June/July, 2007

From the Editor

Tesco To Test Our View Of Delis

The future of the supermarket deli industry is likely to be decided in the next few months as Tesco, the giant U.K.-based retailer, rolls out its Fresh & Easy Neighborhood Market stores in southern California, Las Vegas and Phoenix.

The concept — 10,000- to 15,000-square-foot stores, heavy to private label, fresh and prepared foods, a strong dose of organic and natural products served with a green, sustainable consciousness, all priced at a mass market level — poses a direct threat to the supermarket deli in its present iteration.

As warehouse clubs and Wal-Mart Supercenters rolled across America over the past 15 years, most conventional supermarket executives came to feel they could not beat the price points of these formats.

The strategy became to be the anti-Wal-Mart. Wal-Mart was large and unwieldy, so promote the smaller neighborhood store. Wal-Mart required a drive, so promote nearby shopping. Wal-Mart was weak on perishables, so promote the full range of perishables, promote organics, service, whatever Wal-Mart was not. If you want to know what this produces, look at something like a Safeway Lifestyles store.

Tesco’s new concept, however, cuts this positioning off at the knees. Smaller and more local, Fresh & Easy makes a claim to be more convenient than a traditional supermarket.

The competitive edge in perishables and prepared foods is also being undercut. Tesco’s finance and strategy director defined its efforts this way: “In America we are positioning it [Fresh & Easy] in between America’s Whole Foods Market, which does fabulous food unbelievably expensively, and Wal-Mart, which is as you would expect. We want great quality and price.”

Tesco is riding the newest wave in consumer analytics, which is looking at customers based not on demographics or psychographics — all very yesterday — but on behavior.

Here’s a glance at Tesco’s promotional material: “People aren’t like eggs. You can’t put them in boxes, so we don’t bother...Instead of focusing on the differences between people, we simply try and understand what are the really important things that everybody wants from their regular shopping trip? We then design stores that deliver those things better than anyone else, and put them where people are — in their neighborhoods.”

This provides more questions than answers — everybody doesn’t want the same thing. Tesco operates everything from tiny convenience stores to giant hypermarts, which implies lots of people want lots of things at different times. Which is what Tesco is targeting — and counting on.

Instead of identifying an individual as a Safeway shopper, Wal-Mart customer or Whole Foods fan, Tesco, picking up the most sophisticated analysis of IRI and ACNielsen data, is looking at the various shopping experiences most consumers incur and looking to be the best at a few of them.

We don’t have Tesco's secret list, but from the facts we know, we can speculate it probably wants to be the king of the “topping off” shopping trip. Let consumers do a big monthly or twice-monthly stock up at a warehouse club or super center, but when they need to restock perishables or pick up something fresh and delicious for dinner, let them come to Tesco.

It is not a convenience store in the American sense — heavy to beer and tobacco — but it is located nearby and easy to get in and out of without massive checkout lines.

It is possible Tesco may have identified an underserved retail segment in the food industry in America in 2007 — an extraordinary achievement in and of itself.

Suppliers are salivating because how often does a new retailer that conceivably could open thousands of stores appear on the scene? Yet the implications of Tesco go beyond being another buyer in the market. The logic of its concept, if successful, could transform food retailing.

If consumers stock up at warehouse clubs and super centers and fill in perishables and prepared foods at 10,000-square-foot neighborhood stores, when would they go to the supermarket? Put another way: How can you be the anti-Wal-Mart and the anti-Tesco at the same time?

The issue for all retailers is not who “our customer” is; we now know “our customer” also shops in plenty of competitors. The key is to ask, “Why is this customer shopping here, now?” Once you know that, the store can be merchandised to excel at serving the needs of the key shoppers.

Part of this has to involve product differentiation. In the United Kingdom, all chains work arm in arm with suppliers to develop extensive lines of differentiated private label products to meet the taste, convenience and pocketbook needs of the shopping occasions that draw people to those stores.

For far too long, product development at manufacturers has gone on almost in isolation from retailers’ customer data, and retailers have waited passively to be presented new items. If retailers are to recognize the shopping experience they attract and then orient themselves to exceeding consumer expectations for those trips, they will need to become proactive in the search for the products to meet their needs.

Top retailers such as Costco and Whole Foods have been leading in this field. With Tesco’s opening, the available niches will become narrower and consumer expectations will get higher. Only those deli operations contributing value to the shopper experience are likely to survive.  DB