tesco fresh and easy case study

Tesco’s Stumble into the US Market

• Entering the US, Tesco deserves credit for creating a neighborhood market approach—emphasizing fresh produce and meats, and good quality but value-priced prepared meals.
• By not partnering or hiring local executives, Tesco missed the opportunity to learn more about the habits and needs of target customers.
• Tesco rightly aimed to scale the concept as soon as possible so that fixed overhead investments in its own distribution centers could be spread across a larger number of stores.
• Perhaps Tesco's original rollout plan was too ambitious, with executives assuming that the company would get everything right on the first try.
• Tesco has listened to its customers, learned from its mistakes, and made appropriate midcourse corrections.

Tesco PLC is the third-largest retailer in the world, just behind Wal-Mart and Carrefour. But that didn't make the UK-based chain immune from many costly mistakes as it entered the US market in 2006.

For example, it opened some of its Fresh & Easy stores on the wrong side of the road, eliminated discount coupons, and decorated in a spare style more suited to a hospital than a food retailer. Five years later, Fresh & Easy has not made a dime, and analysts are wondering whether the company should pack up and go home, as so many other British retailers have done before it.

Tesco's story makes ideal Harvard Business School case material for teaching everything from multinational strategy to on-the-ground logistics. Marketing professor John A. Quelch recently introduced Tesco PLC: Fresh & Easy in the United States , developed from public sources.

Sean Silverthorne: Each country poses its own obstacles for multinationals entering new geographies. Your recent case on Tesco highlights challenges faced by companies coming to do business in the United States. Tell us about the initial strategy to conquer the United States with Fresh & Easy stores.

John Quelch: The United States is an unusually competitive and cluttered market. It is tough to succeed without a clear and sustainable point of differentiation. While successful grocery retailers are expanding internationally, the odds are long. Both Sainsbury's and Marks & Spencer of the United Kingdom have withdrawn from the United States. Wal-Mart tripped up badly in Germany.

Tesco's international forays have hitherto been successful—with the possible exception of Japan. Tesco intelligently elected to concentrate on fast-growing, emerging economies in Eastern and Central Europe and in southeast Asia. Its modus operandi has been to joint venture with a local retailer, acquiring good store locations and local management talent in the process.

Tesco deserves credit for not taking a "me-too" approach in its US strategy. Tesco entered the California, Arizona, and Nevada markets with a new retail concept: a neighborhood market emphasizing fresh produce and meats, and good quality but value-priced prepared meals. Averaging 4,000 items in assortment, its Fresh & Easy stores aimed to be distinctive on those two attributes: fresh and easy, conveniently located stores with a conveniently preselected assortment.

Q: The company did a serious amount of homework before entering the United States, including sending 50 British executives to live with California families. But it seems the advance team didn't learn all that it should, such as the notion that designing stark stores with concrete floors wouldn't necessarily appeal to American tastes. What can other companies that are thinking of moving into the United States learn about Tesco's early fact gathering and strategy development?

A: I suspect that Tesco had a view on what would work before sending its executives to live with those California families. The result was perhaps a bias toward gaining evidence in support of a predetermined strategy.

California is a car culture. Most households undertake a weekly shopping expedition, supplemented with stock-up purchases at convenience stores. A small neighborhood market's success depends on enough consumers changing behavior to buy a higher proportion of their groceries on a more frequent basis. This could work in inner-city locations where younger shoppers might buy their evening meal on the way home each day, but it is less likely to work in the suburbs.

In addition, the Fresh & Easy assortment carried around 50 percent private- label products, rather than more familiar national brands. And finally, fresh produce was prepacked rather than loose on the shelves. While this can actually improve freshness, consumers perceive the opposite.

Q: Tesco decided initially to fill its US management ranks mostly with British expats instead of hiring locally. How did that strategy work for them? What can we all learn?

A: Tesco established Fresh & Easy as a greenfield investment rather than acquiring or joint venturing with a US retailer as its starting point. Therefore, Tesco did not have immediate access to local retail savvy, not just in store design and assortment but also in the critical area of store locations.

Many Fresh & Easy stores are refits of preexisting retail stores that were up for sale; at least some of these stores were on the wrong side of the road, more easily accessible to inbound rather than outbound commuters who would more likely be thinking about what to buy for dinner. Foreign managers, transplanted from the UK, might not readily have these kinds of insights. And as a greenfield newcomer, Tesco would not necessarily attract California retailing's best and brightest talent as it would assuredly do in the UK.

Q: As sales remained under plan, Tesco execs halted development of new stores temporarily and made adjustments to those stores already open, such as shifting product mix, allowing some coupon discounting, and expanding hours. Do you have advice for companies about revisiting original assumptions? Do companies new to the American market have to do this reassessment more frequently or look for different things?

A: Tesco has not been afraid to listen to its customers, learn from its mistakes, and make appropriate midcourse corrections.

The assortment was expanded by 600 items; stores that were originally stark and unwelcoming—to project a value price feel—were painted in pastel colors; and more signage was added. Weekly price specials were increased to build store traffic.

Perhaps Tesco's original rollout plan was too ambitious. It assumed that Tesco would get everything right on the first try. On the other hand, Tesco rightly aimed to scale the concept as soon as possible so that fixed overhead investments in its own distribution centers could be spread across a larger number of stores.

Q: What issues do students have to answer as they make their way through the Tesco case?

A: There are two questions that students must wrestle with.

First, are Tesco's problems in the United States a result of poor strategy or poor execution? The latter problem is obviously more correctable. On the other hand, Tesco has lost time; competitors have responded to its initiatives by incorporating some of Tesco's approaches in their own merchandising and assortment selections.

The second question is how long the Tesco board will permit management to hemorrhage losses in the United States. Originally, Tesco announced a five-year plan to profitability that would come due in 2011.

Q: The case ends with Tesco in the fourth year of its five-year plan, with largely disappointing results. We heard the news recently that Philip Clarke has authorized a new expansion program through at least 2013, when it finally expects Fresh & Easy to become profitable. Correct decision?

A: Sir Terry Leahy, Tesco's highly successful CEO for more than a decade, recently announced that he would step down in favor of Philip Clarke, a long-standing Tesco insider. Speculation that this might result in the the company abandoning the Fresh & Easy experiment no doubt prompted the recent announcement that Fresh & Easy would be given a two-year reprieve until 2013.

Tesco has the resources to continue, and the US market's size remains a juicy target if Tesco can get it right.

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Tesco Case Study: How an Online Grocery Goliath Was Born

Tesco boasts an impressive history in the UK and abroad. Over the years, the grocery goliath has achieved continued success by remaining at the forefront of retail trends, including everything from self-service shopping to international expansion. More recently, Tesco has made its mark with a sophisticated online grocery strategy that enables seamless digital shopping. There’s a lot that can be gleaned from Tesco’s eCommerce efforts. In this Tesco case study, we highlight the retailer’s long-term emphasis on customer service, which can be seen not only in its physical locations but also in its eCommerce strategy.

Table of Contents – Summary

A Brief History of Tesco

Tesco’s and world’s first virtual store, tesco and scandals, how tesco became a retail case study favorite, tesco’s ecommerce website, interesting technologies that tesco’s uk site uses, impressive tesco stats you may not know, faq on tesco.

• The Tesco Success

To understand current growth and successes and why they warrant a Tesco case study, it helps to understand the retailer’s history. Founded in 1919, the company initially consisted of a group of high-performing market stalls. Founder Jack Cohen conceived the idea shortly after leaving the Royal Flying Corps as World War I drew to a close. He used demobilization funds known as “demob money” to purchase surpluses of fish paste and golden syrup.

Tesco’s initial success could largely be attributed to Cohen’s understanding of mass-market sales. In a time of strict austerity, he employed a rigid business model of “stack ’em high, sell ’em low.” The brand also set itself apart by embracing a self-service approach, which, at the time, was rare in the UK. Following the introduction of its first supermarket in 1956, the retailer entered an era of rapid growth.

After emerging as the UK’s preeminent grocery chain, Tesco released the revolutionary Clubcard. During the 1990s, the chain expanded to include thousands of international locations. This was quickly followed by investments in internet retailing, which led to the chain’s current status as a top eCommerce grocer, netting  £1.3 billion in pre-tax profits  for the year ending in February 2018.

In 2011 Tesco was the first-ever retailer building the world’s 1st virtual grocery store in South Korea. The experiment took place in a subway station and the results were tremendous: the number of new registered members rose by +76%, online sales increased by +130% and Tesco became South Korea’s no1 online grocery retailer, outranking its rivals e-mart, so this experiment was one of the first key steps towards Tesco’s digital transformation.. After this phenomenal success, Tesco opened its first European virtual grocery shop in Gatwick Airport, UK. See how they did it in this brilliant video:

Tesco has occasionally suffered controversy in the last several decades, with 2 shocking moments that everyone remembers:

• The Horse Meat Scandal: Back in February 2013, several products believed to consist entirely of beef were found to contain horse meat. The Food Safety Authority of Ireland tested a range of cheap frozen beefburgers and it found that Tesco’s sample contained 29% horse instead of beef .  The retailer made every effort to appease concerned customers. One of which included a notable promise to tighten up its supply chain and purchase a more significant share of its meat from the UK. Such efforts have likely played into the grocery chain’s recent logistics successes.
• The Accounting scandal: It was 2014 when the news dropped like a bomb: an FTSE 100 firm could get away with “cooking the books”. The company admitted submitting overstated profits by £250 million . The results? £2 billion off the supermarket’s share price in one day.

How Tesco thrived in the COVID-19 area

During Q1 2021, Tesco reported that the sales from its online store were “remarkably higher” than before the Covid-19 crisis. As Internet Retailing mentions , Tesco’s sales increased by +22% in 2020, even though the physical stores and hospitality re-opened at some point. It is believed that this success was a result of Tesco’s recent delivery enhancements and doers mentality, implemented during the first lockdown. 

It’s revenue analysis shows that 1.3m online orders were conducted only in spring 2021. This means that the total number of transactions was 81.6% higher than the same period in 2019 (a before Covid-19 year), proving that Tesco actually turned COVID-19 into an opportunity for its business, achieving memorable results by quickly adjusting its business model to the pandemic’s needs.

Despite the horsemeat scandal, Tesco remains a customer favorite throughout the United Kingdom. The Tesco case study has become a common phenomenon, as the chain boasts several unique strengths worth emulating on a broad scale.

Over the years, the retailer has shifted its original “stack ’em high, sell ’em low” approach. While affordability remains a priority, Tesco did not pursue it to the detriment of quality. Instead, it combines reasonable prices with exceptional convenience and customer service. This can be seen in physical stores and eCommerce alike.

Excellent Customer Service

Strong customer service lies at the heart of Tesco’s sustained success. The retailer employs a variety of initiatives to keep consumers happy. Customer-oriented product development, for example, ensures that all stores are stocked with the items visitors actually want. This development process includes rigorous consumer testing to ensure that new products and services are well-received. Customized stores lend further appeal; each is designed based on carefully analyzed demographics.

Quality customer service means making accommodations for all consumers—including those with special needs. Tesco accomplishes this through the use of sunflower lanyards, which allow customers with hidden disabilities to secure additional assistance discreetly. The chain also provides induction loops for hard-of-hearing customers, as well as helpful visual guides for consumers with autism.

Ultimately, Tesco’s impressive customer service derives from its top-down approach, in which a commitment to customer satisfaction permeates every element of the company’s culture. Insight Traction’s Jeremy Garlick tells The Grocer that the key to large-scale retail success lies in “ understanding your customers, anticipating their needs, and giving them what they will value.” Tesco checks off all these boxes. This is true both in stores and with its website, which uses an intuitive layout to ensure that customers can quickly access the products and services they desire.

Product Diversification

Tesco may be best known as a grocery chain, but the retailer provides a surprising array of products and services. It aims to serve as the ultimate one-stop-shop for those who prioritize convenience and quality above all else. Customers can expect to find a collection of produce, dry goods, frozen products, and more. Toiletries, household products, pet food, and even apparel can also be located within Tesco stores and on the retailer’s eCommerce website.

Beyond its many product offerings, Tesco also provides a few key services to enhance customer convenience. Tesco Bank, for example, offers everything from credit cards to pet insurance. These digital offerings play largely into Tesco’s eCommerce strategy, with banking customers capable of accessing their account information online.

Fine-Tuned Logistics

Quality customer service is not possible without an effective logistics and supply chain strategy. Strong relationships with suppliers are essential, especially as Tesco seeks to diversify its already vast product collection further. Efficient routes ensure that produce and other time-sensitive products arrive promptly in stores—and are quickly distributed to customers taking advantage of the chain’s affordable home delivery program.

Ongoing investments in telematics promise to further improve Tesco’s already fine-tuned supply chain. New monitoring tools offer greater insight into the trip status and real-time decision-making—and how these elements play into both profit margins and long-term customer satisfaction.

Digital customers, in particular, appreciate Tesco’s tight supply chain. When they order items online, they can rest assured, knowing that their favorite products will consistently be in stock. What’s more, online customers feel confident that delivered items will be fresh and of exceptional quality.

Insane International Expansion

Tesco may currently dominate the UK grocery market, but it’s also an international force. While the retailer pulled out of the United States in 2014, it has enjoyed sustained growth in Eastern Europe and Thailand.

Just as Tesco targets its international in-store efforts to reflect local populations, it designs its global eCommerce strategy around a diverse consumer base. Different websites are offered in each target country, with text provided in both English and the respective region’s primary language.

Customer Loyalty

Brands such as Costco and Amazon prove that customer loyalty can pay dividends for a company’s bottom line. Tesco demonstrated this long ago with the Clubcard, which encourages customers to prioritize the chain over competitors.

Today, the Clubcard continues to play a crucial role in Tesco’s success. Further transformation is in store, as Tesco recently unveiled a £7.99 per month subscription service called Clubcard Plus . Subscribers will receive significant discounts above and beyond those offered through the traditional Clubcard, including a permanent 10 percent off many of the store’s most beloved brands. Given the current popularity of subscription services, this could prove an excellent opportunity to get existing customers even more enmeshed in the Tesco ecosystem and more responsive to eCommerce marketing automation efforts.

Tesco’s eCommerce strategy reflects the brand’s commitment to value and convenience. These priorities are evident in everything from the logo to the images and even the general layout. Website visits are just as efficient and orderly as in-person purchases at Tesco’s physical locations. Tesco’s website, like its stores, may not be fancy—but it gets the job done. In this Tesco case study, we’ve analyzed several of the key eCommerce strategies that help Tesco’s page stand out in a competitive digital marketplace, as well as a few areas that warrant improvement.

Analyzing Tesco’s Homepage

What We Liked

• Easy to navigate . Today’s impatient customers demand easy-to-navigate websites that almost instantly get them from point A to point B. Tesco’s homepage appeals greatly to convenience-oriented online shoppers, who can quickly find desired products via a simple search tool. Headings highlight main categories, including groceries, clothing, banking, and even recipes.
• Visually-appealing fullscreen displays . Rather than distract website visitors with several separate visuals, Tesco’s website maintains a single, but decidedly bold display. This impactful background stretches across the entire screen and is layered behind text and customer prompts. The homepage, featuring fresh produce, has eye-catching graphics that reflect the commitment to quality that emerges in every Tesco case study
• Minimalist, but not dull . Minimalist displays dominate modern web design. Sometimes, however, white space feels excessive. Tesco strikes an ideal balance by keeping clutter to a minimum without relying on a bare-bones approach.
• Easy logo identification . Customers can always spot the Tesco logo in the upper left-hand corner, surrounded by just enough white space to ensure that it stands out.

What We Didn’t Like

• Customer testimonials . Reviews from happy customers may prove desirable in some contexts, but there is a time and a place. These particular testimonials take up the page’s most prominent space, which could be better served by showcasing exciting deals or products.
• Tabs that open into new pages . Ideally, when clicking on a link that appears to be a tab (such as the Delivery Saver tab), the new content should open in the same page, instead of loading an entirely new page.

Analyzing Tesco’s Category Page

• Sticky cart functionality . As shoppers browse the website and add items to their carts, they can keep track of these intended purchases on the right side of the screen. This intuitive design allows for a seamless Tesco checkout process , thereby increasing the likelihood of conversion.
• Variety of filters . A wide array of filters are provided to allow customers to browse through products based on brands and categories. Furthermore, customers can customize their browsing according to specific dietary filters such as vegan or Halal. This plays into Tesco’s overarching emphasis on personalized shopping.
• Usually bought next . Situated at the bottom of each category page, this helpful section makes it easy to pair similar grocery items. This increases customer convenience while also helping to improve sales and final revenue on Tesco’s end.

What We Didn’t

• Difficult filter navigation . There’s a lot to be said for the variety of filters at customers’ disposal, but the actual process of navigating them can prove complicated, particularly compared to competitor websites.
• Navigating to different items within categories . Navigation can prove surprisingly difficult for those browsing various items within categories. The constant need to return to the homepage could quickly grate on otherwise amenable customers.
• Lack of search functionality within categories . Items cannot be sought via keywords within specific category pages. All searches must be completed using the main search bar on the top of each page. For many users, this may represent the website’s greatest weakness, as keyword category searches are an expected feature among competitors.

Analyzing Tesco’s Product Page

• Time-limited delivery notice . Produce delivery is inherently time-sensitive, as are several other services that Tesco provides via its website. The retailer harnesses the power of time-limited delivery notices to ensure that consumers use products when they’re freshest and most appealing.
• A wealth of product information . Product pages contain a wealth of relevant information, including everything consumers could possibly want to know about each item’s nutritional content, country of origin, and even preparation instructions.
• Customer reviews . Shoppers on the fence about a particular product can read customer reviews to get a better idea of whether they actually want to invest in said item. With a wealth of alternatives available, they can take solace in knowing that other options are always on hand.
• Nondescript Add to Cart button . Tesco’s approach for adding options to its carts may get the job done, but this could be an excellent opportunity for adding a bit of visual flair without detracting from the website’s minimalist approach.
• Too much text combined with too small product images . Many shoppers regularly purchase items without actually knowing their names. Rather, they focus on packaging. Tesco’s small pictures make it difficult for these shoppers to identify the elusive products they want. Some may end up with unexpected and unwelcome surprises upon delivery.
• Too much information . While it’s useful to know the origin of each item, including the exact address may seem like overkill to some users. This detailed information detracts from Tesco’s otherwise streamlined product pages.

Analyzing Tesco’s Checkout Process

• Numerous delivery slots are available . A variety of helpful slots for receiving grocery deliveries are provided on an hourly basis throughout the day. This dramatically improves customer convenience, particularly for those who work long hours and might not be available for the limited delivery times provided by some of Tesco’s key competitors.
• Automatic Click+Collect locations . Those who opt to collect deliveries at Tesco stores can look to this feature to automatically display a variety of nearby locations. This makes in-person delivery collection nearly as convenient as Tesco’s impressive delivery setup.
• Several Delivery plans are available . Shoppers who aren’t in a big hurry can elect to have their orders delivered mid-week for a reduced charge. Meanwhile, demanding customers are asked to pay extra for same-day delivery. Customers love options, particularly when they believe those options prompt significant savings.
• Oddly unavailable Click+Collect hours . Shoppers who plan their grocery pickup several days out will be surprised to find that some collection times up to a week out are unavailable. Hence, while Click+Collect provides exceptional functionality for last-minute pickups, it’s not always ideal for those who prefer to schedule in advance.

Eager to learn more about Tesco’s strategy and the technologic functionalities that make Tesco’s website so easy to use, we harnessed the power of BuiltWith to scan the website. A few of the notable technologies we spotted include:

• Omniture SiteCatalyst . Tesco’s web analytics are provided by Adobe’s Omniture SiteCatalyst — an expensive, complex system when compared to its main competition (Google Analytics). If set up correctly, however, Omniture SiteCatalyst provides excellent customer support.
• Hotjar . One of the world’s most famous screen recording and heatmaps tools, Hotjar offers a range of behavior analytic services ideal for businesses such as Tesco, which aim for a targeted approach based on actual customer behavior.
• Optimizely . This top experimentation platform plays significantly into modern web innovation. Despite its name, however, Optimizely may increase page load times throughout the Tesco site.
• OpinionLab . OpinionLab does an admirable job of collecting customer feedback on every aspect of Tesco’s webpage. This allows Tesco to customize better its web offerings based on actual customer opinions
• SendinBlue . User experience is a huge point of contention for SaaS provider Sendinblue. Clients regularly struggle with forms, automation, and APIs. ContactPigeon may prove a more customer-oriented alternative.

Some of these eCommerce tools are also used by John Lewis, UK’s homeware giant , so we do realize that these technologies play also an important part in a retailer’s business model and online success.

• As of 2019, Tesco boasted over 6,800 shops worldwide.
• Tesco currently employs over 450,000 employees around the world.
• Tesco had a 26.9 percent market share in the UK in 2019.
• Of the UK shoppers who primarily visit Aldi, 45 percent highlight Tesco as their main secondary store.

Breaking Tesco News:

• Tesco changes bonus rules after Ocado success hits pay – Read more here
• Coronavirus: The weekly shop is back in fashion, says Tesco boss – Read more here
• Tesco launches half price clothing sale – but some slam the company as ‘irresponsible’ – Read more here
• Tesco, Sainsbury’s, Asda and Aldi put restrictions on items amid stockpiling –  Read more here
• Tesco sells its Thai and Malaysian operations to CP Group.   Learn more here
• In September 2021 Tesco launched a zero-waste shopping service, providing customers with containers. – Learn more here.

When did Tesco begin?

Tesco technically began in 1919 but did not receive its current name until 1924. The company originally consisted of market stalls, with the first shop that might be recognizable to modern consumers not opening until 1931.

What made Tesco successful?

Tesco is popular in the UK and abroad due to its combined emphasis on quality, convenience, and affordability. The Clubcard plays a huge role in the retail chain’s continued popularity, as it keeps customers coming back for deals.  So why is Tesco so successful? It is because of its customer-centric approach, that it gradually helped Tesco to develop a very loyal customer base and equity and a very powerful multinational brand.

Who is Tesco’s owner?

Tesco is currently experiencing a shakeup in leadership. After serving as CEO for several years, Dave Lewis announced his resignation in 2019. He will be replaced by Ken Murphy in 2020. John Allan currently serves as the chain’s non-executive chairman.

What is Tesco industry sector?

Tesco PLC is a retail company. Its core business is grocery retail but they also are in retail banking and assurance industries as well, as part of their product diversification strategy.

How many stores Tesco has?

Tesco has 6993 stores in 12 countries

How profitable is Tesco?

Tesco’s revenue grew by +12% YoY in 2019 hitting  £63.91 billion.

Is Tesco in the public or private sector?

While Tesco was initially a privately-held company, it became a public limited company (PLC) in 1947 and has continued to operate under this approach. However, despite Tesco’s status as a PLC, it remains firmly part of the private sector.

Discover more resources about FMCG retailers

• Sainsbury’s Marketing Strategy: Becoming the Second-Largest Supermarket Chain in the UK
• ASDA’s marketing strategy: How the British supermarket chain reached the top
• The Marks and Spencer eCommerce Case Study: 3 Growth Lessons for Retailers
• The Ocado marketing strategy: How it reached the UK TOP50 retailers list
• ALDI’s marketing strategy: The key growth ingredients of the FMCG titan
• Walmart Marketing Strategy: Decoding the Success of the US Multinational Retailer
• Analyzing Lidl’s Marketing Strategy: How the Discount Supermarket Leader Scaled
• FMCG Marketing Strategies to Increase YOY Revenue

The Tesco Case Study: An overnight Success?

As our analysis showed, a variety of factors play into Tesco’s success. The retailer has a long history of using cutting-edge practices (like the virtual store mentioned above) to set itself apart from the competition. Much of its current success, however, relies on its perception as a convenient and affordable chain.

Tesco’s success is not a matter of luck. On its website and in its stores, the retailer emphasizes customer-oriented practices designed to make every shopping experience as seamless and as enjoyable as possible. This simple yet effective approach promises to keep the retailer at the forefront of the grocery industry in years to come.

If you’re looking to emulate the qualities evident in this Tesco case study, don’t hesitate to get in touch. Contact us today to book a free marketing automation consultation.

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International Expansion: Why Tesco Missed the Mark in the U.S. Market

Tesco is one of the largest retailers in the world. In 2021, the Tesco Group generated $66 billion USD in revenue. It currently operates 4,673 stores across the globe. Almost 4,000 of those stores are located in the United Kingdom, which is Tesco’s primary market. Based in Hertfordshire in southern England, Tesco “is the leading supermarket brand in the United Kingdom, consistently ranking highest in terms of grocery market share.” Tesco also operates successful stores across many European and Asian markets . In 2007, Tesco expanded in the United States under the brand, Fresh & Easy. At its peak, the company operated 208 stores in the market; however, due to its small store formats, skewed customer research, poor store locations, and food packaging concerns, the company was forced to exit the market in 2013 when it sold its remaining stores. In total, Tesco suffered losses of $1.6 billion USD as a result of its failed entry into the U.S. market.

Small Grocery Store Format

Tesco’s Fresh & Easy stores confused many American shoppers because the stores were much smaller than the traditional American grocery store. The typical Fresh & Easy store was around 3,000 square feet, which is less than one-third the size of an average American grocery, which is usually around 10,000 square feet. The stores were designed to make shopping easier and more convenient for the consumer. In short, they were built for daily shoppers. This daily shopper model, which is common in Europe, did not resonate with the typical American grocery shopper, who typically shops on a weekly basis. Tesco’s smaller stores had less variety which also frustrated the American consumer, who prefers to buy everything at a single store .

Skewed U.S. Market Research

The stores emphasized pre-prepared and ready-made meals, which did not resonate with the average consumer. Because Americans typically shop on a weekly basis, they are often buying items in bulk, which means ready-made items are less appealing . Tesco completed “ detailed market research including visiting shoppers at home to see what they bought and asking people to keep a food diary to observe what they consumed.” In their research, Tesco primarily talked to consumers in California. The company did not build a robust representative sample of the wider American grocery shopper. This oversight likely contributed to Tesco’s misguided decision to purchase small store formats with less variety and ready-made meals.  

Poor Store Locations

In its initial property deals, Tesco acquired store locations that “were essentially on the wrong side of the road .” Many Tesco store locations were located on the in-bound side of the road, which made it extremely difficult for people to stop on the way home from work as they left their jobs in the city. People would see the stores on the way into work when they were not looking to shop. Analysts say Tesco should have prioritized stores on the out-bound side of the road, so customers could quickly grab something for dinner on the way home from work. These poorly located stores severely hurt foot traffic in stores, which contributed to decreased sales in the U.S. market.

Food Packaging Concerns

In some ways, Tesco’s Fresh & Easy grocery stores were ahead of their time. Fresh & Easy stores fully embraced self-checkout . At the time, “self-pay checkouts for groceries were confusing for Americans so used to service .” The self-checkouts required products in the store to have a barcode clearly displayed. This meant that Tesco products were often individually wrapped in plastic for easy checkout. This frustrated American consumers, who are accustomed to touch and feel items like produce and fruit . The plastic wrapping undercut Tesco’s environmental and sustainability stance in the U.S. market. Despite its Fresh & Easy name, “it was hard to get quality fresh food there – especially fruit and vegetables.”

Tesco struggled to properly incorporate and contextualize the lessons learned during their customer research, which ultimately hurt the company’s expansion in the U.S. market. At CASTUS, we work with our clients to execute on their strategic growth plans to drive sustainable, long-term sales. If your company wants to expand into the U.S. market, we would love to talk with you .

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Watch CBS News

Why did Tesco fail in the U.S.?

By Margaret Heffernan

September 12, 2013 / 6:45 AM EDT / MoneyWatch

(MoneyWatch) Tesco's American experiment, Fresh & Easy, has failed and the company has been lucky to hand over more than 150 of its stores to billionaire Ron Burkle's Yucaipa Cos. The deal isn't as sweet as it sounds : Tesco ( TSCDF ) has to lend Burkle tens of millions of dollars to take the business off its hands, and additional costs include laying off several hundred permanent staff and shutting dozens of stores. So this is a big and costly failure. But Tesco has a terrific track record in other markets -- notably eastern Europe and China. So why did it come unstuck in the U.S. -- and why do British businesses predictably fail when taking on the American market?

Tesco's timing was unfortunate; the new venture launched in 2007, just as consumer spending and taste for adventure went into sharp decline. The focus on ready meals required higher levels of spending than raw produce and it meant consumers had to be prepared to try something not radical but new: Taking home a supermarket meal in lieu of ordering a take out or cooking from scratch. This is a well established habit in Europe but less mainstream in the U.S.

You can't blame the research. Tesco lavished time and resources understanding how Americans live, shop and eat. And Burkle would hardly be willing to take the stores if he felt they were doomed. The ready meal focus has worked well for Whole Foods but what's less obvious is how far down the market it retains its appeal. It ought to work -- weekday shoppers lack time to shop and ready meals are cheaper than take out. So why didn't it?

In the recession, many people had time, just no money. That reduces the market for ready meals. But more crucially, this kind of food requires a change of habit. It means you have to think differently about how you shop and what you shop for. Any marketer knows that changing habits is hard and expensive because the crucial factor is time. Time to get the message out. Time for it to sink in. Time for new habits to replace old ones.

The ghost at Tesco's feast was Marks & Spencer, the British retailer which bought Brooks Brothers, watched it decline but hung in for 13 years, finally selling the clothier at less than a third of the price it paid for it. What that disaster taught Tesco was impatience: Don't wait for the market to change -- get out now.

I'm not at all persuaded that Tesco has made the smart decision, just the easy one. Significant market growth always takes time and the best businesses don't lose their nerve easily. The real reason Tesco may be pulling out isn't because they did anything wrong in the U.S. but because their home market is proving very challenging. Assailed by competitors, they've visibly lost the plot, with poorly stocked stores, lavish but meaningless advertising and an absence of new ideas so obvious it hurts. Killing off a young venture is always easier than fixing the old one. But is it smart?

Margaret Heffernan has been CEO of five businesses in the United States and United Kingdom. A speaker and writer, her most recent book Willful Blindness was shortlisted for the Financial Times Best Business Book 2011. Visit her on www.MHeffernan.com .

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Tesco PLC: Fresh & Easy in the United States

By: John A. Quelch

Tesco, the world's third largest retailer, is facing problems with its launch of a new retail chain in the U.S.A.

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• Publication Date: Aug 11, 2010
• Discipline: Marketing
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Learning Objectives

To explore the challenges facing foreign multinationals entering the U.S.A.

Aug 11, 2010 (Revised: Nov 5, 2010)

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United Kingdom, United States

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Retail trade

Harvard Business School

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How Tesco Became The Biggest Retailer In The UK

Table of contents.

There are certain brands that always seem to attract global attention and one of those is Tesco. It’s one of the largest grocery store chains in the world and over its 100-year history, it has gone through a rollercoaster of ups and downs that have brought it to where it is today.

• Stores: 4,673
• UK Employees: 336,392
• The top retailer in the UK
• Ranks 17th in NRF Top Global Retailers for 2021 
• Q1 2021 Growth in Online Sales: 22.2%
• FY21 Sales: £53.4 bn

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The Origin Story

The giant corporation that we know today had some very humble beginnings. The idea found its roots back in 1919 when Jack Cohen, the son of Polish immigrants, decided that he was going to sell groceries from a stall in East London [1] . For the first few years, that is all it was – a market stall run by a man with a big dream. But over time, as he gained confidence in what he was doing, he began to think that maybe he was destined for something bigger.

To dip his toe in the water, he opened up the very first Tesco store in 1929 in a small town in Middlesex. The brand took off almost immediately, much to the surprise of Cohen, and he realized that there was room for growth. He had stumbled onto a rather simple premise, in terms of providing food and drink in a very affordable and approachable way, and quickly started to work on expanding the concept as far and wide as he could.

Cohen’s unique personality and selling style was something that he engrained in those early sales teams, pushing them further than they ever thought they could go. He was someone who valued hard work above all else and believed that if you were out there working to make things happen, things would conspire for your benefit. This ethos is something that still lives in the company today.

In the years that followed, Tesco grew from strength to strength until it got to a stage in 1947 where it was large enough to list on the London Stock Exchange. In the two decades that followed the listing, the company continued to grow organically but it also made some aggressive acquisitions that rapidly increased the organization’s footprint. At the end of the 1960s, there were around 800 stores in operation, all maintaining healthy profitability and a growing customer base.

The strong brand was then leveraged to venture out of food and beverages specifically, and into a range of other areas including clothing, electronics, financial services, telecoms, media, internet services, and software. They also expanded geographically into the rest of the UK, Europe, and a brief but ultimately unsuccessful time in the USA.

The Tesco of today is a corporation much bigger than Cohen could have ever imagined, and that’s a testament to the company that he was able to build and the business philosophy that still undergirds their success to this day.

Creating Their Own Brands

We’ll start this strategy study properly by diving into what is widely considered the most important part of the Tesco strategy – which is the creation and scaling of their own in-house brands. When the company started they acted simply as a retailer, buying products from suppliers and then controlling the end-user buyer experience and distribution thereof. However, as they began to grow they came to the same realization that is so common for these massive product curators.

They realized that they could compete and win against these other brands because they had access to invaluable sales data, a loyal customer base who was tied into their stores, and the distribution required to bring their own brands to a mass market almost overnight. All of this while regaining a significant portion of the margin as they did so.

This is a key trend that we’ve seen across major retail conglomerates, but it’s received even more attention in the online era as Amazon has taken it to the next level. Especially in the case of common household goods where it is quite difficult to differentiate the product itself, brand and price become all that matters.

Tesco’s clothing line and their food brands provide high-quality items at prices that undercut the other 3 rd party brands that are trying to win shelf space in the stores. This makes it abundantly clear that by owning the customer relationship and the distribution, you have an immense amount of control in the value chain. Manufacturers are dependent on retailers like Tesco because they need to access the consumer market, and this places all the power in the hands of the retailer.

This business model has been incredibly successful over the past 50 years. Tesco has grown a substantial business that customers trust and whenever they want to win back margin, they can create their own white-label brand and use their pricing power to whittle away at the market share built up by other brands. The big question here though is how long will this last? [2]

In modern times we’ve seen a drastic shift away from brick-and-mortar retail and into online shopping. This was obviously accelerated by the COVID-19 pandemic, but it was something that was coming inevitably anyway. As we move to a future of online shopping, Tesco’s early advantage in terms of distribution becomes less relevant. Manufacturers and suppliers can start to build online presences that give them direct access to the consumer market and thus they can eliminate the Tesco leg entirely, provided they have the brand strength to do so.

This is where the world is moving towards, where the middlemen are eliminated over time and we see a rise of direct-to-consumer brands. This is not to say that Tesco is going to disappear. In fact, their online shopping sales have been incredibly impressive. But they have to think differently about the company they are going to be as we shift into this new paradigm.

It’s definitely something on their roadmap and they are making a lot of investments in this vein, but it’s going to be challenging to transform such a large company with so much tied up in the brick-and-mortar of retail stores. Their ability to adapt and adjust will determine whether they remain a force to be reckoned with in the years to come.

Key Takeaway

• If you control the direct relationship with the customer, you have tremendous power in the value chain that allows you to win market share and margins much more efficiently.

Horses for Courses

The next piece of the Tesco strategy that has proven so valuable for them has been their ability to adapt their value proposition for different contexts. When it comes to retail, you have to have a very good understanding of what your customers in that location are looking for, so that you can tailor your offering accordingly.

It’s tempting to think that you can copy-paste a winning formula wherever you want and scale quickly and easily – but that couldn’t be further from the truth. Even with a simple concept like a grocery store, there is a range of different nuances that determine how the store should be set up, what should be stocked, and how they should craft the buying experience.

Tesco operates 5 different types of stores:

• Tesco Extra
• Tesco Superstores
• Tesco Metros
• Tesco Express
• One Stop Shop

Each of these stores has a different use case, and it targets a unique subset of their customer base. The company has worked very hard to identify the specific items, and setup that is best suited for each one. For example, the Tesco Extra stores and the Tesco Superstores are the biggest ones in terms of size and aim to carry as much as possible so that customers can do all their shopping in one place. This is in sharp contrast to the Tesco Metros and the Tesco Express stores which are focused on convenience and speed, rather than a variety of choices.

Every part of the experience for each category is intentional and fit for purpose. Even the training that the staff will go on differs depending on the type of store that they’re going to be working in. What remains consistent is the brand, the product quality, and the prices. Everything else varies according to what that particular customer is looking for.

It’s also interesting to note that these store categories have different trajectories and trends. If you look at the last couple of years (ignoring the pandemic), the big retail outlets have been struggling for growth, while the convenience stores are growing rapidly. This shows a clear trend in terms of consumer behavior and because the stores are all set up differently, the company can respond to these changes.

Essentially, each category of store can be thought about as a different company entirely – allowing lots of flexibility to adapt and adjust accordingly. If they didn’t have this clear separation, it would be difficult to understand the data they were receiving, and they would have less chance of successfully diagnosing the nature of changes in customer behavior.

Taking this one step further, it’s clear that their online shopping vertical is a new type of store and will have unique aspects that set it apart from the rest. As Tesco follows the growth of online shopping they’ll be able to shift their efforts to these new channels because they have the data that they need to be able to do this with confidence.

• Context is everything in business. By separating your operations into subsets that cater to different contexts, you’ll have the data you need to adjust and adapt to changing trends as they arrive.

Sustainability

A key component of Tesco’s forward-looking strategy is to become as sustainable and environmentally friendly as possible. This is not too out of the ordinary in the modern context as companies around the world work towards mitigating climate change, but Tesco has really gone above and beyond to make this a part of their company DNA.

The biggest offenders in their value chain are the delivery vans which are constantly transporting goods from suppliers to warehouses and then eventually to the stores themselves. These vans number in the thousands and they are running almost 24/7 ensuring that stock levels are where they need to be at all times.

Tesco announced recently that they have begun to transition all those vans to electric vehicles in an attempt to minimize the carbon footprint and work towards a more sustainable goal. Their plan is to have their entire delivery fleet transitioned to electric by 2028 which is a very ambitious plan indeed [3] .

This is but one of their sustainability initiatives that are at the forefront of the company they want to become in the future. They are working tirelessly to integrate this into their corporate ethos for a few reasons:

• Sustainability matters. We all have to be more thoughtful about what we’re building because the impact we’re having on our planet is significant. So, from pure self-interest, a company needs to embrace this value if they are to be robust and to last over the next hundred years. Without this focus, we might find ourselves in a very dangerous position in a generation or two’s time.
• Customers demand it. Building on the point above, there is tremendous social pressure for corporations to become more sustainable because of the heightened awareness we now have of the problems that face as a species. Customers are placing sustainability and environmental concerns as key factors in their purchasing decisions and Tesco knows that. So, they are leaning into this as a key value for the future so that they can continue to build the strong brand trust that they have with their existing consumer base.
• Prices are trending downward. As we shift away from fossil fuels and towards renewable energy, the relative prices will come down and that can have a significant impact on Tesco’s profitability. It might require a lot of investment in the short term, but that will pay off by orders of magnitude as the world shifts and economic incentives work their magic.
• Competitive Advantage. Getting in on this early and working to build this into the future of the company could prove to be a significant competitive advantage for competing against their competitors. This is a clear trend that everyone can see, so those companies that get ahead of the curve will be able to leverage the early momentum to capture more and more of the market going forward.
• Opens up opportunities for innovation. Whenever there is a radical shift in thinking, it creates an opportunity to go back to the first principles. For large companies, these moments are few and far between so it’s important to use these natural breakpoints to re-examine your strategy and plot the best path forward. Tesco is definitely trying to do that so that they can remain relevant as we move beyond pure retail and into a hybrid model where you need to serve customers in-person as well as online.

Those are just some of the reasons why Tesco is giving so much credence to how sustainable their operations are. It’s also important to note that they are thinking beyond their direct circle of influence. Another significant contributor to carbon emissions is their customers who drive to the stores themselves. To mitigate this, they’ve begun to roll out thousands of charging points to their larger retail stores to support customers with electric vehicles and encourage more people to move in this direction.

This is something we’ll see a lot more of going forward, and Tesco remains one of those leading the charge, at least in the European context.

• Sustainability is a key value and operational principle that must be at the forefront of any company looking to remain relevant going forward.

The Clubcard Loyalty Program

It seems that every company these days has some form of loyalty program where they try to reward repeat purchasers in exchange for valuable sales data – but Tesco was one of the first to go this route. Their Clubcard program allows regular shoppers to benefit from automatic discounts that are applied at check-out and it makes the already-low prices even more beneficial. This obviously creates loyalty for their key customers who will use the card to get better prices for their groceries, but the more interesting aspect is what it allows Tesco to do with the data.

Before loyalty programs, large retailers like Tesco were unable to tie specific purchases to specific customers. They would be able to access aggregated sales figures about the sorts of items that were being purchased, and they could use that information to adjust their offering accordingly, but you were limited in terms of how useful it could be. Any granular demographic data had to be assumed based on the store itself and this didn’t allow for much nuance.

The modern loyalty programs, like the one that Tesco runs, offer a much more sophisticated set of data that is incredibly valuable for product development, planning, and demand forecasting. By tying each purchase to a specific customer’s card, Tesco gains a range of new insights into purchasing behavior and they can arrive at a much more granular understanding of what is actually happening in their stores.

Here are some of the ways that they can use this data:

• Demographic Analysis. Tesco can identify specific segments of their customer base and analyze purchasing habits in these unique categories. For example, they can compare their male base to their female base. They can look at how age affects the sorts of items that are purchased. They can look at ethnicity and how that impacts the brands that are most in-demand. All of these slices help to break a massive consumer base into smaller segments that can be more effectively sold into. This affects the marketing messaging, the placement of goods in the store, the outbound sales efforts, and much more.
• Lifetime Value Analysis. When you’re able to track specific customers over time, you gain a lot of insight as to how they engage with your brand and how that plays out over time. Through a more nuanced calculation of a customer’s lifetime value, it informs how they invest time and resources going forward – to maximize this value and build a strong core of loyal shoppers. This is also vital in the other direction when looking for red flags that might point to something that is going wrong along the way. When you can track this effectively, you’re in a much better position to make long-term strategic decisions that are data-driven and attached to the real-time data on the ground.
• Shopping Cart Make-Up . If we move up one level of abstraction, we can analyze the make-up of a customer’s shopping cart to understand the relative associations of different items in the store. When Tesco tracks this over time and matches it to key demographic information, they can start to understand the different use cases and common groups of items that are purchased – allowing them to adjust their offering and store placement accordingly.
• Track the performance of marketing campaigns . When Tesco undertakes various marketing initiatives, it can be difficult to track how well they perform in terms of driving sales in various target markets. The Clubcard loyalty program gives them the data that they need to do this effectively, allowing the company to track whether the marketing message is working with their target audience or if things need to be changed. Once they’ve found a winning formula, they can quickly scale that out across the rest of their stores with a lot more confidence that their investment is going to pay dividends.

Those are just some of the ways that Tesco uses this data to inform their business decisions but hopefully, it gives you a sense of why it’s such an important part of their strategy. The data alone is much more valuable than the discounts that they offer in exchange, making it one of the most impactful revenue generation mechanisms that the company has at its disposal.

• Granular customer data is worth its weight in gold and anything you can do to gather and process it effectively, should be a priority for your organization.

The Price Match Guarantee

The world of grocery stores is incredibly competitive and unless you have a specific niche focus, there is going to be a lot of competition around price. In 2014, Tesco was going through a difficult period and found itself losing ground to some up-and-coming chains that were doing anything they could to undercut Tesco’s prices and win customers away from the incumbent. Tesco realized that they couldn’t afford this to happen for very long and so they came up with what they call the ‘Brand Guarantee Scheme’ to try and mitigate against this trend.

The idea was that if a customer got to the check-out and their basket of ten or more branded items was more expensive than what could be found at a rival store, customers would receive the difference as a discount when they paid. These prices were independently verified on a daily basis and gave customers the confidence that there were no better deals out there.

This simple psychology was enough to retain the vast majority of their regular customers and removed the one major objection that might convince someone to switch to another brand. It didn’t matter whether the amount was large or small, it provided peace of mind that when you bought at Tesco, you were getting the best deal that there was.

What makes this more interesting though is that this wasn’t the first time they had tried to implement a price match system to enable this sort of deal. Previously, they would go through the same process of matching prices but instead of giving the discount right away, they would offer a gift voucher to the value of the difference between the Tesco price and what it cost at another store.

It wasn’t until they listened to customer feedback and heard that many shoppers never got to use those benefits because they forgot about the vouchers, did they realize that they needed to remove the friction entirely [4] . Creating vouchers just added another step into the process that actually was a point of potential error. And even though it was completely within the customers’ control, the impression was that they were losing out.

When the company took that away and chose to implement the discount immediately as they paid, this completely disappeared and customers found the process quite magical. They didn’t have to do anything, yet they knew that if there were savings to be had, Tesco would make sure that they got them.

Achieving this took a lot of technological investment and considerable expense to do the requisite daily market research, but it made the purchasing experience a delight and that’s what keeps customers coming back time and time again. It sends a signal to customers that you’re looking out for them and will do whatever it takes to make their grocery shopping a breeze. To this day, the Tesco Brand Guarantee is one of those components that is severely underrated in terms of the company’s success up to this point.

• The more friction you can remove from the customer journey, the more magical the experience becomes, and the more likely customers are to return.

Aggressive Acquisitions

Another key strategy that typifies who Tesco has been as a company has been its track record of large international acquisitions which looked somewhat impulsive in retrospect. They bought a wide range of different brands in countries like Poland, Japan, India, Malaysia, the Czech Republic, Hungary, Slovakia, and more [5] . In each case, they were hoping to grab a piece of the local market and then apply their technology, data, and operational know-how to rapidly scale the operations.

In most cases, they left the brand as is rather than applying the Tesco name to it, giving them diversification but also underplaying the role that they would play in those specific regions. If you look at their growth over the past few decades, a lot of it can be attributed to these deals – though it’s difficult to know exactly how much value was added in the process. Once each acquisition was absorbed under the umbrella, there are just too many variables to make an educated statement on the overall success rate.

What cannot be denied is that this was a very intentional strategy on their part. By taking the financial power that they had built up in the UK, they were able to go into new markets and take risks on brands, knowing that any losses would be subsidized by the market-leading position back home. This might not be the most efficient way to grow, but it does give you scale and speed when certain acquisitions do provide the value you were expecting.

There is lots of debate about the pros and cons of a strategy like this, but Tesco have stuck with it for their entire history and this land-grab mentality rings true today. It’s only possible when you have a significant war chest and an existing set of operations that can sustain the shocks that come with potential market failures, especially when you are moving as fast as they do.

In the next section, we’ll look at an example of where things went wrong and see what we can learn from it.

Aggressive acquisitions should only be considered when you have a large war chest and you can manage the downside risks as they present themselves.

The Failed US Expansion

Tesco hasn’t always got it right and we can often learn as much from the failures as we can from the success stories. Back in 2006, the company decided that they wanted to enter the United States and try to replicate some of the success they had found in the UK. The strategy was to open a chain of small-format grocery stores in a few states in the West of the USA, specifically Arizona, California, and Nevada. These stores wouldn’t carry the Tesco name but instead were branded as ‘Fresh and Easy’.

In the first five months they opened 60 stores, they had 150 by the end of the first year, and over the next 6 years, they expanded to have over 200 at their peak. However, they found it much more difficult to get a foothold in the market than they had originally anticipated.

It’s not entirely clear as to why the stores failed but it’s likely due to a combination of these factors [6] :

• Unfamiliar Shopping Experience. The Fresh and Easy concept was to mimic the small convenience stores from the UK – offering people a shop where you should shop daily for the food and drinks that you needed. This was a stark contrast to the typical American shopping experience which was to purchase groceries in bulk and shop much more infrequently as a result. This difference in culture meant that they could never really get the traction they wanted, and it didn’t seem to fit the buying patterns of American consumers.
• Economic Recession. The timing of this expansion was really unfortunate because it happened in the middle of the worst economic crisis that the USA (and the world) had seen for a long time. As the sub-prime mortgage crisis took hold, unemployment soared, and the purchasing power of the middle class was significantly harmed. This effect was further concentrated in these Western states and so there was a disproportionate impact on the overall demand. This was not something Tesco could have predicted or planned for, but it’s a good reminder that you don’t operate in a silo. You’re reliant on economic conditions around you to sustain whatever operations you’re involved in.
• Misaligned Product Offerings. The one common criticism that the roll-out faced was that the store focused too much on ready-to-go, microwaveable meals – something that was very popular in the UK but had less buy-in across the USA. When it came to convenience food, the US market was much more comfortable with fast-food outlets and that meant that the demand for the Fresh and Easy offering wasn’t as strong as it could have been.

As always, these reasons are purely anecdotal and it’s not entirely clear what role they played, but the key learnings were that you need to deeply understand the psychology and the buying behavior of a new target market before you enter it. If you don’t, you place the entire project at risk and this can have drastic consequences financially as well as from a reputational perspective.

Tesco had reportedly lost around $2bn when they decided to pull out of the country in 2013 and they’ve never gone back. They continue to focus on the UK market which they know very well and select other European and Asian customer bases which provide some diversification.

• When you’re entering a new market, it’s critical that you understand the nuances and psychology of the customers in that new segment. Without this, you might miss the mark and suffer significant financial damages.

Tesco remains one of the most well-known grocery store brands worldwide and their ability to combine retail dominance, strong logistics capabilities, and sophisticated use of customer data is what will be the foundation that they build their future on.

They face many challenges in the year to come as more and more customers shop directly from brands, but the company is well aware of that and is doing all that they can to pivot the company effectively for this modern paradigm shift. In this strategy study, we’ve aimed to highlight some of the key areas that they’re focusing on with the hope that you can learn from them and apply them to your own context.

As a quick refresh, here are those main takeaways from the Tesco story:

• Aggressive acquisitions should only be considered when you have a large war chest, and you can manage the downside risks as they present themselves.

Remember to take the necessary time to understand the customer context, leverage the power of data, and invest in sustainability so that you can remain relevant for decades to come.

Twenty Lessons Learned From Tesco's Fresh & Easy Failure

Jim Prevor's Perishable Pundit Deli January 9, 2013

The year 2012 closed with the announcement that Tesco will probably exit its US business, Fresh & Easy. Obviously it will sell it or parts of it if it can. It may contribute assets to a joint venture or may just put a lock on the door. Although Tesco claims some have expressed interest, it noticeably did not reassure investors that it would not have to wind up writing a check to exit the business.

The year 2013 gives us the opportunity to draw business lessons from the debacle in the hope that we may do business better ourselves.

We’ve written a great deal about Fresh & Easy, and you can review these articles here .

To our regular readers, the failure of Fresh & Easy will come as no surprise. But it is a surprise in this sense: When we initiated our analysis of Fresh & Easy, we were told, more than in any other situation, that Tesco would get it right. The more we pointed out that they got it wrong, the more we were assured that we were underestimating Tesco.

So here is a large, well-capitalized organization, widely respected for acumen in retail and its ability to work cross-culturally, working on a high priority project… yet it just blew almost two billion dollars and had a very high profile failure.

Why did it fail? What lessons can be drawn from this failure? Let us count the ways:

1) Don’t Let Investment Bankers Dictate Your Strategy.

The initiative to open in America came from the City in London (that is London’s Wall Street) warning Tesco that it was starting to grow substantially in developing countries and that as a larger percentage of sales and earnings came from developing countries, Tesco’s price/earnings ratio would decline.

The City thus was urging Tesco to move into the United States as this is the largest developed market in the world. Further, because both Marks & Spencer and Sainsbury’s had failed in acquisitions in the US, Tesco was told that an acquisition would not be well received.

In one of the statements that Tesco CEO Philip Clarke made explaining the decision to pull back from the US market, he said:

Launching Fresh & Easy in the world’s most competitive retail market was never going to be easy, but the economic backdrop made the task twice as hard.

As Chief Executive of Tesco, I have to focus on those markets which can deliver the high returns which our shareholders rightly expect. Where they don’t, it’s my job to take action, as I did when we pulled out of the Japanese market earlier this year. These decisions aren’t easy, but making the tough calls at the right time is a vital part of the Chief Executive’s job.

Having assessed its long-term potential, we’ve concluded that Fresh & Easy is not going to achieve the scale and profitability it needs in a reasonable timescale.

The truth, though, is that precisely because the US is highly developed and “the world’s most competitive retail market,” there was never a likelihood that it would be one of those “markets which can deliver the high returns which our shareholders rightly expect.” Even if successful, it was going to be only modestly profitable.

This is a case where the operational activities were dictated by non-operational considerations. This is the kernel from which the later failure would grow.

2) Don’t Require Researchers And Consultants To Conform To Pre-Established Outcomes.

It has been pointed out that Tesco did extensive consumer research, even living in the homes of Americans to understand their eating and shopping patterns. This is true, but the early-stage research that led to core decisions, such as the size of the store, was constrained by Tesco’s situation.

Tesco is a very large company. It needs to do things on a large scale or they are probably not worth doing at all.

Since the decision had already been made that Tesco had to open in America and that Tesco could not do an acquisition, the researchers and consultants were constrained in their recommendations. Had they decided that what Americans truly want is to buy food in 70,000-square-foot boxes on prime suburban corners, this would have been a grave problem for Tesco.

These locations are all taken. The little new construction that exists for these types of locations would find Tesco in deep competition with every supermarket chain in each city. It would probably take a century for Tesco to acquire a critical mass of these locations without an acquisition. So it would have been unacceptable for the researchers and consultants to recommend this option.

Equally, had the researchers decided that what Americans really wanted was to buy their food in one-stop-shop supercenters of 200,000-square-feet, similar to the Wal-Mart box, Tesco would have found this problematic. After all, every time anyone proposes to build such a box, they get a lawsuit; they get extended zoning negotiations; they run into legal obstacles, etc. Once again, to build a critical mass of these stores would take a very long time.

In light of these constraints, it is not surprising that the researchers and consultants came to the conclusion that Americans did not, in fact, want to buy food from stores on prime suburban corners, nor did they want to buy food in large supercenters. Instead the researchers concluded that Americans wanted to buy their food in old Rite-Aid drug stores!

These 10,000-square-foot locations had the advantage of being widely available, and developing them did not pose the legal and zoning problems of more conventional locations. But it is easy to identify a hole in the market. The question is whether there is a market in the hole. There was never any evidence that the mass of Americans were actually looking for this small footprint option.

Here, Tesco so leaned on its researchers that it never really got the truth. It just got the truth it wanted.

3) Avoid Massive Overhead On An Unproven Concept — Maintain Flexibility.

Before Tesco opened one store in America, it built a massive distribution center, brought in a large staff of expatriates to manage the operation and enticed key British vendors to build US facilities.

This created tremendous overhead, which created tremendous pressure to open stores quickly, which, in turn, created tremendous pressure to accept sub-par locations.

In a developed market, the limited availability of prime sites is a natural constraint on growth. What you want to do as a retailer is establish strict criteria for your locations: How much foot traffic? How much auto traffic, population density, disposable income, etc. These tough standards mean that you will turn down almost all the locations that come your way. It also means that you will accept only locations that are likely to be profitable.

Fresh & Easy was caught at birth between a rock and a hard place. If it grew slowly, accepting only the best locations and gradually learning from shoppers what worked and didn’t, it was destined to lose a fortune because it had to support this enormous infrastructure it had developed before opening the first store. On the other hand, if Fresh & Easy pushed to grow rapidly, to quickly achieve a scale that could support the infrastructure, it would be forced to accept loads of rotten locations.

Tesco put itself in a “heads you win, tails we lose” situation.

Contrast this with the approach Wal-Mart took when it opened its first supercenters. It contracted with wholesalers and various intermediaries to manage its food supply chain. Possibly Wal-Mart overpaid a little on a case-by-case basis, but the company freed itself to grow at a pace dictated by store performance and site availability.

Wal-Mart also postponed major capital investments in distribution facilities until the company actually knew what was needed.

This failure of Tesco to maintain flexibility doomed what was really a small start-up retailer.

4) Maximize Local Market Knowledge By Using Local Executives And Vendors.

If you are opening a retail store in a developing country, you will need a great deal of expatriate labor. This is because the personnel available in the country do not have the skill-set trained to do things such as food safety or to implement sophisticated supply chains.

If, however, you are opening a chain in an advanced western society such as the United States of America, you want to tap into all the local market knowledge and experience.

You want buyers who know the vendor community, real estate people who have relationships with developers and know the neighborhoods like the back of their hands. You want vendors who are tapped into what is selling around the country.

We can understand that a company might like to send one of its own over as Chief Financial Officer to watch the money, but other than that, there was really no cause to have any British executives in the US.

Equally, pushing UK suppliers to open in the US was counterproductive. At an early stage in the Fresh & Easy adventure, we ran a letter pointing out that the first Fresh & Easy stores devoted 25% of its fresh-cut salad assortment to watercress-based salads.

These are, of course, very popular in the UK, but are virtually never eaten in the US. Indeed neither Fresh Express, nor Dole, nor Ready Pac even produced such a product in their extensive lineup of salads.

Fresh & Easy management knew this, of course, but they didn’t know it in their bones, and their lack of local knowledge — at the processing level, at the procurement level, at the merchandising level — all led to the creation of stores that were not in sync with American expectations and thus were likely to fail.

There was also more than a bit of arrogance here — “We know what those Americans should be eating!”

5) Remember That Equity In The Marketplace Is Typically Built In Stages.

When Bruce Peterson launched Wal-Mart’s produce program, he had already been instructed by none other than Sam Walton that he should realize he was building a program for what would become the world’s largest grocer. Yet, he approached the task with humility. Bruce recognized that Wal-Mart, though well known for general merchandise, had no equity with consumers on fresh produce, so he resolved to carry well-known and respected produce brands. In other words, he wanted to borrow the brand equity of his vendors to woo consumers.

It would be hard enough for an unknown brand such as Fresh & Easy to tempt consumers to its stores; Tesco compounded this by stocking the stores with unknown private label product.

Even if the ultimate plan was to sell mostly private label, it would have been wiser to open the stores with all or almost all branded product. If the shelves were stocked with well-known brands and Fresh & Easy was able to offer a value proposition — more convenient stores or lower prices — it would have had much more business.

True, the low-price strategy might not have been profitable, but neither was having a lot of product that didn’t sell very much.

If Fresh & Easy had lots of customers buying a bit too cheap on Heinz ketchup and Best mayonnaise, then in time Fresh & Easy could have introduced these customers to more profitable private label items.

Yes, Trader Joe’s is almost all private label — but they didn’t introduce their first private label item — granola — until five years after they opened, and the private label assortment as it exists now has developed with over 40 years of consumer input.

Tesco tried to do too much at one time.

6) Don’t Start Out By Creating Reasons For Consumers Not To Like Your Business.

Fresh & Easy opened without accepting American Express or manufacturer’s coupons, or allowing for standard check-out. Doubtless there are real reasons why Tesco felt these would not ultimately fit with its concept. Once again, though, the smart thing would have been to meet the competition on all these aspects and then reassess once Fresh & Easy had won over customer loyalty.

So, maybe AMEX charges an extra point over Visa. If certain consumers prefer to use the card, and perhaps the business model won’t allow for that extra point, still you open up accepting it, let lots of customers who prefer AMEX switch from Vons or Ralph’s or Whole Foods and consider that extra point marketing. Then when you have them as customers, you either renegotiate with AMEX or ultimately phase out AMEX — but you do that after the consumers love you.

Some decisions are hard and some are easy — if you want to know what credit cards to accept when you are entering a new market, the answer is easy: you accept every card your competitors do and if you can take an extra one, that is even better.

Tesco acted as if it were Tesco in the UK — already very successful — rather than acting as if it was a nobody in the US scrambling to gain a foothold in the market.

7) Be Nice!

Few people or businesses succeed all alone. One never knows who will be able to help or when they will be able to help. As such, it is prudent to make the small gestures of comity to the vendor community even if, at that moment, you have no particular plans to use that vendor.

In the early days of the venture, Tesco’s behavior can only be described as downright rude and offensive. We were getting phone calls from the owners of key grower/shipper organizations asking us if we could hook them up with the right person at Fresh & Easy. These were the top two or three vendors in their products and the kinds of reputable growers and shippers that, almost surely, Tesco would have wound up dealing with if its venture in the US had even the slightest success.

But these owners and CEOs were literally treated as if they were persona non grata . Simple questions — who is going to buy the lettuce — were met without a response. Important people were insulted and told to drop off their brochures at an office and that Tesco would call them if they were interested.

Once the project got under way, many of the buyers were profoundly offensive. We wrote a piece here about how a buyer rudely ordered expensive wine at a vendor event and refused to pay for it, despite promising to do so.

If you are the biggest buyer in the country, as Tesco is in the UK, you can get away with a lot, but if you are a struggling nothing, as Fresh & Easy was in the US, then building positive relationships is a key job.

There was this unwillingness to conform even temporarily to American customs. For example, Tesco was asked by many vendors to join the Produce Marketing Association, the United Fresh Produce Association and the Fresh Produce and Floral Council, and we pointed out in many pieces, including this one , why this was a good idea.

Partly this was substantive; Tesco might have learned from participation in these organizations and found sources for new employees and vendors.

Mostly though, the problem was a cultural one in which Tesco wished to impose its standards on America. Instead of saying cum Romano Ramanus Eris — when in Rome do as the Romans do — Tesco wanted to change American habits and customs.

It is not really very difficult. If we were to open a chain in the UK, we would ask what associations do Tesco, Sainsbury’s, Marks & Spencer and Asda belong to and we would join as well. Maybe, after we were well established we would find we weren’t getting value and quit, but initially we would want to be seen as the civic-minded guy supporting industry institutions.

In the end, Fresh & Easy had few friends who were motivated to save it — that may well be why it was not saved.

By the way, the same rudeness was exhibited to reporters at major consumer newspapers and TV stations. We got calls from many asking why Fresh & Easy and Tesco executives wouldn’t return phone calls. We could say the behavior was rude, and it was, but mostly it was stupid. These reporters influenced the prospective customers and they never gave Fresh & Easy the kind of glowing response that would have helped the chain. That may well have been because of how these reporters were treated.

8) It Was Not Fresh And Not Easy: Make Sure Those Who Are Executing Based On Research Understand What The Consumers Were Saying.

Consumers say many things, but it requires great expertise to actually interpret those proclamations. So, for example, consumers might say they want Idaho potatoes for dinner but knowing that doesn’t tell us whether the consumers want a potato grown in the state of Idaho or, simply, a long white baking potation.

Yes, consumers wanted things fresh, but the execution delivered product that Americans did not perceive as fresh. Generally speaking, Americans perceive things as fresh when they are A) variable and, if appropriate, B) cooked at the location and served warm.

In other words, no matter how high the quality of the bread, meat and cheese, Fresh & Easy’s sandwich program would be perceived as vending machine food because the consumer could not customize the sandwich. At most supermarkets, the consumer can say, heavy on the mayo, an extra slice of provolone, some jalapenos, please, etc.

Same thing with rotisserie chicken. In most stores, a consumer sees it cooking, smells the aroma and takes it home hot. At Fresh & Easy it was cooked in a distant commissary, served cold in a plastic bubble.

Tesco knew the consumers wanted fresh, but it delivered an experience that Americans would not perceive as fresh.

Similar confusion exists over the term easy. It seems that Tesco leapt to the conclusion that small would equal easy. It turns out that this is true for only small subsections of the population — notably students and elderly people or urban dwellers who do not have a car. For most shoppers, as Kroger CEO David Dillon caught on right away , a small store that carries mostly private label product was simply an additional stop for the typical suburban mom. It was not easy; it was hard because now the kids had to be dragged to another store, unbuckled from their car seats, etc.

So Tesco knew consumers wanted “fresh” and that they wanted “easy,” but they didn’t understand what American consumers meant when they used these terms.

9) Don’t Be Logistics-Driven; Be Merchandising-Driven. Either Open Stores Only Where The Demographics Suit Your Concept Or Customize Merchandising Assortment To Meet The Needs Of The Local Community.

Inconceivably, the decision was made to offer a uniform merchandising assortment against diverse demographics. So the store in upscale Scottsdale, Arizona carried exactly the same assortment as the one in Compton, California. This guaranteed poor results.

This is a big, diverse country. Get lazy on assortment, and you might as well close up your doors. Which is, of course, what Fresh & Easy is doing.

10) Don’t Fall In Love With Your Technology.

In the early days, Fresh & Easy was plagued by out-of-stocks. It was believed that this was due to a sophisticated ordering system that was functioning poorly due to a lack of historical data. But Fresh & Easy only had a few dozen stores at the time. One vendor suggested that Fresh & Easy equip each store with a clipboard and have the store manager call in all the out-of-stocks every day so they could be delivered the next.

This eminently sensible suggestion was treated as an insult to Tesco’s IT department, and the stores struggled through months being out of stock on lots of stuff. This not only cost business but alienated consumers at a crucial moment. There are few things more frustrating to a consumer than going through the effort of taking a trip to a store and that store not having product it would normally be expected to have. That certainly makes shopping hard, not easy.

There are many reasons Fresh & Easy’s sales never took off, but the fact that the chain alienated so many customers with out-of-stocks in its early days may play a greater role than is realized.

Tesco has enormous resources. It could have made sure there were no out-of-stocks. It could have sent a regional manager to every store every morning and then load a minivan at the DC to quickly stock up. But Tesco was so focused on its systems, the company forgot about the customers. That can easily be the kiss of death for a retailer.

11) Allow Your Own Team To Weigh In.

There has been much written about Tesco’s unwillingness to trust outsiders and thus the bizarre decision to bring in so many Tesco executives to work at Fresh & Easy.

What is less realized is that Tesco didn’t actually trust its own senior staff. As the interest in Fresh & Easy grew, we started getting phone calls from senior Tesco executives. These people were the chief executives for Tesco’s operations in various countries.

They wanted to question us on Fresh & Easy. When we inquired as to why such a senior Tesco executive would need to call the Pundit to get information on Fresh & Easy, it was explained to us that information on the project was shared on a “need to know” basis, and since they didn’t “need to know,” they were told almost nothing.

The problem with this is that these were very astute people with great expertise in retailing, and they had no vested interest in the decisions that had been made regarding Fresh & Easy. Had Tesco been open to the constructive critique of its own staff, there might well have been enough of a counter-weight within Tesco to question some of the decisions being made and thus obtain a better outcome.

12) Don’t Abuse Your Business Partners.

Fresh & Easy made a big point of selecting individual vendors to lead various categories, and there were specific and unusual requirements ranging from how much a clamshell of grapes should weigh to the measurement of an artichoke stem.

Most of these requirements were silly because they did not add value that the consumer perceived, but they did add expense.

In addition, these exacting requirements constrained the supply chain and thus precluded Fresh & Easy from taking advantage of ‘special buys’ that become available due to market conditions.

Still, this was the decision Fresh & Easy made and, perhaps, working closely with a limited number of excellent vendors would lead to success.

Except when times got tough and Fresh & Easy wanted to offer value items, it abandoned its vaunted specifications and bought product on deals. Now Tesco didn’t sit down with its selected vendors, explain the situation and offer them an opportunity to provide standard product at a lesser price. Tesco just went around their backs and bought product.

We were touring more than a few stores with vendors when they would be shocked to see a skid of competitors’ product on the floor when, supposedly, they had an exclusive.

For the most part, this made the vendors hate Wild Rocket and Fresh & Easy, and when one is in trouble, one needs friends. Fresh & Easy didn’t have many.

13) Don’t Fake Your Liabilities And Thus Underestimate The Risk You Are Taking.

One of the reasons Tesco got in so deep is it pawned off on vendors many of the costs. If this were legitimate, it would constitute risk-sharing and might have been a wise strategy.

But, in fact, when the business turned out to be too small to support the British transplants, Tesco bought them out at a huge premium to free market value. We ran a piece here , in which we pointed out that this seemed to likely be the result of an agreement, either explicit or implicit, that Tesco would make these guys whole.

Because Tesco is so large, these things get lost in the shuffle. Had it just been Fresh & Easy doing this, shareholders would have filed suit claiming that management had taken on liabilities that were not properly disclosed.

Another question is whether these potential liabilities were disclosed to Tesco’s own board of directors? Maybe not and, as such, the board was kept in the dark about the extent of the investment the Fresh & Easy project would entail.

No board is better than the information it has, and it is difficult to make wise decisions if liabilities are being assumed based on a wink and a handshake.

14) Secrecy Is No Substitute For A Competitive Edge.

Many of the difficulties Fresh & Easy experienced came about because of the attitude expressed by then Chairman Sir Terry Leahy when at the launch of Fresh & Easy he expressed that “this is a roll-out, not a trial.”

It was always an odd way to proceed. Few retail concepts spring from the minds of geniuses and proceed to serve the consumer in an unaltered state. Much more common is for retailers to launch concepts and to refine them based on consumer feedback. What sells? What doesn’t? What do people ask for?

But Fresh & Easy was reared in secrecy, researched in a mock store built on a sound stage. Then, it was sprung to life, fully formed and rolled out.

There were enormous efforts made to keep things secret, including mock names and no prototype store open to the public.

Self-confident retailers don’t worry all that much about secrecy because they believe they have a competitive edge in what they do.

Look at Wal-Mart’s launch of the supercenter. The company opened one store. The whole world came to see it — every retailer of any size — and whatever these retailers learned from visiting that initial supercenter had virtually no impact on Wal-Mart’s ability to grow the concept.

Indeed, long after it became clear that supercenters were a very successful concept, most retailers did almost nothing. Kroger bought Fred Meyer, but did not attempt to roll the chain out nationally. Nobody bid sufficiently aggressively to acquire Meijer. And major retailers such as Safeway did not develop a supercenter concept.

Obviously, Wal-Mart believed it had had significant competitive advantages in developing supercenters, and the behavior of other retailers in not developing their own such concepts indicates they were correct.

The very fact that Tesco thought secrecy was so important in launching Fresh & Easy was a sign that the concept was weak. If it could be so easily copied, then it would be copied if Tesco had the slightest success.

Indeed, the failure of Fresh & Easy turned out to be a matter of lack of demand. But it could have been a failure in another way.

If by some miracle Tesco had discovered some hitherto unknown demand for purchasing groceries in 10,000-square-foot boxes, the very availability of such real estate would likely have led to an explosion of such stores.

The competition would have been intense because it would not have been restrained by real estate and zoning issues. In addition, such small stores could be opened at a reasonable cost and so individuals of all ethnic groups might jump into the fray.

In fact, such small stores, if successful, might not be profitable for a large corporation to operate at all.

The bottom line is that, in retail, if you believe your concept is so easily duplicated and your edge so weak that knowledge of your concept would allow others to dominate the field, that is a good sign that it is not likely to be a highly profitable concept.

15) Make Sure You Have The Right Person For The Job.

Tim Mason was widely heralded as a genius when Tesco sent him over to the US to head up the launch of Fresh & Easy.

He was held in such esteem, however, principally for his development of Tesco’s loyalty program.

This program was not available for Tesco to use in the US, because it was developed with Dunnhumby , with whom Kroger has an exclusive in the US. So the very tool which was supposedly crucial to Tesco’s UK success was not available for use in the US, and no substitute was ready for opening.

But there was also a question, brilliant or not, as to whether or not Tim Mason was the right man for this job.

Part of the issue was experience. Whatever his achievements, he had never opened a supermarket chain or any business. He was a high-end corporate executive sent to do what was, really, just a start-up.

Part of it was personality. He did strange things. He would tweet about off-topic things. The London Evening Standard wondered if “ the pressure of running Tesco’s loss making US business is getting to Tim Mason? ” — when he bizarrely started tweeting about his habit of hitting the delete key rather than the “m” on his iphone as if he was a 20-year-old with nothing to do but send out random tweets.

And he seemed to have a tin ear for how things were perceived. Everyone who dealt with him had the same comment when they spoke to us: He was always out on a yacht enjoying southern California. They always had to reach him on the boat.

This was a guy running a struggling start-up. This requires super-human efforts of all involved and tremendous self-sacrifice. It requires leadership that sets a standard for hard work and deferral of gratification. At very least, it requires leadership that has the good sense to keep to oneself your extravagances.

And everyone kept talking about Tim Mason and the yacht in the same sentence. That can explain the failure all in itself.

16) Compensate People To Achieve The Goals You Want Them To Achieve.

When Tesco decided to send its dream team to America, it had an opportunity to set up a compensation plan.

It was elaborate and complicated. It involved giving Tim Mason a 2 million-share grant in 2007 under the United States Long Term Incentive Plan, which ultimately lapsed when he was given broader corporate responsibilities and withdrew from the plan.

He did receive a £4.3m payout in 2011, which led to great criticism since Fresh & Easy was such a failure.

And he will receive £5.7m following his departure, plus a £9m pension plan.

We begrudge no one their income, but we do think that compensation plans focus the mind on achieving different goals.

Mr. Mason was a rich man before he came to America, and if the offer made to him was that he would have the opportunity to work for $1 a year but would receive 20% phantom equity in the Fresh & Easy project, the results might have been different. For example, if in 10 years’ time, an appraiser would value the company, or a formula for valuation would be agreed to now, and Tesco’s investment, including an agreed return on investment, was deducted and Mr. Mason would be entitled to a payoff equal to 20% of the value he created by building the chain, we suspect the whole project would have been done differently.

There would have been a desperate attempt to reduce Tesco’s capital investment because that would have been a key criterion in the personal return Mr. Mason could earn. We doubt that distribution center would have ever been built.

As it was, the compensation program was a sort of guaranteed high base with an extra bonus if things go well.

Had Mr. Mason been looking at years of working for a $1 a year with no return, he would have been less likely to allow the project to fail in the way it did.

17) Make Sure Your Promotions Attract The Kinds Of Customers You Hope To Keep.

The general rule in consumer marketing is that your efforts to get new customers need to match your efforts to retain them.

So magazine subscribers who purchase through sweepstakes typically renew best through sweepstakes.

Equally, when a retail business is confronted with a lack of customers, the thing to remember is that you need to promote in line with the kind of customer you hope to ultimately attract.

Fresh & Easy decided to heavily use dollars-off coupons. There were many variants, but a typical one was a $5 off each $20 purchase.

The hope, of course, was to introduce consumers to Fresh & Easy through the discount and then have them stay on as customers at regular prices.

In fact, the coupons became like crack/cocaine. They would boost sales but as soon as Fresh & Easy stopped couponing, it was like withdrawal symptoms — sales would crash.

The food is the cheapest thing, so normally promoting with discounted food can make sense — but you will attract customers who are focused on discounts. To keep those customers, you need to remain deeply promotional.

But we never found Fresh & Easy to be particularly well-priced. When we did our PRODUCE BUSINESS Wal-Mart Pricing Study in Los Angeles, California, we studied their pricing and it turned out that Stater Bros, Ralphs, and Vons plus Wal-Mart were all less expensive then Fresh & Easy when it came to fresh produce.

This being the case, deep discount couponing only brought in customers who would be dissatisfied with Fresh & Easy. They would have been more successful deciding who the customer was going to be and skewing the marketing to that person. Were they looking for Moms? How about a program where 2% of your purchases go to the school you specify?

Or maybe the money needed to be spent on a comprehensive image-building campaign to tell people what Fresh & Easy was all about. In the end, as at the beginning, this was a mystery to most consumers.

18) Know Your Center.

One of the more consistent critiques of Fresh & Easy is that its stores were cold and institutional. This contrasted especially with Trader Joe’s, whose stores are warm and give its shoppers a real sense of place.

Fresh & Easy tried to address this problem with a new décor package, but it didn’t make much difference.

The stores lacked sense of place because management never knew what they wanted the store to be. This is mostly because to decide would have been to exclude. In other words, if you go to an Aldi and complain that the produce is dishelved because they put it out each day and let it run down, they don’t apologize and try to make it better. They tell you to come at 8:00 AM when it is just put out. If that doesn’t work for you, they suggest you find another store.

That attitude — that fierce dedication toward discounting — informs the entire shopping experience. Trader Joe’s, with its Trader Shtick, has a similar rootedness. Fresh & Easy was unwilling to say that anyone shouldn’t be their customer. That is why, in the end, nobody will be their customer.

19) Don’t Kid Yourself As To The Source Of Your Problems.

Throughout the experience, Tesco has consistently blamed the economic crisis of 2008 and its aftermath as the cause of its problems with Fresh & Easy. This has never been true and never made much sense.

One thing Tesco has is financial resources. This means it has an enormous edge over businesses that do not have resources during a financial crisis and depressed economy.

A recession makes available locations and talent that would not normally be available. It would normally be an excuse for a company such as Tesco to put pedal to the metal and drive poorly financed independents out of business.

What is required, of course, is a viable concept.

We used to think these pronouncements were just sop for the shareholders, but, more recently, we came to think that top Tesco executives actually believe that had the economy been stronger, this concept would have succeeded — despite there being no basis for such an assumption.

The power of self-delusion is a major fog preventing business success.

20) Be Open To Criticism And Avoid Groupness.

Of course, all of the first 19 points we mention as reasons for the failure of Fresh & Easy beg one question: Why didn’t they fix it?

Mistakes happen, errors are made, generals always fight the last war — but these were smart people, with enormous resources and the really interesting thing here is that they didn’t turn it around.

Why? Well the obvious answer is that they were unwilling to listen to criticism.

We wrote a lot about Fresh & Easy , and the pieces were very well received, not only amongst our core industry readership but beyond. We were invited to speak on the BBC — in fact we were invited to debate with Tesco but Tesco declined. We were quoted in more than 100 media outlets.

But there was a more serious side. We were paid by many of the world’s top investment banks to give our analysis of the situation. Citicorp had us do a conference call with its investors around the world to discuss Fresh & Easy. It also had us keynote its European Retail Conference for the same reason.

Several of Tesco’s biggest competitors brought us in as a speaker to address the top management team and, in some cases, even the board of directors, on Tesco and Fresh & Easy.

On more than one occasion, Tesco vendors approached us and asked if we would be willing to address various Tesco meetings, as they wanted Tesco to succeed and thought our critiques had been prescient so they wanted to suggest us to their Tesco contact. We agreed each time. Yet the invite never came.

We mention all this to point out a few things: First, our analysis was very credible and taken seriously by very serious people. People who had millions riding on Tesco stock, vendors who had millions in business riding on the success of Fresh & Easy; journalists who had a choice of analysts to speak with. Since we were almost exactly correct on almost everything, we repaid this trust in the best possible way.

Second, we had real influence. People bought and sold Tesco stock based on our conference calls and our analyst meetings.

For both these reasons, it was peculiar and telling that the one group that never reached out was the management team at Tesco and at Fresh & Easy.

At very least, their purpose in reaching out would be to co-opt us, build personal relationships, etc., in the hope that we would be more generous in our assessment.

More importantly, they — and this applies to the California-based management team, the executives in London who were supervising this project and the board of directors that was supporting and funding it, would actually learn something and thus head off disaster.

Why they did not is best explained by a phenomenon that psychologists call “groupness,” which is explained in a great essay in the National Geographic Blog — much of it focusing on why A&P couldn’t sustain its leadership position and why NASA had the Challenger and Columbia tragedies:

Behavior like that, seemingly contrary and nonsensical, stems at least in part from a phenomenon that psychologists call “groupness.” Coined by a social psychologist at Oxford University named Henri Tajfel, the term refers to the tendency of various animals, including humans, to form in-groups.

When the in-group encounters individuals from outside the group, the default response is hostility. People protect their group from outsiders and from outside influences. For example, we will reject information, habits, and culture from other groups.

The power of groupness is not to be underestimated. If a group invests a lot of effort in a goal and succeeds, its boundaries become stronger, and it tends to become even more hostile to outside influences. This may not be overt hostility. It may simply be a subtle and unconscious tendency to reject anything from another group.

NASA has lost two space shuttles, costing the lives of 14 crew members, and groupness was at least partly to blame. The astounding effort and success of the Apollo program had created a culture… NASA defined itself as technically excellent — “the perfect place,” as one researcher called it. They put a man on the moon, and it was hard to argue with success. The insidious message was: We know what we’re doing. The corollary to that is: You can’t tell me anything I don’t already know.

By the time components of the space shuttle began failing (the O-rings in the case of Challenger and the foam insulation in the case of Columbia), NASA managers were so blinded by groupness that they could not recognize that those malfunctions were clear signs of impending disaster.

The official report on the crash of Columbia said, “External criticism and doubt . . . reinforced the will to ‘impose the party line vision on the environment, not to reconsider it . . .’ This in turn led to ‘flawed decision-making, self-deception, introversion and diminished curiosity about the world outside the perfect place.’”

This is another reason why sending all these Tesco folks over to America was a bad idea. They believed in themselves too much; they had a record of success together. Had the team been an American team, the Americans would have been more skeptical of British orders and the British executives would have been more skeptical of the American’s claims to success.

In any case, mistakes can only be corrected if one is open to the possibility that one has made mistakes. This team was never open to that possibility and so never heard the voices that were ready to help.

One way of avoiding this is through staffing, as we mentioned. It also why some people, even if they have sufficient resources to fund a project, prefer to bring in a bank or a partner. They are more likely to question assumptions and challenge non-performance.

We were sometimes accused of being Tesco’s enemy. But that was always silly. We were just an analyst. The vendors we knew all were desperately hoping that Tesco would succeed and thus create a new market. Many had visions of tying their wagon to the Tesco star and making their fortunes just as many did with Wal-Mart a generation earlier.

They may have perceived us as an enemy, but we were the most valuable kind of friend. The one who told them the truth.

Perhaps the very best business lesson to learn from the failure of Fresh & Easy is to remember the plea sent by Oliver Cromwell to the General Assembly of Kirk, in which he famously said: I beseech thee, in the bowels of Christ, think it possible you may be mistaken. Possibly the best business advice ever written — and by a Brit! Though the General Assembly paid no attention either.

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As we consider these 20 points as lodestars to avoid in our own business affairs in 2013, we also think it worth making one point about sustainability. One of the reasons Fresh & Easy made few friends is that it was so sanctimonious on its claims of sustainability.

It put polar bear pictures up in each store as we wrote about here , and claimed it would pay people better and provide health insurance, etc. It was never clear it did anything more sustainably than anyone else but, even if there was such evidence, the potential closure of Fresh & Easy shows that they were not sustainable at all.

Surely it will be no solace to those who lose their jobs that if Fresh & Easy had managed to stay in business, it would have saved some polar bears or paid a higher wage.

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So what does Tesco do from here with Fresh & Easy? Four possibilities: Stay, sell, merge or franchise:

STAY There is an off chance that the assessment being undertaken could lead to a decision to stay in the US. If so, our advice would be as follows:

1) Close down and write off the DCs — both the functioning one in El Segundo and the mothballed one in Stockton. Send back all the expatriates to the UK. Kill any private label product that is not already being produced for Tesco elsewhere. Without this overhead, there is a shot. We would do logistics with someone like CH Robinson. Own as few assets as possible, have as small a staff as possible.

2) There are a lot of people that can be hired. The logical people are grocery folks… Cathy Green , formerly of Food Lion, comes to mind, but this is a Hail Mary pass based on the primacy of fresh, so we would probably make Bruce Peterson CEO as he combines experience with regional retailing – Meijer’s, Baker’s etc., with the ability to know how to interface with a global giant due to his Wal-Mart years. Maybe partner him by seeing if we can woo Tim Riley from Giumarra to be COO, and bring Dick Spezzano on as a local consultant. But we would keep the team ultra tight.

3) A lot of stores will have to close. We don’t have the store-by-store data to make that decision here, but basically, either close the Arizona and Nevada divisions and focus in on California or kill off the lowest performing third.

4) We need a new concept. At an earlier date , we suggested abandoning Fresh & Easy and converting the stores, based on their locations, to either Aldi clones or Trader Joe’s clones. That is still optimal, but if we want to have one concept to start, doing a deep discount format is easier than replicating Trader Joe’s. It is relatively easy to under-price people — all that it takes is a willingness to lose money, which Tesco has shown an ability to handle. With the store base cut and the overhead gone, undercutting prices won’t affect Tesco earnings by even a quarter of a percent. In contrast, ongoing losses of the present operation could have run around 3% of earnings.

SELL Easy to say, but who would buy? Many purchasers would want a check on liabilities related to the leases as well as the taxes and maintenance on the distribution and food processing facilities.

1) Wal-Mart would take the whole operation. It would want a fire-sale price — but everyone will because, well, it is a fire sale. More specifically, only about 30 of the stores are profitable, and we have doubts about those numbers. The big distribution and food processing facilities are very specific to Fresh & Easy’s needs and will only be partially used by a buyer or will require significant investment to normalize them.

Still for Wal-Mart, with its small store Wal-Mart Express concept and ambitions to grow in California, and the fact that the whole thing on Wal-Mart scale would be a trial, not a roll-out, the company would be interested. Plus Wal-Mart would relish the headlines as it steps in and saves so many jobs, etc. Unfortunately the rivalry between Tesco and Wal-Mart around the world is so intense that some believe Tesco would burn each store to the ground before it would sell to Wal-Mart.

2) Any of the dollar stores, Aldi and Trader Joe’s would be interested in some or all the locations.

3) Kroger does operate C-stores. It has overlapping operations, so maybe for the right price, it would do a C-store play in the locations. The big problem is that nowadays C-stores that sell gas are the ones with the prime locations, so almost all of these locations are secondary locations.

4) Cerberus , or any of the other private equity groups or real estate trusts, would buy the sites to resell, maybe temporarily operating Fresh & Easy, where they are profitable. Sort of like Albertsons LLC. These stores don’t have to be food stores at all.

MERGE 1) The most logical merger would be for Supervalu to contribute its Save-A-Lot division, Tesco to contribute Fresh & Easy, have Tesco put in money to convert the Fresh & Easy Stores to Save-A-Lots and to fund the integration. The stores would have viable format and operational structure. We could bring back Mike Kemp in to help with the plan. It could be structured to give Supervalu some cash.

2) Tesco used to be partners with Safeway in an internet shopping service. The stores don’t work as standalone entities but we wonder if they couldn’t work as “Vons Express” stores to capture fill-in business in between trips to the larger grocery stores. Maybe Tesco puts in the real estate and some money for revamp and Safeway puts in its banner names, frequent shopper program, market knowledge and managerial skill — maybe something could work. Of Course, Safeway might rather let them crash and burn as there is usually no love lost when formers partners decide to compete with you.

FRANCHISE 1) How about finding someone to do the wholesaling and then selling each store to its manager or to local entrepreneurs? Just because Fresh & Easy only sells $50,000 a week at a particular store doesn’t mean that an individual operator can’t do a quarter million. They might work 24 hours, customize the assortment to the community, buy opportunities off the local wholesale market, etc.

*************

Our guess as to what will happen? Tesco will sell the whole thing to a real estate trust or private equity group based on the real estate, possibly with Tesco having to write a check to exit the market.

The problem is that the announcement has demoralized workers. The best people are leaving every day, theft is already almost certainly going through the roof, so they just need to exit and put this nightmare behind them.

Source: Jim Prevor's Perishable Pundit

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Tesco Close American Stores due to Cultural Differences

Tesco has recently announced that their chain of American supermarkets, Fresh & Easy, will be closed entirely.

The reason for this? Unexpected cultural differences.

Five years ago, Tesco decided to give the American market a go. By opening a chain of supermarkets called Fresh & Easy, the British company tried to sell their products in the states of California, Nevada and Arizona.

However, the famous Great Britain brand didn’t catch on, probably because Tesco didn’t understand the Americans and the Americans didn’t understand Tesco. 

This is why the company  announced the closure of its US chain of supermarkets the closure of its US chain of supermarkets .

This situation is a great case study of  business that failed to understand culture prior to expansion . Unforunately it happens all too often and Tesco certainly isn’t the first British-based company that had to give up on their American dream.

Even though some brands, such as Starbucks or Boots, have secured a comfortable position on the US market, there are also many companies that fail to do so. The crazy thing is that the company spent years considering their move across the pond but, according to some, ignored many of the findings which led them down the path to failure.

For example, although US shoppers prefer to buy in bulk to save money, Fresh & Easy offered small pack sizes. The stores also stocked British-style ready meals unfamiliar to US shoppers and initially relied heavily on self-service tills. This was a big turn-off to American customers . According to Don DeLillo in White Noise, supermarkets can be described as a church; people go there every week and meet up with other people who practice the same rituals , often leaving them with a sense of order and wellbeing afterwards.

In that respect, British supermarket chains that try to set up shop in the US are like missionaries; they can build new churches, but predicting whether local consumers will actually visit them is virtually impossible.

Brands usually think that they will fit right in because we all speak the same English language, and a great deal of American culture has worked its way into the British one. However, nothing could be further away from the truth; Britain and the US might share the same language, they definitely do not share the same culture.

Many examples of this wrong assumptions can be found; Marks and Spencers tried to export to Canada, but their products didn’t catch on there. Or what about Dunkin’ Donuts, the American doughnut company that tried to conquer the British market but failed miserably? There are only a few companies that actually succeed in appealing to a variety of cultures; for the other businesses, some localization specialists might come in handy. The cost of their American adventure? £1.5bn of investment bills and accumulated losses in five years. Who said cultural differences aren't important in today's business world?

If you're branching out into new international territories, then boost your success and manage your venture with credibility by enrolling on our market leading online cultural training courses  or, opt for a more personal and tailored option with our customised cultural training webinars .

Tailored to meet the specific needs of our learners, our cultural training webinars focus on anything and everything related to culture and business. Whether it's merging intercultural teams following a joint venture, or scoping the consumer habits for retail expansion, we can help!

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Home » Management Case Studies » Case Study: Tesco’s US Grocery Market Entry

Case Study: Tesco’s US Grocery Market Entry

Tesco is currently the UK’s most successful supermarket with a UK market share in excess of 30% and annual profits of some £2bn. It is the world’s fourth largest retailer. The company has developed internationally over the past 10 years particularly in Central and Eastern Europe and the Far East. International expansion is a key element of Tesco’s strategic development particularly as opportunities for further expansion in the UK become increasingly limited.

In February 2006 Tesco announced that it was planning to enter the US retail grocery market. Tesco planned to invest around $400m ( £220m) per annum, over a five year period, in its US venture. This was estimated to be sufficient to pay for between 100 and 150 stores in the first year of operation. Tesco undertook detailed market research including visiting shoppers at home to see what they bought and asking people to keep a food diary to observe what they consumed. A mock store was built in a warehouse on an industrial estate to help develop the model for the US market. This had to be kept secret to avoid competitors obtaining knowledge of Tesco’s plans and the stock for the mock store was purchased in the eastern states of America and shipped to California. The proposed market entry caused a great deal of interest in the USA where Tesco was expected to raise a serious competitive challenge to existing food retailers including Trader Joe’s, 7-Eleven, Kroger, Safeway, and Wal-Mart. Tesco thought that 7-Eleven with more than 5000 stores nationwide and Trader Joe’s (owned by the German company Aldi) with some 300 branches would be their major competitors. Tesco believed that its strategic format would enable it to undercut its main competitors prices, with the exception of Wal-Mart, by between 10% to 25%

Tesco decided not to open large supermarket style outlets but opted instead to introduce a chain of low cost convenience stores similar to those operated in the UK under the ‘Tesco Express’ brand. The aim was to provide a classless retailer capable of operating in both upmarket and deprived areas with Tesco planning to open stores in so-called ‘food deserts’ (urban areas which had been abandoned by the major US supermarkets). However, there is a key difference between convenience stores in the USA and the UK. In the US convenience stores are associated with gas (petrol) stations whereas in the UK they are essentially self standing.

Tesco planned to introduce the British model into the USA believing that this would provide an element of competitive advantage in a highly competitive market where small food retail outlets are relatively unknown. It was agreed that the first stores would be located on the West Coast of the USA in California, Arizona and Nevada. Unlike their other international operations it was decided not to use the Tesco brand name. The stores were to be named ‘Fresh & Easy’ and referred to as Neighbourhood Markets. If the initial stores proved successful then a move into other areas of the west coast of the USA would take place.

The first ‘Fresh & Easy’ store was opened on 8 November 2007 in the town of Hemet east of Los Angeles with a further four opening in Las Vegas on 14 November. The company planned to open a further 100 outlets in the following 12 months. By mid – July 2008, 71 ‘Fresh & Easy’ outlets were in business. The format of the new stores came as something of a surprise to American consumers. The muted green branded stores are bright and clean with a bias towards fresh and organic foods much of which is pre-packed, a relatively unusual feature in the USA. Around half of the products are ‘Fresh & Easy’ ‘own brands’ including high ‘value-added’ ready meals. This, again, is unusual in America where brands dominate the food retail scene. First perceptions by some customers at the Hemet store were that prices were relatively high and that people were ‘looking’ rather than ‘buying’. In addition there are no in-store checkout staff and customers are required to scan the bar codes on their purchases before paying. This means that many of the products on sale have to be packaged to carry a barcode which somewhat undermines the company’s environmental claims.

In February 2008 ‘Fresh & Easy’ announced that it was moving into northern California with plans to open 19 stores in and around Sacramento. However, at the same time Piper Jaffray, a major US broker, suggested that ‘Fresh & Easy’ was not performing as well as Tesco had expected. This was denied by chief executive Tim Mason who has been quoted as saying ‘We are very pleased with the performance of all of our stores. Every single week brings more good news as sales, customer numbers and repeat visits are all growing.’ In March 2008 reports were emerging that ‘Fresh & Easy’ was performing badly with one commentator saying that sales targets were being missed by up to 70% as a result of very weak ‘footfall’1. Tesco responded by saying that the claims were untrue and that they were bewildered by the report. However, at the end of March 2008 Tesco announced that it was ‘freezing’ the ‘Fresh& Easy’ store opening programme for three months to allow the business to ‘settle down’. The store opening programme was expected to resume at the beginning of July 2008 and this did, indeed, happen. However, the expansion plan has slowed and by 2009 the company will have opened around 60% of its original target.

However, Tesco continued to experience problems because of the financial and economic crisis which hit the USA in mid-2007 and which has seen consumer expenditure fall dramatically in some parts of the country. Three of the States (California, Arizona and Nevada) in which Tesco established ‘Fresh & Easy’ have been the most seriously affected by the economic crisis and this has created fresh problems for the company. In January 2009, to counter these problems, a range of 98cent products and $1 special offers were launched along with ‘$6 off’ coupons for customers who spent more than $30 in a single visit. The company has claimed that the 98c packs increased sales by 11%. This is a competitive strategy which may work in the current economic climate and some analysts have argued that ‘Fresh & Easy’ may benefit as shoppers trade down to lowerpriced stores. Some analysts continue to argue that Tesco’s attempt to enter the US market has been a failure and that the company should withdraw. Piper Jaffray has estimated that if Tesco were to withdraw from the US venture it will have cost the company £1bn.

Tesco’s expansion into the USA has not been without its critics. The company’s environmental claims have come under scrutiny, along with its property strategy, its non-unionisation policy in a relatively strongly unionised sector of business and its refusal to sign a community benefits agreement. Community benefits agreements are used by stores in the USA to gain customer loyalty. Tesco, in turn, has countered these criticisms. Tesco’s Annual Review Statement for 2008 contained the following comment on its American venture, ‘The early responses of customers to our offer has surpassed our expectations with our research regularly confirming that they like the quality and freshness of our ranges, as well as the prices and convenient location of the stores’.

Other major British companies, including Marks and Spencer, Boots the Chemist and Sainsbury’s, which have attempted to enter this highly competitive market have failed largely because they have not understood the psyche of the American consumer. It was this which motivated Tesco to undertake its huge market research programme prior to launching in California. However, Tim Mason recently admitted that the research on which the market entry was based might have been flawed.

Will Tesco succeed where others have failed?

1. Why do you think that Tesco decided to expand into the highly competitive US market when almost all of its previous international activity had been either in the transformation economies of Eastern and Central Europe or the emerging economies of the Far East?

2. Why do you think Tesco decided to use the brand name ‘Fresh & Easy’ for its US stores when the Tesco brand has been used for all its other international activities?

3. Why do you think that Tesco will not achieve its original target for store openings by 2010?

4. How do you think that Tesco should define ‘success’ in terms of its entry into the US market. Should Tesco put a time limit on its market entry activity? If so, what might that time limit be?

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9.38 tesco plc.

Though still still essentially UK-based, Tesco has diversified geographically and into widely-separated market sectors: retailing books, clothing, electronics, furniture, petrol and software, financial services, telecom and Internet services, DVD rental, and music downloads.{10}

Competition

Tesco is an aggressive company benefiting from Internet technologies, as indeed are its main UK rivals. {9} Sainsbury's and Morrisons cater for more affluent customers, and Asda focuses on the more cost-conscious. Market share as of 2008 was: Tesco 30.5%, Asda 16.9%, Sainsbury's 16.3, and Morrisons 12.3%.{10} A cost breakdown is given below. {9}

Tesco has built its fortune on two business elements: an unrelenting drive to provide value to customers, and continued investment in the latest technologies — today customer relationship management, Internet and mobile phone shopping, and supply chain management (probably a private industrial network, though details are not available).

Back in 1995, however, Tesco was losing market share, causing Terry Leahy, the new CMO, to reexamine its market position and propose a three-pronged solution: {11}

1. Stop copying Sainsbury's and develop its own strategy. 2. Listen to customers throughout the company, at every level. 3. Offer goods and services as the customer valued, not what Tesco could do (i.e. adopt an outside-in strategy).

Customer Relationship Management

Tesco went to extraordinary lengths to understand its customers and add value to their lives.

1. Marketing was aimed at sensible, middle-class families, from its slogan 'Every little helps' to its no-frills website. {11} {14} 2. A loyalty card ('Clubcard') was introduced in 1995, and data subsequently fed into Customer Management Systems. {10} 3. American preferences were studied by embedding staff with US families prior to launching its USA operation in 2007. {11}

Internet Technology

Tesco has been particularly forward-looking. It was one of the first to: {10}

Outlook: Pestel Analysis

A Pestel analysis identifies the forces with most impact on Tesco performance.{9}

Tesco benefited from access to the world's most profitable market of 1.3 billion people, notably by:

1. Britains' joining the European Union, and the inclusion of 10 more countries in 2004. 2. China's entry into the WTO.

The continuing recession has made supermarket customers:

1. More cautious and cost-conscious. 2. More inclined to eat in that go out to restaurants.

As the UK's population changes (especially ages), customers:

1. Tend to eat (and therefore buy) less food. 2. Have become more health conscious, met by Tesco's increased stocking of organic foods. 3. Have been retained by Tesco loyalty programs.

Technological

Tesco were early leaders in Internet shopping, supply chain management and customer relationship management. These continue to be vital today with:

1. Customer loyalty cards and Internet shopping records providing CRM information. 2. Growth of Internet use and broadband access fueling growth in Tesco online shopping. 3. Mobile phone shopping, introduced with Cortexica Vision Systems for Tesco Wines, etc. 4. Supply chain management: rumored to be the world's best, still being extended. {4}

Environmental

Tesco has responded to Government environmental initiatives by:

1. Encouraging reuse of plastic bags. 2. Rewarding bagless deliveries with Tesco's green Clubcard points. 3. Providing practical advice of environmental issues. 4. Adding carbon footprint data to its products.

1. European VAT increases will affect nonfood sectors like clothing. 2. Increase in the UK's minimum wage will increase Tesco operating costs.

Outlook: Swot Analysis

The SWOT {9} analysis regards the UK concentration of business as a weakness, though this is a market Tesco knows well, and which saw further expansion in 2011. {13}

Outlook: Value Chain Analysis

As defined by Lynch (2006), {19} the value chain is the value added at each link in a company's key activities. For Tesco, the values are: {9}

1. Use of leading market position and economies of scale to achieve low costs from its suppliers. 2. Constant upgrading of their ordering system, approved vendor lists, and in-store processes.

Operations Management: 30%

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Tesco PLC: Fresh & Easy in the United States

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Publication Date: August 11, 2010

Source: Harvard Business School

Tesco, the world's third largest retailer, is facing problems with its launch of a new retail chain in the U.S.A.

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Tesco pays out to rid itself of US chain Fresh & Easy

Tesco has finally negotiated an exit from its failed expansion into the US by lending US billionaire Ron Burkle £80m to take away its loss-making Fresh & Easy chain.

After more than nine months searching for a buyer, Burkle's Yucaipa investment vehicle has agreed to take on 150 Fresh & Easy stores as well as 4,000 staff and a vast distribution centre and production facility east of Los Angeles.

The deal will cost Tesco £150m in total, including the loan, payoffs for about 400 permanent staff and the closure of about 50 stores not included in the deal – taking the total cost of the humiliating episode to nearly £2bn. The future for a further 600 staff is unclear, with some expats likely to return to Tesco in the UK while others are part-time staff and will be let go.

Philip Clarke, the UK supermarket's chief executive, said: "The decision we are announcing today represents the best outcome for Tesco shareholders and Fresh & Easy's stakeholders. It offers us an orderly and efficient exit from the US market, while protecting the jobs of more than 4,000 colleagues."

Tesco said that the deal would mean there was no ongoing financial exposure in the US. However, under the agreement, which is expected to be finalised by the end of the year, Tesco will hold warrants that entitle it to a 32.5% stake in the holding company that will run Fresh & Easy, should certain performance criteria be met. They could be exchanged for a cash sum in the future.

Ron Burkle, managing partner of Yucaipa, who founded the Ralphs and Food4Less supermarket chains in the US, indicated that he planned to continue to run Fresh & Easy as a standalone chain.

He said: "Fresh & Easy is a tremendous foundation. Tesco should be applauded for giving their customers an affordable, healthy, convenient shopping experience. Its dedicated employees and great base of customers give us a solid starting point to complete Tesco's vision with some changes that we think will make it even more relevant to today's consumer."

He said Yucaipa planned to build the chain into a "next-generation convenience retail experience". However, there has been speculation that Burkle wants to use the Fresh & Easy stores to relaunch his Wild Oats brand, which he sold to rival Whole Foods Market in 2007.

The deal is good news for Tesco after weeks of speculation that it would be unable to find a buyer for its US business. The trip over the Atlantic, begun in 2007 with ambitious plans for thousands of stores, has proved very costly for Tesco with trading losses and investment reaching some £1.8bn.

The failure has not only meant problems for Tesco but tarnished the reputation of former chief executive Sir Terry Leahy, who was previously held up as a shining example of British retail success.

It also reflected badly on Tim Mason, the Tesco marketing supremo who was relocated to the US to run Fresh & Easy and build it into a chain the same size as Tesco UK. He was made redundant earlier this year with more than £2m.

It was not clear on Tuesday night if Tesco would have to make further write downs after completing the deal.

Selling off the US business is good news for Clarke, who has been attempting to get rid of poorly performing overseas assets in order to concentrate on Tesco's problems at home.

In April, the supermarket reported its first fall in annual profits for 20 years as its chains both abroad and at home suffered during a global downturn.

The ongoing losses in the US were blamed for a squeeze on expenditure in the UK which meant that stores began to look tired and customer service suffered. Tesco has also suffered from a series of PR disasters including revelations that some of its burgers contained horse meat.

Tesco recently revealed it was in negotiations to put its Chinese business into a new joint venture with the state-owned Chain Resources Enterprise. The deal, which would cost Tesco an estimated £1.5bn, would merge its 131 stores into CRE's Vanguard chain, which has nearly 3,000 outlets.

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Tesco PLC: Fresh & Easy in the United States Harvard Case Solution & Analysis

Home >> Finance Case Studies Analysis >> Tesco PLC: Fresh & Easy in the United States

Tesco, the third-largest retail network in the world, is faced with the problems of with his launch of the new retail a chain in the To increase the of their efficiency, the color of cases should be printed in color. «Hide on John A. Quelch Source: Harvard Business School 21 pages. Date of publication on the site: 11 Aug, 2010. Prod. #: Five hundred eleven thousand and nine-PDF-ENG

[slideshare id=9638628&doc=7532969-tesco-case-study-111010225655-phpapp01] Company overview Tesco is actually a food retail leader in Uk and Ireland. Company’s annual on line sales exceeded $5 billion and Tesco. com is regarded as the world’s largest on line grocer, with a person base of little somewhat less than 1 million and much more than 250, 000 orders completed weekly. Company has not quite 1, 900 vans that operate and about 300 stores and 9, 000 pickers. Tesco. com 2006 sales was raised strongly by 29. 2%.

That he was appointed to the Board on 16 February 1995. He could be a Non-executive Director of Whitbread PLC. That he was in charge of technological area.

Wal-Mart may be the biggest food chain on the planet and contains annual sales eight times larger than Tesco’s.Even though company has been struggling lately it really is beginning to reunite on the right track. Despite predictions that Sainsbury's would regain 2nd position and a narrowing of ASDA's lead lately, the most recent figures released by Taylor Nelson Sofres show Asda's share as 16. 6% in comparison to Sainsbury's at 16. 22%.

Tesco announces a fresh strategic relationship with American supermarket Safeway Inc, to just take the Tesco. com home shopping model to the united states. 2002 – Tesco launches its exclusive clothing brand ‘Cherokee’ in to a lot of its UK stores. 2004 -

6. Challenges Even though Tesco includes a 27% of market share, competitors are always one step behind. With having many of these huge grocer giants which have on line delivery services in addition to offline shops, market was packed and there is a chance and need of expansion in the areas. Tesco thought that when there's any market share left, there's a prospect of growth and expansion. Other challenge in on line selling is how exactly to succeed with no huge expenses. Over 8, 000 services and products will undoubtedly be available from beds and sofas to kitchenware, electronics, cameras, bikes etc. Clients can pick the product they need on a fresh web site or from the new catalogue and order in another of three easy ways: on line, by phone or in selected stores at the brand new Tesco Direct desks. Clients have option for the merchandise to be delivered or found in a selected local stores.

8. Technological drivers of change UK internet penetration by 2007 was nearly 64% and Ireland’s internet penetration is nearly 51%. These results create a clear statement for new and emerging on line shopping market. Tesco. com captured the possible on line grocer market share and reaching for more had not been the very best approach, once you know about huge competitors always staying a step behind. “ Convenience is increasingly vital that you our clients and we think that offering new methods to order and a wider selection of products will undoubtedly be really favored by our clients. ” - Andrew Higginson, Finance and Strategy Director. This new strategy had not been frightening and Tesco took the chance to market non-food stuff like furniture.

9. Creating Value: Economics Of Internet-based Commerce Probably the most value that's being developed by Tesco non-food on line selling may be the good thing about convenience. On line shopping can save yourself hard work and also money for customer. By offering services and products on the net it could slice the transaction costs, labor costs and increase market efficiency. Tesco is well known for low prices therefore the Internet could make those prices even cheaper and create more value for the buyer.

In UK’s grocery store a unitary company such as for example Tesco dominates in every areas – offline and on line. Tesco can be attempting to capture the worthiness insurance firms loyalty programs, membership cards and special deals on its web site.

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TESCO PLC Case Analysis 2

INTRODUCTION

Tesco PLC holds the best position among food retailers in the uk, with market share that exceeds 15 %. In England, Scotland, and Wales, the business runs 588 supermarkets, 257 which are superstores--stores that sell foods and a selection of other products and services, including gasoline, clothing, housewares, and alcohol consumption. Tesco also operates 32 stores in Northern Ireland and 77 in the Republic of Ireland under various brands, 43 in Hungary beneath the Worldwide and Tesco names, 31 in Poland beneath the Savia name, and 13 in the Czech Republic and Slovakia beneath the Tesco brand. In Northern Ireland, the business also runs 52 Wine Barrel off-license outlets. Tesco may be the largest independent gasoline retailer in Britain; its 288 gasoline stations sell 12. 5 % of the gasoline sold in britain. Recent company innovations are the Club card loyalty card in addition to offerings from Tesco Personal Finance, such as a grocery budgeting account called Club card Plus, a Tesco Visa Card, and a Tesco checking account. Jack Cohen founded Tesco in 1919 when that he started to sell surplus groceries from the stall at Well Street Market, Hackney, in the East End of London (ironically, the marketplace is currently much smaller than in those times; a big Tesco Metro store now sits on the webpage. ) The Tesco brand first appeared in 1924. The name came into being after Jack Cohen bought a shipment of tea from T. E. Stock well. Through the 1950s and the 1960s Tesco grew organically, and in addition through acquisitions, until it owned a lot more than 800 stores. The business purchased 70 Williamsons stores (1957), 200 Harrow Stores outlets (1959), 212 Irwin’s stores (1960, beating Express Dairies Premier Supermarkets to the deal), 97 Charles Phillips stores (1964) and the Victor Value chain (1968) (sold to Bejam in 1986).

COMPANY VALUES

Mission Statement would be to “create value for clients to earn their entire life loyalty. ” Our success depends upon people: individuals who shop around and individuals who use us. If our clients like what you can expect, they're more prone to keep coming back and shop around again. If the Tesco team find what we do rewarding, they're more prone to go that extra mile to greatly help our clients.

CORPORATE, FUNCTIONAL AND WORLDWIDE STRATERGY

Tesco includes a long term business strategy to be able to increase profits, the business has three different dimensions within their strategies, and they are: corporate, functional and worldwide or international. Tesco has 16 stores over the Malaysia 80% of these group profits result from the business enterprise. In accordance with Tesco. com, the main element with their successful plan is they deliver first-class value, choice and convenience for the duration of their customer offer. To generate value for clients to earn their entire life loyalty may be the TESCO core purpose. As a result of this belief, sales have become by 7. 9%. This season they celebrated the fifth anniversary of the best possible brand by expanding the number to at least one, 100 products and services. They will have continued to cultivate the convenience business with a like-for-like growth in ready meals of 23% and lead just how in product development making use of their Healthier Living and Meals for just one range Yet another strategic action that the Tesco have undertaken is what they called Regeneration. This technique is comparable to instituting a store by using the neighborhood community and the neighborhood government relating to the generation of jobs and commerce in specific areas. On the list of areas where Tesco have “regenerated” includes Puchung, Kuala Lumpur, and Simpang Pulai. In this plan, the business places a store in specific areas that they consider as deprived and in dire need of employment. In this manner, they will have instituted a store in a spot where there is little competition and in once increases their reputation on the region by giving jobs for folks locally. More over, this plan also moves their commodities nearer to the general public. Providing the requirements and quality service with their customers may be the functional dimension of Tesco’s business strategy. TESCO introduced over 5, 000 new food lines this season. Yet another innovation is attracting screw-cap wines and their very own label range ‘Unwind’, that is on-track to be always a $5m brand this season. Grab and Go counters have already been introduced in to over 500 stores, offering clients an enormous selection of cheese and hot chicken and never have to queue, rendering it simpler and cheaper to use. Yet another new introduction with their system is Primary Distribution, where they saw great progress this season. Through this process, they could manage product from the factory gates with their distribution centres, improving efficiency and delivering cost benefits they reinvest in customer initiatives. Yet another strategy that TESCO emphasized is within their non-food section. They will have expanded their non-food offer to get their customer’s expectations. As a result of this, they will have a 5% share of Malaysian non-food market. They will have a 16% share of chart music sales, up from 4% five years right back.

In accordance with they're implementing six elements with their global strategy to be able to compete internationally:

Flexibility- Making each market unique and also have different approach. Acting local- Local clients, local cultures, local supply chains and local regulations need a tailored offer delivered by local staff - somewhat less than 100 of Tesco's International team are ex-pats. Keep focus- To function as leading local brand is really a longterm effort and takes decades, not really a couple of years. Be multi-format- No format can reach the entire market. A complete spectrum from convenience to hypermarkets is vital and you also have to have a discounter approach for the duration of. Develop capability- Developing skill in people, processes and systems and having the ability to share this skill between markets will enhance the likelihood of success in challenging markets. Build brands- Brands enable the building of essential lasting relationships with customers

STRATEGIC APPROACH

Tesco may be the biggest ultimate food retailing company on the planet with not quite 2300 stores across global. Tesco operates the buyer banking facility with their customers also it operates on the non-food sector. Tesco changed its technique to change positions in 2008 for the organization responsibility. Tesco includes a build the three stair technique for addressing the climate change in the business. The initial objective would be to decrease the GHG emissions from the operations of the own company. It has defined some legal plans because of its carbon footprint. It really is now reducing the reduction the plans also to committed transparent to attain the specific goals. Tesco includes a 2nd objective that choose technology based era and set the task finished with others and obtaining the profits. This is a better solution for regulations carbon solutions. By this we are able to obtain the appropriate results with in a mean time. The 3rd objective would be to avail clients with the reduced carbon choices and the business y is ready because of this kind of the emissions. In this manner the retailing businesses will get the god result oriented business in international market.

CORPORATE CULTURE

Corporate culture is among the main determinants of success or failure in a small business development practice, since it largely determines how flexible, accepting of change and innovative an organization is commonly. Fairfield-Sonn (2001: 36) provided a four-layer style of corporate culture that included cultural artifacts, cultural history, core ideology and core values that really helps to quantify and describe the organization culture of a business. Hence, Tesco’s corporate culture could be determined from its corporate responsibility statements, which describe its core values and core ideologies in addition to some areas of cultural artifacts.

Tesco’s stated core priorities include:

Ensuring community, corporate responsibility and sustainability are in the center of our business. Being truly a good neighbour and being responsible, fair and honest, considering our social, economic and environmental impact once we make our decisions These values experienced a substantial effect on how Tesco does business, in addition to its financial performance. Tesco’s corporate culture priorities allowed the business to take into account opening stores in areas where indigenous supermarkets were reluctant to go, also to provide services to the region that the neighborhood providers either couldn’t or didn’t consider. Hence, they opened stores in underserved regions, not merely permitting them to express their core ideals, but additionally providing a chance to enter an nearly untapped market. Yet another area where the company’s business development techniques have both impacted and been influenced by the organization culture may be the introduction of lines of natural, organic and free-range foods to its stores from the 1990s, and continuing in to its development of the Nature’s Choice sustainable production lines within the last couple of years. These lines, such as organic fruits, veggies, meats along with other proteins, milk products, free-range eggs along with other responsibly produced goods, has increased its importance lately to the company’s important thing because of growing knowing of environmental facets by clients. But this provision can be mandated by the company’s corporate culture’s core ideals, especially those of environmental responsibility and awareness. These ideals entered the organization culture in the mid-1990s, at a comparable time because the first environmentally aware life style product range (that of free-range eggs) was introduced. If the shift in corporate culture inspired the change in development strategy or if the shift in development strategy inspired the shift in corporate culture certainly is really a chicken and egg question!

SWOT ANALYSIS OF TESCO

Strengths : -

TESCO have secured commercial standing within the worldwide market winning Retailer of the entire year 2008 at the “World Retail Awards”. This is useful for marketing campaigns to operate a vehicle advantage towards the demographic base for future growth and sustainability. Within an environment where worldwide retail sales are showing decline or level performance on a like for like basis TESCO Group have published sales gain of 13% for UK markets and 26% growth in international markets. As a small business searching for continued expansion TESCO have reserve funds of credit in conjunction with income produced from property portfolio development funds.

Weaknesses: -

TESCO Finance profit levels were impacted through bad debt, charge card arrears and household insurance claims. TESCOs position as a cost leader in UK markets can result in reduced income to be able to wthhold the key price points on will need to have commercial items. Grocer outlets are not setup to use as specialist retailers in specific regions of product which may be capitalized on by other smaller bespoke retailers. Whilst current fiscal conditions suggest TESCOs key value message will succeed there's a weakness in non-essential, mid to high ticket price goods that are affected from the rising cost of living and lower disposable incomes.

Opportunities: -

Statistics suggest TESCO may be the third largest worldwide grocer which indicates an even of shopping for capacity to ensure main-stream economies of scale. The acquisition of Homever supplies the possibility to develop the brand through Asia, specifically South Korea and additional grow International markets for the group. The development of Tesco Direct through on line and catalogue shopping will grow the usage of technology, providing the launch pad for larger nonfood based services and products with moderate to high margin returns and less concentrate on sales and margin per foot go back to space. TESCO mobile have become ¼ million clients in 2008 and moved in to profitable status suggesting further growth and development in this technological area could be developed.

UK and American markets have already been suffering from economic concerns through the “credit crunch”. Lower available income will impact and strategic focus might need to change to lessen priced basic services and products with less concentrate on more costly brands suggesting a switch in cost architecture. Rising raw material costs from both food and non-food will impact income over all. Sourcing changes to Asia locations with regards exporting restrictions on some non-food product areas will certainly reduce margin rates on services and products with already low margins. Changes to consumer buying behaviors require further analysis - as technology develops consumer buying patterns change that may bring about product areas requiring evaluation. For TESCO there's a persistent risk of takeover from the marketplace leader Wal-Mart who has both means and motive to pursue such action

PORTER’S FIVE FORCE MODEL ANALYSIS

INDUSTRY COMPETITORS: -

First, there's a have to identify Tesco’s industry competitors.The aforementioned conditions all connect with the arena of retailing industry where Tesco plays, hence the larger dependence on the firm to spotlight strategic management to be able to gain competitive advantage over their competitors.

POTENTIAL ENTRANTS: -

The economies of scale, for example, means that the more scale economies, the less risk of entry for the reason that if entrant can't quickly get large market share , it has a significant cost disadvantage. Incumbent can additionally threaten to improve output and low cost. Potential entrants will see that barriers are imposed in it, either explicitly or implicitly, by the conglomerate incumbents. Usage of distribution channels may also prove harder for individuals who desire to enter the. Because the incumbents have previously cornered the more prevalent distribution channels, it'll be difficult to both contend with the already established chains in the distribution channels to check out new channels with which to dispense of the retail services and products.

The leverage and bargaining power of clients are usually relatively greater when clients are few in numbers so when they purchase in large quantities so when customers’ purchasers represent a big percentage of the trying to sell industry’s total sales. In the retailing industry, the amount of customers is quite large, and frequently, they don't purchase in bulk. Out of this alone it could already be said that the bargaining power of consumers in weak. Once the supplying industry is made up of many relatively small sellers so when that being purchased is sufficiently standardized among sellers that clients will maybe not only find alternative sellers however they may also switch suppliers at virtually zero cost, the buyers’ buying power is strong. When it's economically simple for clients to get the input from a few suppliers instead of one, their power also increases, which will not happen in this specific industry, since it is less expensive to get in one retailer than from the host of retailers.

SUPPLIERS: -

Several supplier firms has more bargaining power once the input is, in a single way or yet another, vital that you the customer so when the supplier industry is dominated by way of a few large producers who enjoy reasonably secure market positions and that are maybe not beleaguered by intensely competitive conditions. In Tesco’s sort of industry, they will have the extreme benefit of having the ability to dictate the purchase price they are ready to pay the supplier, because the suppliers, if the retailing giants won't pay the formers’ price tag, will undoubtedly be left without someone to sell to save lots of the tiny supermarket chains, which may not be considered a wise move ahead the suppliers’ part. that is clearly false, thus it could be deduced that suppliers usually do not exert just as much power because they could have liked to. Switching in one supplier to some other will never be expensive for a retailing giant such as for example Tesco. Actually , as suppliers, they'll be clamoring for the firm’s focus on choose them as supplier when the business decides to change suppliers.

SUBSTITUTES: -

In the retailing industry, as stated above, there are a lot of competitors. This level of rivalry may be the main force that drives the costs of most companies on the market down. Like Sainsbury can match the reduced prices that Tesco offers on the market and also equal the grade of the merchandise they offer, making the substitute force saturated in the retailing industry where Tesco operates. Further, your competition from substitutes is suffering from the ease with which buyers can transform to an alternative, an integral consideration being that always the buyers switching costs-the one-time costs facing the customer in switching from usage of something to an alternative for this, is low. Since switching in one chain to some other will generate a comparatively low priced or fuss for the buyer, the substitute force on the market is relatively high. This opens an avenue for Tesco to boost quality and differentiate from their competitors while driving down costs at exactly the same time.

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