American dream that died for Tesco

From its 300,000 square ft manufacturing facility shimmering on the edge of the California desert, to its supermarkets shrouded in San Francisco mist, Fresh & Easy was supposed to be the venture that transformed Tesco from a British-based supermarket chain to a US powerhouse.

As it is, Tesco’s American dream is in tatters. A strategic review, ordered after £1bn of investments and almost £850m of losses, is expected to lead to a withdrawal from the country.

“The business has failed, let’s face it,” said Tesco chief executive Philip Clarke of Fresh & Easy, the brainchild of his predecessor Sir Terry Leahy that launched with much fanfare five years ago.

Tesco has also parted company with Tim Mason, the head of the US business, Tesco veteran, and the last of senior Tesco directors who built the group under Sir Terry. Mr Mason is expected to leave with a £1.7m settlement, and £1.8m of long-term incentives already earned. He has also accrued a £9m pension pot.

Tesco is not alone in finding the US a difficult market to crack. The history of retail expansion is littered with examples of foreign-based groups that failed to build big American businesses.

In 1988, Marks and Spencer bought Brooks Brothers, the US clothing retailer, and Kings, a supermarket chain. Both were later sold for a fraction of their purchase prices.

J Sainsbury did well with Shaw’s, although it did suffer problems with US unions. It sold the business to Albertsons for $2.5bn in 2004, as it sought to turn round the fortunes of the core UK chain.

On the face of it, a European grocer should find it simpler to enter the US than other markets, such as South Korea, China, Brazil or Russia. After all, both British and American consumers speak the same language and like to stock up on food and household essentials.

“There is an inherent assumption that America is very like Britain, with a slightly different accent,” says Allyson Stewart-Allen, head of consultant International Marketing Partners.

But when it comes to groceries, US and European consumers have vastly different tastes.

Tesco found that US shoppers like to pick up and touch their fruit and vegetables, something that proved difficult with Fresh & Easy’s pre-packaged produce.

US consumers like stocking up their spacious freezers with a large amount of frozen food. As the brand name suggests, a plentiful selection was not initially on sale in Fresh & Easy. They also like brands, but Tesco focused on developing its own-label product range, which failed to resonate with shoppers.

Tesco experimented with self-service checkouts as well, a common sight in the UK, but rarer in the US.“We are not used to low service in grocery,” says Ms Stewart-Allen.

US shoppers also expect staples such as fresh coffee to take away, as well as freshly baked bread, in their supermarkets. Fresh & Easy did not initially offer these features, even though some investors and analysts questioned why such obvious points were missed in the early days of the venture.

In April 2011, Mr Clarke admitted there were big problems at Fresh & Easy, which he said had “just pulled away too much from the mainstream”. Consequently, he set about putting bakeries and fresh coffee stands in stores. He also revitalised Fresh & Easy outlets to make them feel warmer and less utilitarian.

But it was too late. The changes failed to lure shoppers to the stores, while Tesco was still grappling with a dire economy and fresh competitive threats from Walmart and Aldi.

“I’m in Los Angeles and I came here 10 times in the past 18 months,” Mr Clarke said on Wednesday. “We gave the business the best shot.” He was in the US to announce the strategic review.

Analysts also point out that the US is made up of a collection of local markets; tastes can differ as much from state to state as they do across national borders. Many chains concentrate on particular states or regions. Even Walmart, the world’s biggest retailer by sales, has traditionally been under-represented in some areas, such as the west coast.

But some analysts argue that the US market is not so difficult to navigate and that Tesco simply misread the needs of the US consumer and made too many mistakes.

Indeed, some European retailers have managed to build successful US operations. Probably the best example is Aldi, which has built a discount chain of more than 1,200 stores across 32 states.

Trader Joe’s is also owned by the family trust of one of the German billionaire brothers behind Aldi. In its quirky stores, staff wear Hawaiian shirts, shelf-edge labels look handwritten and the walls are adorned with colourful murals – a world away from the traditional image of the austere discounter.

Ahold and Delhaize operate US chains too, which they acquired rather than built from scratch. Ahold has experienced challenges, however. The US unit was at the centre of an accounting scandal in 2003 that almost bankrupted its parent.

“I’m not sure it is especially difficult to crack the US,” says Clive Black, analyst at Shore Capital. “The US is a reasonably open market, and it's a very democratic market. If you have got a retail formula that is appropriate to the markets, the Americans will embrace it. I don’t think they will care where it originates.”

“I believe it was self-inflicted mistakes that made it impossible for Tesco to succeed in the US, says Dave McCarthy, analyst at Investec Securities.

But Andrew Kasoulis, analyst at Credit Suisse, says: “They have taken the right decision for shareholders. But we are never going to know whether the great experiment would have ever worked.”