The Failure of Tesco in the USA

Ola Onikoyi
Oct 1, 2019 · 11 min read

…”The British are coming” “Wallmart, Kroger, safeway, 7 Eleven — be warned UK’s largest grocer, Tesco is readying an assault on your home turf with a new “mystery” format that analysts say could leave its US competitors shaking in their boots”…Parija Bhatnagar

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In November 2007 — Tesco — one of the top three largest UK Supermarket chains and a major global retailer opened its first stores in the USA under the brand name ‘Fresh & Easy’. The company’s stated aim was to build a coast-to-coast business of more than 1,000 stores, and it constructed a costly supply infrastructure to match. Six years later at a cost of over $2 bn — in April 2013, Tesco confirmed it would exit the US Market.

What happened?

  • Nov 2007 first of Tesco’s Fresh & Easy stores opened in Hemet, California;
  • in the first five months Sixty stores opened; and
  • by the end of the first year 150 Fresh & Easy stores opened across California;
  • April 2009: Fresh and Easy reported close to $200 million loss;
  • June 2009: Fresh & Easy stores were criticized for employing only part-time workers and rejecting a request to recognize a union;
  • April 2011: Losses climbed to around $220 million;
  • Jan 2012: 12 Fresh & Easy stores temporarily closed across California, Arizona and Nevada because of weak local economies;
  • December 2012: Philip Clarke the new Tesco CEO announced a strategic review of Fresh& Easy “with all options under consideration”;
  • April 2013: Tesco confirmed at a cost of around $ 2bn it will cut its exposure to the US business;

Tesco did not rush into this venture blindly, they spent twenty years considering a move into the US Market and did three years worth of intensive on the ground research; and spent US $1 billion on it. Tesco is not new to researching markets and has a reputation for cutting edge use of data. They own ‘Dunhumby’ the customer science consulting company who analyzed their research. They put executives into American homes to see what they had in the fridge, what they ate, and how they shopped. They even went so far as to build secret test stores.

Why went wrong?

It probably had a lot to do with a miss-interpretation of the data they had collected. It is always necessary to have a full understanding of the context in which data is collected. Although British and Americans share a heritage and speak the same language, they have wide cultural differences. It is a common mistake of UK companies trying to break into the US market to think of the USA as one market. In reality it should be viewed more like Europe, the individual states are not different countries, but their markets can have vast differences not only in business practices but in cultural attitudes and approach.

We happen to speak English in America,” explains Jim Prevor, a food retail expert and editor of the Perishable Pundit website. “It seemed Tesco understood instinctively that when you open stores in China or Poland those stores are going to have to be different from the British stores. But somehow arrogance kicked in, and they made the fatal mistake of thinking, ‘We know what Americans want.’

Tesco launched on the West Coast of America, amid a publicity storm, initially in neighborhoods across California in areas considered to be “food deserts” full of fast food outlets. This launch was into a society that is car centric and view shopping as part of their entertainment experience. They might have done better launching on the East Coast, where populations are denser and there is far more pedestrian traffic. Other British companies have succeeded on the East Coast such as: ‘Topshop’ and ‘Pret’ however rather than a dash for growth which Tesco took, they have opted for a more gradualist approach.

Analysts say in the US getting the right location is a big part in creating success, Tesco got this very wrong. Sometimes it found itself opening aspirational stores in low income areas. It also discovered that finding locations for stores near to its distribution centre was a problem. This suggests a lack of forethought on their part. Tesco’s growth strategy was determined by a need for 500 stores to justify an investment, costing approximately US $100 million in its distribution centre in Riverside that is powered by California’s largest roof-based solar panel array. The green approach for Fresh & Easy was emphasized by its delivery vehicles, hybrid electric diesel; and some parking spots reserved for shoppers with hybrid cars. This investment in property and supporting infrastructure took place at the height of the property boom and just before its collapse amid the financial crisis. The unfortunate timing of this venture is perhaps the ‘elephant in the room’ it brought to the fore all the problems Tesco faced.

The world ‘Financial Crisis’ hit the US consumer hard and consumers spending and taste for adventure collapsed at the same time as Fresh & Easy were faced with crippling costs for the leases on its stores. Las Vegas, which was a large and growing area and one of the centers where Fresh and Easy established itself; soon turned into the repossession capital of the USA. Phoenix another center chosen by Fresh & Easy was also a serious victim of the housing crash.

Fresh & Easy opened sixty stores in its first six months and had 150 by the end of its first year of operations but by April 2009 it had made around$180 million loss and by April 2012 the losses had climbed to $200 million. Although by April 2012 things had begun to look up with losses narrowing to $170 million. As it was the failure to make a profit from their stores meant funds had to be expended in redesigning existing stores and mothballing others. So, by the time it closed, it only had 199 stores and all of them on the West Coast of America — never reaching its predetermined initial goal of 500 stores and thus failing to make its food factory and distribution centre viable.

It looks as though they took their data as hard and fast facts rather than just one of the ingredients in the creative mix from which to create an effective strategy. Tesco’s research had told them that potential customers required fresh organic food in environmentally sustainable environments and desired a one stop shopping experience. However Tesco’s strategy of establishing their Fresh and Easy stores in retail oases so called ‘food deserts’ in urban areas meant they were actually establishing themselves in a different market to that which their research had identified as making lifestyle choices when shopping.

American consumers seem baffled by what kind of store Fresh & Easy is. While many of the outlets — which are much smaller than most American supermarkets — have been opened in upper working-class areas, products and marketing seem to be aimed at more affluent shoppers.

Initially at least, they didn’t recognize this failure to connect with their target audience. Rather than taking a nimble approach and recognizing the need to adjust and adapt they appear to have doggedly stuck to their original strategy. They invested heavily in their new ‘unknown’ brand and own brand labeling excluding the trusted brands US consumers instinctively look for. Unlike other British Companies in the USA they did not rush to adapt their product for the tastes of the US market, although, they began to add American recipes to their pre-packed ready meals range. Tesco also appears to have believed their data above an accepted cultural norm, ignoring available opposing cultural data that suggests in reality Americans tend to visit more stores than their European counterparts, seeing their shopping as part of their entertainment experience. By refusing to recognize this cultural norm they were unable to ask themselves: why the consumer would want to restrict themselves to one place of entertainment when there were many others available, they could also visit.

Critical to their strategy was the decision not to use the brand name of ‘Tesco’ and to come up with ‘Fresh & Easy’, a name that held no meaning at all to the American market and appeared to be something to do with hygiene. When entering one of the most difficult markets in the world, for British businesses to break into, why throwaway one of your greatest assets? In this case the Brand name of ‘Tesco’, it is a strange decision. It is a globally recognized brand that can be argued to immediately give confidence to shoppers whatever country they are shopping in because of they know that what they are buying is of good quality at good price. They went further creating a completely new look for the stores themselves, think clinical, for the interior design and the size of the stores themselves were smaller than that of conventional US supermarkets and larger than the traditional Convenience Stores. So, the size of their stores became an oddity rather than an attraction in the US market.

It appears not only were Tesco’s set on challenging the existing US players in the market, but they were also intending to change American consumer shopping habits. Changing habits tends to be hard and expensive because the crucial factor is time, the ability to stay in the market while the message is going out, being consumed, and sinking in leading to the required change in habits.

The changes for the consumer included:

  • Self service tills when US consumers are known to value service highly and are used to having people around to pack their shopping for them and in some cases carry it out to their car leading to a much-quoted jibe: ‘Not very Fresh and Easy’;
  • Offering small pack sizes when US consumers were used to buying in bulk to save money;
  • Offering British style prepacked ready meals an alien concept to US consumers whose only experience was the 1950’s ‘TV’ meals that had a poor reputation and were far from popular with today’s consumers and slimming meals. The unfortunate timing of Tesco’s launch coinciding with the subprime mortgage crisis meant these meals were never going to be on the top of struggling families shopping lists.
  • Shrink-wrap food packaging meaning customers could not feel the fruit they were buying or buy for example a single onion. This was due to a misconceived idea about consumer worries about health and hygiene;
  • Placing all their offers and coupons online rather than in store, this was diametrically opposed to existing price sensitive consumer preference which was to have such things available in store.

Also, the Home-grown competition did not sit back and do nothing in response to the Fresh & Easy Launch. ‘Aldi USA’ part of the German discount grocer announced it would be opening a string of stores in California and ‘Walmart’ hired a former Tesco executive to devise a strategy enabling it to compete in Fresh & Easy’s own choice of market. Walmart also followed Fresh & Easy’ with smaller convenience stores in neighborhoods

So, it is probably fair to say Tesco were overly ambitious and one wonders how they ‘reality’ tested their overall strategy before commencing with their launch. It appears their costing was out from the beginning as they expected it to cost around $350 million a year. By the end of the first year they discovered this projection was way out. It is normal practice when launching into a new market to expect a flow of ‘learning opportunities’ to flow in over the first few months as mistakes are made and a greater understanding of the market is gained through customer feedback and other means.

Had Tesco cut its losses and run too early?

If Tesco had stayed the course, would it have been able to turn the situation around? Some analysts think so, killing of a young venture is always easier than fixing an old one. This is an interesting and very relevant argument and raises another question; was the reason to pull out purely down to the situation in the USA or were there other compelling reasons external to the USA. Many customers of the Fresh & Easy Hollywood store were surprised to hear that Tesco’s were pulling out. Saying it didn’t look like a business in turmoil. ‘Its always busy’ was a common response to the news along with its so convenient, ‘I can walk there’.’ And I love it it’s like a neighborhood market’, and perhaps surprisingly the size of the store itself was beginning to be appreciated.

When Tesco’s new COE Mr. Clarke announced the strategic review that led to the decision to pull out of the USA, whilst acknowledging some of the above mentioned mistakes he made the point that:

…”Whilst the business has many positives, its journey to scale and acceptable returns will take to long relative to other opportunities’…

This suggests the decision had as much to do with Tesco’s global aims and strategies not just what was happening on the ground in America. It is arguable that Tesco’s balance sheet was strong enough to take the strain of the US operation having about $75 billion of assets at February 2012.

When the announcement to quit was made Tesco in the UK had seen its annual profits fall for the first time in 20 years. Over the three preceding months, growth had only been 0.5%. This was accompanied by a $1 billion write down of its UK property portfolio. This followed a review in which the company identified over 100 sites bought during the property boom in the UK that it did not intend to develop. Tesco also announced it had some great stores but would not need many more of them as it was in future concentrating on a multi-channel approach; large stores, convenience stores and on-line. The question is whether their US adventure took their attention away from their main market, the UK and was the decision to pull out of the USA in part a recognition of this.

A retail analyst at Investic would say a definite yes:

…”Tesco sent the A team to run the US operation and, by definition, that left behind the B team running the UK side.” Tim Mason, Tesco’s deputy chief executive, moved to California to run Fresh & Easy. He was also the grocer’s marketing supremo, the man who dreamed up the Clubcard and built the brand’s classless image in the UK. He kept that top marketing role even when he was in Los Angeles — 5,000 miles away from Tesco’s core domestic market — and the brand’s image at home took a substantial battering”…

His suggestion is that with only the ‘B’ team left, investments in the UK stores were put on the back burner and their eye was taken off the game so much so that Tesco’s competitive pricing structures began to fail and the competition took advantage of the situation. He goes further suggesting it is no coincidence that British firms tend to pull out of America when they are struggling in the UK citing both Sainsbury's and Marks & Spencer. It might well be possible that all three British firms did not have the human and financial resources available to concentrate on two such dissimilar markets at the same time. However, as other British Firms have managed to succeed in the USA it might have more to do with the market they were attempting to enter and establish themselves in. Warren Buffet the renowned US investor said he believed Tesco had been foolhardy to enter the US grocery sector.

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