Early errors muddled Fresh & Easy’s image, while shareholder impatience over on going losses proved to be too much for firm
As Tesco prepares to dump its Fresh & Easy chain it can take comfort from the knowledge it is not the first British retailer whose ambitions have broken up on the rocky shores of the US.
The move follows a litany of ill-fated forays dogged by poor preparation, heavy competition, financial difficulties and sheer arrogance. Some retailers failed because they tried to run things from the UK, were suckered into taking on expensive stores that could never be profitable, or failed to consider the different tastes, seasons or even clothes sizes of US shoppers. Others underestimated the scale of investment needed to take on such a large territory.
Tesco cannot be accused of poor preparation. The company spent two years researching the US market, even sending in a crack team of executives to investigate the contents of Americans’ fridges. It gained some knowledge of the market through a deal to provide IT for the online arm of the US retail chain Safeway.
Despite those efforts, Fresh & Easy clearly managed to get things wrong. Initial plans to open hundreds of stores within a short time-frame served by dedicated distribution centre and food “kitchen” were put on hold when it became clear the retail concept needed tweaking.
Andrew Kasoulis, an analyst at Credit Suisse, said Tesco needed 300 to 400 stores to become profitable given the costs of its dedicated support infrastructure. But getting to that size would have taken years, and vast additional investment, while Tesco was forced to tackle early errors including limited ranges with too few brands familiar to US shoppers, mistakes on health and beauty and bakery, and an attempt to take ready meals to a US public not used to such a concept.
All of those problems combined to give Fresh & Easy an unclear image that swung between upmarket and low-cost discounter, according to experts. Meanwhile competition in the region stepped up in reaction to Tesco’s arrival. Walmart hired David Wild, a former Tesco executive, to help it counter the British invasion. Aldi, the German discounter, announced plans to open stores in California, Fresh & Easy’s heartland.
Richard Hyman, a veteran retail analyst and president of the consultancy PatelMiller, said: “If a retailer goes into a market already very well serviced by good retailers, it is stacking the cards against it. They are going to have to run faster and take business from those established retailers with well-known names.”
Kasoulis said that despite many improvements to the chain, Tesco’s shareholders were clearly not prepared to give management sufficient time to find out whether it could make Fresh & Easy could work, given its ongoing losses.
As he battles to deal with problems at home, the Tesco chief executive, Phil Clarke, may have found it easier to cut and run from Fresh & Easy, which was the baby of his predecessor, Terry Leahy.
What’s more, the move has led to the departure of Fresh & Easy’s boss, Tim Mason, Tesco’s deputy chief executive, whom Clarke beat to the top job.
HMV Finally extracted itself from the US in 2004 after failing to make a profit from expensive and over-ambitious stores.
WH Smith Sold its US airport and hotel stores after the retail meltdown that followed the 9/11 terrorist attacks in 2001.
J Sainsbury Sold its upmarket grocery chain Shaw’s in 2004 after failing to expand the business sufficiently to take on the US’s biggest grocery chains.
Marks & Spencer Lost two-thirds of its investment when it sold the fashion chain Brooks Brothers in 2001. It sold its upmarket grocery chain King’s in 2006 amid difficulties at home, deciding it did not want to invest enough to expand.
Dixons sold its stake in the US electricals chain Silo in 1993, six years after acquiring it, after losses caused by over-expansion during a recession. It faced tough competition from the likes of Best Buy and Circuit City.
Laura Ashley Sold its US chain for a dollar in 1999 after over-ambitious expansion led to a string of profit warnings.
Body Shop Heavy losses at its US operations in the late 1990s took a heavy toll, forcing it to close its manufacturing operations and expand elsewhere.