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Tesco is currently the UKs most successful supermarket with a UK market share in excess of

30% and annual profits of some 2bn. It is the worlds 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 Tescos 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 Tescos 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 Joes, 7-Eleven, Kroger, Safeway, and Wal-Mart. Tesco thought that 7-

Eleven with more than 5000 stores nationwide and Trader Joes (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 self standing.

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.

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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 toAmerican 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 companys 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 perform ance 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 footfall1. 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 Tescos attempt to

enter the US market has been a failure and that the company should withdraw. Piper Jaffray

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has estimated that if Tesco were to withdraw from the US venture it will have cost the company

1bn.

Tescos expansion into the USA has not been without its critics. The companys environmental

claims have come under scrutiny, along with its property strategy, its non-unionisation policy ina 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. Tescos 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

Sainsburys, 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?

Questions

1. Why do you think that Tesco decided to expand into the highly competitive US market whenalmost 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 sto res 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?