Tesco's US Invasion is Delayed for Now

♠ Posted by Emmanuel in at 4/03/2008 12:20:00 AM
Here's my summary of what has happened with Tesco's planned invasion of the US retail market via its "Fresh & Easy" chain: It came, it saw, it didn't conquer. According to the Telegraph, Tesco has called a ceasefire on its expansion in the US due to lower-than-expected performance Stateside. How much of this lack of success is attributable to economic slump? Surely, now is not the most opportune time to introduce a new retail concept in the States. OTOH, it may also be due to the puzzling inability of the world's retail titans in breaking some international markets. Recall, if you will, that Wal-Mart closed shop in Deutschland under fierce competition from the likes of German discounters ALDI and LIDL.

Honestly, I thought the American effort of Tesco would fare better given that the British retail giant spent a very long time studying the US market before setting up shop. Who would have guessed that even Tesco would not have an easy time? Is it due to opening during a downturn in the economic cycle or is the business model off? We'll have to wait and see.

Tesco has halted the rollout of Fresh & Easy, its chain of US convenience stores, while it reviews the performance of the fledgling business. The move will spark renewed speculation about the performance of Britain's biggest retailer in the world's largest consumer spending market. Tesco is understood to have called a three-month halt to the expansion of Fresh & Easy last week after opening almost 60 stores since last autumn.

Amid claims that Fresh & Easy has missed internal sales targets, analysts have questioned whether US consumers have been left unimpressed by the format, which Sir Terry Leahy, Tesco's chief executive, has pledged will make significant inroads into the US.

Tesco, which insists that the start-up is on track, has earmarked more than £250m for investment in Fresh & Easy. Leahy has staked his £10m-plus long-term bonus on the success of the venture, arguing that Fresh & Easy could eventually be as big as the core UK business.

But having opened 59 stores in just four months Tesco has halted the rollout of new stores in order to "make improvements and allow the business to settle down. We've given ourselves a little bit of time to kick the tyres, smooth out any wrinkles, and make some improvements that customers have asked for," wrote Simon Uwins, marketing director of Fresh & Easy, on his company blog last week.

"In nine months, we've gone from a project team of 200 people to a business employing nearly 2,500 people. We've learnt a huge amount about running the operation, and talked to thousands of customers about what they like about Fresh & Easy, and where they would like us to improve," he added.

Uwins stressed that the roll-out of new stores would resume in three months following the review. "Improving the operation and the shopping trip is what we do every day … but the next three months will allow us to accelerate this process, before we restart what's been described as an opening programme on steroids," he wrote. Jeff Adams, the US-born chief executive of Tesco's Lotus business in Thailand, is relocating to the US to work alongside Tim Mason, the chief executive of Fresh & Easy.

Two weeks ago Mike Dennis, a City analyst with Piper Jaffray, claimed that research among US suppliers had suggested first-half sales at Fresh & Easy could be $30m (£15m), compared with the $100m the broker had expected. "The issue is very weak footfall," wrote Dennis in his research note titled Miles Off Target.

Tesco executives dismissed the research as baseless and reiterated that Fresh & Easy was performing in line with expectations. "We have been very pleased," said one senior Tesco source.

Over the past decade Leahy has transformed Tesco from what was the UK's number two supermarket chain into one of the largest retailers in the world. With almost 1,500 stores outside the UK Tesco has gone head-to-head with the likes of Carrefour and Wal-Mart in Asia and Europe. However, the US has been widely seen as the most ambitious move by Leahy.