| August 12, 2013
Back in 2009, I asked the question, “Are retailers inherently local?” My question was prompted by the news that the British headquartered Marks & Spencer (M&S) was struggling with “basic shop keeping” in China. Now comes the news that British retailer Tesco has not only closed its Fresh & Easy stores in the U.S., but is reducing its stake in China by merging its stores there with the state-run China Resources Enterprise (CRE).
Asked to explain Tesco’s move in China by BBC Radio 5 Live's Wake Up to Money program, Bryan Roberts, lnsights Director at Kantar Retail EMEA, focused on the challenges that China poses for international brands, noting its unique nature including central and localized bureaucracy, regionalized shopping habits, and regionalized supply chain. Roberts concluded:
It's an incredibly difficult market and Tesco is just the latest in a long list of international retailers who've come away... with their tail between their legs.
There is no doubt that China is a very complex market and one where foreign brands really do need to get their homework right in order to be successful, but the failure of Tesco’s Fresh & Easy stores in the U.S. points to a more fundamental issue. In addition to fundamental differences like population density, supply chain complexity, legislation and regulation, shopper mindsets differ dramatically from country to country. If ever there was a situation when local culture and expectations impact purchasing behavior, it is in the grocery store.
Of course, there is one other factor that played a major role in Fresh & Easy’s demise: the Great Recession hit soon after the first stores opened. With many of the stores sited in less well-off suburban areas, pricing soon became a major issue. Add to that the failure of management to recognize that shopping to fill the freezer is a well-established part of the U.S. consumer’s shopping behavior, Fresh & Easy really was trying to push water up hill.
Back in 2009, my colleague Phil Herr was still very bullish about Tesco’s ability to adapt and win in the U.S. market, stating:
I can't believe that Tesco will fold its tents and retreat. The U.S. market is too lucrative -- even with the recession.
And truthfully, Phil might well have proved right had not Tesco’s new CEO faced a fall in profits and a need to revamp many of its stores in the UK. With two thirds of the company’s revenues still originating in the UK, the primary need must be to stabilize business there rather than try to save a loss-making business elsewhere.
The Los Angeles Times reports Fresh & Easy lost more than $1 billion since it opened in 2007, and notes that abandoning the project means Tesco will take a write-off of $1.8 billion.
The story of Fresh & Easy is a salutary reminder that you need to get the business basics right as well as meet consumer needs if a brand is to be successful. And in this case, it is not clear which factor was most important in Fresh & Easy’s demise. Why do you think Fresh & Easy did not succeed? Please share your thoughts.