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.

Competitor News: Where is 'Wal-Mart America?' A Demographic Look and Analysis

Fresh & Easy Buzz Editor's Note: The official U.S. commission that reports whether or not the country is "officially" in an economic recession reported today that indeed the United States is in a recession -- and has been in one since December, 2007, making the current recession already the longest since the 1980's. Our analysis, and that of the majority of government and independent economists, is that there are worse times to come before the economy starts to gets better. We see the current recession lasting most likely all of next year.

Both Wall Street -- commercial banks and what's left of the once mighty investment banks -- as well as main street --the "Big Three" Detroit auto makers, chain and independent retailers of all formats, and nearly every other industry and business -- are feeling the pressures of the economic recession and related financial and credit crisis to different degrees, ranging from being on the verge of bankrupcy to having to make serious cutbacks, to seeing stock share values melt away, in the case of publicly-held corporations.

Mega-retailer Wal-Mart Stores Inc. is on fire though, despite and in part because of the serious economic recession.

The retailer is experiencing a consumer flight to its U.S. Supercenters and other format stores by food and grocery shoppers in general, along with by consumers of nearly all income levels looking for holiday shopping bargains. After all, who cares where you buy that Ipod for daughter Cindy or computer for son Chip for Christmas right now, as long as it's offered at the best price available. And few consumers can even afford such gifts for Christmas. For many its a trip to Wal-Mart for its $10 and $20 Christmas gift selections this year.

Wal-Mart has been growing its share of the food and grocery market in the U.S. over the last few years considerably, recently unseating Kroger Co. as the number one retailer of groceries in America on an overall, national basis.

And that was even before about the middle of this year when the retailer began experiencing considerably higher customer counts in its stores with a particular focus on shoppers buying food and grocery items at primarily Wal-Mart's Supercenters, but also at its Sam's Club stores and Wal-Mart Neighborhood Market supermarkets. Consumers have flocked to Wal-Mart for consumables in even greater numbers since late September and early October when the first signs of the financial crisis started to hit.

As a result, it appears when it comes to shopping at least, and perhaps even more, Wal-Mart is America right now.

Dante Chinni, who writes the Patchwork Nation Blog for the Christian Science Monitor takes a look at Wal-Mart in the United States in what he calls a "Patchwork Nation" in an excellent demographic analysis piece titled: 'Where is 'Wal-Mart America'? Below is that piece:

Where is ‘Wal-Mart America’?
Christian Science Monitor
Patchwork Nation blog
By Dante Chinni
December 1, 2008

The early returns from the holiday shopping weekend show some good news for retailers and quite a bit of good news for one in particular: Wal-Mart. With the holiday air heavy with economic angst, the store that promises “always low prices” is one of the few that is expected to post good numbers for the season.

But most retailers in America don’t elicit the strong love-hate reactions that Wal-Mart does. In some locales, residents welcome the hangar-sized megastores, seeking their low-cost TVs, clothes, and groceries. Others have voiced concerns about what Wal-Mart does to smaller local retailers and how the company treats its employees.

It is arguably a part of America’s culture wars, complete with a documentary by a liberal filmmaker that blasts the company and a robust selection of pro- and anti-Wal-Mart websites. Even last weekend wasn’t without controversy for the retailer, when early on Friday morning an employee was trampled to death at a Long Island store.

Given all the attention paid to the stores, is there such a thing as “Wal-Mart America”? If so, where does it reside?
More than 3,700 Wal-Marts are open for business in the United States, so it may be that the term “Wal-Mart America” is almost redundant. Still, when the store locations are analyzed through the lens of Patchwork Nation, differences among the sites emerge.

Of the 11 communities that represent the various county types in Patchwork Nation, all but one have a Wal-Mart less than 20 miles away. Some have multiple stores. (A Wal-Mart is a bit further down the coast from Lincoln City, Ore., which represents our small-town “Service Worker Center.”)

In terms of sheer numbers of stores, the wealthy, largely suburban “Monied ’Burbs” lead the way, with 885 Wal-Marts in their boundaries. But that’s largely due to the number of people that live there – roughly 85 million.

A better measure may be Wal-Marts per 100,000 people, and that method yields very different results. One finding: The stores seem to have their strongest base in communities with a conservative tilt.

The highest Wal-Mart-to-person ratio exists in the aging “Emptying Nest” counties (2.4 Wal-Marts for every 100,000 people) and in the socially conservative “Evangelical Epicenters” (2.0 Wal-Marts for every 100,000 people).

Also scoring high are the “Military Bastion” counties located around armed-forces bases (1.8 Wal-Marts for every 100,000 people) and rural agricultural “Tractor Country” counties (1.7 Wal-Marts for every 100,000). Both of those types tend to lean Republican.

For the most part, Patchwork Nation correspondents in Hopkinsville, Ky. (our “Military Bastion”), and Sioux Center, Iowa (our “Tractor Country” community), speak fondly of their local Wal-Marts.

Meanwhile, the reliably Democratic big-city “Industrial Metropolis” counties have the lowest Wal-Mart-to-person ratio – at just 0.5 per 100,000 people.

Also on the low end are the more politically divided county types: the “Monied ’Burbs,” the growing and diversifying “Boom Towns,” and the “Service Worker Centers” (all those places have 1.4 Wal-Marts per 100,000 people or less). Conversations we’ve had with residents in some of these communities reveal a negative value judgment about the chain.

For instance, in Eagle, Colo. (our “Boom Town”), debate abounds about “big-box store” development. But the discussion changes for many when the name on the “big box” changes. Talk about the arrival of, say, Whole Foods, and you’ll hear warmer words. You’ll hear something else about one of Sam Walton’s superstores.

In part to appeal to communities that are less interested in them, Wal-Mart has recently introduced a new logo and is hipping it up a bit. The approach also includes a new motto about “living better.”

In some communities that consider themselves progressive, criticism has risen over how the company treats and pays its employees. Look at Ann Arbor, Mich. (our collegiate “Campus and Careers” community), where some people have signed up to start a Boycott Wal-Mart Meetup Group. No Wal-Mart is within the city limits yet, but there is one in neighboring Ypsilanti, Mich.

Protests or no, Wal-Mart has established quite a foothold in those “Campus and Careers” counties (1.9 stores for every 100,000 people). Cash-strapped students are often among the most concerned with stretching their dollars.

Watching how Wal-Mart performs and grows in all these communities in the coming years could be telling. If the current economic downturn deepens, protesting against or boycotting a company that promises low prices may become harder for some. And the Wal-Mart battlefield in the culture wars may shrink.