Tesco's Exit from the United States

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

Excerpts

Tesco's Global Expansion

Tesco entered Ireland in 1979 when it acquired a 51% equity stake in three Guys stores owned by Albert Gubay . In 1986, Tesco divested itself of the stores when it found itself unable to sustain its operations in the country as customers were rejecting the British products that it sold in its stores. During the late 1980s and the early 1990s, Tesco examined the options available to it in the US and in the European countries, after the government's regulations regarding out of town stores. In December 1992, Tesco entered France by acquiring an 85% equity holding in Catteau supermarkets, which operated under the Cedico brand with 72 superstores, 7 hypermarkets, and 24 small stores...

Tesco in the US

Tesco had been eyeing the US market for a long time - even from as far back as the 1980s, according to some reports. However, serious efforts to enter the US market began only in the 2000s. In mid-2006, Tesco reportedly sent around 50 senior officials from its British operations to live with American families 'recruited' by the company in California so that they could study the shopping and consumption habits of these families. These officials, whose true identities and objectives were not revealed to the host families, also went on shopping trips...

Fresh & Easy Stores

The layout of the Fresh & Easy stores was designed to make grocery shopping more convenient for customers. The store format was developed keeping in mind the busy, time-pressed shopper and was based on Tesco's highly successful and innovative Express concept. The layout was kept straight and simple to allow easy movement.

All the Fresh & Easy stores were similar in layout with eight aisles, each nine feet wide. One third of the store was earmarked for baked foods, dairy goods, and produce. The first three aisles from the entrance had 'fresh' items, including produce and meat. The other five aisles stocked dry items or 'easy' items. An area of around 24 feet was demarcated for prepared fresh meals. According to Mason, the stores were "intentionally smaller than the usual supermarket" so that customers could enter and exit the stores faster and more easily...

Plans Go Off-Track

In February 2008, an analyst from Piper Jaffray pointed out that the sales from Tesco's US operations were 70% below the target. He said, "The Fresh & Easy concept is not right and they need to quickly find out what the issues are and reset the concept." He pointed out that customers in the US were not in favor of wrapped fruits and vegetables as they wanted to handle them before use. The same was the case with automated checkouts, as people were used to the presence of store helpers. The report from Piper Jaffray stated that the stores were able to average sales of US$ 60,000 per week, far below the projected US$ 200,000...

Revamp Proves Futile

Tesco added several products on its shelves based on customer feedback. To cater to the needs of shoppers hit by recession, it brought in budget priced, private label products including breads, hamburger buns, etc. When shoppers complained that they did not find their favorite brands on the shelves, it started including those brands too. Though Tesco offered only single serve portions of heat and eat dinners, it increased it to family size portions based on customer recommendations. Only pre-wrapped fruits and vegetables were sold by Fresh & Easy at the beginning. Later on, the fruits and vegetables were not packaged as customers said that they preferred to select the produce...

And Losses Mount

At the same time, some of the Fresh & Easy stores were doing well. As against the predicted sales of US$ 45,000 - 60,000 per week, some stores in California were reporting sales of US$150,000 per week during April 2011. For the first quarter of 2011-12, sales from Fresh & Easy increased by 21.9% and same store sales grew by 11%. This positive response encouraged Tesco to continue to invest in the US operations despite the slower than expected growth. During the first half of 2011-12, sales at Fresh & Easy grew by 20.1% to £ 365 million, with same store sales increasing by 5.2%...

What Went Wrong?

Initially, Tesco's US venture made American retailers sit up and take notice of its plans. Given Tesco's track record in global operations and its success in several countries, analysts expected Tesco to make an impact on the US retail scenario within a short span of time. Once the first Fresh & Easy store opened, the retailers took a breather, as they realized that Tesco was not competing with any of them directly, but was offering products that were available in restaurants, convenience stores, supermarkets, etc, thus competing with different operators.

But they were quick to make changes in their product offerings and store formats. Retailers in the Western US including Whole Foods, Trader Joe's, Ralphs, Vons, Albertson's, and Gelsons improved the range of their products and added new products to their ready-to-eat assortments...

Conclusion

With the exit, Tesco joined the list of British retailers like Marks & Spenser and Sainsbury's which had also quit the US. Marks & Spenser entered the US by acquiring the stores of Kings Supermarkets in New Jersey in 1988. It left the market in 2006 to concentrate on the UK venture. Sainsbury's acquired a 21% stake in the US-based Shaw's Supermarkets in New England in 1984. By 1987, it acquired the remaining stake and owned around 80 stores of Shaw's in the US. In 1994, Sainsbury's acquired a 16.7% stake in another retailer Giant . Sainsbury's operated Shaw's Supermarkets in the US till it exited the country in 2004 after selling the stores to Albertsons...

Exhibits

Exhibit I: Tesco - Income Statement
Exhibit II: Tesco's Store Formats
Exhibit III: Tesco - International Expansion
Exhibit IV: Recession in the US - Origins and Impact

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