Tesco talks to OPI+ about its plans for the US market and the extensive research that went into the move
Just one month after Tesco’s CEO Sir Terry Leahy ruled out making a significant acquisition in the US, the retail giant has announced it intends to enter the US market and grow organically – through the development of a new convenience format.
"I think we will be successful with customers over there," Greg Sage, international corporate affairs manager at Tesco told OPI+. "In the US we found affluence levels to be high and people to be very busy so we believe we have the right model in the convenience format. We’re very excited by the US market."
The smaller "convenience" store is likely to be the least risky format for Tesco in the overcrowded US marketplace and one which observers expect to yield relatively fast, profitable returns. Traditional grocers in the US have, in general, been unsuccessful at developing a credible high-end food offer so there exists a significant market opportunity for the UK retailer.
In addition, many US grocers do not carry large stocks of non-food items; this being largely the job of the warehouse and discount retailer. This means that they do not have large non-food revenue streams to help boost margins and allow them to discount food items.
Tesco has not yet disclosed whether the US convenience stores, which are to be modelled on the retailer’s highly-successful "Express" concept that now operates in five countries, are likely to stock non-food ranges such as office products. These details would, of course, provide their competitors with too much information.
However, the company openly states that "we aim to be as strong in non-food as we are in food".
Tesco intends to open its first US store on the west coast in 2007. Initial planned expenditure is expected to be up to £250 million ($435 million), which will be funded from existing resources, with break-even expected by the end of the second full year of operation.
The announcement comes after more than 20 years of research in the US market, Tesco told OPI+. "It has been our most extensive research project ever," said Sage. "And we have ramped up our research over the last year."
Certainly, it seems Tesco did not hold back when it came to getting to know its customers. In fact, Tesco representatives spent time alongside them, in their houses, and following them around in their daily lives, said Sage, although he would not release further details on the research such as the number of customers studied.
Tesco now operates in 12 countries outside the UK, mainly in the developing markets of Asia and Central Europe. In a statement, the company said the US grocery market is worth $600 billion a year and is expected to expand by 40 per cent over the next five years.