Tesco: Dreaming Of California?

The British retailer is counting on high tech to crack the U.S. convenience market

It was a covert operation. A year ago, when giant British retailer Tesco was planning its foray into the U.S. market, the company dispatched an advance team of senior managers stateside. This was no routine intelligence-gathering trip, though. Hoping to keep their plans secret from rivals, the Tesco executives posed as Hollywood film producers making a movie about supermarkets. The operatives set up a trial convenience store in a West Coast warehouse. Loath to leave a paper trail that could tip off competitors, they used plastic bags of cash rather than corporate charge cards to buy goods for their mock store.

The result was a huge surprise for the U.S. retail industry. On Feb. 9, Tesco CEO Sir Terry P. Leahy announced that the world's No. 5 retailer will spend $453 million to open a chain of convenience stores on the West Coast next year.

On the face of it, the move sounds not only bold but harebrained. European chains have long tried, mostly unsuccessfully, to make inroads into the U.S. Meanwhile many U.S. retailers, squeezed by rising costs and big-box players such as Wal-Mart Stores Inc. (WMT ), are scaling back or selling out. Operating a store in the U.S. these days is not for the fainthearted.

If that all weren't daunting enough, Tesco will be starting from scratch, with no brand recognition, no customers, and no distribution system in place. There's even new competition to worry about. This month, Home Depot Inc. (HD ) is launching a chain of gas-station convenience stores called Home Depot Fuel. Canada's Alimentation Couche-Tard Inc. is expanding in the U.S., where it already has 3,000 outlets, including those under the Circle K name. Industry leader 7-Eleven Inc., which was acquired by a Japanese affiliate last year, is upgrading. "Going from zero to a well-known brand in any country takes a long time, but in the U.S. it will take a lot longer," says Jonathan Pritchard, food retail analyst at Oriel Securities Ltd. in London. Tesco executives were not available for comment.


Yet Tesco is a powerhouse in Britain, where it has blunted Wal-Mart's drive to dominate the retail scene. Wal-Mart's superstore format has been outflanked there by a swarm of Tesco stores, from huge emporia to tiny express shops. Today the company controls more than 30% of the grocery market in Britain, a fact that has led Wal-Mart, which operates under the name of ASDA Group Ltd. (WMT ) in Britain, to call for a government investigation of its rival. Tesco has been expanding in Eastern Europe and Asia. And like Wal-Mart, it used its global buying power to achieve operating margins last year of 5.7%, just under Wal-Mart's 5.9%.

High tech is another Tesco strong point. It runs the world's biggest online grocery: British shoppers can even buy their groceries via cell phone. Tesco, like Wal-Mart, was an early adapter of radio-frequency identification technology and other methods to get goods to stores in the most cost-efficient way. "Tesco is ruthless in supply chain management," says Scott Langdoc, vice-president of Boston consultancy AMR Research Inc.

Tesco will model its California outlets on its successful Express stores, a chain of 800 mini-supermarkets. The company, which operates some Express stores in conjunction with Exxon Mobil Corp. (XOM ), plans to go far beyond the traditional convenience-store format of gas, snacks, and smokes to include groceries, produce, and private-label ready-to-eat meals.

Is Tesco itching to mix it up with Wal-Mart on the American retailer's home turf? The British actually are targeting an area where Wal-Marts are relatively scarce. The Bentonville (Ark.) company has 266 stores in California, Oregon, and Washington, compared with 415 in Texas alone. Wal-Mart is experimenting with its smaller-format Neighborhood Markets, but these are more like supermarkets than convenience stores. "To grow, Wal-Mart needs to go beyond big stores," says Frank Badillo, director of global research and senior economist at consultancy Retail Forward Inc. in Columbus, Ohio. "Tesco is beating them to the punch."

By Kerry Capell

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