THE STATE UNIVERSITY SCHREYER HONORS COLLEGE

DEPARTMENT OF SUPPLY CHAIN AND INFORMATION SYSTEMS

THE RISE AND FALL OF 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.

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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 ...... 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

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LIST OF FIGURES

Figure 1. Unemployment by State, 2009...... 2

Figure 2. United States Consumption, 2007-2009...... 3

Figure 3. 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

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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.

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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 recession. The next two years saw the near doubling of the national unemployment rate, millions spent in government bailouts, and the dropping of the

Dow by fifty percent of its all-time high in October of 2007. Although the economic disaster was felt in nearly every corner of the country, several states were more severely impacted than others.

Due to a substantial growth in residential areas prior to the recession, Nevada, Arizona, and

California were among the states hit hardest. As figure one shows, between 2008 and 2009, unemployment in Nevada increased by a staggering 5.1 percent, by 3.2 percent in Arizona, and

4.2 percent in California. 2

Figure 1. Unemployment by State, 2009. These increases in unemployment were accompanied by decreases in consumption. From hitting an all-time high at the tail end of 2007 to hitting a nearly all-time low mid-2009, figure two portrays how personal consumption throughout the United States dropped by upwards of

300 billion dollars. Although the retail grocery sector is price inelastic by nature, many chains felt the pressure. Chains such as Whole Foods, known for its fresh produce, meats, and other high quality products, saw a stock drop of nearly seventy percent between 2006 and 2008.

Target, also known for its wide variety of fresh food, was hit hard by the economic downturn, experiencing a 22.3 percent drop in profits in 2008. Despite the major impact of the financial crisis on retailers across the country, there was one that managed to turn the turmoil into profit— 3 . Well known for its low prices and wide variety, Walmart overshadowed all competition in a time of penny-pinching and financial disaster. The world’s largest retailer experienced a 5.1 percent growth in in-store sales between 2008 and 2009, accompanied by a 2.7 percent increase in shares.

Figure 2. United States Consumption, 2007-2009.

Britain’s Economy

Although understanding the economic state of the United States and its major grocery retailers during the Great Recession is vital in examining the introduction of Fresh & Easy by

Tesco, also to be considered is the economic condition of Britain during this time, and how the 4 Recession affected Tesco as a whole. Resulting in a six percent decrease in overall GDP and a two percent increase in unemployment rates, the United Kingdom was not immune to the ongoing crisis in the United States. These major impacts naturally led to decreases in consumerism as well. The onset of 2009 saw a decrease in consumer spending of 1.2 percent alone, accompanied by an overall decrease in employee compensation of 1.1 percent. Much like the United States, no industry was immune to the extreme economic downturn, including

Britain’s largest retailer. By the end of 2008, Tesco had experienced its lowest annual growth in fifteen years, coming in at just two percent. This increase paled in comparison to the company’s discount rivals, and , which respectively experienced 20.7 percent and 12.8 percent sales increases amidst the recession.

Competition

Although it is safe to say that the economic state of both the United States and Britain massively affected the introduction of Fresh & Easy, it is certainly not the only factor to be considered. Pure competition from multiple grocers also created massive obstacles for the new chain, especially competition from the aforementioned chains, some being Walmart, Whole

Foods, Target, Aldi, and Amazon. This innovative competition came in many forms. For

Walmart, this innovation came in the form of their Supercenter store format expansion of nearly

400 stores and marginal decrease of traditional discount store formats between 2012 and 2015.

This “trade-off” of store formats provided more variety to consumers, with less stores offering traditional consumer goods and more stores offering a full-scale . A similar shift occurred at Target with the opening of its first dedicated food distribution center in Florida in 5 2008. The center was designed to handle perishable goods such as meat and dairy items, a design that would prove helpful in 2009, when the company expanded the offering of fresh foods to nearly all of its locations nation-wide. For Aldi, innovation came in the form of massive store expansion. Although the United States saw its first Aldi store back in 1976, rapid expansion did not take place until 2008 and on. The past decade has witnessed the near doubling of Aldi, U.S. locations, with the location count reaching 2000 stores in 2018. As for Amazon, innovation came easy to the tech giant. Although the grocery sector was an untouched space to the technology industry, Figure 3 displays Amazon’s initiative as the first to enter , introducing their

“AmazonFresh” service around 2007. The service allows customers to order fresh foods such as produce and meat directly from their Amazon accounts and have them delivered to their doors.

AmazonFresh was proceeded by “Prime Pantry” services, which offer only non-perishable items, and “Prime Now,” which offers perishable, non-perishable, and restaurant items. “Amazon

Dash” buttons and “AmazonGo” are more recent innovations, respectively offering easy reordering of common household items with the click of a button and brick and mortar Amazon

“smart” stores.

Figure 3. Amazon Services Timeline, 2007-2018.

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Internal Factors

With the external factors of economic climate and market saturation taken into account, it is also vital to consider the internal factors that may have contributed to the success, or lack thereof, of Fresh & Easy. Although analysts have varied opinions on the specifics behind the downfall of the chain, there seems to be consensus on one major misstep identified—a lack of focus on the demographic. In an interview with Certified Safety Professionals (CSP) Daily

News, Gerald Lewis, a New York based retail consultant, shared his opinions on the decisions of the chain in January of 2016, just one year after the official closing of Fresh & Easy. According to Lewis, the desired demographic for the chain was shoppers of the Aldi-owned American chain, Trader Joe’s. By offering “fresh,” pre-prepared foods and tasting samples, the chain hoped to enter a niche market that had not been tapped in the United States (qtd. in Peters, “Fresh &

Easy: Doomed Since Day One?”, 2016). However, the concept was not as warmly-welcomed as anticipated. To begin at a macro-level, American consumers primarily struggled with the name of the chain itself. In an interview with shoppers, one individual commented that the name

“Fresh & Easy” spoke to them as the name of a deodorant brand or women’s hygiene product.

Others commented that it looked, and sounded, like just another grocery or convenience store.

The new chain also missed the mark of a target demographic in regard to choice of store locations. Despite a desire to entice “middle-class” shoppers of chains such as Trader Joe’s, the company chose store locations across polar opposite demographics, opening its first stores in 7 some of the poorest neighborhoods of Phoenix (those with median annual incomes of just

$37,500) in addition to the richest neighborhoods of Phoenix, where average annual income rang in at $93,000. The intent for this broad spectrum was to offer an entirely “middle of the line” grocery store—one that could be utilized by all classes, revolutionizing the grocery scene in the

United States. However, the ambiguity of a target demographic ultimately led to a shopper experience in which no one felt like they quite belonged. The lack of brand recognition and demographic were perhaps Tesco’s first failures when it came to the introduction of the chain, followed by the layout and atmosphere of the stores themselves. Much smaller than Tesco’s traditional stores across Europe, yet much larger than their Tesco Express convenience stores in urban areas, the new stores ranged in size from 10,000 to 15,000 square feet. Fresh & Easy stores were a layout the company was mostly unfamiliar with. According to customers, store décor and atmosphere lacked, especially when compared to direct competition, Trader Joe’s. Fresh & Easy also opted for a heavy reliance on self-checkouts due to its less conventional size, which also tended to sit poorly with American shoppers of 2008-2012. A fairly new concept at the time, shoppers were still used to face-to-face service, not the use of a machine to complete their own order. According to a Guardian journalist, the self-checkout system was “far from idiot-proof” and “often left customers pleading for help” (Bateson, 2012). Lack of brand recognition and poor shopper experience were two hefty contributors to the demise of the chain, however the major downfall of the chain can be observed simply in the service offered. 8

Figure 4. Tesco Supercenter Floor Layout, approx. 200,000 square feet.

Figure 5. Tesco Express Floor Layout, approx. 2,500 square feet.

Figure 6. Fresh & Easy Floor Layout, approx. 10,000 square feet.

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The Fresh & Easy Concept

As the name might suggest, Fresh & Easy aimed to offer a wide selection of fresh, pre- prepared, pre-packaged food that could be eaten immediately or after warming. The food itself was prepared daily by “independent fresh-food processors,” delivered to docking centers, then shipped out to stores the same day. Despite its popularity in England, this “cold chain delivery system” did not yet exist in the United States, which Tesco saw as a shining opportunity.

However, increased competition in this sector, the quality of the food itself, and the lack of potential customers in the stores’ surrounding areas became massive barriers. Walmart, already succeeding financially, had the capability to begin experimenting in the fresh, prepared food sector. The retail giant’s brand recognition and value were able to undercut the product and price offered at Fresh & Easy, drawing customers away from its doors. The quality of the food offerings themselves further deterred customers, pushing meals that were far less “fresh” than consumers expected when considering the store’s concept. The quality of meals faired comparably to those of Walmart and other convenience stores, making the premise of the store less than useful in the minds of consumers, especially in regard to value. Boasting higher prices than those of Walmart and lack of entry into the “coupon game,” American consumers failed to feel as if they were getting the most for their money. Finally, the English retailer also failed to consider one more key-component when it came to rolling out its pre-prepared meal oriented operation—population density. The demand for fresh, already prepared meals in England is very high, which, according to Lewis, can be closely correlated to the country’s high population 10 density, currently sitting at roughly 702 people per square mile. As commuters head home from major cities after a day of work, Tesco stores stocking fresh, prepared meals are placed in the middle of the rush. However, the same was not reality for Fresh & Easy stores. The first Fresh &

Easy stores were opened in Nevada, California, and Arizona, boasting the following population densities per square mile, respectively: twenty-eight, two-hundred and fifty-five, and sixty-three.

Less foot traffic meant less sales, and less sales meant increased waste of “fresh” meal offerings.

What Went Right

Market Research

Regardless of their missteps, as an experienced retailer, Tesco did incorporate some impressive elements into its launching of Fresh & Easy. Preparation for the expansion, marketing efforts, and incorporation of technology into the shopper experience were all areas in which the company flourished. Despite what the company’s quick failure may imply, Tesco extensively prepared for its launch into the United States. Far from the typical focus group, Tesco went above and beyond when it came to attempting to understand their new American market. The company went as far as to send several top executives to the United States to live with sixty

American families in Phoenix for upwards of two weeks. While there, executives studied commonly stocked food items within homes, accompanied families on grocery shopping trips, and studied the layout and offerings of surrounding stores. Scott Motely, an employee of the city of Phoenix, worked to secure store space for the Fresh & Easy Expansion. According to Motely, 11 the company had been “studying the city for about a year” before even approaching the city council (qtd. “Fresh, but far from easy”, 2007).

Technology

Tesco also made every effort to impress when it came technological advances in the grocery sector. The company was a “pioneer” of the “scan while you shop” scene in the United

States. Already being tested in Tesco stores across the United Kingdom, Fresh & Easy’s parent company made the decision to adopt this strategy in several of its stores across the west coast.

The service worked like any scan while you shop service works across grocery chains today,

Figure 7. Fresh & Easy "Scan as You Shop" Feature. allowing customers to scan products prior to placing them in their carts, thus eliminating the need to scan items at the checkout, saving customers time and inconvenience. Although far from a novelty in today’s grocery market, this was leading-edge technology back in 2012 when the trials across stores were launched. According to customer feedback, this system was much less 12 trouble than using the stores’ self-checkouts and was compatible with the company’s rewards card, a cornerstone of their marketing strategy.

Working much like Tesco rewards cards,

“Friends of Fresh & Easy” rewards cards could be scanned prior to checkout, allowing customers to accumulate one “point” for each dollar spent at a store. The Friends of Fresh & Figure 8. "Friends of Fresh & Easy" Rewards Card.

Easy program was launched around the time of the chain’s opening in 2008 as simply an email subscription, providing “Friends” with store news and exclusive email offers. In 2011, the store launched its rewards card and points program, allowing for the accumulation of rewards points for customers and providing members with bi-weekly emails. Emails included points updates, store news, and individualized offers for savings, based on your total points. Unlike many competing grocery chains, Fresh & Easy’s reward card did not offer lower in-store prices across broad ranges of items—prices storewide remained the same for all shoppers, regardless of membership. The membership not only acted as a way to keep customers coming back, but also as a way to study shopping trends. The Tesco Clubcard, available to Tesco shoppers around the world, acts as the company’s “secret weapon” when it comes to gathering customer data. Using the cards to track customer purchases, Tesco analysts search for correlations within the data. For example, if analysts notice an increase in the purchase of paprika and salami, it may suggest that

Hungarian immigrants are entering the area. This prompts the store to increase Hungarian marketing efforts, including advertisements in Hungarian or the stocking of other Hungarian foods. The Friends of Fresh & Easy card was to work the same way—accumulating points for 13 customers, while also tracking purchase trends within given areas. Had the chain experienced success, this marketing tool may have been key in edging out competition.

Unfortunately, the smart business strategies were outweighed by the not so smart, leading to the selling of all Fresh & Easy stores in 2013 and the final closing of this chapter in Tesco’s book in 2015, when the chain shut its doors for good. However, what if this chapter were to be revisited? With a stable economy in the United States and a harsh learning experience, could

Tesco once again venture into America?

Chapter 2

Plan

Regardless of extensive market research and planning, Tesco’s American venture, “Fresh

& Easy,” fell flat. The last Fresh & Easy store closed its doors in 2015—but what if Tesco were to try again? What should they consider before reentering the market? Chapter 1 outlined what led the company to failure after their 2008 launch—Chapter 2 will outline how Tesco could avoid those same mistakes, if they ever were to make a second attempt at the American market.

14 Niche Market

The Grocery Matrix

“Where does a need exist?”

This is perhaps one of the most fundamental questions to ask when considering a new business, yet a question seemingly overlooked by Tesco during its introduction of Fresh & Easy. To understand where a need exists in the American grocery market, the matrix shown in Figure 9 can be examined. Included in the matrix are some of the nation’s biggest players in the grocery market, including Walmart, Aldi, Amazon, Target, Ahold (owners of Stores and

Food Lion), Trader Joe’s (examined independently of Aldi), and Whole Foods (examined independently of Amazon). The matrix categorizes stores based on four criteria—competitive pricing, quality, convenience, and experience. “Competitive pricing” can be defined as product prices that rival or undercut most competitors, “quality” can be defined as the “prestige” of products sold in the opinion of consumers, “convenience” as the simplicity of stores (no frills shopping), and “experience” as the opulence of stores, in terms of either services or ambiance.

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Figure 9. Grocery Matrix.

16 Reading the Matrix

Convenience and Competitive Pricing

To understand where Tesco might lie, it is important to first understand why the included retailers are in their respective positions on the matrix. Going from left to right, Amazon and

Aldi appear first on the matrix. Although assessing Amazon’s market placement is a bit more challenging, as most of its grocery shoppers use their online platform as opposed to physical locations to purchase groceries, it is still vital to consider as an emerging entity in the grocery sector. Amazon is situated in the competitive pricing column and on the line between the convenience and experience squares. Amazon’s competitive prices when purchasing common household items in bulk and “add-on” items place it in the competitive pricing column, while its easy to use website and “thrill” of ordering groceries online places it neatly between the convenience and experience squares. Aldi’s strategy varies, placing a strong emphasis on low pricing and convenience for shoppers. By keeping products in pallet packaging rather than removing each unit individually when stocking shelves, Aldi is able to save time and effort, which translates to savings for shoppers. The chain’s ownership of nearly all brands sold in stores and refusal to provide plastic and paper bags at no charge also allows the company to cut some corners when it comes to operational costs, allowing the chain to keep its prices low. Aldi’s emphasis on convenience can be observed through its bottom-line, no frills stores across the

United States. Concrete floors, no decorations, and few aisle choices make shopping at Aldi fast and free of distraction. Walmart has also been placed in the “competitive pricing” and

“convenience” square, but for different reasons. Although Walmart does offer shoppers a cheaper, generic option across many of its goods, Walmart achieves most of its cost savings 17 through purchasing in bulk. Bulk purchases of goods drives down the cost for each individual item, which allows for lower prices for shoppers. In regard to convenience, Walmart does not exactly provide the same limited selection as Aldi. Despite extensive grocery offerings and dozens of aisles, the chain segments all grocery items to a designated part of their stores, making it easy for food-only shoppers to find what they are looking for. The chain also does not bother customers with free tastings or specialty food aisles, such as those offering only organic or gluten-free items.

The Middle

Ahold places slightly higher in regard to experience and is placed right on the line between “competitive pricing” and “quality.” Ahold is a difficult entity to analyze, as it is a collection of stores as opposed to a single chain. Ahold’s largest chains are , a chain popular in the southern United States, and Giant Food Stores, popular across the northeastern

United States. To choose their placement, qualities of both chains were accounted for, creating an “average” of their ratings in regard to each category. With this being said, the company’s placement between the lines of competitive pricing and quality can be attributed to Food Lion’s no-frills, low cost stores across the southern United States, while its slight inclinations towards higher quality can be seen in Giant Food Stores’ recent push towards more upscale brands.

Recent remodeling of Giant Food Stores has seen the additions of multiple gluten-free and organic aisles, in addition to expanding offerings of upscale meats and cheeses, independent of deli counters. Giant Food Stores also provides a slight push towards the “experience” square, once again through its recent store renovations. The addition of cafes, salad and specialty food 18 bars, and vast beer and wine selections (particularly specific to Pennsylvania and New Jersey) have propelled the chain into a higher class of shopping experience. This shift in store offerings is once again balanced out by the Food Lion chain’s more “bare-bones” shopping experience, lacking all aforementioned offerings available at Giant. However, this may change in the upcoming years, as the company has begun renovations across several Food Lion stores in the

Norfolk, Virginia area. Remodeled stores will include specialty wing and pizza bars, more local produce and gluten-free items, in addition to a coffee and specialty drink bar.

Target, Trader Joe’s, and Whole Foods all appear more towards the upper right squares, indicating more of an emphasis on quality and experience. Target’s position falls nearly exactly in the middle of all quadrants, indicating its lack of commitment to any one category. Although

Target has often been coined as a more “up-scale” Walmart, its grocery offerings in specific do not do much to surpass those of its rival. Due to grocery sections being a more recent addition to many Target stores, offerings are not extremely vast, resulting in the selection of only a few aisles. This makes a Target grocery shopping trip convenient and fast, yet still an “experience” due to the chain’s offering of specialty products through brands. All of these brands, such Archer Farms and Sutton & Dodge, are marketed as upscale products as opposed to generic brands, allowing for a shopping experience that can only be had at Target stores. In regard to quality versus competitive pricing, Target sits on a middle line. Prices rarely, if ever, undercut those of its major competitor, Walmart, yet also rarely exceed more upscale establishments, such as Whole Foods. More elevated offerings in departments such as apparel, home goods, and cosmetics seep through the entirety of the store, creating seemingly more elevated quality in grocery offerings, whether or not that is actually the case. 19 Experience and Quality

Trader Joe’s takes a much different approach in regard to its offerings, placing it in the high experience category and falling somewhere between competitive pricing and quality. With an emphasis on differentiation from competitors, the chain offers products that, almost exclusively, cannot be found anywhere else. It shares this strategy with parent company, Aldi, yet executes it in a much different way. Targeting younger shoppers, especially college students,

Trader Joe’s stocks, unique, “hip” items, such as frozen meals in a variety of ethnic cuisines, fresh, local flowers at competitive prices, and a wide variety of local and imported wines at a range of prices. The shopping experience is further enhanced by the stores’ kitchens, providing free samples of private label foods and beverages to shoppers every day. In regard to pricing its specialty goods, Trader Joe’s once again shares a similar strategy with its parent company with a few alterations. Just as Aldi, owning many of its own labels helps the chain drive down costs. In addition, utilizing large entities (such as manufacturers for Pepsico and Kraft) to produce products and then selling them under store-owned labels also cuts costs, allowing the chain to provide products equal in quality without paying for big-label names.

Finally, Whole Foods, at the forefront of quality and shopping experience, is a novelty in the grocery sector. As the first “nationally certified organic grocer in the country,” all product offerings are available in non-GMO and hormone-free certified organic options (Myers, 2015).

The chain’s popular store-owned brand, “365 by Whole Food Markets,” follows the same premise in regard to natural and hormone-free ingredients at a slightly lower price. The chain is also offering high quality products through corporate social responsibility initiatives, including its stocking of “Whole Trade” products. Whole Trade products are produced in economically developing countries and the purchase of one of these products will help improve working 20 conditions for workers producing these products by donating a portion of their price to overseas organizations. Coffee, chocolate, and nuts are among the most commonly certified “Whole

Trade” products, each product indicating where the money spent will be making an impact.

Concerning experience, the chain also offers unique touches in each of its stores, including their

“try before you buy” policy. According to the chain’s official website blog, all products are available for taste-testing before purchasing. This tasting includes packaged cheeses, chips, and produce-- simply ask an employee for help, and they will allow you to sample any product. This offer also holds true for the stores’ organic salad and sides bars, another unique offering at the store.

Where the Need Exists

“Where does a need exist?”

Although the matrix does not provide an entirely clear answer, the larger gaps within it can provide some insight. The grocery matrix shows a lack of entities in both the “convenience” and “quality” square, in addition to the “competitive pricing” and “experience” square.

Arguably, convenience and quality were the ambitions of Tesco’s failed venture, Fresh & Easy, offering fresh, high quality prepared foods in a simple store layout. This shows that the company’s intentions and research were correct, just a failure in execution. The second open square, focused on competitive pricing and experience, is also a concept not seen on a large scale in the United States grocery sector. Combining the bottom-line prices available at Aldi with the endless tastings and high-end ambiance at Whole Foods would create a competitive pricing and 21 high experience environment, in an ideal world. With opportunities existing in each of the respective squares, both will be analyzed.

Competitive Pricing and Experience Approach

Festival Foods

Although appearing as an oxy-moron, opportunity in this realm of the grocery sector is a massive place for opportunity. Number sixteen on Business Insider’s “Fastest Growing Retailers of 2018,” Festival Foods, has taken this approach with its thirty-one stores scattered across the state of (Tyler, 2018). First opened in 1946, the chain is still a private, family-owned and rapidly growing entity. Since its opening, the chain has achieved $1.084 billion in sales, seeing a steady increase of nineteen percent in sales each year. To understand the success of this retailer, it is important to understand their business strategy and focus. Still family owned, the retailer maintains a big focus on community. Solely operating in Wisconsin, the chain prides itself on hosting large events for all to enjoy across the state, including its annual community fireworks and “Turkey Trot” Run, which rewards registering participants with exclusive coupon offers. Coupon incentives are consistent with the chain’s overall business structure—with a state of the art shopping app and neatly organized online circulars, customers always feel as if they are searching out a deal. The chain is also diversifying itself through its store layout. Standing at

75,000 square feet, Festival Food stores are roughly half the size of a Walmart Supercenter and twice as large as an average . Wide aisles and open-concept displays make products easy to find and Festival Foods “associates” are always available to assist you, 22 described as being part of the Festival Foods family. The chain’s business strategy relies on something called the “Boomerang Principle,” which states, “every business decision we make is based on the question, “will it bring the customer back” (“The Festival Foods Difference”,

2018)? According to CEO Mark Skogen, grandson of the chain’s original founder, Festival

Foods is edging out competition by offering unique food stockings (qtd. Kloepping, “Festival

Foods aims to change for customers’ needs”). Despite some of its more land-locked locations, the chain has developed close-knit relationships with fishing operations across the coasts of

Alaska, Massachusetts, and Hawaii, providing for “Fresh Flight” fish to be shipped directly to stores, daily. The chain also prides itself on its “Legendary Beef” brand, which offers customers

Wisconsin sourced, hand-trimmed in store beef every day. The store is also making strides into the convenience side of shopping, rolling out its own brand of meal prep kits.

The Demographic

An examination of the fast growing, financially successful Festival Foods chain provides some insight as to what the American market necessitates of Tesco to once again open its doors in North America. Although Festival has its foothold in Wisconsin, current economic and societal data suggest other areas of opportunity for a new chain to be successful. If driving a competitive pricing focus, store locations should be strategically placed in lower income areas.

Texas, Mississippi, Louisiana, North Carolina, South Carolina, Arkansas, Georgia, Alabama,

Tennessee, and Kentucky are among the lower half of states in regard to median household income in 2017 (numbers twenty-nine, fifty-one, fifty, forty-six, forty-one, forty-seven, thirty- five, forty-five, thirty-nine, and forty-four, respectively when including the District of 23 Columbia). According to the Bureau of Economic Analysis, many of these states also tend to spend a higher percentage of these incomes on grocery bills. As figure ten below shows, the southern states are among the biggest spenders on groceries relative to their overall expenditures.

Figure 10. Grocery Expenditures as Percentage of Total Expenditures by State.

Another factor to consider when examining expansion is number of families moving into a given area. According to the Bureau of Labor statistics, families with children under the age of eighteen spend nearly seventy dollars more per week on groceries as opposed to families without children. With this being said, areas that are experiencing “baby booms” are important to consider when examining potential. Southern states dominate the top ten list, including the cities of Raleigh, North Caroline (number one), Austin, Texas (number two), Charlotte, North Carolina

(number four), Dallas, Texas (number six), Atlanta, Georgia (number seven), Houston, Texas

(number eight), and Nashville, Tennessee (number nine). The number of children in these cities have seen rises upwards of twenty percent over the past decade, making them great potential markets. Finally, a major factor to consider is the competition that exists within these southern states. Although chains such as and have been known to dominate the southern 24 market, it is important to consider the bigger picture across these southern states collectively.

Kroger and Publix do indeed hold the majority of the market in the ten aforementioned southern states, however their popularity is not unanimous among them. According to Business Insider, a study conducted by FourSquare revealed that although Publix and Kroger were the most visited grocery spots in Alabama, Georgia, Kentucky Mississippi, South Carolina, and Tennessee, other chains have also saturated the market. In Texas, the most visited grocery chain was H-E-B, while

Rouses Markets dominated Louisiana and Food Lion Grocery Stores in North Carolina. A lack of conformity across the regions shows that potential for newcomers is possible.

The majority of the southern United States provide great potential for a new grocery chain. However, considering all factors, the most opportunity appears to present itself in Texas and North Carolina. With their high expenditures on grocery items, fast growing child populations, and taste for the non “mainstream” in grocery chains, Texas and North Carolina provide promising markets for a new, American Tesco.

Concept and Strategy

Despite thorough investigation of their demographic and planning of stores, Fresh &

Easy fell flat when it came to strategy and execution. To start with the most basic of business strategy, Tesco can begin by more carefully considering their branding as a new American venture. When Fresh & Easy launched in the western United States, the chain’s name was entirely new to potential cosnumers. Although this is a struggle that many, if not all new chains undergo when introducing themselves into a new market, Tesco does not face that same challenge to such an extreme. Tesco is Britain’s largest retailer, holding nearly thirty percent of 25 market share. With its vast popularity in Britain and significant presence across several other

European countries, Tesco is a name popular across the majority of Europe. And, with nearly forty percent of American residents’ travel destinations being to European countries, it can be assumed that “Tesco” is a name recognizable to at least a small portion of the American population. By introducing their new American chain under their established heritage name, the company may already capture a small part of the American market, simply based on name recognition.

Beyond simple branding, overall business strategy in regard to pricing, promotions, and community engagement is also vital to consider when launching a new chain. To understand the formula for a successful business strategy in today’s competitive grocery market, we can once again turn to the amazing success achieved by Festival Foods and their Wisconsin based grocery chain. Although not as low as Aldi or Walmart, Festival Foods offers competitive prices with the additional cost savings of coupons. Coupons are available in weekly circulars, distributed in-store, through the mail, or online. Tesco already has a highly refined website and mobile applications for its respective regions in which is operates. A website and phone application featuring updated circulars and digital coupons could be easily adopted to fit the preferences of Americans, allowing for the adoption of an already highly eastablished platform.

Festival also takes advantage of customer loyalty cards, which, similar to those of Ahold stores, allows customers to accumulate fifty cents off per gallon of gas for every fifty dollars spent at stores. However, what makes their program unique is the ability to redeem points at a number of participating gas stations, as opposed to store-owned gas stations like programs at Ahold stores.

This potential for savings across a wide spectrum has undoubtebly contributed to the success of the chain, and reinforces a need for these programs at an American Tesco chain. As previously 26 explained, Tesco already possesses great capabilities in regard to a “club card” network. Tesco club cards could be directly expanded to an American chain, allowing for similar benefits by those received across Europe. Currently, Tesco rewards members by providing exclusive coupons and in-store discounts, in addition to a fuel discount strategy similar to that of Festival

Foods. Club card shoppers are able to receive fuel discounts directly at Tesco gas pumps or any

Esso gas station, a partner of the company. If adopted by an American Tesco chain, rewards cards could provide high-spending customers with exclusive digital coupons in addition to gas points to be redeemed at partnering gas stations. Although this fuel savings strategy is being employed by Festival, this flexibility of discount will be a novelty in the ideal chain locations of

North Carolina and Texas, giving the chain a serious competitive advantage. The cards could also serve as an effective way of collecting market data, just as it is across British . Once again, the data collection network could ideally be adopted to track purchases made by American

Tesco shoppers, identifying trends in purchases and shifts in consumer taste.

Finally, when observing the success of Festival Foods, it is impossible to ignore the chain’s emphasis on community and family. And, when considering the high child and family population in the potential states for the chain, this is a quality that should not be overlooked.

Special discounts on childcare items for new or expecting mothers, small in-store “day-cares” for families to utilize while they shop, and the hosting of community events will all be vital when opening a new chain in family-oriented areas. Although Tesco does not have the advantage of being a family-owned company, that does not mean they cannot outwardly portray a strong family and community emphasis. 27 The Stores

With pricing and promotion strategy accountead for, it is also vital to consider the stores themselves and the ambiance they provide if pursuing an “experience” strategy. Tasting stations, a sit-down café, a small in-store child center, complimentary family recipie cards, elegant décor, and perhaps even live music are some examples of high-end offerings that would contribute to an elevated shopping experience. With those qualities in mind, a potential American Tesco store focused on competitive pricing and shopping experience is illustrated below in Figure 11.

Figure 11. Competitive Pricing and Experience Potential Store Layout.

28

Convenience and Quality Approach

Sprouts Farmers Market

Much like the analysis of Festival Foods, it is helpful to understand what grocers are experiencing success in certain spaces and why they are experiencing this success to determine a successful strategy for a new-comer. In regard to a store that has seen great growth while offering quality foods in a simple store layout, Sprouts Farmers Market takes the top spot.

Ranked as the twentieth fastest growing retailer of 2018 by Business Insider, Sprouts has over three-hundred stores spread across the United States with the majority located in California. This past year, Sprouts stores were producing sales of eighteen million dollars each, and according to

CEO Amin Maredia, that number is only expected to rise. (qtd. in Sozzi, “Sprouts Famers

Market CEO on Deal Speculation and Battle with Amazon”, 2018). Similar to Whole Foods,

Sprouts offers natural and organic products, many of which are sold under the Sprouts brand.

Although more competitively priced than Whole Foods, Sprouts prides itself on offering high quality, natural products to consumers at moderate prices. The store also brands itself on its easy experience for shoppers, offering modest 30,000 square foot stores for a quick shopping trip.

Sprouts has even further eased the burden for shoppers by becoming extensively involved in the e-commerce sector, becoming one of the first grocery stores to offer online purchase and delivery. Recently ending a two-year partnership with Amazon and beginning a new one with the service “Instacart,” Sprouts has seen individual order sizes double what they are in stores, and increase twenty-percent in size since cutting ties with Amazon. This emphasis on grocery 29 delivery has been a novelty in the sector, considering the nature of Sprouts’ business. With twenty-four percent of all sales stemming from fresh foods, Sprouts has needed to create their delivery supply chain around these trends. And, with grocery delivery only accounting for 2.5 percent of the grocery market, and fresh grocery delivery only one percent, Sprouts has come to dominate this space.

The Demographic

Although Sprouts has found success predominantly in California and other pockets of high-income populations dispersed across the country, there are high-income areas that have been left more untouched than others. Opposite of the first strategy proposed, a high quality chain is expected to survive where the products offered are affordable to the surrounding population, necessitating elevated median incomes. High-income areas, coupled with grocery expenditure as a percentage of total expenditures are once again two areas of focus when considering a potential demographic for a convenient, high quality grocery store. Oregon,

Washington, and Colorado are three promising states that deliver on these numbers. Ranked the sixteenth, third, and fifth states respectively (once again including the District of Columbia, which is ranked first) in regard to annual median income, these three states offer promising markets for higher priced products. In terms of grocery expenditures, Oregon, Washington, and

Colorado also deliver promising numbers. Referring to Figure 10, in Oregon, nine percent of all expenditures are attributed to groceries, in Washington 8.01 percent, and in Colorado 7.54 percent. 30 Age and “preference” demographics are also important considerations in regard to a

“high end” grocery establishment. In a proposed value and experience oriented store, an area with a high proportion of families with children under the age of eighteen was a major consideration, due to the simple necessity that families with children need to buy more food, thus drawing families to establishments with more “bang for their buck.” However, in regard to a proposed high quality store, it is important to consider the type of person who will frequent a store with this focus and in which areas organic and natural foods are the most popular. Oregon,

Washington, and Colorado all meet this requirement, as they are respectively the fourth, second and eighth highest organic food consuming states. The states are also bright prospects in regard to their changing age demographic, a consideration when it comes to organic and natural foods.

According to the Pew Research Center, young adults ages eighteen through twenty-nine report the highest number of vegan and vegetarian habits, in addition to the strongest positive opinions in regard to the purchase and consumption of organic and natural foods (Funk, Kennedy, 2016).

Taking this into consideration, areas of growth for young adults are ideal for a store with high quality offerings. Two of the three states, Oregon and Washington, are indeed seeing increased numbers of young adults flooding the area and are ranked as the eighth and second fastest growing states in terms of young adult population.

Concept and Strategy

Identical to the branding advice for a competitive pricing approach, Tesco should take advantage of its brand recognition and reputation if pursing a high quality and convenience stance. Although the “Tesco” name is not necessarily synonymous with a health food store such 31 as Sprouts, its emergence into the American market grants the company the opportunity to rebrand itself as something new, all while acting under their trusted and established name.

Beyond a branding strategy, Tesco will need a business approach that will offer something new and unique to consumers, all while simplifying the shopping experience. Looking first at convenience, it is difficult to deny that the future of grocery shopping is at the mercy of the ever-expanding e-commerce community. It does not get much more convenient than ordering your groceries anywhere and at any time with a smartphone, tablet, or laptop, making e- commerce grocery shopping the epitome of simplicity. And, with e-commerce expecting to capture twenty percent of all grocery spend by 2025, this opportunity is certainly not one that can be overlooked. In its home nation, Tesco is already an expert in the realm of home-delivered groceries. The company began offering the service nearly twenty years ago, and has since produced a state of the art smart phone application to make online shopping even easier.

Although the mentality and phone application can be adopted, the real hurdle in online delivery exists in the infrastructure. Britain’s Tesco has spent the last eighteen years building a lean, efficient distribution strategy. To build one identical in the United States for an up-and-coming chain would take years, which is why a company partnership would suit the business best.

Instacart, a privately owned company, is leading the way in terms of grocery e-commerce.

Providing delivery services across the United States for Sprouts, Aldi, , Sam’s Club, and

CVS, Instacart has built a distribution network capable of reaching the majority of consumers around the nation. A partnership with the company would provide an American Tesco with an edge in the e-commerce realm without sacrificing an abundance of time or capital.

Looking past shopping convenience, the physical products offered by the stores are also critical to consider. If charging higher prices, consumers expect higher quality, unique 32 offerings. At Sprouts, higher prices are justified by offering sustainably sourced products, such as those that partner with the Organic Sustainable Community (OSC), an entity based where the majority of their stores exist (California) which focuses on the “natural products” industry.

Dubbing them as the “brands that care,” Sprouts carries oils, beverages, pastas, soaps, and dozens of other items with OSC certification. This focus on natural and local has played an immense role in quickly propelling Sprouts to the top and is a strategy that Tesco could greatly benefit from as well if focusing heavily on product quality. In addition to partnerships with entities such as OSC, Tesco should consider “going local” through offerings of locally grown produce. A strategy only heavily utilized by Whole Foods, the offering of local produce in chain stores is quite the novelty. Not available at Sprouts, local produce options would differentiate

Tesco in the market, providing a unique option at each store location.

The Stores

With a focus on convenience, American Tesco stores in this sector need to look much different from their experience and cost savings counterpart. Considering the success of Sprouts

Farmers Market with its store layout of 30,000 square feet, a store comparable in size should lend itself to the most success for Tesco. Stores must also be easy to navigate, providing wide aisles that are thoughtfully laid out. Although the store size is significantly smaller than that of most major grocers, brick-and-mortar space will ideally be a less significant investment looking to the long-run, as business strategy suggests that e-commerce will drive a large portion of sales.

With this being said, physical stores will be a marginally smaller consideration in terms of space 33 and ambiance, making that capital available for e-commerce expansion strategies. The below diagram illustrates what a convenience and quality oriented American Tesco may look like.

Figure 12. Convenience and Quality Potential Store Layout.

34

Conclusion

A second attempt at expansion into the United States will not be a simple one, and many years of careful planning will be required to result in a successful venture. Beyond the obstacles of cost, brand building, and targeting a niche market, Tesco will also face the obstacle of entering the American market much later than some of their home competitors, such as Lidl and Aldi. Although the expansion will not be easy, current market conditions present a much more favorable environment for new ventures as opposed to the economic environment that the company entered during the American recession in 2008.

Illustrated below is a potential implementation timeline, if Tesco were to once again attempt a foothold in the United States over the next decade.

Figure 13. Implementation Timeline.

As shown in Figure 13, two years can be dedicated solely to planning and market research to avoid similar mistakes to the original launch. The number of stores opened will be significantly lower than the launching of Fresh & Easy. This way if stores prove unsuccessful, financial losses will be minimal.

Extensive marketing will be done under the brand name of “Tesco” as opposed to an entirely new brand. 35 Marketing will also begin well before store openings. This marketing will be done to create excitement for the new stores and will also allow ample time to prepare for openings. Once stores have opened, performance results can be analyzed and the company can determine how to move forward—whether that be the continuation of only existing stores or expansion to the east or west, depending on which strategic approach and location Tesco adopts.

Although the above timeline could potentially be accomplished if made a priority by the company, Tesco has recently taken a new strategic approach to diversify its portfolio. Similar to an Aldi, or Lidl, Jack’s is Tesco’s newest store in England, with dozens of locations offering nearly twice as many and cheaper products than Aldi or Lidl. With the first stores just opening in September of 2018, it is difficult to tell how the chain will perform. If successful, international expansion, especially to rival Aldi in the unsaturated grocery discounter market in the United States, could be on the horizon. However, only time and financial performance will tell if England’s favorite grocery store is once again ready to cross the pond. 36

Appendix A

Tesco Layouts and Other Store Details

Tesco Layouts

The three store layouts located on page 14 of the thesis are results of both research and personal experience. The Tesco Supercenter diagram was one found in a scholarly paper written about Tesco and its efficient grocery store layouts. Having been to many Tesco Supercenters, I could confirm this layout as a normal layout for this particular type of store. The Tesco Express layout was one re-created on my own after a trip to London. While there, I visited a Tesco Express store and diagramed its layout in real-time to be re-created once I returned to the United States. The Fresh & Easy layout is one also found through a scholarly paper, however difficult to confirm. Although its general layout and offerings coincides with descriptions of the stores, it is impossible to confirm if the diagram is entirely accurate. Not included on the diagram page is the layout of an additional Tesco layout, Tesco Metro. On my trip to London I visited a Tesco Metro, and found it to be a hybrid of a Supercenter and Express store with a heavy emphasis on

“to-go” (or “take-away,” as said in England) foods. In regards to Figures 11 and 12 (the proposed

American Tesco layouts), these are creations of my own. After conducting extensive research on multiple grocery stores and considering the needs of the market, I believe that the respective layouts would be most successful in the American grocery market. 37 Other Store Details

Collecting information on both Festival Foods and Sprouts Farmers Market was challenging, as I have personally never visited either store. To accurately reflect the stores’ strategies and offerings, I contacted Festival Foods and Sprouts Farmers Market directly to ask several basic questions, in addition to speaking with individuals who has shopped at the stores (this being specific to Sprouts Farmers

Market, as I do not personally know any individuals who have visited a Festival Foods). Information on food offerings, demographic information, and pricing strategies was in a great deal obtained through these conversations, in addition to public information available online.

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