Wal-Mart's feisty new British rival.

Commentary about business and finance.
March 1 2006 5:14 PM

First, the Beatles. Now, Tesco.

The British invader that thinks it can beat Wal-Mart.

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Illustration by Mark Alan Stamaty.
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Groceries have been a very difficult business in recent years. Supermarket chains have been laid low by a lethal combination of low margins, rising fuel costs, and relentless competition. Winn-Dixie went bankrupt in February 2005. At Albertson's, former Jack Welch protégé Larry Johnston threw in the towel and put the company up for sale. This five-year stock chart compares grocery giants Kroger and Safeway to the S&P 500. It's ugly. Part of the problem for established grocers is, of course, Wal-Mart, which has become a huge seller of food. According to the consulting firm Retail Forward, Wal-Mart had a 19 percent share of the U.S. grocery market in 2004 and could see it rise to 35 percent by 2010.

Which brings us to the unlikely case of Tesco. Why does a British firm whose name sounds more like an oil refiner than a purveyor of tasty snacks and beverages think it can succeed where veteran U.S. firms have failed?

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On Feb. 9, Tesco, the world's fifth-largest retailer, announced it would enter the United States by investing hundreds of millions of dollars to expand significantly in California—a state Wal-Mart has long planned to dominate. In doing so, Tesco could be setting up the biggest trans-Atlantic heavyweight fight since Lennox Lewis and Evander Holyfield slugged it out in 1999. Like Wal-Mart, Tesco is the largest private-sector employer in its home country, with 250,000 employees. Tesco, a multinational that went public long before Wal-Mart got started, is highly profitable. But it hasn't had any business in the most lucrative market in the world—until now.

Like other British exports—the Mini Cooper, Beatrix Potter characters, and Kate Winslet—Tesco's stores will be cute and small. The British grocery invasion will be launched through high-end convenience stores. Tesco's U.S. outlets will be based on the chain's "Express" format. The 546 Express stores in the United Kingdom collectively occupy 1.1 million square feet—or about as much space as just six Wal-Mart supercenters. Carpet-bombing California with 7-Eleven-sized stores may seem to be folly, like Budweiser opening up a bunch of pubs in Great Britain. But Tesco has plenty of reason to think it can go toe-to-toe against Wal-Mart, which is similarly looking to California and smaller stores—in both the United States and the United Kingdom—for growth.

First, history. Tesco dominates the British grocery market, with a 30 percent market share. It has crushed Wal-Mart's British unit, Asda, which holds only a 17 percent market share.

Second, experience. Because of more restrictive British zoning and the lack of large parcels of open space near population centers, giant British retailers like Tesco and Sainsbury's have had to seek expansion sooner by opening smaller stores. As this primer notes, Tesco already has four different kinds of stores in the United Kingdom, ranging from big ("Extra," 60,000-square feet and up) to tiny ("Express"). As a result, Tesco has developed a sense of scale that is perhaps suitable to American urban areas. Wal-Mart has had difficulty penetrating the highly populated, higher-income coastal zones, because the huge, cheap swaths of land on which it likes to park its Big Boxes are hard to come by. And many of Wal-Mart's target communities aren't exactly welcoming (see Inglewood, Calif., 2004). In 2002, as the Wall Street Journal reports today, Wal-Mart proclaimed it would open 40 stores in the Golden State in five years. So far, it has managed to open only 13. Convenience stores of the type Tesco wishes to open tend not to encounter such opposition. And thus far, Wal-Mart's efforts to think small have been positively Brobdingnagian. Wal-Mart is seeking to ease its entry into more populated areas by opening scaled-down "Neighborhood Markets." At 40,000 square feet, they're almost as large as Tesco's largest outlets.

Eduardo Castro-Wright, chief operating officer of Wal-Mart Stores in the United States, told the Financial Times last November that it is "looking at the Neighborhood Market format as a vehicle … to serve customers who need convenience for a key reason for shopping at Wal-Mart." This may prove to be Tesco's real edge. Wal-Mart has always competed on price, price, and price—not convenience. Wal-Mart pretty well controls the market of people who have to shop there to save money.

But as it enters markets like California, Wal-Mart needs to appeal to shoppers who have more choices, and for whom convenience, status, and quality outweigh price. Again, a possible advantage to Tesco. Its convenience stores will likely resemble their American cousins in name only. Most American convenience stores are stocked with cheese-filled Oscar Mayer dogs that roll endlessly on a steel grill, Slurpees, and tons of non-biodegradable packaged foods (Hostess Snowballs, anyone?). But in the United Kingdom, Tesco's image is generally pretty upscale. Its Express stores will be the kind of places where foodies wouldn't be chagrined to run into their neighbors. Tesco says its convenience stores will stock up to 7,000 items, "including fresh produce, wines and spirits, and an in-store bakery."

Great Britain's last effort to conquer the colonies with muskets and cannon ended in failure. This time, the Redcoats are arriving armed with merlot and cucumbers, which may prove to be superior weapons.

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