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THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE DEPARTMENT OF SUPPLY CHAIN AND INFORMATION SYSTEMS THE RISE AND FALL OF TESCO IN THE UNITED STATES ERIKA VEISZLEMLEIN FALL 2018 A thesis submitted in partial fulfillment of the requirements for a baccalaureate degree in Supply Chain and Information Systems with honors in Supply Chain and Information Systems Reviewed and approved* by the following: Dr. Robert Novack Associate Professor of Supply Chain and Information Systems Thesis Supervisor Dr. John C. Spychalski Professor Emeritus of Supply Chain Management Honors Adviser * Signatures are on file in the Schreyer Honors College. i ABSTRACT Tesco—an uncommon name in North America, yet one of the largest retailers of our time. With nearly 7000 stores worldwide and 460,000 employees, it is no surprise that Tesco currently holds the title of ninth largest retailer in the world. Founded in 1919 by Jack Cohen, a former member of the Royal Flying Force, Tesco began as nothing more than a small grocery stall run by a twenty-one year old boy. After thirteen years of expansion, Tesco became a private limited company in 1932, followed by the construction of its first headquarters and warehouse, the most modern of its kind in England. The next major milestone materialized following the Second World War, when it became a publically traded company in 1947. By the time Cohen died in 1979, the company’s total sales had reached £1 billion and were to double in the following three years. In 1995 it claimed the title of the UK’s top grocer, a title it continues to hold today. When the company began to experience rapid growth in the 1990’s, more strategic business plans became vital. As the turn of the millennium approached, Tesco introduced several initiatives that would change the company forever, including: 1) clearly defining the company’s mission and values, 2) becoming totally customer-oriented, 3) providing better customer value through a more lean supply chain, 4) to be as strong in non-food products as in food, 5) to develop a profitable retail service business (which would soon manifest into Tesco Bank), and finally, the topic of discussion for this thesis, 6) to be as strong internationally as domestically. To fulfill this goal of international expansion, Tesco attempted to enter a sought-after market much different from its European roots—the United States. In 2007, under the brand name “Fresh & Easy,” Tesco entered the American Market. Establishing locations in California, ii Arizonia, and Nevada, the chain aimed to sell fresh, readily prepared food and produce. 200 locations were established and kept their doors open for 6 years, until operations ceased in 2013 due to insufficient profits. 150 of the stores were sold off to Yucaipa Companies which kept the stores afloat until the end of 2015. The remaining fifty were closed completely, resulting in the loss of tens of millions of dollars for Tesco. Why did the expansion fail, and, if Tesco were to try again, how should they do it? The following pages will address these two critical questions. iii TABLE OF CONTENTS LIST OF FIGURES ..................................................................................................... v ACKNOWLEDGEMENTS ......................................................................................... vi Chapter 1 Analysis ....................................................................................................... 1 What Went Wrong ........................................................................................................... 1 The United States’ Economy .................................................................................... 1 Britain’s Economy .................................................................................................... 3 Competition .............................................................................................................. 4 Internal Factors ......................................................................................................... 6 The Fresh & Easy Concept ....................................................................................... 9 What Went Right ............................................................................................................. 10 Market Research ....................................................................................................... 10 Technology ............................................................................................................... 11 Chapter 2 Plan .............................................................................................................. 13 Niche Market .................................................................................................................... 14 The Grocery Matrix .................................................................................................. 14 Reading the Matrix ................................................................................................... 16 Where the Need Exists ............................................................................................. 20 Competitive Pricing and Experience Approach ............................................................... 21 Festival Foods .......................................................................................................... 21 The Demographic ..................................................................................................... 22 Concept and Strategy ............................................................................................... 24 The Stores ................................................................................................................. 27 Convenience and Quality Approach ................................................................................ 28 Sprouts Farmers Market ........................................................................................... 28 The Demographic ..................................................................................................... 29 Concept and Strategy ............................................................................................... 30 The Stores ................................................................................................................. 32 Conclusion ....................................................................................................................... 34 34 Appendix A Tesco Layouts and Other Store Details .................................................. 36 Tesco Layouts .................................................................................................................. 36 Other Store Details ........................................................................................................... 37 iv BIBLIOGRAPHY ........................................................................................................ 38 v LIST OF FIGURES Figure 1. Unemployment by State, 2009. ................................................................................ 2 Figure 2. United States Consumption, 2007-2009. .................................................................. 3 Figure 3. Amazon Services Timeline, 2007-2018. .................................................................. 5 Figure 4. Tesco Supercenter Floor Layout, approx. 200,000 square feet. ............................... 8 Figure 5. Tesco Express Floor Layout, approx. 2,500 square feet. .......................................... 8 Figure 6. Fresh & Easy Floor Layout, approx. 10,000 square feet. ......................................... 8 Figure 7. Fresh & Easy "Scan as You Shop" Feature. ............................................................. 11 Figure 8. "Friends of Fresh & Easy" Rewards Card. ............................................................... 12 Figure 9. Grocery Matrix. ........................................................................................................ 15 Figure 10. Grocery Expenditures as Percentage of Total Expenditures by State. ................... 23 Figure 11. Competitive Pricing and Experience Potential Store Layout. ................................ 27 Figure 12. Convenience and Quality Potential Store Layout. .................................................. 33 Figure 13. Implementation Timeline. ...................................................................................... 34 vi ACKNOWLEDGEMENTS A special thank you to my friends, family, and boyfriend for their encouraging support throughout the writing of my thesis and entire college career. Additional thanks to the Schreyer Honors College and Smeal College of Business for providing endless opportunities and support through my time at the Pennsylvania State University. I visited my first Tesco in Hungary with my family when I was just five years old. I was captivated by the store’s size and offerings, and the store has become a highlight of my trips to Hungary to visit my father’s family ever since. 1 Chapter 1 Analysis What Went Wrong The United States’ Economy On October 9, 2007, the United States Stock Market hit an all-time high. These record- high numbers could be attributed to the United States housing market boom, taking off in the middle of the decade. However, the growth screeched to an abrupt halt as 2007 came to a close, when the nation experienced two consecutive quarters of decreasing economic growth—the defining characteristic of an economic