Tesco aims to crack U.S. with convenience stores

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[London] Tesco was the first grocery retailer in Britain to introduce Internet shopping, loyalty programs and services such as personal finance. Today shoppers can start divorce proceedings at Tesco, or they can use the grocery store as their Internet service provider.

Now, with plans to open stores on the West Coast next year, Tesco aims to be the first British grocery retailer to succeed in the U.S. It's an ambition one British newspaper called "California dreaming," saying the chain will be crushed by the likes of Wal-Mart.


Although Tesco has expanded into Europe and Asia, British retailers have a poor track record in the U.S. Rival grocery chain Sainsbury's sold its U.S. interests in 2004. And Marks & Spencer's strategy of buying Brooks Brothers didn't lead to a major U.S. foothold.

"The U.S. is a graveyard for the hopes of U.K. retailers; if Tesco succeeds they will be the first to take on the U.S. market and win," said Neil Saunders, consulting director at London retail consultancy Verdict Research.

In the U.K., Tesco is invincible. The No. 1 retailer since 1995, it's one of the country's biggest advertisers and most powerful brands, with over 30% of the U.K. grocery market. A retail legend states that £1 of every £8 that goes into U.K. cash registers is spent at a Tesco store.

Tesco established itself as a consumer champion with good service and the slogan "Every little helps." Ads constantly highlight customer services like the "one in front" queuing policy (if more than one customer is in line, another checkout opens). Tesco sells high-quality prepared foods, but also emphasizes value and low prices.

The company started the U.K. trend of bringing services into supermarkets. U.K. consumers can take out insurance or mortgages through the store. They can also rent a Tesco-branded cellphone or access the Web via Tesco.net. They can even, since the introduction of Tesco legal services two years ago, initiate a divorce or prepare a will.

Californians probably can't expect to get a supermarket divorce yet. In the U.S., Tesco plans a smaller scale, convenience-style format, based on U.S. research and modeled after the Tesco Express format already rolled out in five countries. Tesco is deliberately vague about whether the stores will carry the Tesco name, which has no U.S. heritage.

The company, rumored to have been testing in Santa Monica, has said it will invest $435 million a year in the U.S. and expects to break even in the second year.

Attacking the convenience market is clever, said retail analysts, because it doesn't bring Tesco into direct competition with Wal-Mart. Tesco's West Coast stores will likely offer high-quality prepared foods, which means California is a good place to start. "More people on the West Coast are focusing on premium foods and the provenance of foods," said Verdict's Mr. Saunders.

The convenience route also means Tesco won't need a big initial ad budget. However, branding and consumer insight are bound to play a strong role in the U.S. move. U.K. Marketing and Property Director Tim Mason is moving to the U.S. to take charge.

Sign of serious intent

Mr. Mason, 48, has been at Tesco since 1982. As chief marketer he created Tesco's customer-friendly positioning. He also masterminded Tesco's ad efforts, by Lowe London, and oversaw the company's move to Frank Lowe's startup, Red Brick Road.

Although Mr. Mason (who declined to be interviewed) has no U.S. experience, industry observers say his involvement signals Tesco's seriousness about expanding into the U.S. Already a board member, he is often touted as a successor to CEO Terry Leahy.

He also brings a talent for figuring out what appeals to consumers. "His background will make him very receptive to understanding a new market," said Mr. Saunders. "And Tesco is going to need that, because they are in a world that is totally alien to them. That, plus achieving a critical mass of stores that's enough to make a profit, will be their main difficulty in cracking the U.S."

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