Any Minute Now

 

It's been about a year since Tesco PLC announced it would enter the United States some time in 2007, and since then there has been much speculation as to how consumer goods companies and retailers will react. According to Tesco, its new format is designed for the American market, based on extensive consumer research and modeled on Tesco's highly successful and innovative "Express" concept. In an April 2007 press conference, Tesco's CEO Tim Mason indicated the company hopes to have 100 "Fresh & Easy Neighborhood Markets" by February 2008.

 

If you are attending our Fall Conference this month, you will have a chance to hear "What You Need to Know about Tesco's North American Launch," in a session presented by Mike Griswold, research director - retail, AMR Research. Here is a preview of a few selected Tesco facts that Griswold will touch on:

 

Christopher Growe, analyst consumer staples for A.G. Edwards, who covers companies such as Campbell Soup, Kraft and General Mills, believes Tesco may actually provide opportunity to CG companies producing mainly branded products. He says other manufacturers are playing a "wait and see" game, not certain that the Tesco concept will catch on in the United States.

 

Growe explains, "It would seem like in bigger cities there are too many competitive options which would limit expansion opportunities for Tesco. However, they are known for producing good products and are quite savvy in their communication with the consumer." He speculates that some retailers will try to emulate the Tesco concept, but also believes the format already exists here. "I think you are going to find more stores enter this 'category' in the future; all of the big retailers have that capability. However, I question whether what Tesco brings to the table is any different from what the large retailers already present in the market. The uniqueness of their store is likely to be a differentiating aspect, but large retailers here in the U.S. can easily copy that."

 

The UBS Investment Research report, "Tesco's US Entry a Watershed Event?", co-written by Neil Currie, analyst, Lucy Sharma, analyst, Hj. Kim associate analyst and Krista Zuber, associate analyst, states that a critical element to Tesco's success will be price points.

 

"Importantly, we believe one of the keys to Tesco's U.S. business model may be lower prices than conventional supermarkets, despite the convenient locations (convenience stores are usually seen as premium prices). Given superior sales densities, lower store costs and a rich margin mix, Tesco may not need the high prices that supermarkets charge (particularly on the West Coast) in order to generate decent returns on investment. ... In addition, with Tesco saying that it is considered number two globally in relative importance to the supplier community (with number one globally being Wal-Mart), we believe the supplier community would be open to any innovations the company may introduce in its U.S. expansion."

 

 

 

 

 

 

Richard Hastings, vice president and senior retail sector analyst, Bernard Sands, told RIS News, "Retailers need to be afraid of Tesco's ability to make itself fit the mold of any situation, any market, or whatever seems to be the right model. It will, over time, send shivers into those that planned on using large format boxes to drive traffic and price promotion, thinking that smaller formats cannot generate the kinds of promotional events and discounts that consumers want. In 10 years, Tesco will be understood as playing a role in changing general merchandise retailing from centralized multi-product large footprints to nimble and flexible, smaller footprints backed by a buying and administrative organization of great scale. Some regional grocers are already reeling. Tesco's entrance will slowly make things more difficult. Wholesale inventory costs are rising so there's less capital spending available to fund major changes to infrastructure. It will take a long time for Tesco versus Wal-Mart to generate any evidence that Tesco is taking away Wal-Mart shoppers. This is a slow process that would require a lot of Tescos, not just some buzz about the Tesco in another town. We believe the impact will be there, but it is too soon to know it with any detail."

 

According to Greg Buzek, president, IHL Consulting, "The retailer will feel a healthy dose of paranoia, perhaps, but not fear... unless retailers are interested in changing how they do business. Consumers will love Tesco because they will raise the bar for all retailers they compete with in terms of cleanliness, service and efficiency. That will resonate and force other retailers to raise the bar as well. Absolutely, over time those retailers that do not adjust to Tesco's market entry will be squeezed by Tesco as well as Wal-Mart and Kroger. Consumers will expect more from the retailers that they shop in terms of convenience and service. For those women that prefer Target over Wal-Mart today, Tesco will bring that Target cleanliness and safety to the convenience/grocery segment."

 

CitiGroup Analyst Deborah L. Weinswig says, "U.S. retailers and investors are underestimating the potential impact of Tesco's upcoming 3Q07 U.S. market entry. We believe Wal-Mart is working on rolling out a small format. These two retailers have historically competed head-to-head in other markets including the U.K., Korea and Japan."