Tesco retrenches in both USA and China

by Nigel Hollis | 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. 

3 comments

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  1. Anna, August 29, 2013
    Dear Nigel,
    What's your opinion on this matter - why have they failed if those like Wallmart have succeded?
    Have they tried to implement some extreme and eye-catching techniques which cost a lot but were not attractive enough for people to switch from their usual grocery shopping places?
    Or maybe the cost for entering this market was too high for the company and they did mistakes underway by establishing high prices?
    Unfortunately, it's difficult to judge without having actually been in those stores. Maybe you have more information on that?

    Thank you!
  2. Nigel, August 22, 2013
    Just FYI, Phil, I think you will find that Uniqlo originates from Japan
  3. phil herr, August 13, 2013
    I was surprised by the eventual downfall of F&E, although the last 18 months was a slow-motion train wreck. When I read of the extensive consumer research Tesco undertook prior to launch I was convinced they had done their homework and had a good market niche.  But unlike Trader Joe's which began in California and expanded east very slowly, or Aldi which enters markets very deliberately and seeks a low income clientele(initially), F&E went for the middle market: entrenched supermarket shoppers. And they really didn't know what to make of it. Unusual pack sizes, strange prepared food offers and no check-out operators. They evolved their merchandise and added cashiers, but obviously too little too late.

    But in the total scheme of things the prospect of "foreign" retailers being successful varies considerably. Walmart has done well in China and LATAM but not in mainland Europe (Germany was a disaster), and European clothing stores have spread across the globe -- H&M, Zara, Topshop and Uniqlo.  I guess the story comes down to whether the operator can match merchandise to local taste and has the knowledge of local systems to make the chain successful.

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