Yesterday, Tesco announced that over the next three months they are going to exit the US market – their Fresh & Easy stores have not been the success that they hoped for. The 199 stores have never made a profit and the exit is going to cost their shareholders £1.2 billion. This is not like the Tesco we all know of in the UK. To me it highlights fundamental business issues.
So, why did Tesco expand to the US and why was it a mistake?
For quite a number of years now, they have held the biggest market share in the UK superstore market, so like all businesses, they saw the opportunity for expansion, and what better place to go than the ‘land of opportunity’. It seemed like the next logical step, however, in this circumstance, this is far from the case, due to one, yet fundamental reason – Walmart. Walmart is not only the dominant supermarket in the US, but the world. In 2012, they were 3rd largest on the list of the Fortune 500 companies in terms of revenue ($447 billion). This is a list dominated (especially in the top 10) by oil companies, which just shows how much Walmart are worth and the power they possess. Trying to compete with such a powerhouse was a very bold move, but predictably, it didn’t work. They were trying to distinguish their stores to consumers looking for ‘fresh and easy’ food, but why wouldn’t they just go to a supermarket they know and trust, that will provide them with everything they need in one visit? That is the question everyone was asking, but one they could not answer.
Tesco were greedy to expect that they would be able to break into the US market with instant success. Walmart is a big part of the American culture so it was always going to be extremely difficult to enter and establish themselves in the market.
So what next for Tesco?
Well, Tesco have also expanded to Asia and all around Europe, which again has not had the success in comparison to the UK market. Therefore, for now, it looks like Tesco are going to stick to what they are good at; expanding and dominating in the UK market. They have led the way in the UK market for some time now, and they now what works and what doesn’t, so it is the best step.
It was predictable that Tesco would not survive in the US, or at least have the impact that they have in the UK. This result has now left Tesco looking a little weak for the first time in almost 20 years; well in terms of profitability anyway. The position Tesco are now in is well summed up by Robert Peston (Business Editor, BBC) “In the UK its huge market share now makes it look less like an unstoppable juggernaut and more like a massive tanker that’s hard to manoeuvre quickly or easily.”
The focus for Tesco will now be on it’s “most important market” (Phillip Clarke, CEO). This is a positive move. It will get the company back up to strength – they will be able to focus on expanding their product portfolio in the UK, increasing their dominance and if in the future they also concentrate on trying to ‘crack’ the Asian market, exciting times could be on the horizon for Tesco. The next 5 years will be key, due to the changing economic conditions and the ever increasing demands from consumers.
The US was not the right move, but sometimes greed can blind a business.