The British Are Coming To Change Our Grocery Stores

April 19, 2007 — -- A European chain of grocery stores is trying to wrangle the American market with a concept it believes could change the way people here shop for their suppers.

Tesco, the United Kingdom's largest retailer, plans to open small stores called Fresh & Easy Neighborhood Markets that will sell fresh produce and meats. In particular, these convenient stores -- just don't call them "convenience stores" -- will offer ready-to-eat meals targeted at customers who don't want to wander the aisles of traditional supermarkets or spend too much time cooking.

"We looked at the U.S. for about 20 years and finally concluded that we've come up with something that can actually work," said Simon Uwins, Tesco's chief marketing officer.

With the company's experience in the United Kingdom, combined with intensive market research that includes shopping with and cooking with American consumers, analysts say the newcomer could succeed where others have failed.

UBS analyst Neil Currie said Tesco's approach could even reinvent the supermarket. At roughly 10,000 square feet, Tesco stores would be about the size of a 7-Eleven and far smaller than a traditional 45,000-square-foot grocery retailer.

"This has been tagged as a convenience-store concept," he said. "I think it's a convenient store. I don't think it's a traditional 7-Eleven with cigarettes and magazines. It's a fresh-food supermarket."

What exactly the stores will be has been kept secret. Tesco's Uwins said he wanted customers to be the first to find out.

The company announced in February that stores would open in California, Arizona and Nevada later this year. The company said it had secured 20 sites around Phoenix, one of the fastest-growing cities in the United States.

Uwins wouldn't disclose exactly how many stores it was considering in other markets until permits and real estate locations had been secured. So far, Uwins said the company had acquired 100 sites.

Worldwide, Tesco employs more than 370,000 employees and operates 2,800 stores in 13 countries, giving the company Wal-Mart-type clout. Its investment in the United States will reach $400 million per year for the next five years, the company said.

Room to Grow

Tesco's entry into the United States could represent a major structural change to the grocery industry.

A report by Credit Suisse estimates Tesco could generate $1 billion in sales within three years and capture 2 percent to 6 percent of the local market share in five years. Its presence "could redefine the mainstream grocery business," the report said.

The Fresh & Easy model exposes a gap in the industry, which has been hampered in the last decade by consumers who now shop at convenience stores, wholesale retailers and specialty stores, in addition to local supermarkets, explained Currie. Shoppers haven't abandoned the supermarket, he said, but the practice of stocking up with groceries for the long haul is ripe for change.

"The supermarket has been fragmented," Currie said. "There is an opportunity here to redefine the business model."

Currie said Tesco's model would incorporate cheaper labor, cheaper real estate and subsequently lower costs at the register. Competitors' prices are likely to fall in response.

The company has said it is not going after any particular competitor. Fresh & Easy isn't a niche or specialty store, Uwins said.

"It is literally down to serving the customer and doing better than anyone else," he said.

Competitors Abuzz

Analyst George Whalin, a retail specialist in California, said the industry in Southern California was buzzing over Tesco's arrival. He said that existing grocers like Safeway and Albertsons would have to reconsider their formats and that they would have to do more than add self-checkout and express lanes to compete with the Tesco model.

"Most have done little to make it easy for you to get in and out quickly," Whalin said. "They need to reallocate the way they display and build convenience sections in the front part of the store."

Barry Broome, president of the Greater Phoenix Economic Council, said Tesco would open in Arizona first. Broome advised Tesco with location strategies in Arizona, and he said shoppers would find at least some markets in stand-alone buildings on busy street corners.

Alison Bendler, a spokeswoman for Bashas' Supermarkets, a chain with 153 stores in Arizona, said the company was well aware of the new competition.

"The buzz around here is the number of locations they plan to open," Bendler said. "It seems they are going to inundate our market."

But so far, she said no changes were planned until stores opened and the effect on business was clear.

"Competition is healthy," Bendler said. "We love it."

Others Have Tried, Failed

Tesco is not the first foreign company to try and break into the U.S. grocery market. In 2004, British food retailer J. Sainsbury tried, but then sold its New-England-based Shaw's Supermarkets for $2.48 billion in the face of growing competition.

And other novel attempts at food shopping have also failed.

David Livingston, a supermarket analyst based in Wisconsin, pointed to Dallas-based eatZi's, which sells ready-to-eat meals such as pastas and sushi. EatZi's closed stores in Atlanta, Houston and Maryland in November 2006.

"A couple of formats like this kind haven't made it," Livingston said. "Tesco will have to price competitively and have higher quality. They will have to serve the American consumer who is always in a hurry. They must make sure they are fast, and I think they will have to really make a hit with the consumer right from the start, because we are a very unforgiving marketplace."

Tesco believes that studying American shopping and eating habits -- peeking into cabinets, watching consumers shop -- combined with its experience opening different types of markets for differing countries will ensure that its stores will be a success.

"We are not a cookie-cutter store," Uwins said. "We don't take a format and export to every country."

But that success is not coming as easily as the company may have hoped. A lawsuit alleging environmental violations threatens to stop the construction of Tesco's 1.5 million-square-foot distribution center near Los Angeles.

The company called the lawsuit a routine part of doing business, and said the 2007 openings remained on schedule.

Charles Herman of the ABC News Business Unit contributed to this report.