Tesco Felled By Hubris, Leaves USA
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Quitting the country is the easy part. Now, what about all that infrastructure?

Chronicle of a Failure Foretold

Years from now, MBA students will be puzzling over how Tesco, the British food retailer, could have stumbled so badly in its venture in the United States.

Well, more than stumbled. As I predicted more than a year ago in a news feature in the Robin Report, Tesco has called it quits in the U.S., just five years now after entering the country. Tesco racked up a horrendous record: it managed to open about 200 stores in this county, most in California, plus a few in Arizona and Nevada. It burned through well in excess of $3 billion counting startup costs and cumulative losses during its time in this country. At no time did Tesco turn even a modest profit with its Fresh & Easy stores, as they were dubbed.

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That dismal outcome stands in ugly contrast to its stated ambitions. Tesco predicted it would have many hundreds of stores in the U.S. by now. It envisioned a quick leap to the East Coast with fill-ins elsewhere yielding a network of 10,000 stores.

The reality of the situation has cost the career of Tim Mason, Tesco’s U.S, chief officer. When Tesco announced in December it was quitting this country, it also said Mason would immediately leave the company. Mason was a 30-year veteran of the company and at one time was seen as the next chief executive officer of all of Tesco. Mason gave it a good shot. He moved to California from Britain with his wife, Fiona, and three of their seven children to direct the fledgling Fresh & Easy empire. Fiona took up golf to wile away the hours while Mason toiled. To the good for Mason, he left with a huge buyout and an astoundingly generous pension.

Tesco now faces the challenge of how to withdraw from the U.S. without abandoning its assets here entirely.

Flashback Fact Checking

But before we assess Tesco’s exit options, let’s take a look at how Tesco got into such a fix. After all, total failure didn’t seem to be in the cards when Tesco arrived on these shores. Tesco is a huge company with annual sales of about $103 billion. It operates a total of about 6,200 food stores in more than a dozen countries; it’s no stranger to operating in diverse cultures. Tesco is the world’s third largest food retailer, trailing only Walmart and Carrefour.

It’s difficult now to recall the fear Tesco struck in this country because of its deep pockets, success elsewhere, and outsized ambitions. Many supermarket operators and industry observers were convinced Tesco represented a huge competitive threat to supermarkets. Some even predicted Tesco could humble Walmart.

I was never of the opinion that Tesco would ride roughshod over established retailers. During the Fresh & Easy run-up toward store openings, and at the time stores started to roll out, I predicted in Supermarket News, the trade publication of which I was chief editor at the time, that Tesco would have a very tough go of it in this country, and wouldn’t fulfill many of its ambitions. I also pointed out that numerous European food retailers have tried to establish a presence in this country, and each one that tried to introduce a new model failed. My voice of reasonable doubt was a lonely one at the time.

The chief reason Tesco failed in the U.S. can be summed up in one word: “hubris.” Tesco did very little market research in its target territory. Instead, it sent a team of about 50 executives to California to study how consumers shopped. This effort was amusingly code named “Project Aquarius.”

By befriending consumers and entire families, the intrepid Tesco Aquarian team tried to leverage customers’ ideas about what they might want in an entirely new shopping venue. Clearly, this was a futile pursuit. Consumers may be good at learning how to tease value and convenience from the shopping options set before them, but they are not professional marketers. They have no valid notion of what a store format that doesn’t exist should look like, or even what they’re missing from their current options.

Nonetheless, a blueprint for the new Fresh & Easy format was developed, and Tesco started to acquire a number of locations so multiple stores could be opened simultaneously. The idea was to fire a big burst of openings that would startle incumbent food retailers and leave them helpless before the
new format.

More than that, Tesco developed a vast and costly 1.4 million square foot distribution center topped by a huge rooftop solar array to power it. By the way, it’s the largest solar unit in California. Next door, a factory was constructed to manufacture the fresh-prepared meals and pre-packaged produce items to be offered in the stores. All that happened before a single store was opened.

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The effect of all this spending and activity was to greatly increase the cost of potential failure. In fact, it pushed Tesco into a “do or die” position right out of the gate. A more prudent approach would have been to open a few store locations supplied by a third-party wholesaler so format adjustments could be made a low cost.

Sure enough, format adjustments were required all right. When the first Fresh & Easy stores were opened, the conspicuous lack of shoppers signaled that something was amiss.

Indeed, nearly everything was amiss. The Fresh & Easy stores, at 15,000 square feet or a bit more, were far smaller than local consumers expected. So was the limited product offering, consisting of restaurant-quality, fresh-prepared meals; a small grocery line; pre-packed produce; and beer and wine. The product range was simply too small, and had the huge inconvenience of forcing consumers to make yet another food-shopping stop to get what was missing. Also, American shoppers have never been big fans of pre-packed produce.

The stores featured consumer-operated checkout kiosks only; there were no staffed checkout lanes at all. Many shoppers were, and still are, reluctant to use self-checkouts, preferring a slightly higher level of service.

Finally, the stores were judged by consumers as being uninviting, stark and cold, lacking much in the way of decor and charm. The name was uninspired, too. Many consumers joked that Fresh & Easy must be a place to buy soap, deodorants or feminine-hygiene supplies. Tesco is apparently untroubled by that since it has started to use the Fresh & Easy name in its supermarkets in Britain as a private label line. In the end, Fresh & Easy presented to consumers as little more than a chain of up-market convenience stores that sold prepared meals for home consumption. This could have played well in
an urban environment, but it was all wrong for California.

Exit Strategy

So now Tesco must figure out how to depart the U.S. with as little harm as possible and, it hopes, without simply shuttering assets and walking away. Regrettably for Tesco, its options are few at the very time the need is greatest. Tesco is facing slumping sales and profits in its home country, where it generates the vast proportion of its revenue, and needs to refocus attention there.

The best departure outcome for Tesco would be to quickly unearth an investor or retailer that would buy the entire enterprise and continue to operate with the hope that profitability could somehow be achieved. This is not likely.

Tesco could also seek a partner that would do much the same under Tesco’s license, offering a way to lift investors above the hazard of purchasing the whole thing. This is less likely.

The most likely and most difficult outcome is that Tesco must sell the stores and distribution assets piecemeal. Some of the store sites could have utility to dollar stores, a surging store style, or to Walmart for its small-store food format. It’s more difficult to envision a buyer for the distribution
and manufacturing center. It’s also possible that an investor could buy the whole business to parcel out to numerous buyers.

As something of a precedent to Tesco’s plight, in 2004 British retailer J. Sainsbury sold its Shaw’s chain of supermarkets in the Northeast U.S. to Albertsons so it could refocus attention on its drooping sales back home. The Shaw’s saga didn’t end well. Albertsons, with Shaw’s in tow, was later sold
to Supervalu. Shaw’s was for long a millstone around Supervalu’s neck. Albertsons new owner, Cerberus Capital Management, will most likely feel the weight of Shaws too.That might be seen as a cautionary tale for potential Fresh & Easy buyers.

In sum, Tesco’s prospects for an exit strategy are about as bleak as its potential for success was from the start. The only good thing is that those MBA students will have a project in addition to the AOL-Time Warner fiasco to mull over.

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