Tesco didn’t help themselves by launching a store format with a range that was not very fresh and not very easy to shop in.
When Terry Leahy sent his troops to invade California in 2007 he put one of his best generals in charge, Tim Mason, but Tesco didn’t help themselves by launching a store format with a range that was not very fresh and not very easy to shop in.
Back on February 9th 2006, when Tesco announced the ill-fated move into the US, they certainly made sure that their best management was in charge, because the Marketing Director, Tim Mason, was sent to move to California to run the business. In that sense Tesco did something right, but in almost every other sense they got things hopelessly wrong, despite the longstanding accusations of arrogance about British retailers trying to invade the US market.
Tesco, of course, claimed that this time it would be different and that they would make it work. CEO Terry Leahy trumpeted “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”.
Timing is everything in retailing, as it is in life in general, and Tesco’s timing was very poor, launching in the US at the very top of the housing market bubble on the West Coast in 2007, just ahead of the “sub-prime” mortgage crisis and the banking collapse that followed.
Tesco’s store location strategy was questionable as well, with many stores opened in the wrong part of the West Coast and sometimes on the wrong side of the road, which resulted in the embarrassing early decision to mothball some of the first stores.
As for the format, well, Tesco took on some strong local players, like Trader Joe’s, and were warned by such luminaries as Warren Buffett that there was no room for a new type of convenience store, but they pressed ahead.
At the time, the wags joked that “Fresh & Easy” wasn’t very fresh and wasn’t very easy, but they were right, because US consumers didn’t like the food ranges that Tesco claimed to have researched so extensively or the new-fangled self-service checkouts.
Huge operating losses were the inevitable result, but Tesco did tweak things, injecting more fresh food and customer service, but it was always going to be difficult to recover from such a bad start and the writing has been on the wall for the great US adventure for some time. The final straw appears to have been when LFL sales growth in the US business slipped below 2% in Q3, which was clearly unacceptable given the maturity curve that the business should be riding along.
The outcome of the strategic review won’t be clear until April, but CEO Phil Clarke has said that “it is likely, but not certain” that Tesco will exit the US, by selling or closing the stores, with the aim of improving shareholder value, ie the loss elimination will do wonders for the P&L next year (all other things being equal).
The 3% jump in the Tesco share price first thing morning shows that the stockmarket’s first reaction is that this is the right decision by Phil Clarke, but enthusiasm must be tempered by concern over the departure of the aforementioned Tim Mason and the feeling that Tesco seem to be fighting an awful lot of fires left smouldering by Terry Leahy…
It is, perhaps, inevitable that Tim Mason couldn’t stay as boss of Fresh & Easy while a strategic review was conducted of a business he was emotionally attached to, but it is not clear why he couldn’t have returned to his old Marketing patch in the UK. He was, after all, very involved in the recent decision to change advertising agencies and appoint Wieden & Kennedy.
From Phil Clarke’s perspective, however, the departure of Tim Mason now just leaves the FD Laurie Mcllwee as the only credible rival for his own job. But the ruthless elimination of Terry Leahy’s entire command structure only buys Phil Clarke a certain amount of time. He will in the end be judged on his ability to get group profits and returns moving forward again and, although his energy and drive has had some good results so far in the ailing UK Food business, it is a little ominous that new problems keep popping up for Tesco (at home and abroad) and that its UK Non-Food UK business is struggling so badly.
About Nick Bubb
Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.
Tesco likely to exit US business as Tim Mason departs
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Nick Bubb's verdict: Tesco - not very Fresh & not very Easy