Tesco stuns City with move into America

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Tesco finally unveiled its long-awaited attack on the US grocery market yesterday with plans to invest £250m a year starting a convenience store chain from scratch on America's prosperous West Coast.

The move stunned the City, coming just weeks after the UK supermarket giant steered investors away from the possibility of going head-to-head with the world's biggest retailer, Wal-Mart, in its home market.

It is Tesco's first attempt to conquer a first world market since it retreated from France almost a decade ago.

Tesco plans to launch its concept, which will be modelled on its existing Tesco Express format, in 2007. It expects the chain to break-even two years after the first store opens and will fund the investment out of its existing resources.

The UK group is breaking new ground in opting to take the organic route into the US in the hope it can avoid the rude awakening from the American dream that has cost many other British retailers dearly in the past. Marks & Spencer, Dixons, Laura Ashley, HMV and Next are among the long list of retailers that have poured hundreds of millions of pounds into futile attempts to crack the world's biggest consumer market.

Tim Mason, Tesco's marketing director who sits on the main board, will be in charge of running the operation after the recent defection to Somerfield of Colin Smith, Tesco's trading director who spent six months researching the US market.

Analysts at Dresdner Kleinwort Wasserstein estimated that capital expenditure of £250m, which is about 10 per cent of the group's total annual capex budget, would buy Tesco around 100 stores per year, enabling it to build critical mass quickly. They were left guessing as to what the new chain would look like because Tesco refused to flesh out its plans for fear that its US rivals would steam in.

Tesco's lack of detail frustrated some analysts. "This is not the country to go in and say 'trust us' given how many companies have gone to the US and failed," Jonathan Pritchard at Oriel Securities said. Others were more sanguine, drawing comfort from the fact that Tesco has spent the past two decades sizing up the US.

For many, the best news was simply that yesterday's announcement drew a line under months of speculation that Tesco was poised to make a multi-billion pound acquisition.

In targeting the West Coast, Tesco is taking on Wal-Mart where it is weakest and, in addition, it believes its focus on convenience stores will enable it to fill a niche in the market.

Sir Terry Leahy, the chief executive, said the group felt it had found a format that would be "really popular" with American consumers. "This is a tremendously exciting move for Tesco which will add a new leg to our international expansion. The United States... [has] strong forecast growth and a sophisticated retail market."

Philip Dorgan, at Panmure Gordon, said: "For Terry to come across so confident when he normally likes to downplay things means I think they are on to something."