When supermarket chain Tesco first began expanding into nonfoods in 1997, its competitors shrugged, sat back, and waited for it to fail. How could Britain's leading grocer, do well selling anything other than food, its traditional bread and butter? Or so the thinking went.
Now, six years later, Tesco (TSCDY ) has done so well hawking items like clothing, CDs, and housewares that its competitors are struggling to catch up. In September, both Wal-Mart (WMT )-owned Asda and J. Sainsbury announced that they were beefing up their nonfood lines.
Meantime, Tesco is at the top of its game. It's Britain's leading private-sector employer. Sales and profits are soaring. It has expanded in 10 countries -- and is the market leader in six of them. What's more, experts see further growth ahead. On Sept. 16, BusinessWeek's Laura Cohn sat down with incoming Tesco Chairman David Reid to discuss the chain's success, its future in nonfood retailing, and whether it would consider expanding into the U.S. The following are edited excerpts from that conversation:
Q: How have you managed to defy your critics and actually do well in nonfood?
A:The strategy, which we set out some years ago, said we've got great locations, so why don't we sell them nonfoods and become as strong in nonfoods as in foods? What we've done is increase the size of our stores in two ways. One is to build bigger stores. Plus, we've extended a lot of our existing stores where we owned the land. That's been a pretty powerful thing.
Q: But how did you draw customers in?
A:We have the same strategy on nonfoods as on grocery: If we can [be] 15% to 20% cheaper than the expensive British high street, customers will come to you. So if we sell them the right products at the right price at a convenient location, we're going to do well.
Q: How important is nonfood to your future growth?
A:It will continue to be very important because there's every sign the customers like what they're getting. The only constraint is being able to get enough space to sell it to them.
If you look at our overseas hypermarkets, by the end of this year, we'll have 189 hypermarkets in Central Europe and Asia. Roughly 35% to 40% of those sales are in nonfood. We've got sourcing hubs in five or six locations -- Bangladesh, etc. -- where we can buy really well. So that means we can do a better job for customers, whether they're in Thailand or in Britain. We've got to compete with the likes of Wal-Mart.
Q: Some analysts worry that you're taking on too much risk by going into economies that aren't as stable as the one in your home market, like those in Southeast Asia. Your response?
A:South America is a good evidence of that. We're not in South America, happily. We've been pretty careful. We haven't invested in Russia or Indonesia. You have to make choices about where you go. We don't always get it right, but we're pretty happy about our country selection. So far, so good.
Q: What about the SARS scare? Didn't that hurt you, since you have exposure in Asia?
A:We coped very well. In Taiwan, customers are now beginning to think: What sort of an environment do I want to shop in? Do I want to shop in a wet street market with rats? There are signs that people are now thinking: Well, maybe I should shop somewhere that appears to be brighter, cleaner. That was the case in Britain. The more food scares there were in the '90s, the better our trade got because people thought: Well, I trust Tesco. They're going to be on the case.
Q: You're in 10 countries now. Would you ever consider expanding into the U.S.?
A:We never say never to the U.S. It's a big market, it's a good market in many ways. If we could find the right way, we'd obviously have a look at it. We're very cautious because Britain doesn't have a great track record over there. But equally, if Tesco is in Europe, in Asia, then maybe one day it will be in the U.S.