CSD Cover Story: Tesco Prepares for its U.S. Invasion

Discussion
Jun 02, 2006
George Anderson

By George Anderson



Through special arrangement with Convenience Store Decisions
magazine, we present these opportunities to discuss the subjects of CSD’s monthly cover stories.

Richard Hyman, a market analyst and chairman of Verdict Research in London, doesn’t hold back when describing what American retailers and consumers can expect when the British
chain launches its chain of convenience stores on the West Coast in 2007.


“Tesco is not only by some distance the best retailer in the UK, but I don’t think there is an operator in the world that is better at retailing,” he told Convenience Store Decisions. “I won’t say it is better than Wal-Mart but it is probably the best competitor Wal-Mart has.”


And, unlike some of the criticism aimed at Wal-Mart for a singular approach to different markets, Mr. Hyman pointed out that Tesco has not attempted to take its way of doing
business in the U.K. and tried to export it to international markets.


What the retailer has done, said Mr. Hyman, is bring “a different league of professionalism and competition” to the convenience store business in the U.K. “They’ve made the sector more dynamic,” he said.


According to Deutsche Bank, Tesco’s roughly 900 convenience stores generate $2.96 billion in annual sales in the U.K.


The company plans to rollout an additional 100 Tesco Express stores annually with roughly 15 to 20 percent selling gas under the Esso brand.


Opinions of some in the U.K. suggest U.S. convenience stores, especially smaller independents, are in for a bumpy ride when Tesco comes ashore.


Shane Brennan, spokesman for the Association of Convenience Stores, said store closures went up significantly in 2004 and 2005 in the U.K. “We put it down to Tesco’s and Sainsbury’s incursion into the convenience market,” he said.


Tesco has succeeded, in part, because it has leveraged its buying power to offer consumers a better value for their convenience store pound.


As Mr. Hyman observed, “Do they drive a hard bargain? Yes. Do they negotiate hard? Yes. Are they single-mindedly driven? Yes. Do they break most of the rules? I don’t think they do. Is it a really tough competitor that is pinching your market share all the time? Yes.”


And, it’s coming to the U.S.


Moderator’s Comment: What impact will Tesco have on the convenience store sector when it comes to the U.S.? By its own admission, Wal-Mart’s Asda unit
failed to take advantage of the convenience store opportunity in the U.K. and lost market share as a result. Will Wal-Mart respond to Tesco in the U.S. by opening its own chain
of convenience stores?
– George Anderson – Moderator

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15 Comments on "CSD Cover Story: Tesco Prepares for its U.S. Invasion"


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Daryle Hier
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Daryle Hier
14 years 8 months ago

Wal-Mart probably won’t enter the C-store biz, but it’s certainly an area that can be taken advantage of. Although 7-Eleven is continually trying and adding new food offerings, while Circle K expands on the multi-faceted fast-food fuel and drink quarter, I believe Tesco will find a niche not now being filled. They will need to develop and encourage consumers that this new cross between C-stores and super markets is something the consumer wants.

7-Eleven, Circle K and petroleum companies in particular are big boys and won’t be easily pushed around. Of note, Tesco plans a non-union stance, which will be vital to any success. I see a real calculated and profitable format for Tesco as long as the focus is on service and convenience. An interesting battle shaping up.

Mick Long
Guest
Mick Long
14 years 8 months ago

It was just a matter of time before TESCO brought the battle to Wal-Mart’s back yard. Wal-Mart has an ace in their pocket when it comes to C-stores — McLane.

Mike Romano
Guest
Mike Romano
14 years 8 months ago

Albertsons, Safeway and many other similar chains have turned into nothing more than expensive convenience stores. Where they use to command the majority of weekly household shopping wallet at about 80%, they are now down to 25%. Estimated average transaction is now less than $28 per shopping cart — WOW what a drop from 10 years ago when it was $75+.

Say what you want about Wal-Mart, Meijer, Tesco, etc.; they deliver what consumers want at the prices they like. At the end of the day it is still a consumer choice to walk into their store of preference, to buy the products they desire — and these 3 do it best.

Brian Jones
Guest
Brian Jones
14 years 8 months ago

Tesco is a superb retailer that’s been looking at the US market for years and years (they certainly were when I worked there). They take any expansion seriously, tread carefully and don’t impose UK retailing into markets overseas (which is a key reason why they’ve been so successful).

I’m sure that they’ll use this expansion to learn more about the local and national market before making any further plans and won’t worry too much about Wal-Mart at this stage, largely because they’re opening C-stores and not big-boxes.

Lastly, I think it’ll be great news for US customers and retailing because the standards that Tesco set are just head & shoulders above the competition in any country that Tesco operates in.

kumar Rishikesh
Guest
kumar Rishikesh
14 years 8 months ago

The small-format grocery store doesn’t exist right now in the U.S. Typical convenience stores like 7-Eleven sell gas ,where as Tesco Express’ strength is food and that would be its advantage in US markets. Secondly, Wal-Mart, the nation’s largest seller of low-priced groceries through its supercenter stores, is getting hassled by the growing popularity of organic food stores like Whole Foods. Entry through C-stores might be testing of waters for Tesco but Wal-Mart, on the other hand, needs to worry about Tesco’s next move (i.e. Supercenters).

Mark Lilien
Guest
14 years 8 months ago

In the USA, Tesco faces 2 types of competition: independent operators and major chains. Many independents have limited capital and no economies of scale, but their labor and tax costs are minimized. The chains have higher labor and tax costs, but their capital and merchandise costs are minimized. If Tesco’s service and merchandise are superior, they’ll have a chance to be profitable. It’s unlikely they’ll beat the independents’ labor and taxes costs, and it’s unlikely that Tesco’s cost of capital will be materially lower than other convenience chains. Wal-Mart has enough to focus on domestically, and they’re unlikely to come up with a superior service and merchandise mix for convenience stores, so why should they bother?

Warren Thayer
Guest
14 years 8 months ago

Wal-Mart has a bit too much on its plate right now, IMHO, to start up a chain of C-stores. Doesn’t mean they won’t, but I doubt it. I’m enjoying Tesco’s boasting and taunting. Sort of like the old Cassius Clay (Muhammad Ali, for those too young to remember) promising “a total eclipse of the Sonny.” As with the sweet science, retailing has lots of tricks, but no magic. I mean, OF COURSE Tesco can flatten little mom and pop C-stores with one punch. That’s not news. Going up against major American C-store chains, especially given some of the innovative formats and merchandising finally coming to the fore, will be another matter. So let Tesco predict a sixth-round knockout; it adds to the entertainment value. But there are some decent heavyweights out there, all ready to go the distance.

Richard J. George, Ph.D.
Guest
14 years 8 months ago

Tesco by any standard is a world class food marketer. The C-store business — with the exception of 7 Eleven — is still fairly regionalized. For example, the East coast has some very good regional C-stores, e.g. Wawa, Sheets, Quik Check, etc. The look-alike West coast competition will come from traditional C-stores, petroleum companies, fast food providers, and drug stores.

I do not believe Wal-Mart will directly confront Tesco with C-stores. However, their Neighborhood Market concept can be positioned against Tesco as well as the traditional drug stores.

The challenge to Tesco will not simply be to be better than the existing C-store operators. Instead, the realization should be that everybody is selling food and identifying the strategic implications for Tesco and others.

Herb Sorensen
Guest
14 years 8 months ago

In major supermarkets, about 1 out of 6 shoppers buy only a single item with nearly a third buying only one or two items. In fact, something like two thirds of the shoppers buy as few as a half dozen items on a single trip. This is the stark reality behind the growth of the convenience store.

Most supermarkets have responded to this fact inadequately, if at all, all the while staking their futures on the stock-up shopper and making a very poor welcome to their shopper base for the majority of those shoppers’ trips.

But C-stores have been too narrowly focused to take away this large contingent of what are essentially “C-store shoppers” that are putting up with the cold shoulders offered by the supermarkets. Tesco and others are moving into that space with a “super C-store.”

Drug stores are also reasonably positioned to take advantage of this huge hole in retailing, and it is unimaginable to me that Wal-Mart won’t be all over this.

W. Frank Dell II
Guest
14 years 8 months ago
Contrary to some beliefs, Tesco is a retailer not a religion. Tesco’s strength is in finding weakness or void in the market place and working to fill it. Of all the retail formats, the convenience store has lived too long on location, location and location. I have yet to see any customer focus or merchandising worth noting in this segment. My guess is, over 90% plus of the customers never walk the aisles to shop. They pay for gas, buy lotto tickets and cigarettes. Tesco’s store format is not a convenient store, but is a small food store format. The small food format is common is many countries, just not the USA. Like Carrefour before, until Tesco successfully opens 500 or more of this small format, it is a test. The American market is very different than the rest of the world. But unless the convenience store industry decides to get into retailing, it will continue to grow only by opening more stores than they close. When a format’s best year is the year it… Read more »
Gene Hoffman
Guest
Gene Hoffman
14 years 8 months ago

Two huge titans shall one day meet

To test skills on how to compete.

In mass retailing who’s the best?

One owns Britain, one the U.S.

Next time the test sector will be

In smaller stores, just wait and see.

Soon new battle fronts will arise

That should come as no big surprise.

Tesco’s heady with its magic,

Can’t conceive anything tragic.

They chose to enter our West coast

That’s where convenience means the most.

They’ll attack the convenience front

Intending to make a big brunt.

That signals to convenience stores

To spruce up and not look like bores.

The battle lines are being drawn

Oil money versus Tesco’s vault.

Meanwhile down in Bentonville town

Brains are working while faces frown.

They can’t afford a convenience ku

By some Brit outfit, you know who.

Wal-Mart will enter this new fray

And train its guns to “Win the day.”

valerie dellosa
Guest
valerie dellosa
14 years 8 months ago

I really do think that it will be interesting to see what will happen when Tesco does come to the United States. I think that they will have an advantage over Wal-Mart if they play their cards right. I also think that it will give Wal-Mart better competition to compete with than stores like Albertsons, Fry’s, Safeway or any other grocery store that is in sight.

Eliott Olson
Guest
Eliott Olson
14 years 8 months ago

Only 15-20% of Tesco’s UK stores have petroleum. There is also a greater population density and lack of mobility in the UK. While they might believe that they have found the magic key to the American consumer’s stomach, unless they also have their petroleum distribution down pat they run the risk of being just another Boston Chicken.

Jerry Tutunjian
Guest
Jerry Tutunjian
14 years 8 months ago

Tesco would put huge pressure on U.S. C-stores just as it has done in the U.K. Small U.K. independents have been hurt so badly that they have asked Westminster to curtail Tesco’s expansion into their channel.

Bernice Hurst
Guest
14 years 8 months ago
Initially, I think American consumers will love Tesco and that Wal-Mart will wait and see what they do before deciding to go head on. Like Wal-Mart, however, Tesco is starting to suffer from a consumer backlash here with various communities protesting about its presence and trying to resist. Not to mention, of course, the official enquiry into the difference between supermarkets and convenience stores and whether they have too large a share of the market when you combine the two channels. On top of that, suppliers have traditionally been reluctant to complain because they fear they will be cut off in spite of the fact that their margins have often been cut finer than they can afford if they are to stay in business. All in all, Tesco may make a good start over there but whether or not it will be sustainable in the long run is another matter. Assuming that the head office guys in Wal-Mart are even half as smart as you might expect, my gut feeling is that they will wait… Read more »
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