The Innocents Abroad

Tesco is cutting its losses in the United States.

Tesco, the third largest retailer in the world measured by revenues, and second largest by profits, is giving up in the United States, after five years of losses at its chain of 199 Fresh & Easy stores. They were launched in 2007 after much hands-on research into what would do well in the US. Sadly, for Tesco’s shareholders at least, it was wrong, and it has now announced an orderly retreat, so that management can concentrate on its continuing troubles back in the UK, which still accounts for two thirds of its revenues.

Tesco’s UK same-store sales have now declined for three quarters in a row and earlier this year Tesco announced a 6.8% reduction in half year profits to £1.3Bn, its first profit decline since 1994, which was at least in part due to overseas investments in some 14 countries. Earlier in the year Tesco left Japan too and some of its other businesses abroad aren’t exactly doing that well either. Although the $1.6Bn this US experiment cost may be affordable this is another embarrassing glimpse of Tesco’s fallibility: it wasn’t too long ago that Tesco could do no wrong, but those heady days have gone.

Whilst the tyro business developers may think that novelty is the key to success that is rarely the case as this experiment by Tesco, to launch a novel mid-size store format focussed on fresh food, shows so clearly: it just didn’t win the popular vote. Rather than being “the perfect store for the American consumer in the 21st century”, as former CEO Terry Leahy claimed back then, it turned out to be just quaintly foreign.

It certainly didn’t help that many stores were located next to new housing developments, just as the sub-prime tsunami swept over the neighbourhood. But that bit of poor timing was compounded by trying to export things that had worked well in the UK, like: own branding; ready meals; self-service check outs and unfamiliar store layouts. Sadly, the concept wasn’t well received and those who tried these new concept stores failed to come back, or recommend it to their friends. Terry Leahy’s vision seems to have got lost in translation somehow and it left the US consumer rather confused.

There are many lessons buried in this sad story, but let’s just focus on two of them. The first and foremost is to avoid the siren-call of international expansion just because you can. If Tesco management really thought that its shareholders wanted exposure to US food retail they should have given them the $1.6 Bn so that they could have bought shares in Walmart. From banks to supermarkets the globe is now littered with failed excursions into foreign markets that can seem at times like Mark Twain’s famed travel adventure that gave me my title today.

The second lesson from all this, is that when we make buying choices we go through a very subtle and in part sub-conscious trade-off analysis; with something as personal and culturally specific as food that is a difficult thing to really understand if you aren’t local. Americans like branded products, help at the checkout, familiar stores, and to know what sort of store it is: if it isn’t a convenience store, or a discount store, then what the heck is it? Also, it is rarely a good idea to be novel, but transferring proven ideas from one market to another can work very well. However, if you are going to try that, as Tesco did here, you’d better be pretty sure that the locals both understand and value the benefits you are bringing them.


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