Some are wary, but many indies find the power of Tesco irresistible

Tesco has surprised the market as much as it angers it, and its decision last week to enter the world of franchising through its One Stop chain was no exception.

The pilots would “help good independent family businesses make an even greater success of their stores,” declared Tony Reed, CEO of its 640-store convenience chain One Stop.

But what are One Stop’s plans for the model, what do indies make of it, and, more importantly, will it work?

One Stop is keeping its cards close to its chest. The location of the trial store is a closely guarded secret, with One Stop refusing to tell The Grocer even the area of the country it is in [answers on an email if you know, please!]. A picture supplied by Tesco, however, shows an interior shot, suggesting a modern, white interior with grey lettering.

What Reed can reveal, however, is that the store has been trading for several years and was converted “very recently” to One Stop from another fascia. “Since the store has been converted, trading has been very positive and we expect to see a considerable increase in turnover by the end of April versus original turnover,” he says.

The reaction from other retailers since the announcement has also been “really encouraging”. The trial is expected to expand to between six and 10 stores.

“We are talking through this concept with interested retailers and have a number of visits planned,” Reed adds. “But as we are still in the trial stage and not proactively recruiting retailers at this point, we are not presently sending out brochures.”

The move appears to have blindsided many indies. Having viewed Tesco as ‘the enemy’ for so long, now that it is offering to work together, it seems retailers don’t know whether to laugh or cry. A poll on this week found 43% backed the move, while 45% were against. The remaining 12% thought retailers would prefer Tesco Express to be franchised.

“Wow, this sounds amazing. I will be joining One Stop with help from Tesco,” posted one retailer on “Trouble for Nisa, Costcutter, P&H, Booker, Londis and everyone else, this is huge news.”

Another posted: “Good news for independents. I am ready to join One Stop shop.”

Others were not so welcoming. “Tesco knows it cannot match the independents’ local knowledge, unscripted customer service and genuine community retailing, and by hook or crook it is now out to steal that too,” says one leading independent. “Tesco has its eyes set on a bigger slice of the independent sector. And using the franchise route is just a smokescreen to add to its sales and bargaining power with suppliers.”

Another symbol retailer is “not that worried. “One Stop has a lot of stores anyway, so a few more won’t make much difference. And I have never seen it as major competition because, to be frank, its store standards aren’t that great.”

But the sheer strength of the package will be too much for some to resist. Tesco has a buying power of £36bn, and One Stop as a standalone company isn’t doing too badly either. The latest available financials (for the year to 25 February 2012) show trading is buoyant, with profits up 33% to £28.2m on sales up 20.3% to £662.9m, boosted by its 2010 acquisition of indie Mills Group. Retailers will also be able to sell Tesco brands not available to other indies such as Tesco Mobile products and popular tertiary brands including Chokablok.

Tesco’s chances of success in franchising are already being weighed up, and history shows it’s a tough nut to crack.

While Morrisons recently toyed with the idea of setting up a franchise operation for indies in conjunction with Costcutter, not since Somerfield launched Somerfield Essentials, in March 2004, has a big player tried it. Despite receiving hundreds of applications, few signed up, and in June 2005 the trial was put on hold following IT and ranging problems and scrapped the following year following the arrival of a new management team who axed the Essentials fascia in a bid to simplify the Somerfield business.

Currently, none of the big four have a franchise model for indies. The closest an indie can get is operating a The Co-operative store through Southern Co-operatives. The rest of the larger companies prefer to offer their franchises out to big companies. Marks & Spencer, for example, has franchised its M&S Simply Food stores out to SSP and motorway service operators, while Waitrose has 16 franchise sites managed by Welcome Break.”This move by Tesco to bring local ownership into their network through franchising could be very smart indeed, providing they get it right. We welcome the step-by-step approach they are taking,” says Brian Smart, director general of the British Franchise Association. “There will be many issues for the independents who One Stop want to attract to their brand: the extent of purchasing restrictions, in-term and post-term non-compete obligations, rights concerning encroachment, property and supply obligations, commitments on pricing strategies between different strands in the distribution channel, the utility of management information and EPoS systems for independent business owners, and so on. It’s a complicated business but with the right contractual framework and the right approach to network management it will be a substantial win for all stakeholders.” And Tesco’s in good company, he adds. According to the BFA, UK franchising across all sectors in 2011 grew its economic turnover to £13.4bn - an increase of £1bn or 8% on the previous year.

Other symbol groups will be keeping a close eye on how the trials pan out, especially as Tesco’s rivals are predicted to follow suit. But indies are used to being kept on their toes by the big four. The question now is will they beat them or join them?