MARTIN STEVELY

Tesco Fresh and Easy Report

Developing Stage

MARTIN STEVELY

Contents Page
Page 1. 2. 3. 4. 5. 6. 7. 8/9. 10. 11. Introduction A brief summary of who Tesco are The Fresh and Easy concept Research Findings: Analysis of Tescos Success at home and abroad and to examine critically its US strategy of operating with different retail formats Research Findings: Analysis of the complications of only selling own brand products Research Findings: How the US shopper shops differently to that of a UK shopper Research Findings: How Tesco would implement the creation of more Fresh and Easy stores Recommendations Summary References

MARTIN STEVELY

Page 1 Introduction As a student of Business I find it very interesting to look at how companies from small beginnings have grown into large corporations, giants in their own field. When I got the chance to study and investigate Tesco and Fresh and Easy, their American off shoot, I was enthusiastic to find out why they used a strategy unlike their UK approach. They did not compete by trying to be a bigger giant the Americans were used to but by opening small neighbourhood stores. What drove them to try this approach? How can they possibly compete on this basis? My investigations have been very revealing and the American adventure continues. The following subjects were used in this investigiation , these included ; Behavioural Skills for Business , Business Law , ICT , Micro and Macro Economics , Finance and Statistics.

MARTIN STEVELY

Page 2 Tesco Who They Are 2.1 Tesco is a retail giant and one of the top three most successful supermarket chains in the UK . It has over 3700 stores and employs over 441,000 people. It operates in over thirteen countries outside the UK. Tesco grew from a Market Stall set up by Jack Cohen in 1919. The name of Tesco appeared first of all above a small shop in Edgware in 1929 and from that date has grown and developed. 2.2 By the early 1990s they were facing strong opposition. They started to talk to their customers asking what are we doing wrong and then invested in things customers wanted. For instance they launched their loyalty clubcard scheme. Doing that little bit extra for customers has been the key to their growth. Every customer should have a good reason to come back to Tesco. The core statement of Tesco is To create value for customers and to earn their lifetime loyalty. 2.3 Tesco has been principally a food retailer in the UK, in a market that is mature and stable, with little growth in the last 20 years. Tesco has grown its business through customer attraction the only method of growth was taking market share from competitors. Tescos Customer Relationship Management started with the clubcard in 1995 when they offered points for purchases and gave a small rebate to loyal customers. Competitors dismissed this initiative as nothing new, they didnt realise that every every time the clubcard was swiped Tesco was building a database of customers and their buying habits. They found out what customers bought and what they didn,t buy. It measured the amount of their spending. 2.4 Tesco soon expanded into other fields such as discounted travel through Lunn Poly, as well as Personal Finance, Electrical goods, clothing and books etc. Tesco is therefore still a growing company.

MARTIN STEVELY

Page 3 The Fresh and Easy Concept 3.1 Tesco, in order to develop their company even more unveiled its bold overseas venture to open a chain of stores called Fresh and Easy in the USA. After 25years of planning they hope a 250m a year investment will transform them from a UK retailer with overseas interests into a truly world player. Tesco believes that its US business could be as big as its UK one. UK sales are around 36bn with a further 11bn generated overseas. A UK sized US business would certainly transform Tesco. 3.2 The point that the USA has in the past been a positive graveyard for nearly every British retailer that has started there, doesnt deter Tesco. Yet Sainsbury, Marks and Spencer and Dixons have all come back from USA heartbroken. But Tesco have gone to great lengths to research the market thoroughly for the past 25 years. Tescos plan is a convenience store named Fresh and Easy neighbourhood market stores focused in the USA rich West Coast. The first stores will be much smaller than UK stores and will stock healthy, chilled food. Sales targets are not known, but the venture is expected to break even after two or three years in operation. 3.3 Tesco research shows that US shoppers are crying out for healthy food. The US West Coast in well populated and is underserved by food stores. More importantly though, convenience retailing as we know it in UK a small shop selling a wide range of fresh, good quality, top-up groceries do not exist in US. In the USA a convenience store is often a petrol station selling cigarettes, doughnuts and perhaps a soft drink. Tesco however will offer high quality, healthy food. A lot of the goods will be own-label and will not contain dangerous fats, artificial colours or flavourings. Customers can do a weekly shop if they wish but it is expected that initially most will Just come in for selected items.

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MARTIN STEVELY

Research Findings: Analysis of Tescos Success at home and abroad and to examine critically its US strategy of operating with different retail formats 4.1 Tescos success in the home and international markets during the past year is largely due to their living up to their advertising slogan of Every Little Helps. Customers have flocked to their stores not only for well stocked, cheap provisions, but for an increasing number of goods and services from TVs to Insurance and mobile phones, house building and banking. Tesco have gone into low risk areas, less sophisticated retail markets, where they can have a fairly safe go at it. Tesco has been especially successful because of its powerful brand. It has a reputation for value, low prices and being customer focused. It can cater for a wide consumer range. 4.2 They gained a first for launching Tesco.com which is now one of the biggest and most successful online traders. Consumer data, gained from their Clubcard has affected : the products offered and the range, it has given Tesco a better understanding of shopping profiles and helped marketing and it has helped build loyalty. Tesco gains economies of scale from buying large volumes which has supported their low price strategy. 4.3 The UKs largest retailer now operates in more than 800 stores abroad making sales of more than 10bn per year. Tesco made a 3.12bn profit last year and sees international expansion as the main engine for its long term growth. Tesco has applied much of what it has learned in the UK, where it has 30% share of UK supermarket sales. Tesco believes that where you make yourself important in the lives of many consumers, the government and politicians are going to be interested. They will be judged on their record of job creation, lowering prices and on raising standards. The customer is still king and success depends on how well the retailer can meet the customers needs. 4.4 Tesco comment We will continue to make strong progress, at home and abroad, with all four parts of our strategy Making the shopping trip as easy as possible Constantly trying to reduce our prices to help customers spend less Offering the convenience of either large or small stores Bringing simplicity and value to complicated markets The year-end report at April 2010 for Tesco shows what seems to be a very decent set of figures: Sales are up 6.8% to 62.5bn Pre tax profits are up 10.4% to 3.2bn Share dividend is up 9.1% to 13.05p Net Debt down 1.7bn to 7.9bn ahead of plan Financially the US is still loss making for Tesco but those losses are beginning to stabilise and Tesco estimate that they will be breaking even at some point in the near future.

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MARTIN STEVELY

Research Findings : Complications Of Own Brand Labels 5.1 Customers have different views re the quality and value of own brand goods. Because of the heavy advertising done by private brands convincing customers that theirs is the better tasting, better for health and better value than any other, it is little wonder that there is doubt about Own Brand Labels. 5.2 However recent surveys show that own label store brands are the same as, or better than, national brands, and provide a number of benefits. While store own brands have built a reputation for low cost, customers really believe that store brands provide much more than that. At least 80% of consumers claimed that store brands are better than national brands. Most notably they meet the customers needs better, they are convenient and are good for the family. They are good for the environment and encourage trust in the supplier. The idea that store brands are inferior is fast passing away. Store brands are really doing well because of improvement in quality and because of the effects of economy problems on consumers. 5.3 Customers at Tesco will soon be able to choose products not just on taste, nutritional value or price but on their environmental impact. Tesco announced in April that they will label 20 of its own products with a carbon reduction label. The company aims to play a big role in helping reduce carbon emissions and reduce climate change. Grocery chains are dedicating more and more shelf space to own brands in an effort to reduce costs. 5.4 A survey conducted by Ipsos Marketing, that surveyed 21.623 adult shoppers showed that at least 80% now recognise Own Brand as meeting their needs. It was felt by most that they offered convenience, were of good quality and were good for the environment. So the gap is closing. 5.5 In USA Today it was reported that Wal-Mart has seen a rise in purchases of staple foods instead of branded foods. Shoppers have more than doubled their purchases of own Label products over brand names. They also report that customers are not coming so often to stores so that they dont have to drive so much due to local neighbourhood outlets. 5.6 The Mail Online also reported that many stores in the US having enjoyed 20 years of growth based on the idea that customers want as much choice as possible, are starting to shrink since the arrival of the Tesco Effect.

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MARTIN STEVELY

Research Findings : Difference between UK and US customers. 6.1 The first noticeable difference is that 59% of Americans shop at least twice in a week, and 29% say they would shop more if there were more stores nearby. So initially Tesco would seem to be on a winning idea. Fact recorded on February 19, 2008. Categories : E-Commerce, spending 6.2 A market intelligence firm called Synovate released data late in 2009 showing that 72% of Americans prefer to buy local food brands and 65% of American grocery shoppers think that items are over-priced. Bear in mind that American customers, no matter what social-economic background they come from are very willing to complain much more readily than their UK counterparts. 6.3 An American consumer survey reported that Wal-Mart Stores Inc., the largest US grocery retailer is near the bottom in a new survey (April 2009). Shoppers now prefer smaller grocers over Wal-Mart. American shoppers as a whole tend to shop with a list, they check what they need before they go out. They are also influenced by what discount coupons they can acquire and this is where the Tesco Loyalty points cards can compete. Wal-Mart Stores Inc. the largest US grocery retailer, is near the bottom in a new survey, Consumer Reports said on Monday. Wal-Mart the chain where the largest percentage of survey respondents shopped, landed near the bottom of the ratings , with low scores for service and perishables. By Lisa Baertlein, Reuters, April 6th, 2009 wakeupwalmart.com/news 6.4 It is a common and widely believed idea that Own Brand products are always the inferior quality products and are cheaper. They do not usually choose to purchase Own Brand, you only buy out of necessity. These are the products meant for low income brackets. 6.5 Fresh and Easys sales continue to rise which is a good thing for Tesco. Here is the graph Tesco distributed to show how Fresh & Easy is improving on its sales numbers:

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MARTIN STEVELY

Research Findings : The Implementation Of More Stores 7.1 Fresh and Easys first stores were opened in November, 2007 and they now have (as at April, 27 th 2010) 150 stores in California, Arizona and Nevada. A pretty vigorous growth. Fresh and Easy are intentionally opening stores approximately a third the size of an average supermarket in the US. This is a great saving on outlay of financial resources. Employees are well looked after as those who work at least 20 hours a week will get a health insurance package. 7.2 Fresh and Easy have opened many stores in Food Desert neighbourhoods in South California. These areas are underserved and are lower income areas. Contrary to what many thought, locating stores in underserved neighbourhoods can pay off. 7.3 Fresh and Easy have up till now not been accepting manufacturers vouchers, but will be accepting them in future (as many US stores do). This move should increase the popularity of the stores. Fresh and Easy are opening stores in all kinds of neighbourhoods as they as they offer Quality at Affordable prices. Furthermore they then employ staff from the local neighbourhood. Fresh and Easy stores do not have cashiers as customers check themselves out on automatic tills that scan the goods. There are however staff around to help where it is needed. This move together with selling own label goods releases finance to promote further development. 7.4 The American business consultancy TNS Retail Forward predicts Fresh and Easy will be a ten billion dollar operation by 2015. There was initially some resistance to own label goods but now they are generating 75% of store sales. 7.5 One advantage of Fresh and Easy stores is that being smaller they are faster to navigate. This is a change from the American characteristic that bigger is better, whether it be stores or cars. Now because of Tesco the US grocery megastores are starting to shrink. Wal-Mart are planning to open smaller stores this Autumn. Safeway have now already opened some smaller stores in California, so someone recognises that Fresh and Easy are doing things right. 7.6 Perhaps the secret of Fresh and Easys success lies where the American desire for the biggest and the most choice can be outweighed by their desire for speed. Fresh and Easy is putting more focus on value and adding roughly 1000 new items to their shelves. This isnt changing the concept of Fresh and Easy it is fine tuning the service to what the customer want. Fresh and Easys secret is that it is Evolving.

MARTIN STEVELY

Page 8 Recommendations 8.1 Fresh and Easy should do well by keeping focus on what they can do well for customers. The venture with own brand goods should continue to improve and flourish as the result of product improvements, but also because of the effects of the poor economy on consumers. Trust will develop in store brands at this time especially when there has been distrust in other sections like Banking. This would mean that shoppers may be less likely to return to more expensive brands in the future. The economy is changing the way Americans shop for food. 8.2 Part of the strategy should be to focus on the value element, as latest reports from the US state that Fresh and Easys fruit and vegetable sales have increased more than 11% and since American shoppers like to shop twice a week their sell by dates should be easily met. Therefore fruit and vegetables should be made more prominent in the store than tinned fruit for instance. 8.3 Fresh and Easy should develop its Helping Schools scheme. This program makes it easy to help schools by just shopping at Fresh and Easy. During the last quarter of 2009 over $670,000 was raised for schools, California schools raised over $450,000, Nevada schools raised over $130,000 and Arizona schools raised over $90,000. Parents love to help their childrens schools to get books and equipment and this scheme will encourage their custom. It will also demonstrate Free and Easys intention to be part of the neighbourhood. 8.4 Fresh and Easy should trade more on their brands of wine. These again are exclusive to Fresh and Easy but will go a long way into convincing customers that their own brand is quality, because their wines have won more than 40 awards this year alone. Wines and Spirits magazine, one of the worlds leading wine publications, in its latest issue (June 2010) , awarded Free and Easy a Highly Recommended for its Chardonnay. The magazine tested 2195 wines and only those that showed the best relationship between price and quality were considered. This news should be flaunted by Free and Easy. 8.5 The stores operate self-service checkouts which we also have in the UK, but they are not usually the sole method of checkout. Fact is in this country we often see long queues at the self checkout points and choose to go to a normal checkout instead. Americans love attention and dont like staff standing by they want help they want to feel important to the store. So give them both types of checkout and avoid some criticism. At checkouts they also need to sort out the approval for purchases over $50, it entails waiting for an employee to come along and approve it electronically, A big holdup at the checkout. 8.6 Reading some customer reports on their shop at Fresh and Easy their ready-made foods are exceptionally fresh but the expiration date needs to be re-thought. Americans dont go shopping every day and it is a warmer climate in the USA. Likewise some of the packaging needs to be re-organised. Eat especially is at present packed in plastic containers. Meat, in a warm climate, needs to be shrink wrapped. Too much air in plastic containers leads to premature spoiling. However customers are not so keen on shrink wrapped fruit and vegetables. It seems fresher when it is loose, and usually you have to purchase the size of pack they have decided to offer whereas if it is loose you can choose as few or as many as you wish. Page 9

MARTIN STEVELY

8.7 The store must start accepting payment by the American Express Blue Card. This is a most popular method of payment in America and it is not at present being accepted for payment at Fresh and Easy. 8.8 Many customers go to Fresh and Easy in the evening because the store is open till 9pm. Other competition like Trader Joes are already closed. Is this not an indication for doing what we have seen some UK stores do like be open much later or even 24 hours ? I should suggest that it is well worth an experiment. The overall message is clearly that Fresh and Easy should carry on Evolving into what the US customer wants.

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MARTIN STEVELY

Summary 10.1 In summary, the first research done was in investigation into the company of Tesco, who they are, how they started, how big they are, how long they have been trading and how good their customer care policy is. It was discovered that Tesco is one of the top three supermarket chains in the UK and that they have been trading since 1929. They now have over 3700 stores and employ more than 441,000 people. 10.2 Tesco already trade overseas but in order to develop their company even further they decided to venture into the USA under the name of Fresh and Easy. These new stores were to be neighbourhood convenience stores selling fresh, healthy and good quality foods. Fresh and Easy opened mainly in low risk, somewhat deprived areas. They began selling mainly own brand goods and whereas own brand goods in US have the name of being low quality; much is being done to turn this opinion around. 10.3 It was discovered that Americans have different shopping habits from the UK. They tend to shop with a list and like to get discount coupons whenever they can. Americans are more ready to complain openly about what does not please them. 10.4 Fresh and Easy first opened its doors in US in 2007 and now have in 2010 one hundred and fifty stores in California, Arizona and Nevada. Tesco consider it a success that if after a few years (considering the high capital investment) they break even. In the current US, in fact global, financial situation many Americans are now looking to shopping closer to home instead of he big journey to the larger superstores. 10.5 Both Safeway and Wal-Mart are now opening smaller stores in California so they must recognise the Fresh and Easy are doing something right. Fresh and Easy are continually fine tuning its service to what the US customer wants.

References

MARTIN STEVELY

Tescos Strategy Presentation and Results www.Tesco.com/corporateinfo/ Summary of Tesco Results http://tesco.grouptree.co.uk Tesco Annual Review www.tescocorporate.com/images Tesco Share Price www.londonstockexchange.com Mail online www.dailymail.co.uk/news/ USA Today www.usatoday.com/money IPSOS Marketing www.ipsos-mori.com TNS Retail Forward www.marketresearchworld.net Synovate www.synovate.com Bloomberg Businessweek www.businessweek.com Fresh and Easy www.freshandeasy.com www.InTheNews.co.uk www.peoplespress.org Spiegel Online www.spiegel.de/international