Tuesday, April 23, 2013

Tesco ... What went Wrong?

Tesco, a British multinational grocery and general merchandise is the third largest retailer measured by revenues and the second largest measured by profits. It has close to 6350 stores in 14 countries worldwide.  It is a well-known brand in Europe and the grocery market leader in UK with a 30% market share.
The first US store opened in Los Angeles in 2007 and the company had 175 stores across the west coast in California, Nevada and Arizona. They sold under the name Fresh & Easy.  The latest news from The Sun (http://www.thesun.co.uk/sol/homepage/news/money/4892702/Tesco-is-the-latest-Brit-who-failed-to-crack-US.html) tells that their store profit dropped to 96%! Now the company plans its exit from the US market. As indicated in the article “Seven Ways to Fail Big”, many of the reasons such as Pseudo Adjacencies , if not directly but indirectly fit in the case of Tesco. The graph below shows the dip in profits and share price.

Reasons for failure
Understanding American Customer behavior
This is one of the biggest reasons for Tesco’s failure in US. They tried to apply British retail model in the American market. For instance, they introduced the self-service checkout system which was not well accepted by American customers. A full service checkout was what Americans were used to. Also, Americans were used to large portions of food items and Tesco’s Fresh and Easy provided smaller portions with short expiry dates on many food items. The online loyalty program was not useful for Americans either. Tesco also targeted affluent customers instead of the upper working middle class customers. This did not go down well with many customers.
Moreover, Tesco opened stores in places like California where people generally drive to get their groceries.  They are used to big super markets and not small grocery stores. Such grocery stores would have probably worked well in New York , Boston or Washington D.C.

Brand Name and Over-ambitious Attitude
Tesco was a global brand but they operated as Fresh & Easy in the US. This did not create a big impact as their original identity was lost. Also, their initial roll-out plan seemed overambitious with executives thinking that everything would be perfect on the first try itself.

They faced high competition from big food chains such as Wal-Mart, Costco, Whole Foods and Trader Joe’s.  They failed to attract enough customers who were used to shopping in big super markets.

Economic Crisis in US
The time when Tesco started operations in the US was the time of economic crisis or recession. The company attributes this to be one of the reasons of failure, though customers disagree on this.

Tesco stuck to its initial model and opened lot many stores in spite of early indications of trouble.  A change of course earlier could have saved them.

I feel it is very imperative for a company to formulate a strategy to expand business, by keeping in mind the differences in demographic regions. It is not necessary that what worked well in one region, would work in other regions too. Tesco is a clear cut example for this.


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