The last “big thing” is retailing was the big box shop – taken to its logical point by Wal-Mart. But economies of scale were not their only competitive edge. Wal-Mart’s logistical system (supply chain management) was what made it all possible. One of the other rules of thumb in retailing has been differentiation: either you go cheap (Wal-Mart) or upscale (Whole Foods). Supermarkets caught in the middle run the risk of being roadkill.
Now, according to a report in the latest Economist (Fresh, but far from easy), America should be prepared for a new British invasion that will change that American icon, the supermarket. The British company Tesco will soon be opening stores here under the brand Fresh & Easy. The company has a twist on the normal differentiation and big box story:
Tesco’s offering in America will swim against this tide. It is aiming Fresh & Easy squarely at the middle market. The firm is hoping to repeat its success in attracting shoppers from all the main social groups in Britain, where social class until recently played at least as big a role in determining where people shopped as price and convenience did. Tesco will also be a pioneer in two other important ways: the size of its stores and their range of goods.
Most Fresh & Easy outlets will be relatively small, at about 10,000 square feet. Although about the same sales-floor size as the average Walgreen’s, a chain of drugstores, most food retailers in America are either much bigger (six Fresh & Easy’s would fit into a typical supermarket and ten into the average Wal-Mart), or much smaller (each is about three times the size of a 7-Eleven convenience store).
Does size matter? In America’s lightly regulated supermarket industry, most shoppers in all but the deepest backwoods live just a few minutes’ drive from a large supermarket. The chances are the store has acres of parking, is open all night and has a good selection of whatever you might need: prescription medicines, dog food and piping-hot meals that have been cooked in the store.
Convenience, however, has many dimensions. Tesco is betting that there is demand for smaller stores closer to home with fewer products, making it easier to find things. People in too much of a rush to stop at a supermarket use tiny outlets such as 7-Eleven, of which there are close to 1,200 in California alone. But their range is limited. Retail Forward, an American consultancy, reckons nearly 40% of convenience sales come from cigarettes and tobacco, followed closely by beer and wine. As for nutrition, most offer little more than snacks and frozen pizza. “The typical American convenience-store consumer would be Homer Simpson,” says Ira Kalish, a retailing expert at Deloitte, an accounting firm. “No one has done convenience and quality food together.”
As for products, Tesco’s second innovation will be a range of preservative-free “ready meals” that are familiar to British consumers yet barely exist in large parts of America. “There’s a big hole in the American market,” says Rajiv Lal, of Harvard Business School. “American supermarkets have not been innovative with prepared foods. You can’t eat them more than three days in the week without eating the same stuff. But I suspect there are people in Britain who live off prepared meals from Marks & Spencer for three weeks on end.”
Key to making this work is supply chain management:
Whereas American stores are good at moving goods hundreds of miles and keeping them cheap, British retailers specialise in regular, frequent deliveries to heaving city-centre stores. Their supply chains are more sophisticated because they have to be. Stores can be so small that they have to switch from selling sandwiches at lunchtime to selling ready-made suppers in the afternoon.
Expensive labour and a shortage of space have encouraged British retailers to seek economies of scale from centralised food preparation. Rather than cooking on site, they make a wide range of meals that can last for a couple of days. These are not just staples such as macaroni cheese or lasagne. A typical London supermarket now stocks more than 50 different meals, including treats such as organic beef in wine, Keralan prawn curry and Asian noodles with vegetables.
And this system is also flexible, allowing for micro-differentiation:
But Tesco’s biggest innovation has been in the way it collects and uses customer data from its Clubcard, a loyalty programme. Many retailers use clubs to provide nothing more sophisticated than a discount to customers as they pay for their goods. Because rivals can easily match this, it reduces profit margins for all, says Deloitte’s Mr Kalish.
The Tesco scheme mails discount vouchers to customers to encourage them to return. More importantly, it tracks every purchase to build one of the world’s largest databases. This finds correlations between purchases, allowing Tesco to finely tune the product range in each store. Sales of pickled vegetables, for instance, may suggest Polish immigrants have moved in, prompting it to stock barszcz, meatballs and sauerkraut.
As a result, its stores in Asian areas of Britain offer Bollywood movies, curry spices and large sacks of rice and flour. Its stores in London’s wealthiest parts, meanwhile, are stocked with ripe organic avocados, dainty packs of mange tout and steaks in fancy sauces.
It is unclear whether Tesco will be able to pull this off. As the story points out, the US market has its own characteristics. But the smaller, urban market that is bigger and better than a convenience store is an idea that just may catch on. As the story also points out, Warren Buffet has become one of Tesco’s largest shareholders. That is a pretty good endorsement.