November 2007

SPONSORED BY

SPECIAL REPORT

TESCO IN AMERICA
Huge crowds met Tescos arrival in Los Angeles, interested in checking out a hybrid retail concept from one of Europes biggest players in the industry.

BY DOUG DESJARDINS

L.A. landing puts Tesco on map

esco wanted to make a good impression with its Nov. 8 debut in Los Angelesa city where image is everything and it did just that with a huge crowd jamming the aisles on opening day. Company officials reported similar turnouts at five other grand openings in Southern California and acknowledged customer response exceeded expectations. I just came from our store in West Covina, said Simon Uwins, Tescos chief marketing officer in the United States. It wasnt quite this crowded but it was pretty close. More than 100 people stood in line waiting to get into the Los Angeles store, with

employees letting customers in as others left. And what they saw inside was a Tescos

We expected prepared meals to be a massive hit here in the U.S. And so far theyre being cleared out rather fast.
Simon Uwins chief marketing officer, Tesco

new hybrid format, combining elements of Trader Joes, Whole Foods and 7-Eleven with

some borrowings from its stores in Europe. The basic concept of Fresh & Easy is a convenient shopping experience with an emphasis on healthy food and prepared meals from its Fresh & Easy private label. During a brief tour of the crowded store, Uwins explained that 50% of its food offerings are from its private label and that ever ything is created, cooked and packaged at its own state-of-the art kitchen in Southern California, including all of its prepared meals. We expected prepared meals to be a massive hit here in the U.S., said Uwins.

TESCO CONTINUES ON PAGE 2

1

www.retailingtoday.com

RT PHOTOS

SPECIAL REPORT: TESCO IN AMERICA

SPONSORED BY

A LEBHAR-FRIEDMAN PUBLICATION 425 Park Avenue, New York, NY 10022 phone: (212) 756-5100, fax # for releases: (212) 756-5125 SUBSCRIPTION SERVICES: phone: (800) 766-6999 fax: (813) 627-6886 PUBLISHER PAULA LASHINSKY plashins@retailingtoday.com EDITORIAL ED.-IN-CHIEF/ASSOC. PUBLISHER TIM CRAIG tcraig@retailingtoday.com SENIOR EDITOR/SPECIAL PROJECTS MIKE TROY mtroy@retailingtoday.com SENIOR EDITOR ASSOCIATE EDITOR SENIOR DESK EDITOR MIKE DUFF mduff@retailingtoday.com YELENA MOROZ ymoroz@retailingtoday.com JEFF SCHINDLER jschindl@retailingtoday.com

ASSOCIATE DESK EDITOR ROZANNE GELBINOVICH rgelbino@retailingtoday.com ASSOCIATE NEWS EDITOR GAIL HOFFER ghoffer@retailingtoday.com ART & DESIGN DESIGN ASSOCIATE ZANKHANA KATHRANI zkathran@retailingtoday.com

NEWS BUREAUS

Los Angeles SENIOR EDITOR

(760) 434-5096 DOUG DESJARDINS ddesjard@retailingtoday.com

SALES/MARKETING

Nov. 8 saw Tesco grand open in several Los Angeles locations. Each store is a hybrid of an organic supermarket and a convenience store. At least 50% of merchandise stocked is Fresh & Easy private label.

AREA SALES MANAGER AL URBANSKI aurbansk@retailingtoday.com REGIONAL SALES OFFICES REGIONAL MANAGER DISTRICT MANAGER JAMES MALVER jmalver@retailingtoday.com BRUCE SMITH bsmith@retailingtoday.com

TESCO
CONTINUED FROM PAGE 1
And so far, judging from the gaps we see in our refrigerated cases, theyre being cleared out rather fast. Prepared meals, ranging from spaghetti and meatballs to sushi to sandwiches, are housed in cases at the front of the store and in the first two aisles, giving people the option to get in and out of the store in just a few minutes. The first three aislessawedoff versions of a typical supermarket also feature a large selection of fresh produce, meat, poultr y and seafood and an endcap where free samples are handed out toward the back. Several things set Fresh & Easy apart from other grocery retailers like Trader Joes and Whole Foods, the two it could most easily be compared to. As Uwins mentioned, its Fresh & Easy private label has a 50% penetration rate and is represented in nearly every major food category including produce, meat, prepared meals, juice, coffee and mixed nuts. And that reliance on private label allows it to offer

MIDWEST AREA MANAGER CATHERINE STEPHANY cstephan@dsnretailingtoday.com Chicago 444 N. Michigan Ave., Chicago, Ill. 60611 (312) 644-8688 WESTERN REGIONAL MANAGER MARY FAGNANO mfagnano@retailingtoday.com Los Angeles 606 N. Larchmont Blvd., Los Angeles, CA 90004 (323)464-8321 WEST COAST AREA MANAGER STEVEN FAWTHROP sfawthro@retailingtoday.com MARKETING/CONFERENCES ASSOCIATE PUBLISHER OF CUSTOM PUBLISHING BRAD PAULSEN bpaulsen@retailingtoday.com CONFERENCE MANAGER EVENTS MANAGER REBECCA BRIGGS rbriggs@retailingtoday.com LAURIE REESE lreese@retailingtoday.com CORPORATE BUSINESS MANAGER
CORP. DIR. OF MANUFACTURING

JOHN FIELDY RICHARD ZWEIBACK PRODUCTION MANAGER PAMELA GOLDBERG pgoldber@retailingtoday.com

some very competitive prices. A few examples include a 25-ounce beef lasagna dinner for $3.79, a wide array of fresh sandwiches priced under $4 and a half-gallon of milk for $1.98. And some of the pricing gives a nod to one of its top rivals with bananas priced at 18-cents each, one penny below the 19cent bananas sold at Trader Joes. Overall, Tesco says its prices are well below its main rivals at standard supermarkets. We estimate our

TESCO CONTINUES ON PAGE 3

www.retailingtoday.com

RT PHOTOS

Tampa (813) 627-6946 SENIOR EDITOR/SPECIAL PROJECTS MIKE TROY mtroy@retailingtoday.com

SPECIAL REPORT: TESCO IN AMERICA

SPONSORED BY

TESCO
CONTINUED FROM PAGE 2
prices are about 20% lower than most supermarkets in the area, said Uwins. The aisles feature European-style merchandising with products shelved in their original cardboard containers, a gimmick that gives the store a distinctive look and makes restocking shelves easier. The shelves are also stocked with cases of product threedeep so that a full case can be pulled up front when one is emptied. With that depth to the shelves, theres no need to replenish them during the day, and we literally have our warehouse on the floor, said Uwins, noting the technique is unique to its Fresh & Easy format. The in-store signage is also unique and stamps Fresh & Easy as an organic and eco-friendly retailera good image for Southern California. Nearly every green, cardboard endcap features a message about its products including all our bagged coffee is
Tesco Fresh & Easys checkout systems at its stores are 100% completely automated. Some are designed smaller than typical and are meant for 15 items or less, while others are of standard dimensions. And for those unfamiliar with self-checkout there are plenty of employees nearby to lend a hand.

certified organic and our desserts contain 0% trans fats. LED lighting is also used in the store, another element called out in its signs. The stores do not sell cigarettes but do carry a large selection of wine along with liquor and beer. Its general merchandise, health and beauty and over-the-counter medications offerings run more along the lines of a convenience store, though with a much larger selection, albeit smaller than those found in a supermarket. Basics like paper towels, diapers and pet food are stocked in a single aisle and its HBC and OTC products are located on one long shelf toward the back of the store capped with a section for greeting cards and magazines. The rather small selectionand the complete lack of private label productsshows Fresh & Easy is primarily about the food.

TESCO CONTD. ON PAGE 4

www.retailingtoday.com

RT PHOTOS

SPECIAL REPORT: TESCO IN AMERICA

SPONSORED BY

TESCO
CONTINUED FROM PAGE 3
The checkout system is completely automated with 100% assisted self-checkout. Five checkout stands are small and designed for 15 items or less and the rest are a bit larger with scanners and self-pay systems (though there were plenty of employees nearby to help out people not familiar with the concept). 20 to 30 employees. As expected, Tesco had some detractors at its grand openings in the form of labor unions and neighborhood groups. The Carpenters Local 1506 picketed in front of the Los Angeles store and handed out fliers claiming that a group hired by Tesco to help build its stores does not meet area labor standards, including paying for health care and pension for all its employees on all projects. Tesco has a second wave of five openings planned for Las Vegas on Nov. 14 and plans to have stores open in the San Diego market in late November as well as in Phoenix in early December. It expects to have 50 stores operating in California, Nevada and Arizona by next February. And though Tesco is new to the United States, consumer intent to shop at its stores is high. A study conducted by Leo J. Shapiro & Associates in the areas Tesco plans to open showed one-third of consumers interviewed plan to shop at Fresh & Easy stores.

We have assisted checkout where people can either check themseves out or have someone help them
Simon Uwins chief marketing officer, Tesco

We have assisted checkout where people can either check themselves out or have someone help them with whatever level of assistance they need, said Uwins. Just like everything else we do, we like to give our customers options. Selfcheckout should also help keep the number of workers needed to run a store at a minimum. Tesco said stores should be able to operate with

Chief marketing officer Simon Uwins (above) was on hand at the grand opening of the Los Angeles location to lend a guiding voice to shoppers and press alike. And found throughout the store is signage calling out the eco-friendliness of its products.

www.retailingtoday.com

SPECIAL REPORT: TESCO IN AMERICA

SPONSORED BY

Impact: Is shakeup of industry on horizon?

BY MIKE DUFF

resh & Easy Neighborhood Markets will have a profound effect on retailing. Just what that effect will be, however, is a matter of debate, one that revolves around what the concept will turn out to be and who stands to lose if it is successful. Just about every retailer that is carrying a substantial amount of food has had to address the issue of what the Tesco rollout of Fresh & Easy means. Steve Burd, chairman and ceo of Safeway, which brought Tesco in to boost its online business before breaking the partnership after word about Fresh & Easy emerged, said at a recent Goldman Sachs analyst conference, They argue that theyve done more homework here than in any investment that theyve ever made. What I tell people generally is youve got to respect anybody thats coming after your market share. Because they are applying for liquor licenses virtually everywhere, as soon as they apply for a liquor license we know the site and run the demographics and tr y to understand what they might be up to. But we really cant do anything until we see them go to market and see what kind of a market approach theyre going to make. Eric Schiffer, 99 Cents Only ceo, noted, Theyre talking about having eco-friendly stores. Theyre talking about having many food items that you take home which is really not what we specialize in, although that could be a potential business for us going forward. I would love to be known as the low-price leader of organic foods, so thats something for us to work on, and it could be an opportunity. Tesco could lead the way for us by driving prices down. But I dont think that a Tesco and a 99 are going to be that directly competitive. If I was another retail format, Id probably be more concerned. And, in fact, I would love to be next to Tesco. As launched, Fresh & Easy accomodates

Tescos entry to the U.S. market definitely has competitors from various sectors on its heels. However, each happen to look at the new format as a forecast for retail here in the future.

What I tell people generally is youve got to respect anybody thats coming after your market share.
Steve Burd chairman & ceo, Safeway

families residing in residential communities, be they suburban, exurban or even converted commercial, with a particular emphasis on working moms. The four pillars of the concept good food, good value, convenience and sustainable operationswere established specifi-

IMPACT CONTINUES ON PAGE 7

www.retailingtoday.com

SPECIAL REPORT: TESCO IN AMERICA

SPONSORED BY

Impact (continued): Why L.A. will be a tough nut to crack

CLICK HERE TO ENLARGE

About the source: *Chain Store Guide (a division of Lebhar-Friedman Inc.) is a data-powered research company that provides sales and marketing solutions for the retail and restaurant industries. Each month, the company compiles a Monthly Report on Openings and Closings. For more information, including methodology used to compile this report, contact info@csgis.com.

www.retailingtoday.com

SPECIAL REPORT: TESCO IN AMERICA

SPONSORED BY

IMPACT
CONTINUED FROM PAGE 5
cally to address prime concerns of working moms in the United States, according to one consultant who has been in discussions with Tesco. Yet, things dont always turn out as planned. Karen Ghaffari, a Fitch Ratings analyst, pointed out that Fresh & Easy has so many potential competitors that what it is and what it will become may be difficult to immediately gauge. If Tesco strikes a chord with consumers, I think other retailers will take note of that and respond, she said. If Tesco seems to be capturing market share and keeping it, that would indicate theyve struck a chord with consumers, but I dont think they are just going to be competitive with supermarkets but other food retailing as well, including quick serve restaurants. Quick serve restaurants may take a hit, but, as aggressive advertisers, they can hit back, and quickly. Thus, Tesco might find itself facing a barrage of dollar meal deals that could impact who shops the store. And not just from McDonalds. Concepts such as Organics to Go might have a say in determining how much investment Tesco must make to win over its core customer and if it could be pressured into amending its strategy down the road. Drug chains, which already entice female consumers with a convenience proposition, also are among the retailers that Tesco may impact outside the traditional food sector. But they might provide an opportunity as well. Craig Johnson, president of consulting firm Customer Growth Partners, said that Tesco is essentially adopting a drug chain site strategy, placing its locations on corners home-bound commuters cant fail to pass. If a drug store is on the Fresh & Easy is targeted to the time-pressed shopper. With its ability to offer easy, guiltfree shopping, the new format hopes to develop a niche in the U.S. market, taking pieces same pad, Johnson said he envisions them double of business away from takeout restaurants, drug chains and supermarkets alike. teaming supermarket chains. For time-pressed moms, Fresh & Easy can provide easy, no-guilt food shopping while intensity than people are anticipating, he said, adding that Tesco may the drug chains take care of HBA and beauty needs in the weekly be planning for the velocity and density of drug chains. Tesco has designed its rollout into the U.S. market to quickly estabshopping context. Add a couple of monthly trips to Costco or Sams Club and a time-challenged mom could, potentially, ignore the super- lish a niche in what Johnson characterizes as white space where the market altogether. Johnson, in fact, suggests that Fresh & Easy could combination of good food, good value, convenience and environmenbecome the kind of retail-altering concept that warehouse clubs be- tal sensitivity that matters to the emerging American consumer converge. Even if it thinks traditional supermarket chains are assailable, came in the 1980s. Craig even challenges the notion, held by many retailers, that Tesco is aware it will be challenged for the space it covets, as evinced Tescos giant Riverside, Calif., distribution center requires larger store by Fresh & Easys 18-cent banana feature price, which beats that of formats to be financially viable. The DC might be designed for greater Aldi-owned Trader Joes by a penny.

www.retailingtoday.com

SPECIAL REPORT: TESCO IN AMERICA

SPONSORED BY

Financials: Entry felt from freeway to The City

BY MIKE DUFF

escos launch in California has gotten a lot of attention in North America, but it is only a small part of a globe-spanning operation, and that can potentially have a lot to do with just what happens in the United States. The tremendous Tesco investment in North America got a mixed reaction initially in Londons financial community, where some have publicly wondered why the retailer wants to fight its way into a mature market when it can invest in countries with rapidly growing economies such as India and China, which also include less sophisticated competitors. For now,Londons investment community, The City, has accepted Tescos raTIM MASON tionale that the United States represents the worlds largest retail market and that it can grow in an underdeveloped niche. Indeed, with industrial India and China recently losing their edge in recent months to energy producing Russia and given the position of countries that are developing both industrial and energy sectors such as Mexico and Brazil, then taking into consideration possible conflict over Taiwan, Tescos American bid could be regarded as one of the biggest retail hedge moves ever. With potential abundant in the worlds largest economy, Professor Mohan Sodhi of Londons Cass Business School said, The City should be forgiving. Nevertheless, he noted that the initial confirmation of Tescos U.S. ambitions has had a negative impact on the companys share price. Since then, Tesco has convinced the British financial community that it has developed a well thought out U.S. expansion plan. Backers now seem to outweigh skeptics, and The City is looking at the Fresh & Easy rollout with anticipation. Sodhi said Tesco has carefully managed the information emerging about its U.S. expansion, even reassuring markets it wont get in over its head.

Published accounts have Tesco executives promising a rapid U.S. departure if Fresh & Easy flops. On the other hand, Sodhi pointed out that Tesco has very deep pocketsannual sales of around $70 billionit can use to support the rollout.

ence call earlier this year that Tesco is doing well in every country where it currently operates; does a good job in food, including an extensive and popular line of private label items; has good replenishment systems; maintains tight control over

Tesco has invested heavily in the American market, a move that has Londons financial district uneasy. The move has the potential for great success; yet if things go south, it promises to exit quickly.

Tesco has lots of international experience, too. While it is Britains No. 1 supermarket operator, with about 800 stores, it operates 1,200 in Ireland, Central Europe and Asia. Beyond that experience, Jaime Vasquez, a JP Morgan European retail analyst, noted in a confer-

its supply chain; learns quickly; scales well to local conditions; is exemplary in using customer data; and sent one of its best and brightest, Tim Mason, to head the U.S. operation. Still, initially, it is expecting to lose $130 million a year, and thats something The City will watch carefully. 8

www.retailingtoday.com