The British retailer gets a slap on the back from Berkshire. Retail industry insiders weigh in on Tesco's expansion plans.
Warren Buffett doesn't mind buying British. This week his Berkshire Hathaway announced that it has raised its stake in retailer Tesco just above the 3% mark as a show of confidence. It's hardly a controlling interest, but it is at least a sign that the world's third-richest man (and arguably its best-ever investor) thinks Tesco has value.
Vying with Germany's Metro AG in recent years for the No. 3 ranking among global retailers, U.K.-based Tesco ( TESO - news - people ) is testing U.S. waters with its small-format Fresh & Easy grocery chain.
Before Tesco opened its first Fresh & Easy Neighborhood Market, there were plenty of people willing to predict it would rewrite the rules of retailing in the U.S. When the company hit some bumps in the road, there were just as many or more willing to claim it was just another British venture that wouldn't make it in the States.
Elsewhere Tesco has proved its ability to adapt to local markets--from the Czech Republic to China--with more than 4,800 stores worldwide. And life has been good, even throughout the recession. The chain delivered record profits last year, with a pretax jump of more than 10% to 3.4 billion pounds. According to the U.K.'s Guardian, Tesco will soon be adding 16,000 positions to its worldwide payroll of approximately 472,000.
While there is little question Fresh & Easy has faced challenges, company executives believe the right steps are being taken to help it achieve its top- and bottom-line goals. Just this week the chain announced it will acquire 2 Sisters Food Group and Wild Rocket Foods, suppliers that will cohabitate with its own California distribution facility to beef up its fresh food and meals-to-go sourcing.
The chain, which now operates 159 stores and is on schedule to open roughly one per week, is continuing to focus on putting its stores in locations where locals need them. Fresh & Easy is looking to Northern California as its next market for expansion.
"People are really looking for a good opportunity to do shopping right in their neighborhoods, right by where they live--fresh food at low prices, an easy shopping experience," Brendan Wonnacott, communications director for Fresh & Easy, told RetailWire.
Among the communities where Fresh & Easy is looking to open are so-called food deserts that others have avoided due to high crime rates and other factors.
"We had our job fair for the South LA store earlier this year. We had hundreds of people show up. We are just now coming up on our hundred-day anniversary of the store opening and we've really seen it's changed the lives of many folks that live around that store," said Wonnacott. "What we see is that people want access, that they want to be able to buy fresh produce, meats, eggs and cheese. And those are indeed the top-selling products in those stores, and we've been very excited about the performance of those stores across the board."
Location and a smaller footprint, according to Wonnacott, give its stores an edge.
"Our stores are about 30% more energy-efficient than a traditional supermarket of similar size, so we spend less on energy and we are able to keep our prices low because of that," he told RetailWire. "Another bit that's important for us is where we are located. We have access to an immense amount of great products here, and depending on season as much as 70% of our produce comes from the states we operate in."In an online RetailWire poll, 56%t of respondents said they feel at least "somewhat more confident" in Tesco's ability to succeed with the chain than earlier in its rollout, while 24% have not changed their opinions. The lingering skepticism expressed by RetailWire's BrainTrust of industry experts was based typically on Tesco's penchant for shoehorning its methodology into U.S. market conditions.
"They don't have a chance," said Ryan Mathews, CEO of Black Monk Consulting, "until they rethink their supply chain model and the kinds of merchandising decisions it drives. It isn't size that's the problem; it's what's going on inside the four walls in terms of selection."
"When we first heard that Tesco was entering the U.S., I expected it would be with their proven Fresh Express concept," wrote convenience store expert Steven Montgomery. "Instead they elected to enter the market with a format that was neither convenience store nor supermarket. It was much more a superette/Whole Foods hybrid."
As for the Fresh & Easy's food desert strategy: "There is a reason the supermarkets have avoided this market," Montgomery says. "The operational challenges outweigh the profits. With its product mix and pricing strategy, it will be very interesting to see if Fresh & Easy can sustain these operations."
And yet another saw marketing savvy and perhaps something admirable in Tesco's inner-city approach.
"The food choices and prices available to what is politely called the 'underserved markets' are a national disgrace," wrote Bill Emerson, President, Emerson Advisers. "The reality is that these are largely land-locked communities where the only alternative to fresh, wholesome food involves a long ride on public transportation.
"Are these markets complex to operate in? You bet. Is there enough disposable income available to make them profitable? Yes, if the offering fits the market. Does the local community appreciate and reward the presence of retail choices that the suburban shopper takes for granted? More than you can imagine."
James Tenser of VSN Strategies is also a fan of Fresh & Easy, but questions "some of its particulars."
"The stores are designed to support a highly efficient distribution mechanism," said Tenser, "with pallet-deep gondola shelving providing space for a high level of stock-on-hand. They have a compact footprint with no food prep on premises. Everything--including packaged produce, prepared foods, ready-to-cook entrees and baked goods--arrives shelf-ready from the distribution center."
However, Tenser believes the format's reliance on high merchandise turnover presents limitations. "In stores with high foot traffic," he observed, "the appearance of fresh foods on display was quite attractive. In less busy locations, produce often looked tired beneath the plastic film, and some entrees looked downright toxic."
Overall, however, few commentators were willing to write off a competitor such as Tesco just yet.
"Tesco has a great opportunity to get in with an advantaged cost structure in this market environment," commented Jonathan Marek, senior vice president, APT. "I'm sure the rents they're seeing pale in comparison to U.K. rents. They've got a massive pool of potential employees seeking jobs. Tesco has a real 'grind away at it' mentality that serves retailers very well."
Tenser was so bold as to suggest Tesco is simply being patient while American consumers catch up to its better way of doing things.
"For U.S. supermarketers who have carpeted suburbia with oversized, over-assorted stores with vast parking lots," wrote Tenser, "the Fresh & Easy concept may seem very foreign indeed. Its success depends in part upon shoppers' willingness to adapt. I believe that's a key reason why adoption has been slower than Tesco anticipated."RetailWire's interview with Brendan Wonnacott of Fresh & Easy, along with other retailer interviews, are available on its Facebook page
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