Will Tesco be the Next Big Kahuna?

By Emily Esterson, 11-08-07

Oh, woe to the traditional American supermarket: You know, the Albertson’s, Safeway, King Soopers, Krogers, Whatever It’s Called in Your Neighborhood. From an economics standpoint, the supermarket, and what’s happened to it over the years, makes for an interesting study. Ready to eat, organic food, Wal-Mart, it all changed the supermarket landscape. And made it even harder to compete. And, if you happen to live in a poor neighborhood, your choices are limited. At the same time, if you live in a wealthy neighborhood, chances are you’ll have a supermarket at every major intersection. Everyone wants a piece of your food dollar.

So what of today’s news that Tesco, Britain’s largest supermarket chain, plans to enter the U.S. with its first market in California? What does this mean for my neighborhood? Probably nothing, since it’s a long way between central New Mexico and Los Angeles from an economics standpoint. But the company certainly has the power to give both Wal-Mart and the Albertson’s of the world a run for their grocery money.

As of this morning, Tesco opened (all at once) five Fresh and Easy stores in California. A week ago it opened one store in the retirement community of Hemet. And, get this: It plans to open 120 by the end of February. That’s right, 120 stores in the space of four months. And 200 in the Western U.S. by February 2009.

Tesco plans to open in what it calls “food deserts.” It’s referring to neighborhoods long abandoned by grocery chains as too poor, too dangerous, or too economically uninteresting to bother with. The company says it will open in such communities as Compton, California, which has been underserved by other markets.

What Tesco offers that others do not is a much larger, and less expensive, selection of ready to eat meals. The company says its food if fresh and ready to serve, and it doesn’t have any qualms about competing, price-wise, with Wal-Mart, or with any other supermarket. It has been known in the U.K. to undertake aggressive, predatory pricing to beat up its competition.  “Neighborhood retailing is successful when the prices are sharp,” a Tesco representative told Reuters. “The reason (consumers) leave the neighborhood is because the value’s not good enough. What this brings back is great value to the neighborhood.”

And Tesco can keep its prices low: Rather than work within the U.S. supermarket system of distributors, many of whom charge grocers stocking fees and are unwilling to compete on price, Tesco is bringing its own labels to the its Fresh and Easy markets. Like Trader Joe’s famous Two-Buck-Chuck, Fresh and Easy has the $1.99 Big Kahuna, an Australian wine, which it is importing through a new U.S. subsidiary of a British company. And that’s just one example. It will deliver its own food through its own fleet of trucks through its own distribution system.

How is Tesco poised to change the supermarket business? If successful, it could have almost as much of an impact as Wal-Mart Supercenters did on traditional supermarkets. With its fresh-foods, ready to go concept, it can compete with Whole Foods and Wild Oats much costlier takeout counters. Contrary to its marketing, it has planned at least half its markets in higher-income neighborhoods.

Where Tesco finally ends up in the big picture of the U.S. food industry is any analyst’s guess. But in case you’re thinking of buying stock, the company’s was up almost two points today on London’s FTSE.