Hard Nut To Crack
By Jim Prevor, Editor-in-Chief, Produce Business
The decision of Tesco to enter the U.S. market with a convenience store format may tell us more about the problematic position of conventional supermarkets and the difficulty of competing with Wal-Mart and its supercenter concept than it does about the merits of c-stores.
Certainly, the City in London (the British version of Wall Street) is restrained in its enthusiasm. When Tesco announced that it would spend $485 million dollars a year to open a U.S.-based chain modeled after its Express format stores, its stock price dipped. Despite a claim that the chain would break even in year two.
Perhaps the problem is that other brilliant British retailers, such as Marks & Spencer (which tried its hand with Kings) and Sainsbury’s (which tried its hand with Shaw’s) have found the U.S. market daunting.
Maybe Tesco won’t have the many advantages in the United States it has in the United Kingdom. Tesco has no name recognition, no logistics network and, unlike home where it owns outright 85 percent of its U.K. stores, here Tesco will have to pay big bucks in rent for the prime urban locations necessary if this new format is to have a chance of success.
The truth is that Express is not really a convenience store. It is more like a small upscale grocery store in Manhattan or San Francisco, something like a D’Agostinos or an Andronico’s. The focus is on high-margin prepared foods and big lunch traffic from local office workers. U.K. Expresses are located where foot traffic is heavy.
In a sense, it is a brilliant move. It is a niche pretty insulated from competition with Wal-Mart and higher-margin than traditional supermarkets. But one shouldn’t get too excited. At the end of the 2004/2005 fiscal year, Tesco had 546 U.K. Tesco Express stores, an impressive number. However, at 2,000 square feet apiece, all 546 of them could fit into about six Wal-Mart supercenters.
Tesco has been studying the U.S. market for decades and is a minority partner with Safeway in the GroceryWorks Internet shopping service. Still, management will confront difficulties that will shock them.
The density of U.S. population is so much less than what Tesco Express stores experience at home that the stores will strain to move the volume necessary to keep all those prepared foods fresh and appealing. And foodservice offerings are what make the produce offerings possible. If you look at a chain such as Wawa, you realize the core of the produce rack is really the cooler for the sandwich program. It is the need to keep the sandwich program booming that led Wawa to an alliance with Missa Bay, transforming a small local wholesaler into a fresh foods distribution powerhouse.
The high density the Tesco Express stores require will necessitate urban locations, but our British friends will be shocked when they learn what operating in urban America is really like.
Wawa tried to open stores in New York but being advised to install bullet-proof glass and surveillance cameras offended management’s sensibility. It was a noble experiment, but human nature didn’t rise to the trust placed in it, and Wawa shuttered its stores when they were robbed blind.
And Tesco simply has no idea of how often it will get sued. There are three times as many lawyers per capita in the United States than in the United Kingdom.
Of course, they will learn all this, and if they are truly committed, they will succeed. If they have to change the format or juggle the branding, they will.
Research provides a lot of insight, but the experience is research as well, a type that reveals things no study ever will. It is why the school, for all its value, can never take the place of experience.
Convenience is an attribute not solely of the product but also of the distribution and services surrounding that product. This is why industry promotion efforts, so focused on marketing, are often so ineffective. You can’t sell more produce in general unless specific places sell more produce.
In gas station mini-marts across America, vending machines, fast food outlets, and drug stores that stock milk, eggs, and butter, there is a paucity of fresh produce. In many cases where produce is carried, the quality is so poor consumers can get turned off just looking at the product.
The industry lacks a distribution system for getting fresh produce to small outlets each day. Too large packaging often leads to infrequent delivery of excessive amounts of fruit. Produce vendors are accustomed to working with produce departments and dedicated produce personnel, so vendors are flummoxed when the guy in the convenience store that finally added a fruit display doesn’t know and doesn’t care about proper care and handling.
Foodservice purveyors are probably more suited for the job than anyone. They are used to small deliveries, splitting cases and so forth — a very labor intensive solution — but retail margins can’t usually handle the costs blended in at a white tablecloth restaurant.
Tesco Express will probably have a great produce section. Why? First, because they will do a large foodservice business and prepare a lot of things in store. This will provide a base for frequent, cost-effective deliveries of fresh produce. Second, whereas the typical c-store customer is a blue-collar male, the Tesco Express concept will likely skew to white-collar females who want salads and fresh produce, not 2-pound cheeseburgers.
Some of the produce business Tesco Express wins will be new for the trade — a lady who wants a snack and runs in rather than going to Starbucks. But a Tesco Express is less likely to steal business from a 7-Eleven than from a Safeway Lifestyles store.
The issue for the produce industry is how to appeal to the traditional c-store demographic and how to distribute produce in small quantities efficiently while making sure the quality of what is on display is always good. The British are welcome, but getting produce into c-stores is our problem to solve.