June, 2007

Fruits of Thought

Tesco's Take On American Consumers

Tesco’s move into the U.S. market is different than other European operators that purchased U.S. chains as their mode of entry. Its move is also very important. As the fourth largest retailer in the world and one famed for assessing consumer needs, Tesco plans to open in America with the unique prospect of something we haven’t had since Wal-Mart went into the produce business: a major new produce buyer.

In a world defined by consolidation and shrinkage in the number of buyers, this fact accounts for the enormous attention paid to Tesco’s arrival here.

The long-range impact of Tesco’s new venture in America will be determined by whether its new concept, Fresh & Easy Neighborhood Market, is a success. It is larger and more fresh-oriented than a convenience store but smaller and more private-label-focused than a supermarket; if the concept works, not only can we expect Tesco to build thousands of them but we can also expect every other supermarket chain to build them as well.

Unlike super centers, real estate is available for these small footprint stores. If they deliver a decent ROI, we could anticipate as many as 100,000 stores across North America.

Even more important than the new concept is the thought process that seems to have driven its development. Most supermarkets have viewed the customer as one to be wooed; customers choose whether to shop at Stop & Shop or Shaws, at Von’s or Ralph’s, at Winn-Dixie or Publix, at Giant or Safeway.

More research and a more sophisticated understanding of the consumer indicates that this either/or model is not capturing the dynamic nature of consumer shopping patterns. This is especially true in light of the plethora of concepts available. Consumers can load up at a warehouse club, plan for a blizzard at a super center, go upscale at a Food Emporium or Balducci’s, do good for the planet at Whole Foods, get some Latin flavor at Publix Sabor, buy specialty foods on-line, use an Internet service to get groceries delivered — not to mention pick up certain items everywhere from convenience stores to drug stores to gas stations. And also go to the supermarket.

The insight in store planning Fresh & Easy represents is to stop thinking about winning over the customer and start thinking about winning over certain shopping experiences from the customer.

Consumers don’t choose formats as if they are obligated to enter into an alliance with one. Instead they have different moments when they need different things. Some are simple and regular — the stock-up and top-off trips. Others are more complex and episodic — for example, a big dinner party shopping trip.

The key today is not so much to focus on “who” shops the store — the demographics and psychographics we have been looking at for years. The key is to look at “why” consumers shop your store.

This is more actionable for retailers and suppliers. Wanting women 18-40 to shop a store or buy a product is interesting but doesn’t really provide a guide of what to do. Looking at your own store and own shoppers and identifying a few key shopping experiences that draw people allows the creation of layouts and products that can make the store a “killer application” in serving that need.

It seems likely Tesco’s concept was to develop an extraordinary application for the fill-in shopping market. U.S. convenience stores, so oriented toward blue-collar males with their emphasis on tobacco, beer and quantity of food, do not fit this need. Supermarkets meet it but with many frustrations because they are designed to encourage stock-up shopping.

Drawing on the consumer insight gained through its Dunnhumby partnership, Tesco has designed a store focused on delighting a consumer looking for fresh foods fill-ins and a fresh dinner tonight.

There are still more questions than answers. For one we don’t know how produce-centric the concept will be. Our understanding is prepared foods and private label are likely to drive the concept and offer major differentiation from conventional supermarkets.

We don’t know if the concept will work. It is unclear if those who want to pick up dinner wouldn’t rather get curbside pickup at a popular chain, fast food or delivery of pizza or Chinese.

It is also true that lower U.S. population densities may make it difficult to turn the prepared foods sufficiently to sustain a large and appealing selection. Without that broad selection, the Tesco concept may lose its main draw.

Even if the concept succeeds, it is not clear Tesco will win. When Wal-Mart launched its super center concept, something unusual happened: Nobody really competed. Other vendors of food felt incompetent to start selling so much general merchandise, and other general merchandise retailers felt hesitant about a large move into lower-margin food. So Wal-Mart had the playing field to itself.

That is unlikely to happen simply because Kroger, Safeway, Supervalu and others are already selling all the same products.

Still and all, the opening of Tesco’s Fresh & Easy Neighborhood Market in the second half of 2007 will be the seminal moment for a new way of approaching retail and product development.

From now on, retailers’ focus will be identifying the occasions that consumers use their stores for and then designing and stocking the stores to make those particular experiences exceptionally good.

Producers will have to offer products that reinforce these exceptional experiences retailers are trying to create. This means fresh-cut items and proprietary produce must be developed from inception in a collaboration between retailer and producer to satisfy particular consumer needs.

Tesco is spending a lot of money on something that may fail. But its efforts give us a thought process that will transform the trade.  pb