Tesco joins the ranks of US flops
In 2006, when Tesco announced its plans to launch the Fresh & Easy concept in the US, it appeared nothing could go wrong. Yet unfortunately for the group, ‘the American dream' never materialised. Dan White examines why Tesco is by no means the only UK retailer to have crashed and burned in its attempts to conquer the states
Print14 May 2013
Tesco’s ignominious departure from the United States, where it is walking away from its Fresh & Easy chain at a cost of Stg£1.2bn, is merely the latest stateside flop by UK retailers. It joins a long list of British high street favourites who have come a cropper in the ‘Land of the Free’.
It all seemed so different way back in February 2006 when Tesco announced its plans to crack the previously elusive American market. Instead of spending a fortune on an expensive acquisition, which had been the favoured route of other UK retailers seeking to make it in the United States, Tesco would grow its own.
Ambitious plans
Tesco chief executive Terry Leahy unveiled plans to invest Stg£250m a year in a start-up convenience chain, to be called Fresh & Easy. The new stores would be located in the south-western United States in the states of California, New Mexico and Arizona.
The new stores would have an average floor space of 1,400 square metres and would, it was hoped, introduce the Americans to the joys of ready meals, a category in which it is the market leader in the UK. Fresh & Easy would also focus on fresh produce.
The 2006 announcement was preceded by two years of forward planning during which Tesco constructed a "dummy" store in a Los Angeles warehouse to trial the concept with US shoppers. Surely, after such intense preparation, nothing could possibly go wrong?
Things not going to plan
The famous Prussian general Helmut Von Moltke once famously observed that no military plan survives contact with the enemy. Tesco had a similar experience with Fresh & Easy. Almost as soon as the first stores opened for business in early 2007 it became clear that things weren’t going to work out as planned.
Everything, from the name, the product mix, the customer service to the store size seemed to rub American shoppers up the wrong way.
Starting with the name; it left shoppers utterly confused with many wondering whether Fresh & Easy was a deodorant or a hygiene product rather than a retail chain. The product mix also failed to cut the mustard with many stores experiencing difficulties keeping sufficient ready meals or fresh produce, ostensibly Fresh & Easy’s raison d’etre, in stock.
Self-checkout? Fuggedabouit!
Then there was the customer service (or rather the lack of it) and the store size. While supermarkets on this side of the Atlantic have educated their customers to bring their own bags and then pack them themselves, American shoppers still prefer to be mollycoddled with the store not only packing their bags but also carrying them to the car. And as for self-checkout, fuggedaboutit!
The Fresh & Easy stores were also much too small, no more than a third of the size of the average American supermarket. Just to make matters worse they were standard-issue Tesco, functional and antiseptic, and did nothing to welcome sceptical American shoppers.
However, in practice most of these glitches could, given time, have been ironed out. Tesco is a world-class retailer as its success in Ireland, Central Europe and the Far East, as well as in its native Britain, demonstrates.
Major competition
Unfortunately there was an even bigger flaw with the Fresh & Easy concept. Whatever the advance planning may have indicated, there was already a chain catering to the market niche identified by Tesco.
Trader Joe’s has almost 400 stores, over half of them in California, and specialises in selling the sort of upmarket food items that Fresh & Easy was planning on. Its stores are also much larger and it provides the sort of customer service that American shoppers expect as standard.
Just for good measure Trader Joe’s is owned by the family of Aldi founder Theo Albrecht. At the risk of mixing one’s metaphors it would appear that, not alone was Tesco proposing to re-invent the wheel, having done so it was then planning on getting into the ring with an 800lb gorilla.
With, unfortunately, entirely predictable results. By the time Tesco finally pulled the plug on Fresh & Easy last month and confirmed that it was exiting the United States, the total cost of the debacle had risen to Stg£1.2bn. A big number even for a company of Tesco’s size.
Not alone among UK retailers
It will not have come as much consolation to Tesco shareholders but their company is not alone in making a complete hash of the United States. In fact the list of British retailers who have got the United States terribly, horribly wrong reads like a roll of honour of the UK high street.
In 1988 Marks & Spencer paid $750m for the iconic US menswear retailer Brooks Brothers. It sold the chain for just $225m 13 years later. M&S’ other US acquisition, supermarket chain Kings, was also a lemon and was sold at a heavy loss in 2006.
Tesco’s major UK rival, Sainsburys, also failed to crack the US market selling its American subsidiary Shaws for $2.5bn. Other UK major retailers who didn’t make the grade in the United States include WH Smith, Dixons, HMV and Laura Ashley.
So what is it that UK retailers find so difficult in the United States? Could it possibly be that, spoiled by their British success, they fail to realise until it is too late how very different the American market is?
The whole of the UK has an area of less than 250,000 square kilometres into which a population of over 62 million people has been crammed. This combination of a relatively large population and a relatively small geographical area means that every store can be quickly supplied by a single nationwide logistics network. In addition this high population density has led to the development of a single national market with the store in Southampton being virtually identical to the one in Aberdeen.
Very different logistics networks
By comparison the United States is very different with over 310 million people spread across almost 10 million square kilometres. This means that American retailers have to employ very different logistics networks to cater for very different, geographically dispersed groups of customers. In effect the United States is a series of local markets with very different tastes. What works in Bridgeport, Connecticut, might not necessarily do the business in Boise, Idaho.
Tesco was merely the latest UK retailer to learn that lesson the hard way. It probably won’t be the last.
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