Tesco finally goes global with bold advance on to Wal-Mart's home turf

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The Independent Online

When Tesco plants its blue, red and white banner on Californian soil next year, the US is likely to become the 13th country that the British retailer does business in.

That irony was not lost on a sceptical City of London, which greeted yesterday's revelation that Tesco was preparing to take on the world's most successful retailer on its home turf with some trepidation.

In the UK, where it has more than 30 per cent of the grocery market and takes at least one pound in every eight spent on the high street, Tesco is running out of options. Under the increasingly watchful eye of the competition regulator, the group is forced to be ever more inventive in the types of goods it sells.

Only last month it announced it was moving into the voguish world of cyber phone calls with the launch of a voice over internet protocol service. The grocer is testing out a store that doesn't even sell food to try to increase its 13 per cent share of the retail market. But the trial is believed to have met with only mixed success, and Tesco is a long way off being able to sell its catalogue of non-food products over the internet.

The easiest solution, therefore, is to look overseas for growth, popping new countries into its portfolio as its customers might its groceries into their shopping trolleys. But with its flags already dotted across 12 countries around the world, including the world's most populous, China, Tesco is running out of obvious destinations.

Since pulling out of France in 1997 - the retreat was Sir Terry Leahy's first major task when he took over as chief executive - Tesco has shunned the developed world in favour of faster-growing emerging markets. It has focused its efforts on building a credible presence in countries across central Europe and Asia. In some markets, such as Poland and Korea, it is already a sizeable player, whereas in others, such as Turkey, it still has plenty of scope for growth (see map). Jonathan Pitkanen, at Fitch Ratings, the credit rating agency, said: "All the easy wins are gone. Tesco has taken off all the low-hanging fruit in terms of markets that are easy to enter."

The result is that more than half of its floor space is outside the UK. Its overseas business will make more profit than J Sainsbury, the UK's No 3 supermarket chain. And this without stepping off the gas in Britain, where it delivered the strongest Christmas trading performance of any of the top supermarkets. Yet Tesco remains a relative minnow in the world's supermarket league, trailing Wal-Mart, Carrefour and Ahold by some margin.

More worryingly, many analysts believe the main drag on Tesco's shares, which have trailed those of other food retailers during the past six months, has been continued incredulity about its overseas operations. Its house broker, Merrill Lynch, estimates the cash return on Tesco's £5.5bn investment overseas, is 9.7 per cent, against a UK return of more than 17 per cent.

Philip Dorgan, at Panmure Gordon, says: "The jury is out is far as Tesco's international business is concerned because it is still not 100 per cent proven. Now it will be in 13 countries, which is unlucky for some."

Its Christmas trading update showed sales were slowing overseas, with the group's numbers undershooting analysts' expectations by some degree. Tesco is in the process of pulling out of Taiwan after failing to take on France's Carrefour in the competitive market. It is also struggling to make much headway in the highly fragmented Japanese market, where even its 104 convenience stores account for but a fraction of the overall retail market.

Sir Terry claims he is only one-fifth into the overseas expansion plan and eventually aims to make more money internationally than at home. But tailoring a food offering to so many different nationalities is a tall order.

The group tends to play safe by teaming up with a local retailer and creating a joint venture, as with China's Hymall, a chain of 39 hypermarkets in which it has a 50 per cent stake. It complements the local feel by rolling out a concept with the internal nickname of "Tesco in a box", which spans opening multi-format stores and stacking shelves with own-label goods that it can source globally.

In taking the organic route in the US, Tesco is treading a different path. After searching for a potential partner - or acquisition target - for the best part of two decades, the group figured it was best to go it alone. In a market where regional supermarket chains dominate and national chains are few and far between, Tesco failed to persuade the mainly family-owned grocers to sell up.

Tim Mason, the marketing director who will run the US venture, believes the company has found a gap in the market - namely a lack of easy-to-navigate shops selling high quality produce to affluent and time-poor Californians. "The biggest gap is in the area of convenience, and I use that word in a very broad sense," he said.

Crucially, Tesco has picked a rare corner of the States where Wal-Mart is relatively weak. Across California, Oregon and Washington, the retail powerhouse has 266 stores, compared with the 415 stores it has in Texas. Only in the north-eastern seaboard is Wal-Mart similarly underrepresented.

Tesco will hope the new venture boosts its cash returns and gives it a credible springboard to attack the rest of the American market. It dangled big numbers, carrot-like, in terms of the ultimate potential of the US grocery market, which is worth more than $600bn and forecast to grow 40 per cent over the next five years.

Somewhere in the depths of sun-drenched California, the shelves of a prototype Tesco store are groaning with groceries. That sight has pleased the handful of honoured West Coast residents who have been allowed a peek at the new concept, which is good enough for Sir Terry. Wal-Mart, watch out!

America: a graveyard for British retail ambition

WH SMITH

It took £30m of trading losses for the cards and magazine retailer to draw a line under its 18 years in the US. The post-9/11 collapse in the retail market saw it sell its US hotels retailing business to former management for £8m and the airports side for £41m.

MARKS & SPENCER

The UK retailing doyen lost two-thirds of its investment when it sold the preppy menswear chain Brooks Brothers for £160m in 2001. Stuck with its struggling New York-based supermarket chain King's after twice failing to persuade anyone to take it off its hands.

DIXONS

Its acquisition of Silo, a US chain, in 1987 proved disastrous after a recession left Silo unable to compete with larger rivals. Eventually the electrical retailer took write-offs of more than £200m to withdraw.

LAURA ASHLEY

Despite early success in the 1970s and 1980s, the champion of chintzy floral frocks eventually accepted just $1 to get rid of its US empire.

BODY SHOP

The ethical cosmetic group's founder Anita Roddick nearly destroyed the company by failing to do her homework before rushing into the US market. She also managed to make enemies of the group's US franchisees.

HMV

The music retailer closed its three remaining US stores in 2004, drawing a line under its loss-making American adventure.

J SAINSBURY

Performed a strategic U-turn by checking out of the US in 2004 when it sold Shaw's, its New England-based business, for £1.37bn to free up cash to placate its long-suffering shareholders.

NEXT

Yet another clothing retailer that has failed to crack the US market. In the early 1990s Next opened three trial stores, including one in the middle of Boston. Lost "a handful" of millions of pounds on the venture before beating a graceful retreat.

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