When you think about London, the obvious landmarks come to mind: Big Ben, Buckingham Palace and the Tower Bridge But there is an unofficial staple in the UK. They extends. Well beyond the country: Tesco. It's the largest retailer in the UK with over 3,400 stores. The brand has been met with success abroad in Europe and Asia with international operation profits of over half a billion dollars in 2018. There are more than 6,500 stores worldwide, but there's one place at the UK retailer just didn't take off: the United States Tesco announced its U.S. Expansion in 2006. And at the time, Tesco was the third biggest retailer on the planet. But the brand just didn't click with Americans. Tesco left the U.S. in 2013 when it sold off its remaining stores to Yucaipa companies. To understand why Tesco failed in the U.S., let's go back to the company start. Tesco got its start in 1919 when Jack Cohen began selling surplus groceries from a stall in London's East End. The first official Tesco store opened ten years later with the idea of bringing affordable foods to the people of Great Britain. In the 1930s and 1940s, Tesco expanded across London and the suburbs. Tesco went public on the London Stock Exchange in 1947 and in the 1950s, they opened its first supermarket. Starting in the 1990s, Tesco set its sights on global expansion. Tesco had stores in the Czech Republic, Poland, Ireland, Thailand, Malaysia and India. By 2007, Tesco had over 1,300 stores in 12 countries. In that same year the company invested roughly $500 million to establish operations in the United States. And In November of 2007, Tesco entered the U.S. Market. Instead of going by the name Tesco, these stores opened under the name Fresh & Easy. The name was supposed to introduce Americans to what they would expect from shopping at Tesco in America, fresh food at a reasonable price. It also had small store formats to make shopping simpler and they offered lower prices under its company-owned labels. For Americans, the shopping experience at Tesco is a lot different from what they were used to. Fresh & Easy stores were a fraction of the size of the average American grocery store. They were designed for the kind of consumer who shops daily. They were more ready to go meals for consumers than your typical American grocery store. And there are lots of self-service checkouts. The format of typical American grocers are really big compared to Tesco's. They are designed for a shopper who shops in bulk and on a weekly basis. That means checkout counters are typically staffed with clerks and baggers and there are more brand names on shelves and there isn't nearly as big an emphasis on ready to go meals The designation Fresh & Easy is actually a very good sub-branding In other words, Fresh & Easy, you know pretty much sums up the two key attributes that they were selling a freshness of the product and convenience. The first of Tesco's 53 fresh and easy stores all launched in the West in states like, California, Arizona and Nevada. So, how did Tesco come up with its strategy for the U.S.? They actually embedded with the American consumer before entering the market. Tesco sent executives and Anthropologists to live with families in the U.S. to get a sense of how the typical American family spends their money on groceries. And they thought a large number of people, maybe 40 people into California, to research the market. These people did not research the market very intelligently. They understood they culture to a degree. The concept of these Fresh & Easy stores, the small convenience store, with Fresh & Easy food. You know, that was something that would work in London with Tesco Express, but wouldn't work so easily in the LA area. And that Tesco speak in the United States, they had 208 Fresh & Easy Banner stores and all were in the West. That was actually well below expectations. Tesco initially planned to open 200 stores by the end of 2008. But it ultimately wanted to open 1,000 stores. But by 2013, the retailer was hemorrhaging cash in its first five years in the U.S. The company racked up losses of over a billion and a half dollar. Are sales improving on a weekly basis? Every week. Are they meeting Tesco's original targets? Our sales are improving every week and we're very happy. We're exceeding budget. You're exceeding budget? We are exceeding our budget. You're making a profit? We are... I didn't say that I said we're exceeding our budget. Tesco anticipated It would finally break even in 2014, but the brand decided not to wait it out. It announced in April 2013, that Tesco would exit the U.S. market What went so wrong with Tesco in the U.S.? When Tesco launched in America its stores were all located in the West. At the time they decided to enter the U.S. market, they just done their research. They had found that per-capita spending at supermarkets in the western states, where they had targeted, was was higher than any other region in the country. Actually about 15% higher than the national average in 2007. But then the financial crisis of 2008 hit. Like many other companies, Tesco didn't see the Great Recession coming. Where two of the core metropolitan areas that they had decided to focus on were Phoenix and Las Vegas. When the recession hit, the economy in those two metro regions crated Subprime mortgage crisis and the Great Recession was gonna be bad news for anybody. But their particular geographic focus in the West meant that it was particularly bad news for them. Tesco's locations also happen to be in some of the states affected most by the Great Recession. Arizona, California and Nevada saw unemployment rates that are higher than the national average. Consumers in these states also cut back on spending and when they did spend they went to retailers that offer the lowest price as possible. But just in general, in terms of entering the market, in terms of the recession, this is a really bad time to kind of have this message that fresh and easy espouse of having a fresh and healthy products and a competitive price. Because as consumers look to stretch their budgets as far as possible when the recession hits, they turn to well-known retailers that have long-standing reputation for low prices. These stores were also in areas where there wasn't much foot traffic. So they ending up acquiring leases on a large number of properties there were basically on the wrong side of the road. In other words, they were on the inbound commuting side of the highway instead of the outbound or going home side of the highway. So you can see immediately that you know people are gonna go straight by them on the way into work when you want to go and to get some to eat on the way home from work, they're on the wrong side of the road. Geography was only part of the problem. Tesco also faced pushback by the American consumers. The Fresh & Easy stores didn't embrace the idea of the classic American grocer. Instead they embraced Tesco's British style of food shopping. American grocery shoppers tend to gravitate toward larger stores that have everything under one roof. But the Fresh & Easy chains were approximately one-fifth the size of the typical American grocery store. The reason for the smaller store footprints is because Tesco's typical shopper shops at the store daily. Smaller stores make it easier for shoppers in the UK to grab what they need on the day-to-day basis and go home. But American consumers tend to grocery shop in bulk on a weekly basis. Plus, the Fresh & Easy stores also place a substantial focus on ready to go meals which are a big seller in the UK and Europe. Tesco built a massive distribution center in Riverside, California complete with the commercial kitchens that helped churn out these prepared meals. But Americans are more accustomed to ordering takeout for cooking meals themselves. Then there were the safety issues with Tesco's food that turned away American shoppers Fresh & Easy stores offered produce that was wrapped together in cellophane bundles. Now consumers in the US, however, and that might have worked in the UK or in Europe, but consumers in the U.S. they're picky when it comes to getting their produce. Because people want to be able to touch their produce before buying it. However, because the the food was wrapped or the produce was wrapped in cellophane, people weren't able to do that. And additionally, if they wanted, for example, like one item like one onion or one bell pepper. They were not able to do that. They would have to buy it out of it and wrapped with multiple items. Tesco's Fresh & Easy chains didn't go after big retailers like Target and Walmart. They tried to target a niche market of consumers. But the stores just simply didn't resonate with American shoppers. In the end, Tesco pulled out in 2013 at the cost of several billion dollars. They sold off its stores and its distribution and production facilities to Yucaipa companies. Yucaipa acquired more than 150 store locations, although others were shuttered by Tesco. Tesco also ended up loaning Yucaipa companies $120 million to take over the Fresh & Easy brand. But just two years later after the sale, Yucaipa began to close down the remaining Fresh & Easy stores and in 2015 the company filed for bankruptcy. CNBC reached out to Tesco about the company's time in the U.S., but the company did not respond to any questions. But Tesco isn't the only British supermarket to fail in the U.S. Sainsbury's exit the U.S. in 2004 and Marks & Spencer's called it quits in 2006. So Tesco's ill-fated attempt to break into the U.S. wasn't totally unprecedented. But it did turn out to be one the biggest failures yet and resulted in major losses for the UK retailer.
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