA. Generic feedback will be provided via iLearn at the end of the induction programme.

The Mini-Case Study

Tesco Enters the US Grocery Market Tesco is currently the UK’s most successful supermarket with a UK market share in excess of 30% and annual profits of some £2bn. It is the world’s fourth largest retailer. The company has developed internationally over the past 10 years particularly in Central and Eastern Europe and the Far East. International expansion is a key element of Tesco’s strategic development particularly as opportunities for further expansion in the UK become increasingly limited. In February 2006 Tesco announced that it was planning to enter the US retail grocery market. Tesco planned to invest around $400m (£220m) per annum, over a five year period, in its US venture. This was estimated to be sufficient to pay for between 100 and 150 stores in the first year of operation. Tesco undertook detailed market research including visiting shoppers at home to see what they bought and asking people to keep a food diary to observe what they consumed. A mock store was built in a warehouse on an industrial estate to help develop the model for the US market. This had to be kept secret to avoid

competitors obtaining knowledge of Tesco’s plans and the stock for the mock store was purchased in the eastern states of America and shipped to California. The proposed market entry caused a great deal of interest in the USA where Tesco was expected to raise a serious competitive challenge to existing food retailers including Trader Joe’s, 7-Eleven, Kroger, Safeway, and Wal-Mart. Tesco thought that 7-Eleven with more than 5000 stores nationwide and Trader Joe’s (owned by the German company Aldi) with some 300 branches would be their major competitors. Tesco believed that its strategic format would enable it to undercut its main competitors prices, with the exception of Wal-Mart, by between 10% to 25% Tesco decided not to open large supermarket style outlets but opted instead to introduce a chain of low cost convenience stores similar to those operated in the UK under the ‘Tesco Express’ brand. The aim was to provide a classless retailer capable of operating in both upmarket and deprived areas with Tesco planning to open stores in so-called ‘food deserts’ (urban areas which had been abandoned by the major US supermarkets). However, there is a key difference between convenience stores in the USA and the UK. In the US convenience stores are associated with gas (petrol) stations whereas in the UK they are essentially selfstanding. Tesco planned to introduce the British model into the USA believing that this would provide an element of competitive advantage in a highly competitive market where small food retail outlets are relatively unknown. It was agreed that the first stores would be located on the West Coast of the USA in California, Arizona and Nevada. Unlike their other international operations it was decided not to use the Tesco brand name. The stores were to be named ‘Fresh & Easy’ and referred to as Neighbourhood Markets. If the initial stores proved successful then a move into other areas of the west coast of the USA would take place. The first ‘Fresh & Easy’ store was opened on 8 November 2007 in the town of Hemet east of Los Angeles with a further four opening in Las Vegas on 14 November. The company planned to open a further 100 outlets in the following 12 months. By mid - July 2008, 71 ‘Fresh & Easy’ outlets were in business. The format of the new stores came as something of a surprise to American consumers. The muted green branded stores are bright and clean with a bias towards fresh and organic foods much of which is pre-packed, a relatively unusual feature in the USA. Around half of the products are ‘Fresh & Easy’ ‘own brands’ including high ‘value-added’ ready meals. This, again, is unusual in America where brands dominate the food retail scene. First perceptions by some customers at the Hemet store were that prices were relatively high and that people were ‘looking’ rather than ‘buying’. In addition there are no in-store checkout staff and customers are required to scan the bar codes on their purchases before paying. This means that many of the products on sale have to be

packaged to carry a barcode which somewhat undermines the company’s environmental claims. In February 2008 ‘Fresh & Easy’ announced that it was moving into northern California with plans to open 19 stores in and around Sacramento. However, at the same time Piper Jaffray, a major US broker, suggested that ‘Fresh & Easy’ was not performing as well as Tesco had expected. This was denied by chief executive Tim Mason who has been quoted as saying ‘We are very pleased with the performance of all of our stores. Every single week brings more good news as sales, customer numbers and repeat visits are all growing.’ In March 2008 reports were emerging that ‘Fresh & Easy’ was performing badly with one commentator saying that sales targets were being missed by up to 70% as a result of very weak ‘footfall’1. Tesco responded by saying that the claims were untrue and that they were bewildered by the report. However, at the end of March 2008 Tesco announced that it was ‘freezing’ the ‘Fresh& Easy’ store opening programme for three months to allow the business to ‘settle down’. The store opening programme was expected to resume at the beginning of July 2008 and this did, indeed, happen. However, the expansion plan has slowed and by 2009 the company will have opened around 60% of its original target. However, Tesco continued to experience problems because of the financial and economic crisis which hit the USA in mid-2007 and which has seen consumer expenditure fall dramatically in some parts of the country. Three of the States (California, Arizona and Nevada) in which Tesco established ‘Fresh & Easy’ have been the most seriously affected by the economic crisis and this has created fresh problems for the company. In January 2009, to counter these problems, a range of 98cent products and $1 special offers were launched along with ‘$6 off’ coupons for customers who spent more than $30 in a single visit. The company has claimed that the 98c packs increased sales by 11%. This is a competitive strategy which may work in the current economic climate and some analysts have argued that ‘Fresh & Easy’ may benefit as shoppers trade down to lowerpriced stores. Some analysts continue to argue that Tesco’s attempt to enter the US market has been a failure and that the company should withdraw. Piper Jaffray has estimated that if Tesco were to withdraw from the US venture it will have cost the company £1bn. Tesco’s expansion into the USA has not been without its critics. The company’s environmental claims have come under scrutiny, along with its property strategy, its non-unionisation policy in a relatively strongly unionised sector of business and its refusal to sign a community benefits agreement. Community benefits agreements are used by stores in the USA to gain customer loyalty. Tesco, in turn, has countered these criticisms. 1

Tesco’s Annual Review Statement for 2008 contained the following comment on its American venture, ‘The early responses of customers to our offer has surpassed our expectations with our research regularly confirming that they like the quality and freshness of our ranges, as well as the prices and convenient location of the stores’. Other major British companies, including Marks and Spencer, Boots the Chemist and Sainsbury’s, which have attempted to enter this highly competitive market have failed largely because they have not understood the psyche of the American consumer. It was this which motivated Tesco to undertake its huge market research programme prior to launching in California. However, Tim Mason recently admitted that the research on which the market entry was based might have been flawed. Will Tesco succeed where others have failed?

1. Footfall refers to the number of people entering a retail outlet in a given time period

Questions Consider the following 4 questions. Your responses need not be lengthy – a total of around 1000 words in response to all 4 questions would be appropriate for this exercise.

1. Why do you think that Tesco decided to expand into the highly competitive US market when almost all of its previous international activity had been either in the transformation economies of Eastern and Central Europe or the emerging economies of the Far East? 2. Why do you think Tesco decided to use the brand name ‘Fresh & Easy’ for its US stores when the Tesco brand has been used for all its other international activities? 3. Why do you think that Tesco will not achieve its original target for store openings by 2010? 4. How do you think that Tesco should define ‘success’ in terms of its entry into the US market. Should Tesco put a time limit on its market entry activity? If so, what might that time limit be?

Notes This mini-case study was prepared from a range of publicly available documents and has been developed purely as a teaching tool.