The UK’s largest retailer is to develop a convenience format similar to Tesco Express on the West Coast, with the first stores opening next year. It is investing £250m from existing resources and expects to break even by the end of the second full year of operation. The chain will not carry the Tesco fascia.
Last year The Grocer revealed that former trading director, grocery Colin Smith was on a fact-finding mission (The Grocer May 7, p4) and that he was with a team in Orange County, California (The Grocer May 14,pg5).
Tim Mason, Tesco’s marketing and property director, is to head up the new US business, which may explain why Smith - who was tipped to lead any operation - left to join Somerfield as trading and marketing director last month.
However, analysts have questioned the appointment of someone with little experience of the US. The move is also believed to have caused a boardroom rift (The Grocer, December 10, p5).
One senior industry figure said Tesco was entering the market “by stealth”. “I would not be surprised if it didn’t have a deal lined up for when it has its feet under the table,” he said.
“It is highly unlikely that between now and 2007 they will be sitting on their hands,” added one analyst. “You have to ask if this is all they are going to do?”
Shares fell 3% following what another analyst called a “frustratingly vague” conference call in which Tesco refused to give details on store size, the potential number of stores, whether the stores would be leasehold or freehold and the market opportunity. The company would only say that it was competing with everyone from supercentres to restaurants. It already operates an online jv with Safeway in the States and has a test store in Santa Monica.
“It changes the risk profile of investment in Tesco,” said Jonathan Pritchard, analyst at Oriel Securities. “The business wants to invest large amounts of free cash flow and we need a lot more reassurance on all fronts.”
However, Investec analyst Ingrid Boon said that, while Tesco had led the market to believe it had abandoned the idea of the United States, the retailer was expanding at a low cost to shareholders.”