Sunday, June 2, 2013

Tesco Quits US

Tesco is one of my favorite retailers to blog about – maybe because in the UK and even Malaysia, it is highly visible. But if you had been reading my posts, you will know that it has been facing many challenges in its own home market. One can be lulled into a false sense of comfort by assuming that Tesco is doing well overseas.

On the contrary.  UK’s biggest retailer wrote down the value of its global operations by $3.5 billion and announced plans to exit the US market, as it sought to rebuild after a year in which profit fell for the first time in two decades.

[Tesco also wrote down the value of its property in the UK by £804 million, reflecting a decision not to develop more than 100 sites, and its businesses in Poland, the Czech Republic and Turkey by £495 million, to account for a sharp downturn in demand].

In the US, Tesco is abandoning loss-making Fresh & Easy and this involves restructuring and other one-off costs of £1 bilion ($1.5 billion), and thereby admitting that its American dream is over.

Indeed, Tesco is only the latest British retailer to have attempted to leap over the pond – and drowned. The past couple of decades have seen rival supermarket Sainsbury's, as well as Marks & Spencer, WH Smith, Dixons and HMV all forced to beat a retreat.

Some have underestimated the costs of breaking into such a large and highly competitive market; others took on stores that were far too expensive or, like Tesco, hit the US just as it headed for economic downturn.

Many past transatlantic ventures have been the victim of arrogance and poor preparation, failing to understand the surprising differences between US and British shoppers. We may, broadly, speak the same language, listen to the same music and watch the same films, but other tastes and habits can differ quite dramatically.

It is interesting to note that Tesco spent 20 years considering a move into the US market, and put in two years of intensive on-the-ground research, even sending senior executives to live with Californian families to observe the way they shopped and ate. They built secret test stores and investigated the contents of Americans' fridges.

And yet, experts say Tesco ignored much of that research, deciding to set up the stores it wanted, rather than listening to its potential customers. For example, although US shoppers prefer to buy in bulk to save money, Fresh & Easy offered small pack sizes. The stores also stocked British-style ready meals unfamiliar to US shoppers and initially relied heavily on self-service tills. This was a big turn-off to American customers, who value good service. I call this, paying lip-service to marketing.

Dave McCarthy, a retail analyst at Investec says it is no coincidence that many UK retailers have failed across the Atlantic at a time when they are struggling at home. Both Sainsbury's and Marks & Spencer, for example, were forced to sell off their US businesses as they dealt with problems in the UK.

"It's a chicken-and-egg situation. Is it the distraction of going overseas that means management is no longer focused on the home market, or failure at home that drags down the business overseas?" asks McCarthy.

Still, a business the size of Tescohas to take calculated risks from time to time or risk stagnating. After five years of trying, Tesco did manage to turn Fresh & Easy into a store that enjoyed higher sales per square metre than a typical US supermarket, which shows it wasn't rejected outright by US shoppers.

McCarthy says: "I still honestly believe that if they had used the right strategy they could have got it right, and blown the market apart." I certainly agree.

No comments: