Europe's Grocery War That's Not About Food

Can Britain's Tesco beat back Asda with cheaper CDs, clothes, and yoga mats?

Pile it high and sell it cheap. That was the motto of Sir Jack Cohen, who founded Tesco PLC (TCSDY.PK ) in 1924 with money he earned from Army service in World War I. In the years since, the British retailer has gone from a small grocery store in North London to an international retailing powerhouse. Currently the No.1 grocer in Britain with $48 billion a year in sales, Tesco has logged double-digit profit growth for three years running. It now operates in 10 countries around the globe and is the leader in six, including Thailand and Hungary -- prompting experts to dub it the Wal-Mart of Europe. "Tesco is emerging as a virtually impregnable retail machine," says Steve Gotham, senior retail analyst at Verdict Research Ltd., a retail consultancy in London.

So what happens when the Wal-Mart of America goes after the Wal-Mart of Europe? A classic battle of titans, right in the shopping centers of Britain. Wal-Mart-owned Asda Group Ltd. recently overtook J. Sainsbury PLC to become Britain's No.2 grocer. Now it's on a mission to knock Tesco from its perch.

Theirs is not really a food fight: The weapons of choice are products like yoga mats and CDs. Nearly one-fifth of Tesco's revenues come from what it calls nonfood items -- double the share ten years ago, according to Verdict Research. Tesco is eager to keep the category growing, since nonfood items boast margins of about 9%, vs. 5% for food. Tesco sells more CDs than Virgin Mega- stores, and its Cherokee clothing line, introduced last year, is now the fastest-growing brand in Britain. Says incoming Chairman David Reid: "We're very serious about nonfood."

And so is Asda. In September, it kicked off a 12-month pilot project of selling its popular George clothing line in stand-alone stores. The move is aimed directly at Tesco's Cherokee line. Sainsbury PLC is also fighting for a piece of this market: It recently unveiled a new line of 2,500 goods for the home, including everything from frames to cookware.


Such moves by both chains make Tesco executives nervous, although they see Asda as the bigger threat. Unlike Sainsbury's, which caters to more upscale customers, Asda offers Tesco-like low prices. In fact, Tesco takes Asda so seriously that at its larger stores, the shelves are dotted with little cards that list the prices for goods -- and what consumers would pay if they were to shop at Asda or Boots (BOOYY ) instead.

A look at the shelf signs at Tesco's Kensington store in London reveals why the top brass is worried: Prices at Tesco and Asda are largely the same. Sure, Tesco, with its nearly 2,000 British outlets spanning everything from convenience stores to hypermarkets, typically rakes in more than 11/2 times the sales that Asda does each quarter. But Asda clearly has momentum. Its sales have been growing at a 10% annual clip, and it has opened 10 new stores this year, bringing its total to 263.

To stay on top, Tesco will rely on marketing tools it has perfected over the years. Each quarter it analyzes the data it collects from its 10 million regular, club-card-holding customers. It also solicits feedback from shoppers by means of phone and written surveys, along with customer panels. The approach is even more sophisticated than that of Wal-Mart, according to Mia Kirchgaessner, an analyst at Sanford C. Bernstein (AC ) & Co. "They are extremely good at using their data," she says.

Tesco watchers are betting the retailer will stay ahead -- for now. To do that, its stores are slashing prices by more than $300 million this year. "Even though we're successful, we're never complacent," says Sir Terry Leahy, Tesco's chief executive. The marketing war begins in aisle nine.

By Laura Cohn in London

    Before it's here, it's on the Bloomberg Terminal.