Tesco's Exit from the United States
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Case Code: BSTR437 Case Length: 26 Pages Period: 2007-2013 Pub Date: 2013 Teaching Note: Not Available |
Price: Rs.500 Organization: Tesco Plc. Industry: Retail Countries: UK/USA Themes: Business Strategy, Business Environment |
Abstract Case Intro 1 Case Intro 2 Excerpts
Fresh & Not Easy
In April 2013, UK-based Tesco plc (Tesco), the third largest retailer in the world, announced that its profits had fallen for the first time in 20 years. Net profit for the year ending February 23, 2013, fell by a whopping 95.7% to £ 120 million from £ 2.81 billion the previous year. One of the major reasons for the slump was a write-off of £ 1.2 billion due to its US operations which had failed. Tesco announced that all its 199 'Fresh & Easy Neighborhood Markets' (Fresh & Easy) stores in the US would either be closed down or sold. Tesco spent around three years in researching the US market before entering the country in November 2007 with small format grocery stores called Fresh & Easy, designed exclusively for the American market.
These stores were positioned as a smaller and more convenient alternative to the US supermarket and offered fresh food and ready to eat meals. Fresh & Easy sold a variety of chilled prepared food, pre-wrapped produce, and dry grocery items. Tesco's stores were located in neighborhoods which were known as 'food deserts', where there were no retailers present.
Tesco planned to have operations all across the country and have over 2,000 stores within five years. According to Terry Leahy (Leahy), former CEO of Tesco (from 1997 to 2011), "Convenience is the fastest-growing sector of retailing around the world. One exception, interestingly, is the U.S. We felt there was an opportunity in the U.S. [in] this broad area of convenience, so we invested in Fresh & Easy. We believe - hope - this will be a sector that will grow into the future." Over the years, Tesco invested £ 1 billion on the stores and the distribution center in the US.
Although Tesco had thoroughly researched the US market and the American shopper and developed what it felt was a foolproof entry strategy, reports suggested that its US operations had met neither the shoppers' expectations nor its own. The company was criticized for its small assortment, its overemphasis on private labels, lack of customization based on the neighborhood, and self-checkout. The Fresh & Easy stores failed to compete with the large well-established supermarkets. Tesco's positioning confused customers, who could not make out what kind of a store Tesco was. At the same time, the economic slump due to the subprime crisis affected consumer spending, which, in turn, had an impact on the fortunes of Fresh & Easy.
To revive its fortunes, Tesco increased the assortment of products, modified the interiors of its stores to make the stores look brighter, and pepped up its marketing efforts. However, none of these efforts yielded results and the losses from the US operations continued to mount. Further investments were needed to spruce up Tesco's US operations and fund its expansion across the country. At the same time, the UK operations were showing signs of strain, which was attributed to the company's concentration on the international operations. Tesco then decided to quit the US. It announced, "Fresh & Easy has been treated as a discontinued operation within these results."...
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