Aspects of Innovation in Tesco plc s Market Entry into the USA - Professor Michelle Lowe
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Aspects of Innovation in Tesco plc‟s
Market Entry into the USA
Professor Michelle Lowe
Lead Innovation Fellow, Advanced Institute
of Management Research (AIM)
Professor of Retail Management, School of
Management, University of Surrey
1. Introduction
2. The US, the UK and Flows of Retail Innovation
3. The Fresh & Easy Story and Dimensions of Innovation
Nine innovatory dimensions of Tesco‟s market entry into
the USA
4. Discussion
Introduction
“When I was the chairman of Tesco we looked very carefully
at the North American market, and found that there was a
significant difference in cultural attitudes to shopping over
there. In the UK the development of own labels has been
very strong indeed, whereas in the States, customers are
very brand-oriented, and tend to regard „own labels‟ as
inferior products. It's a nonsense, of course, but as
Sainsbury's and M&S have learned, it's a difficult job to
change established mindsets, which is one reason why, after
examining the situation in detail, we turned our face
absolutely against going into the US”.
Extracted from Ian MacLaurin (1999)
Tiger by the Tail : A Life in Business
from Tesco to Test Cricket
Basingstoke: Macmillan p 107
09/02/2006 – Tesco to enter United States
• Tesco PLC today announces that it intends to enter the United States
through the development of a new convenience format, beginning on the
West Coast in 2007.
• The development of the business will be through organic growth, with initial
planned capital expenditure of up to £250 million per year, which will be
funded from existing resources, with break-even expected by the end of the
second full year of operation. Tim Mason, currently our Marketing and
Property Director, will move to the US to run the business, remaining on the
PLC Board.
• The new format is designed for the American market, following extensive
consumer research and modelled on Tesco‟s highly successful and
innovative Express concept, which we now operate in five countries, with
over 800 stores serving around eight million customers every week.
• International growth forms a key element of Tesco‟s four part strategy and
the business currently trades in 12 countries outside the UK, mainly in Asia
and Central Europe. Over half of Tesco‟s selling space is now outside the
UK. Today‟s announcement represents a strategic move into another
developed market, complementing our entry into the emerging Chinese
market in July 2004. It will allow us to build our position in the world‟s largest
markets, and brings the population of markets we operate in to 2.1 billion
people, contributing over 55% of global GDP.
09/02/2006 – Tesco to enter United States
(continued)
Tesco Chief Executive, Sir Terry Leahy, commented:
• "This is a tremendously exciting move for Tesco which will add a new leg to
our international expansion. The United States is the largest economy in the
world with strong forecast growth and a sophisticated retail market. It is a
market we have researched extensively for many years and over the last
year we have committed serious resources to developing a format that we
believe will be really popular with American consumers.
• "We‟ve put a strong team together, led by Tim Mason and drawing on the
wealth of skills and experience within the group. The first stores will open on
the West Coast in 2007."
TESCO International
The US, the UK and Flows of
Retail Innovation
“Like so many British entrepreneurs after him [Simon
Marks]…looked west for inspiration. And so, one chill
February morning in 1924, he set sail from Southampton
on the White Star liner Olympic, destined for
America…[this] visit to the United States revolutionised his
thinking…He met many retailers, although his notes reveal
the name of only one – Sewell Avery of Montgomery Ward.
Simon returned home bursting with new ideas and
motivation.”
Extracted from Judy Bevan (2001) The Rise and Fall of
Marks and Spencer London: Profile Books p.25“[On] 23 February 1950…Sainsbury‟s opened its first new shop since 1939…In an article in the JS Journal of March that year, Fred Salisbury, assistant general manager and a driving force behind the design and fitting-out of the new premises, talked up Selsdon as a „turning point‟ in the company‟s history. Although small, this shop did indeed contain a number of innovations…Not least, Sainsbury‟s abandoned the wooden till for the thoroughly modern cash register – an American import, this was a major innovation in retailing in 1950.” Extracted from Giles Emerson (2006) Sainsbury’s: The Record Years 1950-1992 London: Haggerston Press p.37
“The improvements since my last visit were beyond belief. There were the great names of American food retailing – Safeway, Atlantic and Pacific, Food Fare – all up to their neck in supermarket trading…There were gleaming palaces, well lit, roomy and clean. One of the most impressive developments concerned the packaging of goods. New materials, radical new designs, bright labels, clear price markings, and the women not only carried baskets, they pushed trolleys. It was utopia for a retailer…The noise from the cash registers was music to any trader‟s ears.” Jack Cohen quoted in David Powell (1991) Counter Revolution: The Tesco Story London: Grafton Books p.65
The Fresh & Easy Story and Dimensions of Innovation
“Tesco has staked its fortunes on an innovative new store that is about a quarter of the size of the traditional US supermarket, building on the success in the UK and Europe of its Tesco Express local stores. Some elements of the Hemet store will be familiar to UK shoppers. But the store also includes a “kitchen table” where a staff member heats samples of prepared foods such as pizza and chicken curry. In a further innovation, all the check-out registers require customers to scan their own goods, with staff on hand to assist.” Financial Times, 4 November 2007
Nine innovatory dimensions of Tesco’s market entry into the USA a) Physical market entry preceded by on-line entry b) Anthropologies of innovation c) Follower-supplier relations and integrated production/ distribution networks d) Product innovation e) Trialling of formats f) Innovative locational strategies g) Service innovation and employment issues h) Digital marketing i) Publicly betting the firm
a) Physical market entry preceded by
on-line entry
• Tesco‟s acquisition of 35% stake in the e-commerce operation
of the leading US supermarket chain Safeway in summer
2001 for £16m.
• Tim Mason previously involved in Safeway link-up and this
undoubtedly informed his – and other Tesco executives –
understanding of the US market
• US market entry has more generally benefitted from
experience gained via Safeway link-up concerning
„merchandising range price and innovation‟
• Difficult to believe Tesco‟s world-class strength in customer
insight and customer loyalty card interrogation not brought to
bear on Safeway ventureb) Anthropologies of innovation
• According to Jones (2008)
Ethnographic research “has become part of the landscape
of innovation for many firms and associated
consultancies”
• Working closely alongside market research agencies and with
camera crews on hand to record events the executive team
dispatched to the US by Tesco visited a range of consumers,
shopped and cooked with them, discussed their food choices
and queried their thoughts on diet and health, etc.
• End result is “an American store designed for American
consumers” (Tim Mason)
• Role of executive team in intra-firm knowledge transfer and
organisational translationc) Follower-supplier relations and integrated
production/distribution networks
• With establishment of Riverside distribution centre‟s 80,000 sq
ft food preparation facility Tesco has arguably become a food
manufacturer for the first time
• Enables Tesco to manufacture a higher standard of prepared
ready meals than currently available in the US market
• 40% of ingredients provided by Wild Rocket Foods and 2
Sisters Food Group, established UK suppliers of Tesco
• Follower-supplier relationships widely discussed in
manufacturing represents an innovative dimension of UK-US
knowledge transfer in the retail sectord) Product innovation
• Markedly higher levels of own-label products at Fresh & Easy
than conventionally found in US food retailing (over 50% of
products own-label)
• Each Fresh & Easy store incorporates a „kitchen table‟ with a
crew member offering food samples and menu suggestions in
an explicit attempt to build the Fresh & Easy brand
• UK food retailing acknowledged as having „world class‟ skills
in the chilled/prepared meals segment, but this is the first time
this skill-set has been exported wholesale to the US from the
UKe) Trialling of formats
• In the run-up to the opening of the first Fresh & Easy stores
the press reported that Tesco executives had concealed the
firm‟s market entry plans by posing as film industry moguls
• The real Tesco operation carried out by Terry Leahy‟s hand-
picked group, posted to Santa Monica between March and
October 2005 was even more covert
• Group posed as International Research Resource Ltd, group
set up and tested mock-up of potential store in West Coast
warehouse
• Transnational retailers usually focus on deriving competitive
advantage from back region spaces. Tesco entered USA
unusually determined to protect „front region‟ knowledgef) Innovative locational strategies
• Fresh & Easy has opened in a range of different locations,
across the income/class/ethnicity range e.g. Compton in
South (Central) Los Angeles; Hollywood, a stone‟s throw from
Mann‟s Chinese Theatre and Manhattan Beach
• Tesco has been prepared to go into partnership arrangements
and develop stores in areas which have long been neglected
by the main corporate food retailers
• Whilst Fresh & Easy‟s contribution to these “underserved
markets” is clearly not altruistic, its stated desire to serve “all
kinds of neighbourhoods” is an important and innovative
dimension of the firm‟s market entry strategyManhattan Beach
Hollywood
Compton
g) Service innovation and employment issues
• Service innovations taking place hand-in-hand with
technological innovations have long been considered
fundamental drivers of retail productivity
• At Fresh & Easy this association focuses on the issue of there
being no checkout staff, facilitating “a simple and efficient
business model [that allows Fresh & Easy] to offer Wal-Mart
prices in convenience store locations”
• “Assisted service” has been introduced into all the recently
opened Fresh & Easy stores – a high-risk strategy in a
country renowned for its customer-service offer• Time magazine in a recent (2008) article entitled “The end of
customer service” drew the explicit comparison between the
„self-checkout‟ lanes at Fresh & Easy and Clarence Saunders
first self-service store - Piggly Wiggly - which opened in 1916
and „revolutionised retail‟ increasing efficiency and allowing
substantial cost savingsh) Digital marketing
• Fresh & Easy has been extremely innovative with its use of
contemporary digital marketing techniques in order to spread
the message of the new brand in the US
• Simon Uwins, Chief Marketing Officer, uses his „blog‟ on the
firm‟s website in order to have a „conversation‟ with customers
and potential customers. His blog is designed to add clarity to
the firm‟s mission, and to demonstrate that Fresh & Easy are
living up to this statement
• The firm treats Uwins‟ blog – together with blogs written by
others on Fresh & Easy – as “any other type of PR”. As Uwins
remarks “We‟ve started to talk to bloggers and that‟s working
really quite well. We invite them to [store] launches and
stuff…they‟re getting to know us…we‟ve got lots of positive
blogs written about us now”Sunday, September 14, 2008 About Me
what's your favorite fresh&easy product?
I'm increasingly struck by the number of people who let us know what their favorite fresh&easy products
are.....and how many different products they talk about. • Name: Simon
Before we'd opened our first store, one of the big questions was whether people would accept our own Uwins
brand products, which made up nearly 50% of our assortment. • Location: El
It was one of the key reasons we built a "kitchen table" into each of our stores, so that people could try our Segundo,
products and make their minds up themselves. California
It was also why we kept our packaging simple, so that you can see the product for yourself.
So it's good to hear how many different products are striking a chord with our customers.
If someone had told me when I
Our Hummus gets a mention quite a lot (the Lemon & Cilantro is my favorite), many of the prepared meals left Oxford university that I'd
from our own kitchen (including the Beef Lasagne and the Sheperd's Pie!), many of our ready to eat salads spend most of the next 20 odd
(also prepared fresh in our own kitchen), and the quality of our meat. But then there's also our Gelato years working in food retailing &
(especially the Roasted Banana), our Kettle Chips, our Mountain Trail Mix, our One Huge Hunk (of
chocolate), our Pure water, and of course our award winning wines - Reflexion, our own brand Rioja which for one company, I wouldn't
was given 91 Parker points, is my particular favorite. have believed them (as it was
my mother thought i was mad!).
As well as how they taste, many comment about what great prices they are, and the fact they have simple But I was lucky enough to join a
ingredients, with no artificial colors, flavors, preservatives (except where absolutely necessary), and no company, Tesco plc, that
added transfats. Our Mashed Potato, from our own kitchen, is a case in point, just have a look at its
ingredient list... simply believed that you should
just listen to what people want
Of course, not every product has worked, but we listen, and we're adding to our assortment all the time - & then deliver it better than
we've recently announced another 200 products before the end of the year. anyone else - & anyway, for
My own personal favorite? Ahi Tuna Poke, from our fish cabinet - a Hawaian dish, I often have it for lunch. someone who wants to make a
But enough about me, tell me, what's your favorite fresh&easy product?
difference, everybody has an
posted by Simon Uwins interest in food...
@ 3:38 PM 13 Comments Links to this post
Sunday, September 7, 2008 View my complete profileSunday, September 14, 2008 The High Priestess
Party for $20
Actually, less than that.
I wish I wasn't in such a rush that I ran out of F&E on Friday without my • Los Alamitos, CA, United States
receipt.
But just for $16.91 after the $5 coupon is applied, I managed to buy
these for a barbecue with my out-of-town Big bottle Tropical Iced Tea
Big bottle Limeade View my complete profile
A package of Dixie plastic cups
3 bags of Kettle Chips (Jalapeno Cheddar, Hickory Barbecue, and This Many Served
Original salted)
Pretzel chips
Raspberry Swirl Shortbread
Chunky chocolate chip cookies (in a tub, not from the bread aisle) Subscribe to the Sermon
Small bag of Cheetos (to hold me over for the drive over) Posts
We were expecting a lot of people, but it ended up just 4 of us. We took Comments
a few swills out of the drinks and dipped into the cookies a little bit.
The Gods
The only thing of these that got consumed in its entirety is the Jalapeno
Cheddar Kettle Chips. Salty and a little bit spicy without being Fresh&Easy
overwhelmingly cheesy or that fake Jalapeno flavor you get sometimes. Fresh&Easy Blog
It was perfect. And even yummier when crushed and sprinkled over your My F&E: Spring Street, Long Beach
hot dog a la Latin American style. ...oh god. Now I'm craving THAT.
Verdict: Nirvanai) Publicly betting the firm
• Fresh & Easy as Terry Leahy‟s “biggest
ever gamble” – puts his achievement of
repositioning Tesco as transnational
operation largely „under the radar‟ of hostile
financial market scrutiny on the line
• Market failure in USA risks considerable
adverse impacts on reputation of firm in
international financial markets• Most previous retail internationalization has been
characterised by firms stressing the limited nature of risk and
potential reputational loss being assumed
• „Public betting of the firm‟ by Leahy in this way rather unusual
aspect of market entry
• Tim Mason‟s role as CEO of Fresh & Easy is signal to the
critical position the US is playing in Tesco‟s long-term
strategic development and leadership succession planningDiscussion a) Managing the contested relationship with financial markets b) Transformation of organisational structures and competencies of the firm as a consequence of transnational operation c) The culture of innovation powering Tesco‟s performance in the global economy – potential research directions
Wal-Mart to push customer service at
Marketside stores (Retail Week, 16 May 2008)
Wal-Mart has upped its game in its fight against Tesco's Fresh & Easy format,
promising to deliver "the highest level of customer service" at its small
neighbourhood grocery stores.
The world's largest retailer said its planned 15,000
sq ft (1,395 sq m) Marketside neighbourhood
stores will be "dedicated to helping our customers
answer the question 'What's for dinner?'"
According to The Financial Times, Wal-Mart is also
planning to prepare and serve food in the stores.
The stores will include a kitchen, food counters
and seating for up to nine people.
Job adverts for the first four locations in Arizona
describe Marketside as "the neighbourhood
market for busy people with a taste for fresh and
delicious food". The stores – Wal-Mart's first new
format for a decade – will be in direct competition
with Fresh & Easy supermarkets.
Tesco has opened more than 60 Fresh & Easy
neighbourhood stores since November around Los
Angeles, Las Vegas and Phoenix, Arizona.Safeway to muscle in on convenience in US
(Retail Week, 23 May 2008)
Safeway has become the latest US grocer to make its bid for a slice of the
country's emerging convenience market by launching smaller-format stores.
The retailer will open its first 15,000 sq ft grocery store at Long Beach, California, this week
through its Von's subsidiary. Called The Market, it is located in the heart of the region being
targeted by Tesco's Fresh & Easy stores.
The strategy will be a threat to Tesco, whose Fresh & Easy roll-out was put on hold in March
while it reviews its performance.
The opening also coincides with US giant Wal-Mart's plans to open its first small-format store in
Arizona.
. Planet Retail grocery research manager Natalie Berg said the
move indicates Tesco's competitors are taking the UK grocer's
push into the US seriously
She said: "Safeway's new store in Long Beach is a key Tesco
region. If its new format is successful, it could convert more than
50 of its stores.“
Safeway's new stores will reportedly be more upmarket than
Fresh & Easy and focus on a strong own-label offer, as well as
good merchandising and design.
Berg added that the move signals a shift in the way US grocers
are encouraging customers to shop. American consumers are
being encouraged to buy "more fresh produce in smaller
amounts more often", she said.
Tesco operates more than 60 Fresh & Easy stores in the US.Fresh look for Fresh & Easy (Retail Week, 13 June 2008) Tesco rethinks format to create a 'warmer' feel as it prepares to press on with US store openings Tesco is revamping its Fresh & Easy stores in the US to create a "warmer" shopping environment as the grocery giant gears up to resume openings. The 61 Fresh & Easy stores, which launched with a functional design and basic layout, will be given more colour and signage. The overhaul is in response to shopper feedback. Tesco Corporate and Legal Affairs director Lucy Neville-Rolfe said consumers' reaction to Fresh & Easy has been "very strong" and confirmed the shop improvements. She said: "We've been working on brighter stores, better ranging, signage – the sort of things we always do when we move into a new market." The grocer, which opened its first Fresh & Easy store in November last year, paused expansion in April to assess the format. As part of the refresh, which will be completed by July, further signage will be added to popular products. A Tesco spokesman said the design has been "tweaked" and, while it will maintain its clean look and feel, the changes should help shoppers "dash in and find the milk or whatever other products they want to find quickly and easily". The grocer has also added a further 250 products to its own-label line, including new ready meals and juices, and the stores now also take American Express cards .
Fresh look for Fresh & Easy (Retail Week, 13 June 2008) "Tesco took a break in order to tweak a few things," said Planet Retail grocery research manager Natalie Berg. "The concept is hugely innovative, but, as other supermarkets in the US are full of signage and promotions, the Fresh & Easy stores can look a little stark in comparison." On July 2, Tesco will open a store at Manhattan Beach, California, and remains committed to having a total of 200 stores in the country by the end of the year. On Tuesday, Tesco reported group sales for the 13 weeks to May 24 rose 13.7 per cent. In the UK, like-for-like sales were up 3.5 per cent, excluding petrol, but non-food growth slowed. Neville-Rolfe said: "We're well within our 3 to 4 per cent like-for-like target and are in good shape. "We've seen good growth in our core food categories, but what we find is higher food prices affect non-food demand. We have focused on how we can help people save money."
Wal-Mart to rollout Marketside into California (IGD Retail Analysis 10 Sept 2008) According to a report in today's Financial Times, Wal-Mart is planning to rollout its new Marketside concept into southern California. Wal-Mart is believed to have signed the lease for a 12,000 sq.ft site in a new development in downtown San Diego, as well as applying for a liquor licence for a small format store in Oceanside, a coastal city to the north of the city. Wal-Mart has not yet commented on the reports. IGD Analysis The launch of Marketside is believed to be just weeks away. Four stores will open initially in the Phoenix suburbs of Gilbert, Mesa, Chandler and Tempe, also home to a number of Fresh & Easy stores, with a strong focus on fresh food and a more meal solution led merchandising strategy. Despite speculation suggesting that Wal-Mart could turn Marketside into a $10bn business, the company has said that the first four stores will be operated as part of a pilot project, with no further plans to rollout the concept in the short term. Entry into California would give Wal-Mart an opportunity to grow its presence in the state. Up until now, it has faced strong competition from union-led opponents which has slowed the expansion of its core Supercenter format in the state, home to one of the largest markets in US retailing. At 10,000 sq.ft however, Marketside stores are significantly smaller than the average Wal-Mart Supercenter, making it easier for Wal-Mart to acquire new sites going forward. Like in Arizona, southern California is also home to Fresh & Easy, Tesco's US venture. Despite a planned three month halt to expansion, back in March 2008, Tesco is now pushing ahead with its small store concept, with 77 stores open to date. Preparation also continues for entry into Northern California, where the first Fresh & Easy stores are expected to open early 2009, as well as a second distribution centre in Stockton, further strengthening Tesco's ability to operate at full capacity across the state as a whole.
Wal-Mart chief executive: Tesco's Fresh & Easy will succeed (Retail Week, 11 Sept 2008) The success of Tesco's fledgling US venture, Fresh & Easy, has been endorsed by the most unlikely of advocates – bitter rival Wal-Mart's chief executive, Lee Scott. Tesco's push into the US – which has proved a graveyard for UK store groups' ambitions in the past – is regarded by many observers as a high-risk enterprise. However, Scott's comments, which he made to an audience of investors at last week's Goldman Sachs retail conference in New York, may well convince sceptics to revise their opinion. Responding to a question, Scott said he had heard mixed reports about how Fresh & Easy was faring, but that he was convinced the business would perform well. He said: "The thing that bothers me is Tesco is a very good retailer. I have a lot of faith that they will find their direction and it is something we need to pay attention to." At present, there are 75 Fresh & Easy stores. Tesco is investing £1 billion in the business, which is headed by Tim Mason, and aims to take its store count to 1,000. Exane BNP Paribas analyst Tim Attenborough agreed with Scott's analysis, saying: "There's been a lot of misguided comment about Fresh & Easy. Tesco is onto something good and it's a very lucrative long-term growth opportunity." He expects Tesco chief executive Sir Terry Leahy to report that Fresh & Easy is moving in the right direction when the retailer posts interims later this month. Fresh & Easy's arrival has prompted Wal-Mart to develop a rival fascia, Marketside, which is expected to make its debut within weeks in Phoenix, Arizona. If successful, Marketside is also likely to be developed into a 1,000-store business.
Wal-Mart gears up to take on Fresh & Easy (Retail Week, 25 Sept 2008) Wal-Mart will open its first four Marketside stores a week tomorrow, four days after Tesco reveals much-anticipated figures for its fledgling Fresh & Easy business. Wal-Mart will open the small shops in Phoenix, Arizona, where Fresh & Easy is already trading. The launch comes less than a year after Tesco entered the US, where it has since bumped up its store count to 78 in the states of Arizona, California and Nevada. Tesco reveals its interim results – including the first figures for Fresh & Easy – on Tuesday. Broker Citi expects a loss of about £100 million for Fresh & Easy for the year. Analyst James Anstead said: "It will be difficult to draw too many conclusions from the significant loss that the company has already guided towards." However, he added: "The absolute sales figures will give some indication of the level of sales densities that the business is achieving." Fresh & Easy has been the subject of much speculation since its debut. Wal-Mart chief executive Lee Scott said earlier this month that Tesco is a very good retailer and that he had "a lot of faith that they will find their direction" with Fresh & Easy.
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