Michael Baker
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Tesco out for the count in the US

9/12/2012

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In an extraordinary piece of triumphalism by the standards of British investor research, Citi analyst David McCarthy wrote a research note in October 2007 on Tesco's launch in the US that pretty much told the American supermarket industry to run up the white flag.

McCarthy's 20-odd page tribute to the superiority of British food retailing concluded with: "As we have said, the US is potentially a $100bn opportunity for Tesco.  An opportunity that the incumbents have largely missed.  US supermarket retailers should be concerned.  Very concerned."

McCarthy was not alone.  Tesco execs gushed with confidence from the outset.

Last week, after five years, 200+ store openings, weak productivity and mounting losses, Tesco's CEO announced that in all likelihood the company would sell or close the entire chain.

I visited a number of Tesco's "Fresh and Easy" stores in California and Arizona over the five-year period and quite liked them.  They are larger than the standard convenience store and much smaller than a full-line supermarket.  Their selection of prepared foods and private-label merchandise is fairly good.  Trouble is, most US consumers, unlike me, didn't go for it.  They remained loyal to their own.  Fresh and Easy was caught in a Bermuda triangle consisting of high-service models like Trader Joe's, traditional supermarkets and large-format supercenters and warehouse clubs.

Tesco's was a stunning failure in the US and a reminder to all international retailers that overwhelming success in one's domestic market coupled with intensive market research prior to entry into a new market do not guarantee success in the latter.  

The US is a tough market, sure, but it also highly segmentable.  Minor niches can be huge in absolute volume terms.  Tesco should have done better.  Either their research was very faulty or they did a lot less research than they made out.
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    Michael Baker

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