Tesco's Fresh & Easy Venture in the USA, and the Ironic Challenge to its Food Retailing Dominance at Home in the UK

Tesco, parent company of Fresh & Easy Neighborhood Market in the U.S., is not only the third-largest retailer in the world in terms of sales volume, it's also far and away the number one retailer at home in the United Kingdom, with an impressive 30% share of all the food and grocery products sold in the country.

Number-two Asda (owned by Wal-Mart, Inc.), number-three Sainsbury's, Morrison's, the UK's fourth-largest food retailer, the Co-op, Waitrose, Aldi, Lidl (both German-owned chains) and a few others split up the remaining 70% of the market share. That's a lot of retailers to fight over that 70% pie. In other words, Tesco stands alone in its dominance of the UK food retailing market. Currently it does.

We use the word "currently" in the above sentence, because despite Tesco's present status as the dominant food retailing market share leader in the UK, a serious challenge is being waged against the retailer's market share ownership.

The grocery chains primarily waging that battle are Wal-Mart-owned Asda, Morrisons, and the two German grocers, Aldi and Lidl, which operate small-format, no frills, limited assortment discount stores throughout Europe. (Aldi operates its small-format discount stores in the U.S. as well. It also owns Trader Joe's in the U.S.) It's the two small-format discount grocery chains, Aldi and Lidl, we focus on in our piece today.

The Aldi and Lidl grocery stores in the UK average about 15,000 square feet. The stores design is basic and no frills, but attractive. The product mix is similar for both Aldi and Lidl: a mix of private label (about 60% -to- 65% of what they sell) and national brand grocery products (about 35 to- 40% of what the stores' sell.)

Both German-based chains put a major focus on price, and offer a limited assortment of basic grocery items. The stores also offer a small selection of higher-end specialty foods and grocery products at hot, discount prices. In the UK, the stores are called "downmarket" supermarkets in the industry.

Aldi's and Lidl's stores' in the UK may sound a bit familar to you. In a number of ways--store size, the limited assortment basic grocery products' offering with a focus on low price, specialty items offered at disount prices, for example--Tesco's Fresh & Easy small-format grocery stores in the U.S. are similar to the German "downmarket" stores in the UK.

There are differences however. Unlike Aldi and Lidl, Fresh & Easy in the USA has a second focus in its stores--which is an extensive selection of fresh, prepared foods. All three--Aldi, Lidl and Fresh & Easy sell fresh produce and meats. The Fresh & Easy stores also are somewhat more upscale in design, but not much.

Tesco also has a small-format grocery store in the UK called Tesco Express. It's similar to Fresh & Easy in the USA in many ways. However, unlike Aldi and Lidl in the UK--which focus on selling groceries for as cheap as they can, Tesco Express in the UK offers more mid-range prices, and is more upscale in its positioning and store design.

The Tesco irony: While Tesco if trying to get its fledgling small-format Fresh & Easy Neighborhood Market venture off the ground in the U.S.--and is garnering lots of attention for launching a small store competitive challenge in California, Arizona and Nevada to large-format supermarkets like Safeway, Ralphs' Wal-Mart Supercenters, Albertsons and others--its large supermarkets and even larger hypermarkets (along with its smaller Express stores) are about to get the biggest challenge they've seen to date. That challenge is coming from Aldi and Lidl--the German invaders--both of which have embarked on massive growth plans in the UK, designed to take market share from Tesco.

Aldi plans to open at least 50 new no frills, small-format discount grocery stores a year in the UK for the next few years. By the end of 2008, Aldi should have a t least 400 of the discount grocery markets in the UK. The German grocer says it plans to build at least 1,500 total stores under this fast-growth plan.

Tony Blain, Aldi's UK managing director in charge of buying, recently said the German grocer could very well have a store in every town in the UK in the next 15 -to-20 years. Blain also said Tesco is the most vulnerable UK chain in terms of Aldi's growth plan. "If you've got someone with 30% of the market [Tesco], you can assume most of our growth is going to come from that," he says.

Aldi also has launched a massive growth initiative in the U.S. The grocer recently announced that beginning this year, it will build about 100 new stores a year in the USA over the next five years. The grocer already has almost 900 Aldi small-format, discount grocery markets in the U.S. The stores are located in the Midwest and eastern portions of the country.

Lidl also has been building and opening its no frills, small-format discount grocery markets in the UK at a fast pace, and plans to not only continue but to excelerate that new store opening pace. the grocer currently has more than 450 stores in the UK and has said it plans to double that amount in the next few years.

Tesco is very worried about these two German invaders and their no frills, little discount grocery stores. So concerned is giant Tesco that it's set up its own version of a mock German small-foramt grocery store in an old warehouse facility in the UK which is owned by Tesco's founder.

Tesco is using this mock Aldi or Lidl to test merchandising strategies and related concepts. It's also highly believed in UK grocery industry circles that Tesco is using this mock store--like they did in the U.S. in developing the Fresh & Easy format--to create its own version of a small-format, no frills discount grocery store on the order of Aldi and Lidl.

The key to Aldi and Lidl's success in the UK and elsewhere throughout the world is that the grocers use a super low-cost model across the board. The retailers first try to find the cheapest sites to build their stores, and often buy empty retail buildings at a discount and then remodel the buildings to fit their store formats.

Since the store-format is small (average 15,000 square feet), it also costs less to build (or remodel an existing building) than the typical supermarket, which can range from 35,000 -to- 70,000 square feet, or a hypermarket, which is anywhere from 100,000 -to 200,000-plus square feet.

The small-format stores' require less shelving, refrigeration cases, checkout stands and the like. Additionally, because the stores' are no frills in design, the design costs also are lower than those of an even semi-upscale supermarket. Further, the small-format stores are low-overhead: less montly fixed costs for energy and water use for example, lower property taxes and more.

Aldi and Lidl also are able to extend their respective low-cost models to the all important area of labor. The no frills, discount grocery stores often have no more than 4 or 5 employees working in them at any given time.

Store employees multi-task, stocking shelves when not running the cash register, doing clean-up work when needed, and working in mutiple departments, unlike larger-format supermarkets, which have seperate produce department and meat department clerks, for example. Aldi and Lidl store managers also are working managers. They stock shelves, work at the checkstands and do other day-to-day tasks, along with managing store operations and employees.

Lastly, the two German discount grocers employ this super low-cost model in product buying. Private label grocery product development plays a major part in operations and merchandising. And both grocers are very good at it. The retailers' obtain the lowest cost of goods possible from suppliers, have extremely cost-effective packaging operations, and cut-costs aggressively throughout the entire supply chain.

Aldi and Lidl also buy lots of national brand grocery products and non-foods items on an "in-and-out" basis at steep disounts. (Aldi even makes key buys on items like small appliances, gas energy generators and other hard goods, and sells them a super-low prices.) The grocers' agree to buy scores of truckloads of an item from a supplier in return for getting a very low cost. The retailers' then create massive displays of these items in their stores and sell the goods for low prices, making only a small gross margin, but selling a huge volume of product.

Both grocers--especially Aldi--have recently increased the amount and variety of specialty, gourmet, natural and organic grocery items they sell in their UK stores as well, as a way to reach more upper-end shoppers.

The stores' offer these items a deep disounts. For example, Aldi recently offerred fresh, whole Canadian Lobsters for sale at about 40% less than the UK's leading supermarkets. There was a stampede of shoppers to Aldi stores to buy the Lobsters, which the grocer sold out of in a couple days. Aldi recently was said to offer the best quality food items among all grocery retailers in a UK consumer survey.

So, as British food retailing invader Tesco struggles to achieve success with its new, small-format Fresh & Easy grocery store venture in the highly competitive Western U.S. market, two German invaders--Aldi and Lidl--are posing a major challenge to the British-based, global retailer's dominance at home in the UK.

The irony of that fact is, Aldi and Lidl are launching their respective challenges against Tesco with small-format grocery stores, which are similar in a number of ways to the Fresh & Easy grocery markets Tesco is using to launch its competitive challenge against U.S. home-grown, larger-format supermarkets with.