25 Oct 2010  HBS Cases

Tesco’s Stumble into the US Market

UK retailer Tesco was very successful penetrating foreign markets—until it set its sights on the United States. Its series of mistakes and some bad luck are captured in a new case by Harvard Business School marketing professor John A. Quelch. Key concepts include:

  • 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.

About the author

Sean Silverthorne is editor-in-chief of HBS Working Knowledge.