In the Wrong Place at the Wrong Time: How the Location of Tesco’s US Experiment Contributed to its Failure
On April 13, 2013, Tesco Plc announced its plans to exit the US market after a five year experiment with its Fresh & Easy banner. This statement formally concludes the company’s efforts to establish a foothold within the world’s largest retailing market. When it opened its first store in November 2007, Tesco had strong ambitions for its Fresh & Easy brand, envisioning a footprint that would top 400 stores by early 2013. However, the company now leaves the US market with only 200 stores and a value share of only 0.3% among US supermarkets. Why has Tesco Plc – a global powerhouse in the supermarket channel with nearly $18 billion in sales in 2012 – been unable to build its Fresh & Easy banner in the US? What factors have contributed to the failure of this venture?
Some of the issues that plagued Fresh & Easy in the US stemmed from cultural discrepancies between shoppers in the US and the UK. To address food safety issues, for instance, Fresh & Easy offered produce that was wrapped together in cellophane bundles. Consumers in the US, however, are picky shoppers that like to examine each individual produce item before placing it into their carts. In addition, Tesco employed a uniform product mix at each of its Fresh & Easy locations. This varies significantly from the practices used by many successful US retailers in which product assortments are tailored to fit the specific demands of demographic groups that shop each particular outlet. Even concepts like self-checkouts, which are common in the UK, did not resonate well with consumers in the US.
While all of these factors likely played a role in the demise of Fresh & Easy, it is hard to understate the importance of the time and place of Tesco’s venture into the US. The first Fresh & Easy store opened in November 2007, only months before the US plunged into its most severe economic recession since the Great Depression. As consumers looked to stretch their budgets as far as possible, they turned to well-known retailers that held longstanding reputations for low-prices, including hypermarkets (Walmart), warehouse clubs (Costco), and variety stores. Others continued to shop at their traditional supermarkets and maximized value by cutting back and trading down to private label offerings. This value-focused behaviour has persisted even as the economy has begun to recover in recent years. As a result, sales in the US supermarket channel have stagnated, growing at a CAGR of less than 1% from 2008 to 2012.
The effects of the economy on Tesco’s US entry are even more profound considering Fresh & Easy’s geographic footprint. All of the company’s 208 stores were located in West, with locations in California, Arizona, and Nevada. Ironically, these states were devastated most severely by the onset of the recession. The national unemployment rate, for instance, which topped out at 9.6% in 2010, reached 12.4%, 10.4%, and 13.2% in California, Arizona, and Nevada, respectively, in the same year. For this reason, consumers in these states cut back, traded down, and shifted to retail channels that offered the lowest-prices, including hypermarkets, warehouse clubs, and variety stores. As a result, growth in the supermarket channel since 2008 in states like California and Arizona has trailed most other states (and the national average) by a significant margin (see graph).
Source: Euromonitor International
At the time, Tesco’s decision to launch Fresh & Easy in the West in 2007 made sense. In fact, per capita spending at supermarkets in the West was higher than in any other region and was 15% higher than the national average in 2007. The problem for the Fresh & Easy, however, was that it struggled to find its price positioning relative to competitors. The company was not upscale enough to compete with premium retailers like Whole Foods Market Inc, which targets higher-income consumers. At the same time, Fresh & Easy lacked the low prices and large formats that draw budget-conscious shoppers to hypermarkets and warehouse clubs.
This identity crisis caught Fresh & Easy in the middle at a time when the recession squeezed mid-priced supermarkets. High-income consumers who were less affected by the recession continued to drive growth in specialty, gourmet, and high-end supermarkets. At the same time, middle and lower-income consumers who were acutely exposed to the recession turned to retailers that could offer the lowest prices. This recession-driven squeezing effect – felt most acutely in the Western states where Fresh & Easy had its store base – left the retailer little chance of driving profits in its first five years.