In February 2006 Tesco announced that it was planning to enter the US retail grocery market.

Tesco planned to invest around $400m (220m) per annum, over a five year period, in its US venture. This was estimated to be sufficient to pay for between 100 and 150 stores in the first year of operation. Tesco undertook detailed market research including visiting shoppers at home to see what they bought and asking people to keep a food diary to observe what they consumed. A mock store was built in a warehouse on an industrial estate to help develop the model for the US market. This had to be kept secret to avoid competitors obtaining knowledge of Tescos plans and the stock for the mock store was purchased in the eastern states of America and shipped to California. The proposed market entry caused a great deal of interest in the USA where Tesco was expected to raise a serious competitive challenge to existing food retailers including Trader Joes, 7-Eleven, Kroger, Safeway, and Wal-Mart. Tesco thought that 7-Eleven with more than 5000 stores nationwide and Trader Joes (owned by the German company Aldi) with some 300 branches would be their major competitors. Tesco believed that its strategic format would enable it to undercut its main competitors prices, with the exception of Wal-Mart, by between 10% to 25% It was agreed that the first stores would be located on the West Coast of the USA in California, Arizona and Nevada. Unlike their other international operations it was decided not to use the Tesco brand name. The stores were to be named Fresh & Easy and referred to as Neighbourhood Markets. If the initial stores proved successful then a move into other areas of the west coast of the USA would take place. The first Fresh & Easy store was opened on 8 November 2007 in the town of Hemet east of Los Angeles with a further four opening in Las Vegas on 14 November. The company planned to open a further 100 outlets in the following 12 months. By mid - July 2008, 71 Fresh & Easy outlets were in business. The format of the new stores came as something of a surprise to American consumers. The muted green branded stores are bright and clean with a bias towards fresh and organic foods much of which is pre-packed, a relatively unusual feature in the USA. Around half of the products are Fresh & Easy own brands including high value-added ready meals. This, again, is unusual in America where brands dominate the food retail scene. First perceptions by some customers at the Hemet store were that prices were relatively high and that people were looking rather than buying. In addition there are no in-store checkout staff and customers are required to scan the bar codes on their purchases

before paying. This means that many of the products on sale have to be packaged to carry a barcode which somewhat undermines the companys environmental claims. In February 2008 Fresh & Easy announced that it was moving into northern California with plans to open 19 stores in and around Sacramento. However, at the same time Piper Jaffray, a major US broker, suggested that Fresh & Easy was not performing as well as Tesco had expected. This was denied by chief executive Tim Mason who has been quoted as saying We are very pleased with the performance of all of our stores. Every single week brings better news as sales, customer numbers and repeat visits are all growing. In March 2008 reports were emerging that Fresh & Easy was performing badly with one commentator saying that sales targets were being missed by up to 70% as a result of very weak footfall1. Tesco responded by saying that the claims were untrue and that they were bewildered by the report. However, at the end of March 2008 Tesco announced that it was freezing the Fresh& Easy store opening programme for three months to allow the business to settle down. The store opening programme was expected to resume at the beginning of July 2008 and this did, indeed, happen. However, the expansion plan has slowed and by 2009 the company will have opened around 60% of its original target. However, Tesco continued to experience problems because of the financial and economic crisis which hit the USA in mid-2007 and which has seen consumer expenditure fall dramatically in some parts of the country. Three of the States (California, Arizona and Nevada) in which Tesco established Fresh & Easy have been the most seriously affected by the economic crisis and this has created fresh problems for the company. In January 2009, to counter these problems, a range of 98cent products and $1 special offers were launched along with $6 off coupons for customers who spent more than $30 in a single visit. The company has claimed that the 98c packs increased sales by 11%. This is a competitive strategy which may work in the current economic climate and some analysts have argued that Fresh & Easy may benefit as shoppers trade down to lowerpriced stores. Some analysts continue to argue that Tescos attempt to enter the US market has been a failure and that the company should withdraw. Piper Jaffray has estimated that if Tesco were to withdraw from the US venture it will have cost the company 1bn. Tescos expansion into the USA has not been without its critics. The companys environmental claims have come under scrutiny, along with its property strategy, its non-unionisation policy in a relatively strongly unionised sector of business and its refusal to sign a community benefits agreement. Community benefits agreements are used by stores in the USA to gain customer loyalty. Tesco, in turn, has countered these criticisms.

1 Tescos Annual Review Statement for 2008 contained the following comment on its American venture, The early responses of customers to our offer has surpassed our expectationswith our research regularly confirming that they like the quality and freshness ofour ranges, as well as the prices and convenient location of the stores. Other major British companies, including Marks and Spencer, Boots the Chemist and Sainsburys, which have attempted to enter this highly competitive market have failed largely because they have not understood the psyche of the American consumer. It was this which motivated Tesco to undertake its huge market research programme prior to launching in California. However, Tim Mason recently admitted that the research on which the market entry was based might have been flawed.

NOT a failure??
Zoe Wood, retail correspondent The Observer, Sunday 13 April 2008

Tesco chief executive Sir Terry Leahy will this week attempt to silence critics who say its new American chain Fresh & Easy has been a failure. Although he will give some details of the performance of the four-month-old venture at the group's annual results on Tuesday, Leahy will stop short of giving a sales update. A decision to halt an ambitious Fresh & Easy opening programme last month was seen as evidence that it had been poorly received, but Leahy will try to reassure investors by saying the chain is on track and by sharing customer feedback. The supermarket is due to report profits up more than 250m at 2.75bn. The perception that it has failed to crack America is a chink in its armour at a time when it is making more headway overseas than in the UK, where sales are slowing. It is estimated that the international arm, with stores in 12 countries, generated half the rise in profits. Total sales will be up 10 per cent at 47.35bn. Tesco lost ground to resurgent rivals Asda, Morrisons and Sainsbury's over the Christmas period, and analysts are worried that its domestic business, which had sales of 35.6bn last year, has become unwieldy. Some analysts think that like-for-like sales growth at Tesco's UK stores slowed to around 3 per cent in the final quarter, compared with the 4.1 per cent recorded in the previous three months, which was also judged below par. By contrast, the Co-op will report underlying sales growth ahead of the market at more than 4 per cent, buoyed by demand for its Fair Trade and organic ranges, when it reports full-year results on Thursday.

The Co-op is in talks to buy Somerfield, which was put up for sale in January by its owners, who include property tycoon Robert Tchenguiz and private equity firm Apax Partners. The Co-op has tabled an improved offer of 1.7bn to win control, although the mooted figure is less than the 2bn to 2.5bn price tag originally attached by the consortium. If it succeeds, the Co-op will become the fifth largest player in the grocery sector. As the UK's largest store group, Tesco is seen as a barometer of consumer confidence. Leahy's comments about the outlook will be seized on by analysts already concerned that 2008 will be a washout. Tesco's shares have been marked down 18 per cent since the start of the year. The chain has expanded into non-food areas, such as clothing and electricals, in stores and via the internet, but these are weak areas generally as consumers defer spending on nonessential items. However, it is understood that Tesco has gained market share in clothing with its Florence & Fred ranges. Panmure Gordon analyst Philip Dorgan expects Tesco to react by slashing prices: 'We believe Tesco will aggressively invest in price to reverse poor sales trends and because it is what customers will respond to as we enter a recession.'