=DJ Tesco's Small US Stores Could Be Big Trouble For Grocers
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NEW YORK (Dow Jones)--British-based Tesco PLC's (TSCO.LN) plan to open small convenience stores on the West Coast might become a big worry for U.S. grocers nationwide.
The U.K.'s largest retailer said Thursday it plans to open a chain beginning in 2007 modeled on its "Tesco Express" format, which currently includes convenience stores, gas stations and small supermarkets at more than 800 locations in five countries. With an annual budget of about $430 million, the West Coast stores are expected to break even two years after opening their doors.
The pint-size U.S. stores could be formidable competitors for the 7-Eleven chain owned by Japan-based Seven & I Holdings Corp.'s (3382.T0). But some industry experts also say Tesco's format has the potential to steal customers from conventional U.S. supermarkets with a combination of high-quality private-label groceries, fresh meat and produce, prepared meals, gourmet sandwiches and pastries, European snacks and candies, and fine wines and liquor.
Such products are precisely what U.S. grocers including Albertson's Inc. (ABS), Safeway Inc. (SWY) and Kroger Co. (KR) have worked to sell more of during the past few years as they've struggled to compete with Wal-Mart Stores Inc. (WMT), whose fast-growing chain of supercenters sells mainstream groceries at rock-bottom prices. It's possible that Tesco has decided the 50,000-square-foot stores occupied by traditional U.S. supermarkets are bigger than necessary for the task, says Neil Currie, an analyst at UBS.
"We think these are going to be 'convenient' stores rather than convenience stores in the traditional sense," Currie says. "It strikes us as a vote of no-confidence in the traditional U.S. supermarket format."
'Something Original'
Tesco, which says it has spent "a lot of money" and a "huge research effort" on its project, will use a brand name other than Tesco for the new stores, Chief Executive Terry Leahy said. Tim Mason, Tesco's No. 2 executive, is moving to the U.S. to lead the startup effort.
"We have been watching the U.S. market for many years but never thought we had the right approach and format for the American consumer," Leahy said. "We could have gone in before, but our new format is tailored to the U.S. and brings something original."
Citing competitive reasons, Leahy was stingy with further details, including how many stores Tesco plans to open and where, and whether they will sell gasoline. But if the West Coast stores are anything like the Tesco Express stores in Europe and Asia, they'll cater to a young, well-educated clientele that demands high-quality foods that are free of chemicals and additives, says Burt Flickinger III, managing partner at Strategic Resource Group.
While the stores likely will carry cigarettes, soda and potato chips, they'll also be stocked with fancier private-brand spaghetti sauces, soups, cookies, crackers, coffees and cheeses, Flickinger said. Rather than the hot dogs and nachos displayed under hot lamps at many U.S. quick-stop stores, Tesco Express stores typically sell prepared breakfasts, lunches and dinners whose quality is high enough to lure customers away from some U.S. restaurants, too, he said.
To keep stores stocked with fresh goods, Tesco typically partners with local farmers and operates regional kitchens to supply prepared foods to stores. While 7-Eleven has used a similar system to good effect in the U.S. over the past few years, Tesco has been doing it worldwide for more than a decade.
Tesco's announcement surprised U.S. and European investors alike, who had speculated Tesco's massive cash horde might be used to buy a U.S. supermarket chain. But while Tesco was reported to have performed due diligence last year on the Albertson's chain, which was sold last month to private-equity firms, it didn't participate in the bidding.
Just Getting Started
Tesco says its U.S. format has been years in the making and was developed with the entire nation in mind. But not all observers are convinced it's the only format the company is considering. Flickinger still sees a possibility for Tesco to buy some Albertson's stores at a later date. Edward Kelly of Credit Suisse notes that Tesco, which operates multiple formats worldwide, typically enters new markets with small investments in a single format before expanding into others.
"Tesco clearly does not want to challenge the major U.S. retail players without some scale and a solid understanding of the local markets," Kelly said in a Thursday research note to clients.
The West Coast is a highly developed market that's expensive to operate in. But it's also densely populated, well-heeled and more worldly when it comes to food, industry experts say. In addition to conventional supermarkets and niche chains including Wild Oats Markets Inc. (OATS) and Whole Foods Markets Inc. (WFMI), Tesco's stores could be a threat for privately owned Trader Joe's, whose low-priced, multiethnic, private-brand foods and wines have fueled the chain's rapid growth across the U.S. Tesco's smaller store format also is likely to be better received in California, where local groups have fiercely resisted openings of Wal-Mart supercenters, hampering their expansion.
Strategic Resource Group's Flickinger says Tesco also has scouted out the East Coast for development and estimates it could begin opening stores in the Northeast and Mid-Atlantic states within two years. In the future, he says a steady expansion into Middle America likely wouldn't be impeded by Wal-Mart, whose giant stores and parking lots serve a different customer.
"Tesco has developed a core competency in determining the needs and wants of the local consumer," analyst Patricia Baker said in a Friday research note. "This concept, whatever it looks like in the end, will most likely be innovative, on target and a worthy competitor. "
-By James Covert, Dow Jones Newswires; 201-938-5360 |
