The highly-anticipated and closely-guarded news of the ultra-successful UK-based Tesco launch of its Fresh & Easy Neighborhood Market in Southern California in November 2007 made retailers and manufacturers wake up and smell their Organic Breakfast Blend Coffee. Their promise of low prices, convenient shopping alternatives, and fresh/organic quality foods — together with their environmentally- and socially-enviable sustainability efforts — all sound too good to be true. The question begs: Can one retailer be all things to all consumers? One thing is for sure. Tesco is a formidable competitor.

Global footprint
Tesco is the UK’s largest retailer and the third largest international retailer, operating over 3,200 stores across 13 countries and employing more than 400,000 people. Tesco touts that its success is due in large part to their ability to deliver a consistently strong customer offering on every visit and every transaction, and by focusing on the company’s core purpose: to create value for customers to earn their lifetime loyalty.

And it seems to be working. Just 10 years ago, Tesco was simply a British grocery business. Today, their international businesses reach far beyond just food retailing. With commerce in telephony, financial services, legal services, books, music, electrical goods and hypermarkets, they certainly have come a long way in a short time. And staying true to their core strategy has paid off with consistent and steady revenue performance.

Ingredients for success
Three words — follow the customer. Sounds simple, but it is what Tesco credits the secret to their turnaround and continued success. Their store and category performance are benchmarked on five components of the “Tesco Shopping Trip”:

1. The prices are good.
2. I can get what I want.
3. The staff is great.
4. I don’t queue. – (i.e.,I don’t have to wait in line)
5. Shopping is easy and enjoyable.

And, ”doing well by doing good” is equally qualified by their corporate sustainability efforts that make good on their promise of being a responsible company and a good neighbor. From procedures to reduce carbon emissions for their stores and transportation fleet to reformulating foods to promote healthier living, Tesco may have hit the consumer sweet spot by supporting important issues that reverberate across the globe.

Entry in the U.S. — a brave new world
While Tesco’s track record in the U.K. and around the world is undeniable, it may have met a new level of challenge when landing on U.S. soil. Will American consumers embrace Fresh & Easy’s small, sterile and utilitarian-styled format with limited assortment options? Has Tesco taken into account the unique blend of diverse consumer tastes and ethnicities in the areas where they have opened doors? Which retailers will potentially take the biggest hit — or offer the biggest threat? While the retail giant is still getting its feet wet, a detailed review of the California, Phoenix and Las Vegas markets — Tesco’s first ports of U.S. entry — provide some important answers.

Retail interaction — the competitive set
Retail interaction is measured by the overlap between Consumer Trade Areas that compete for the same shoppers and dollars. Taking a pulse of the grocery stores near planned Tesco locations within the Los Angeles, Southern California, Phoenix and Las Vegas markets, it is clear that Kroger faces the greatest threat, with potentially $6.7MM weekly dollars at risk. SuperValu, Safeway, Bashas and Wal-Mart within these four markets are vulnerable as well, with the weekly loss potential amounting to a total of $4.3MM, $4.0MM, $2.4MM and $1.5MM, respectively.

How far shoppers are willing to drive to get to Tesco will likely have a big effect on trade areas. For example, even though Safeway has the largest number of stores in these three states — 100 more than Kroger and over 500 more than Wal-Mart — only 32 stores are within five miles of Tesco locations. Kroger banners, on the other hand, have a total of 57 stores within this radius — and Wal-Mart follows close behind with 47 grocery stores in this vicinity.

In their apparent quest to appeal to the masses, Tesco has chosen locations that cater to a broad demographic. In the Phoenix market for example, Tesco’s shopper base is very similar to its two largest competitors, Wal-Mart and Fry’s, while showing a slightly more ethnic bias than Basha’s, Albertson’s and Safeway.

Location, location
Taking a detailed review of department-level market performance surrounding Tesco locations, it is clear that they did their homework when choosing prime sites. The stores in the closest proximity to Tesco locations – or about one mile in distance – show the greatest year over year dollar volume growth for just about all departments analyzed (Alcohol & Tobacco +12.8%, Personal & Home Care +10.3%, Produce +9.6%, Grocery +6.4%, Frozen & Refrigerated Grocery +6.7%, Bakery & Deli +5.7%, Meat & Seafood +4.1%).

A deeper dive by state, however, shows subtle differences in department contribution, indicating important factors that need to be considered when planning assortment, layout and space allocation. For example, while produce grew 13.2% in Arizona stores and 9.6% in Southern California, it remained flat in Nevada. Likewise, the Arizona market outpaced growth performance in all but two departments (Personal & Home Care and General Merchandise) when compared with Southern California and Nevada. And five of eight departments in Nevada actually declined.

Consumer snapshot
In keeping with Tesco’s mantra to follow the customer, a review of the demographic makeup within the Phoenix, California and Las Vegas markets reveals a diverse group of consumers. In the California market, more than half (58%) of consumers are non-white ethnicities, with 40% being of Hispanic origin. In Phoenix, the majority of consumers are white (60%), with roughly 10% Hispanic, and in Las Vegas, 27% are Hispanic and 53% are white and other ethnicities.

Household size also varies. The California market boasts the largest family sizes of the three markets, with 31% having five or more persons living together, compared with both the Phoenix and Las Vegas markets where less than one-quarter have family sizes that big. Manufacturers looking to support either Tesco or their competitors should take note to determine how categories and brands can be used to appeal to the demographic drivers within these retail trading areas.

The battle begins
For competing retailers and their supplier partners, knowing what to expect is the first important step. Taking action is the next. There are several strategies that can be deployed to protect market share and your consumer base:

• Offer convenience-oriented solutions with an expanded selection of wholesome prepared foods.
• Increase the assortment of natural and organic foods.
• Take advantage of Fresh & Easy’s limited supply of health & beauty and non-food offerings by providing promotional tie-ins that drive larger shopping baskets and frequent trips.
• Create a welcoming environment with a friendly and helpful staff that caters to the unique demographic makeup of the market segment.

The bottom line is that Tesco is successful because they understand their consumers and they give them what they want. It is a lesson well learned!