Wednesday, December 10, 2008

Global Food and Grocery Retailing: Researcher IGD Forecasts Tesco Will Become Number Two Global Retail Chain in 2012; We Offer Some Analysis

The international food and grocery research firm IGD is forecasting Tesco will overtake France's Carrefour Group by a tiny dollar margin of sales to become the number two global retail chain in 2012. Meanwhile, the research firm projects Wal-Mart stores, Inc. will have annual sales of nearly half a trillion dollars in 2012, maintaining its status as the world's number one retailer by a substantial margin. (pictured above is a Tesco store in the United Kingdom. Below is a Carrefour store in France. At bottom is Wal-Mart's new logo, which it is phasing in globally)

The international food and grocery retailing research firm IGD is forecasting that Tesco, which owns and operates Fresh & Easy Neighborhood Market in the U.S., will become the second-largest global retailer in terms of total annual sales by 2012, inching out current number two France's Carrefour Group by a hair for that ranking.

IGD bases its projection on an estimate it has made of United Kingdom-based Tesco's growth rate, which the researcher says it forecasts to be an average of 11 percent between 2007 and 2012, compared with seven percent growth for Carrefour over the same time period.

Further, IGD says key to Tesco's growth and assumption of the number two global retailer ranking, after number one U.S.-based Wal-Mart Stores, Inc., will be international expansion in markets such as China, the United States and India, which the researcher predicts will contribute to Tesco's annual sales reaching $157.1 billion by 2012, just inching out Carrefour, which it projects will have annual sales of $157 billion by 2012.

Wal-Mart has annual sales at present (2008) that are nearly equal to the combined sales IGD is forecasting for Tesco and Carrefour for 2012, assuring the U.S.-based mega-retailer's number one position for the years to come. In fact, IGD is forecasting 2012 global annual sales for Wal-Mart Stores, Inc. of $476.2 billion, which under IGD's scenario would give Wal-Mart over $100 billion more in sales in 2012 than both Carrefour and Tesco combined.

All three of the chains operate multiple formats, including those that sell general merchandise, electronics, hard goods and soft goods, in addition to food and groceries.

What can we say? We respect IGD's work considerably, and appreciate as analysts that the researcher is willing to project out so far. However, such forecasts, as they must be, are based on many assumptions. And we know what is said about ASSumptions. All kidding aside, assumptions are needed in forecasting, obviously.

We do agree with IGD's Jonathon Guntz, a senior business analyst with the firm who says emerging market growth, particularly China and India, will be key to Tesco's rise to number two by 2012, as it will be to Wal-Mart's and Carrefour's growth as well.

"We estimate that in grocery, retail markets in China and India will each grow at a compound annual rate of 13.2 percent between 2008 and 2012, exceeding any other country in the top ten," IGD's Guntz says. "Other emerging markets to watch include Indonesia, Ukraine and Vietnam."

All three retailers --Wal-Mart, Carrefour and Tesco -- are fairly well positioned for these emerging markets, including India and China. But we would disagree with IGD that Carrefour Group can't maintain its number two ranking, especially as you notice there's just a hair of a difference in the research firm's 2012 sales forecast between what it says will be a number two Tesco and number three Carrefour.

Carrefour has proven itself to be as very strong global retailer, as of course has Tesco, and we think Carrefour could grow at a far higher percentage than IGD is projecting. But Tesco could do so as well.

One flaw we see in the IGD analysis is that it is factoring massive growth in the U.S. for Tesco's Fresh & Easy as significantly contributing to the UK-based global retailer's rise to number tow.

IGD and other forecasters are still using Tesco's now-inflated and non-performance-based assumptions, as well as their own, for Fresh & Easy Neighborhood Market USA.

Those assumptions include already operating about 200 Fresh & Easy stores (which less than a year ago was at least how many Tesco said would be open at this point in time), rather than a shade over 100 which there currently are, along with the grocery chain already being in the Northern California market, which may or may not even happen in 2009.

The Fresh & Easy assumptions IGD and others have used also call for Tesco's U.S. grocery chain to be moving into markets like Chicago in 2009 and Florida and New York in 2010.

We don't see this happening at present. Fresh & Easy CEO Tim Mason has already said there are no plans to enter Chicago in 2009, even though it was being seriously discussed at the grocery chain's headquarters in El Segundo, California as recently as three months ago. Florida and New York are currently distant thoughts at Tesco, even though as late as the first of this year they were on the planning boards.

IGD and other researchers, especially those based in Europe, have assumed a $3 billion dollar a year Fresh & Easy chain by 2010. Currently Fresh & Easy has annual sales of about $400 million, with a little over 100 stores. The retailer plans to open 50-75 new stores between now and the end of 2009, most likely closer to the 50 stores than the 75. We will be surprised if at the end of 2009 Fresh & Easy Neighborhood Market has sales of $1 billion. We suspect more like $700-$800 million, assuming they open at least 50-60 new stores and are able to increase same store sales in at least a decent fashion.

Additionally, the jury remains out even on if Fresh & Easy will succeed in the Western U.S. states of California (Southern only at present), Nevada and Arizona, let alone expanded outside those current three markets. We estimate at least 50-60% of the current Fresh & Easy stores are underperforming; doing below $200,000 a week in average sales. At least 15% are doing no more than $100,000 a week in sales, based on our source information, research and estimates. At what point does a grocer decide to close at least the "very-underperforming" stores?

Based on what Tesco says the Fresh & Easy combination grocery and fresh foods markets are -- that they are food and grocery stores for all consumers; stores that offer products at at least 15% less than the competition does -- they should be thriving in the current down economy. Instead, they are struggling, which is why the retailer has postponed its launch into Northern California as well as is cutting back on the number of new stores it's opening in 2009.

This is bad news. If the no frills, limited assortment, small-format, everyday low price Fresh & Easy model and format, as Tesco describes it, can't do well in a down economy, that means there's something wrong with the model, the company's marketing and merchandising, or both.

The problem with Fresh & Easy is that its hurting in the way specialty foods stores are hurting in this recession. But it's not a specialty foods store format, according to Tesco. This spells trouble for the kind of growth IGD is forecasting Fresh & Easy to contribute to Tesco's 2012 sales, not to mention trouble for Fresh & Easy and Tesco in general in terms of its U.S. venture. (The latter is the real trouble. The former is just sales forecasting by a research firm.)

But IGD could be correct in its forecast. Who really knows for sure?

Global food retailing is a dynamic process. For example, what about acquisitions. One major one by either Carrefour or Tesco could change the landscape and rankings completely. Or, what if Tesco pulls out of the U.S. completely? Or if Carrefour decides to divest some holdings, since it operates on a mixed corporate/franchise-type system? But we appreciate the IGD forecast. Wonkish types like us love it.

On the other hand, Tesco is doing well in Asia though (except for some serious problems in Thailand), which we see as the biggest growth opportunity for all three of the chains -- Wal-Mart, Carrefour and Tesco. Therefore it could soar to number two based on super-growth and success in Asia, particularly China.

India is a tough nut for all though since in order to do business in that nation retailers have to joint venture with Indian companies. That puts the brakes on desired growth compared to being able to go it alone. But it's a level playing field in that regard because Wal-Mart, Tesco and Carrefour all have to play the same joint-venture game under the same rules.

About the only thing clear to us though is that Wal-Mart won't be challenged for the top spot by either Carrefour and Tesco. Even if the two merged, Wal-Mart would still edge out the combined retail empire (Tesfour perhaps?) to rank as number one.

Of course there is a wild card for Tesco in the U.S., which also would go a long way towards becoming the number two global retailer as IGD is forecasting. That card wild would be for Tesco to make a major acquisition in the U.S.; say of a major U.S. supermarket chain doing $10 billion or more in annual sales. Not only would that change Tesco's fortunes in the U.S. --including moving it from currently being a tiny retailing player in a huge country to becoming more of a major player -- it also would go a long way to adding the needed annual sales to top Carrefour in 2012 as IGD is projecting will happen.

We suggest IGD take a look at what we believe in our analysis is and will be a much smaller Fresh & Easy Neighborhood Market USA in terms of real annual sales compared to all the multi-billion dollar forecasts from just a year ago, many of which came out of UK-based research houses.

Then, see if that difference, which we believe to be the case, doesn't end up putting Tesco just about even (or even a couple hundred million below) with Carrefour at $157 billion a year for both in 2012, even though we agree Tesco will likely have a somewhat higher percentage of overall global sales growth compared to Carrefour Group. In other words, could Fresh & Easy USA be what keeps Tesco from overtaking Carrefour for the number two ranking in 2012?

Look soon for an upcoming piece about possible acquisition targets and opportunities we think there are for Tesco in the U.S.

1 comment:

Anonymous said...

The buzz around Wal-Mart H-Q in Bentonville is that the incoming new CEO wants to basically double the company's current efforts in China. If so that could mean even bigger growth than IGD is suggesting. You are right about Tesco in the U.S. In order to become even a moderate player they need a major acquisition. Look at it this way, even if Fresh & Easy were to be a $3 billion year operation by 2010, that's small potatoes in the U.S.