August/September, 2006

From the Editor

Putting Tesco To The Test

Up until now, the proliferation of food channels has only served to reinforce the importance of the deli in the supermarket schema. If supercenters — at least in the iteration that Wal-Mart has rolled across the country — were going to focus on price and attracting the consumer who lives paycheck to paycheck, it naturally led supermarkets to adjust. The supermarkets deemphasized easily price-comparable groceries and reduced space allocation for bargain lines of groceries.

Equally, if warehouse clubs were going to attract an infrequent shopper — perhaps because their relative paucity of locations and perhaps because minimum package sizes made it a concept unsuitable for quick fill-ins — logic led to an emphasis on perishables in supermarkets to attract the business that was left after a monthly stock up to Sam’s, Costco, BJ’s or another club.

And the proliferation of other food venues, such as drug stores, caused an increase of food offerings in conventional discount stores. Even on-line offerings by companies like NetGrocer.com were all focused on non-perishables and thus left this area free and clear for supermarkets.

These competitive dynamics, combined with consumer trends of less cooking and a need for more convenience, really led to the notion that the next generation supermarket was going to carry groceries almost as a convenience for those needing a fill-in between trips to a supercenter or warehouse club. The next generation supermarket would also be for those wanting certain specialty brands and products not available at supercenters and warehouse clubs.

Now, however, the British are coming — once again.

They have been here before, mostly to disastrous effects, as with Marks & Spencer, which achieved nothing with its acquisition of Kings in New Jersey, and Sainsbury’s, which flopped with its acquisition of Shaw’s in New England.

This time it may be different. Tesco is a more formidable company. It competes head to head with Wal-Mart’s British division, ASDA, and wins. In addition, the company has studied the U.S. market for many years, and through its Dunhumby subsidiary, Tesco is widely recognized as an expert on consumer behavior.

The real key to Tesco’s success, though, will be one thing: The success of an idea. Unlike Marks & Spencer or Sainsbury, Tesco arrives not through an acquisition but through the opening of new stores with a new concept.

Committed to spending almost $500 million a year to launch its new venture, called Tesco Fresh & Easy, it is understood that Tesco has already signed papers for 200 new locations in Southern California, Arizona and Nevada.

Though loosely based on the Tesco Express concept popular in the U.K. and other countries, these stores are mostly 10,000 to 15,000 square feet, which is much larger than the U.K. concept.

The stores will lean heavy toward private label and heavy toward perishables and, especially, heavy toward prepared foods. The stores have been compared to Trader Joe’s but with more fresh and prepared foods.

The stakes are hard to overstate, not just for Tesco, but for the future viability of the supermarket business model. It seems as if Tesco is imagining a consumer purchase pattern that might go like this: Once a week or within ten days, consumers shop at a supercenter doing the bulk of their food shopping.

Every three to six weeks, depending on location, the consumers stock up at a big warehouse club on many high volume consumption items.

Fill-ins for milk and whatnot are at convenience stores. But to pick up lunch or dinner, consumers will run to the new small-size Tesco Fresh & Easy.

The prepared food offering is Tesco’s main focus. It is so extensive and different from what is offered in the U.S. that the Tesco people took no risks on any U.S. producer of prepared foods. Instead they are setting up a campus on 88 acres in Riverside, CA, and have persuaded its British suppliers of prepared foods to set up U.S. production facilities as part of the campus.

It is uncertain if the concept will succeed. Tesco Express stores prototypically sell prepared foods to a London shopper stepping out of the Tube, picking up some prepared foods, then walking to her flat.

That is an entirely different model than what is being talked about in America’s car-loving west.

It is questionable whether a bunch of smaller stores will be perceived as so convenient that consumers will want to stop, park, get out of the car, etc., before buying dinner.

And lower-than-expected sales can easily start a death spiral in this type of concept, with Tesco faced with the dilemma: Keep a full range of fresh foods and go broke due to shrink or start to limit the assortment but limit appeal.

And, of course, that’s what the issue is for the supermarket in general. If supermarkets respond to supercenters and warehouse clubs by ceding the market to them and emphasizing perishables, what do supermarkets do if someone comes up with a superior format for merchandising perishables. But if supermarkets respond by deemphasizing these products, what can be the focus of a food format that neither sells dry goods or perishables very well?

There has been an interesting exchange on this subject on our new Internet product, www.PerishablePundit.com. You can check it out on line and subscribe for a free daily e-mail version.  DB