Why Tesco (Fresh & Easy) Failed in the United States

After shortly above five year of operation in the United States, Fresh & Easy, a supermarket chain established by Tesco quit the United States market. Tesco pulled away from the United States by handing over more than 150 of its stores to Yucaipa Cos, owned by billionaire Ron Burkle. However, it was not an easy pull of business with respect to the fact that Tesco had to lend tens of millions of more dollars to Ron Burkle for him to accept the offer. Additionally, Tesco had to shut completely down some of its stores as well as lying off a couple hundreds of permanent employees (Brickley, 2013). The aim of this report is to critically analyze the failure of Tesco’s Fresh & Easy in the United States market. The critical analysis also includes the examination of Fresh & Easy’s exit strategy upon the realization of failure. The report highlights factors such as Tesco’s failure in adapting cultural norms, optimal generic marketing techniques, as well as the relatively low customer service levels, which all resulted in the failure of Fresh & Easy in the United States. The report starts with a brief introduction of Tesco and its industrial environment. It then moves on to evaluate some of the works that have been prepared with respect to the above challenge. Finally, a critical review, as well as sound recommendations, also features in the report.

Introduction

Tesco is a public company incorporated in the United Kingdom. Its headquarters are in Cheshunt, Hertfordshire. Tesco started its operations in 1919 when Jack Cohen opened a couple of market stalls. In the years following the end of World War I, the business experienced bubbly growth such that there were over 100 stores under its name by 1939. Originally, Tesco not only focused its operations in the United Kingdom only, but also focused its operations on the retail of groceries only. However, starting in the early 1990s, the company started to diversify its operations both in terms of products as well as geographically. In light of the above, the company now specializes in the retail of groceries alongside other general merchandise such as clothing, electronics, books, furniture, software, internet and financial service products. With respect to profits, Tesco is the third largest company in its industry operating with stores across various countries in Europe and Asia. The diagram below shows the distribution of Tesco in Europe and Asia.

In terms of revenue, however, it is the second largest global retailer operating over 7300 stores and across all countries where it operates (Tesco Plc, 2015). Other than being listed on the London Stock Exchange (LSE), Tesco features as one constituent of the FTSE 100 Index. According to the company reports at the end of the first quarter in 2015, Tesco’s market capitulation was 18.1 billion pounds, that is, the 28th largest company in the LSE. The operations of Tesco are intense in the United Kingdom with almost half of all its stores there (3300 stores). The management of Tesco has applied all techniques and strategies to strengthen the company’s foundations in the pursuit of remaining relevant to the United Kingdom business dynamics. In so doing, Tesco features various accelerated plans aimed at delivering quality offers to customers at improved qualities, sharper prices, wider product ranges, as well as better and improved services.

Literature Review

According to Lowe and Wrigley (2009), Tesco has had various transitional successes with respect to its record of establishing and developing new retail stores both locally and in several other countries where it operates. However, the above fact did not help in guaranteeing the success of its Fresh & Easy brand in the United States. There are many reasons and perspectives with respect to the failure of Tesco to capture the United States market, according to various industrial observers and critical analysis. The information in this section majorly focuses on what such parties contributed in response to the above failure of Fresh & Easy, which resulted in the abrupt exit of Tesco’s venture in the United States frontier. Whereas there could be many reasons behind the failure of Tesco in the United States, most industrial critics and market analysts have identified four major reasons: entry strategy, market analysis, as well as risk assessment.

Risk Assessment: Assessment of risk refers to the predetermination of any shortcomings expected about the establishment of a certain undertaking in the future. In the pursuit of business expansion beyond local frontiers, risk assessment features as one of the most vital pre-expansion activities necessary by all means to a company aiming for a serious market competition in new frontiers. According to marketing and business analysis, the risk assessment by Tesco featured as one of the reasons leading to its exit in the United States Market. The rationale for the above finds its basis in the following two facts. To start with, Fresh & Easy was established with a strategic target in California, Nevada, and Arizona, due to their far proximity from relatively larger groceries (Telegraph, 2013). Unfortunately, Tesco failed to consider the fact that the above areas were surviving from a severe economic recession as a result of the real estate market collapse (Tuttle, 2013). As a result of such a move, the inherent risk in the venture of Fresh & Easy increased. According to a further analysis by Lowe & Wrigley (2010), the effects of the housing bubble went on and intensified the inherent risk of Tesco’s venture in the US food and grocery industry.

Additionally, strategic research carried out shortly after the entry of Tesco’s Fresh & Easy in the United States grocery market indicated a significant lack of specialist retailers in the mid-market niche (Emerald Group, 2008). As soon as it got that insight, Tesco jumped on the opportunity aiming at exploiting the above market gap through the establishment of smell stores that could easily meet the demands of mid-market customers. Unfortunately, it turned out that the consumer’s demands were harder to meet than envisioned in the risk assessment. Soon after establishing numerous mid-retail stores (Thesing, 2013), Tesco realized the fact that that was not a niche. The major reason behind the absence of mid-retail stores in the United States finds its basis in the fact that majority of American retail consumers prefer big and infrequent shopping at huge stores and supermarkets such as Costco and Traders Joes. As a result, there was not demand at all for mid-retail stores. The lack of such vital information means that Tesco’s risk assessment was relatively poor and thus a key contributor to the failure of Fresh & Easy, continues Emerald Group (2008).

Market Entry Strategy: Before the idea of venturing into the United States market with Fresh & Easy, Tesco had successfully made other transnational ventures elsewhere. Ideally, strategic market entry is the key success to market penetration. It is a key factor determining the ease at which a new firm expands its operations in new frontiers. As highlighted above, Tesco applied a strategic approach that integrated the embracing of cultures and practices sensitive to the local consumers in every new location it sought new markets. According to the Emerald Group (2008), the above approach did not feature during the introduction of Fresh & Easy in the United States. Instead of carrying on with its strategic market entry technique, Tesco made plans to make the existing retailers play with it rules by introducing small stores of Fresh & Easy, in the same format it operates Tesco Express stores in the United Kingdom (Telegraph, 2013).

The above strategy failed as a result of negative reception by the Americans. Ideally, although it works perfectly in the United Kingdom, Tesco failed to account for the existence of various cultural discrepancies between consumers in the United States and those in the United Kingdom. Morris (2013) highlights the fact that it is in the culture of the Europeans to make several grocery trips while the Americans prefer to make less frequent but bigger grocery trips. As a result, despite the high popularity of small stores in the United Kingdom, there was no way possible to make them a success in the United States. According to a research aimed at understanding the above nature of American consumers, it is clear that their satisfaction features in the ability to gain a wide product range thus offsetting cost of traveling long distances (Simmie and Sutcliffe, 1994).

United States Market Analysis: In as much as risk assessment and optimal market entry strategies may be easy to plan, their success requires a deep market analysis. Market analysis features as the perfect reconnaissance study that helps to build a picture of the state of the market in a new region before a company may officially expand its operations. Ideally, there are other key aspects of marketing apart from the goods and services being introduced. For instance, in the retail chain store business, the image is very important. In light of the above, it seems that Tesco failed in its pursuit to capture the most important aspects that American consumers hold the image of a store. Since a long time ago, maintaining a suitable image in the United States helps a lot in the establishment and development of a retailer in the market (Steenkamp and Wedel, 1991). In support of the above argument, Corstens and Lal (2000) agreed that with a favorable image for a store in the United States, is becomes possible for a retailer to establish a differentiating criteria with other competitors, thus increasing the power to bargain as well as the overall profitability index. More research indicates that the ambience of the store and the services, the merchandising mannerisms, and the attractiveness of the basic marketing feature as key elements of a retail store, as perceived by the consumers (Hsu, Huang and Swanson, 2009). The diagram below shows the distribution of Fresh & Easy in Western USA.

Before the launch of Fresh & Easy, Tesco conducted an intense research with respect to purchases behavior in the United States. However, the limited selection of products and the pre-packaging of the products did not help in winning the American consumers. According to Tuttle (2013), the self-checkout lanes in the Fresh & Easy stores were both impersonal and frustrating. Moreover, the stores featured minimal customer services and, therefore, were a disappointment to consumers used to full and unlimited customer services in other American stores (Bateson, 2012). In light of the above, Fresh & Easy turned out to be a weak brand in the perspective of the majority of the United States consumers. The brand was overly simple and it the marketing techniques it featured were in no position to have the ability to boost its image. Hsu (2013) adds that the lack of coupons and vouchers also contributed significantly to turning away price sensitive shoppers. According to him, the above is characteristically irrational since it is the very technique that has brought much success of Tesco Express stores in the United Kingdom. In the absence of all the above, it was impossible for Fresh and Easy to bring about an effective differentiation between itself and the already established competitors in the United States retail market. The absence or little concern about customer satisfaction as well as brand image played a great part in assisting in the failure of Fresh & Easy and its subsequent exit from the United States Market (Vickers, 2013). Vickers underlines the fact that it was not possible for the limited services of Fresh & Easy to compare with those of seasoned American retailer such as Trader Joes that gives free stickers to children and offers free coffee to morning shoppers. With respect to the concepts and provisions of marketing, Fresh & Easy had nothing new to offer the American consumers. By all means, it was trying to lure consumers for fewer services thus its eminent failure, continues Vickers (2013).

Critical Review

Typical of every retail brand in the United Kingdom, Tesco’s path towards growth is global expansion. In light of the above, the United States features as one obvious region to venture in international expansion. The rationale for the United States standing out as the best overseas expansion opportunity for United Kingdom business firms finds its basis in the fact that they share a similar language. Thus, communication is perfect all the way. Over the years, various United Kingdom retail brands have employed different strategies in the pursuit of seeking success in the United States. Some have effortlessly made it through, while others share the same fate as Fresh & Easy, that is, they have failed and exited the United States market.

From the analysis and evaluation of Tesco’s case in the failure of Fresh & Easy and its subsequent exit in the United States retail market, it is possible to highlight some critical issues that United Kingdom companies should have in order to successfully establish their operations in the United States. The failure case of Fresh & Easy clearly raises two critical questions. What makes United Kingdom brands seek the United States market? What are the main aspects suitable in the creation of awareness in the United States by the United Kingdom brands? According to Huge Inc (2014), the presence of digital technologies in the United States has made the region quite attractive with respect to retail market expansion. As a result, companies in the United Kingdom find it easier to establish new ventures in the United States as a result of the cost-effective reach provided by the digital technologies.

However, even with the above holding true, Tesco still failed with its Fresh & Easy brand in the United States. Therefore, the failure can be attributed directly to Fresh & Easy. In the history of Tesco, its expansion strategies majorly included joint ventures and acquisitions. In the perspective of an international joint venture, Tesco gets into a partnership with a local company in the foreign region where it finds suitable to establish its operations. In such an arrangement, both the local company and Tesco actively make the necessary strategic decisions suitable for the purpose of the success of the joint venture (Henry, 2008). On the other hand, where there are no options for joint ventures, Tesco acquires local companies in the regions it deems fit to pursue international operations. By acquisition, it means that Tesco purchased enough shares in the local company’s stock that enables it to have control over the local company (Henry, 2008). Over the years, Tesco has effectively applied the above two market entry strategies in various European and Asian countries where its operations profitable.

However, upon the conception of the idea to venture in the United States, the management of Tesco decided to try out a new strategy. Instead of carrying on with the company culture of establishing international market expansion operations through joint ventures and acquisitions, Tesco decided to enter the United States market in terms of Greenfield investment. The above is the complete opposite of either a joint venture or complete acquisition. The diagram below shows the type of investment strategies applied by Tesco in various regions for market expansion purposes.

 

Ideally, a Greenfield investment refers to the kind of venture where a company’s market entry mode is in the form of wholly-owned subsidiaries. In the case of Tesco in the United States, Fresh & Easy was a wholly owned subsidiary, completely established and owned by Tesco, with no prior operations or ownership by another management at all. Of the above three international market expansion strategies, Greenfield investment is the riskiest and as illustrated in the case of Fresh & Easy, very unsuitable for application in international market expansion (Corstjens and Vanderheyden, 2010). As mentioned above, Tesco had tremendous transnational market expansion ventures in Asia and other parts of Europe. The ventures in Asia and other parts of Europe, where joint ventures and acquisitions were used, Tesco made profits. On the other hand, the venture in the United States where Tesco used the Greenfield investment strategy, the company registered losses. The figure below shows profits and losses for Tesco in the period between 2008 and 2012.

Other than the change of organization culture as illustrated in the application of Greenfield investment to establish Fresh & Easy in the United States, the failure of Tesco in the above region also finds basis in several other key aspects. In the pursuit of market expansion, both locally and internationally, there are many analytical evaluations a company should do to facilitate success (Curseu et al., 2009). Ideally, a company may have all the necessary resource, both human and monetary, but still fail in case certain market evaluations are not made in time. In light of the above, the failure of Fresh & Easy leading to the sudden exit of Tesco from the United States market means that the company undertook limited or no market analyzes before its venture there (Tan, 2009).

One of the above key analyzes is the SWOT analysis. The above technique helps in analyzing all the underlying aspects of strength, weakness, opportunities, and weakness with respect to the undertaking of a given the business idea. In the case of Tesco, launching Fresh & Easy in the United States retail market depicted that the company had considered a SWOT analysis with the Strengths and Opportunities winning over the Weaknesses and Threats (Helms and Nixon, 2010). However, after the establishment of the brand in the United States, the end results show that Tesco did not make a SWOT analysis before venturing in the United States or the one that was made was highly unrealistic. It is a certified fact that Tesco is and still was a force to reckon with in terms of the retail market in the United Kingdom. More so, Tesco had made various other successful transnational ventures in several European and Asian countries. All the above were the strengths that resulted in the decision of Tesco towards launching Fresh & Easy in the United States. However, with respect to the outcome of the venture, Tesco clearly overestimated both the opportunities and its strength in the United States retail market.  Tesco thought that it would change the mentality of American consumers and lure them into adopting the culture of small but frequently. However, that failed to work out as Tesco learned that it was part of their culture that was impossible to change. Additionally, no effort of persuasion would make Fresh & Easy influence the American consumers to use self-checkout systems that Tesco assumed would be a powerful aspect of luring the American consumers due to the speed and efficiency of the system (Reinders, Dabholkar and Frambach, 2008).

Another very important market analysis technique is the Porter’s Five Forces (Porter, 2001). The above technique underlines the fact that every market has certain factors that determine and influence the entry of new players in various industries. The key factor considered under the above analysis is competition. It is the nature and extent of competition that determines whether a company should venture into a certain market at a certain time or not (Wang and Chang, 2009). The United States retail market is relatively market huge due to the huge consumer population. More so, the grocery market is never full. In light of the above, there was space for Tesco to introduce and establish the Fresh & Easy stores in the United States. Otherwise, it would have been irrational to establish over 200 stores across various places, the number of Fresh & Easy stores in the United States by the time of its exit (Howell, 2004). However, there is one aspect of competition that Tesco failed to consider – the introduction of substitute services. The retail market in the United States remains penetrable. However, it is not open for the introduction of new services or variety of goods. With respect to the failure and exit of Fresh & Easy from the Unites States, it is clear that the Americans have a specific taste and expectation that must be met by both old and new retailers if they want to become or remain relevant in the market (Li, 2013).

Lastly, the PESTEL analysis also features as an important aspect that Tesco may have failed to apply effectively. The above technique seeks to identify various external factors affecting. Tesco may have taken good consideration of all its internal factors before venturing into the United States retail market. However, the eventual failure means that there were some external factors the company failed to consider. PESTEL incorporates the aspects of politics, economy, social, legal, environment, and technology. In the case of Fresh & Easy, it is clear that Tesco evaluated most of the above features in the PESTEL analysis. However, the failure of Fresh & Easy clearly shows that Tesco failed to consider two very important aspects of PESTEL during the entry period (Dockalikova and Klozikova, 2014). Firstly, Tesco failed to analyze the economic factor perfectly. The Fresh & Easy launch in the United States happened while the region was recovering from the housing bubble. It means that the anticipated consumers had a less affinity to consumption. On the other hand, the failure of Fresh & Easy also depicts the failure to consider the social aspect in the PESTEL analysis (Dockalikova and Klozikova, 2014). As its market entry strategy in the United States retail market, Tesco decided to use the format of small stores. However, the Americans prefer to shop huge and in big supermarket stores that guarantee variety. The failure to consider that aspect of social analysis greatly resulted in the failure and exit of Tesco in the United States retail market.

Recommendations

From the above critical review of the failure of Fresh & Easy in the United States retail market, it is possible to make a couple of recommendations for Tesco or any other United Kingdom willing thinking of venturing into the Unites States market.

First, it is necessary to carry out deep and intensive market research. Tesco and other United Kingdom companies share similarities in language and to some extent shopping behavior with United States companies. However, the retail markets are significantly singular at so many levels. Tesco should understand that the United States consumers have a great admiration for United Kingdom lifestyle and heritage brands which does not translate to every industrial sector. Ideally, an intense market research would help Tesco and other British companies to have a clear understanding with respect to the consumer perception, competitive landscape, as well as the most desirable essentials behind the creation of market entry strategies (Steenkamp and Wedel, 1991).

The building of a strong ground team features as the other key aspect worth considering. Tesco could learn about the above strategy from observing how a company like Asos opens various business centers through partnering with local delivery companies. The strategy requires having a marketing team already working in the United States even before the operations of a new company officially starts. The rationale for the above finds its basis in the fact that the presence of a ground team helps in facilitating certain marketing essentials such as advertising and CRM, as well as providing unbiased insight of the market to the parent company in the United Kingdom.

Brand awareness is a key factor necessary for successful market entry in a new frontier. The retail market in the United States features the challenge posed by the presence of numerous competitive brands. In light of the above, establishing a strong brand awareness campaign is one key factor promoting the ease of entry and penetration of a company in a new market. Tesco and other United Kingdom companies ought to understand the necessity of establishing thoughtful and strong PR strategies in the pursuit of selling their brands to the consumers. The United Kingdom Companies can learn the aspect of brand awareness campaigns from Top-Shop. The above brand entered the United States retail market in 2008. During that time, its website was completely aimed at audiences in the United States. A couple weeks later, it started its physical operations by opening a one store in New York. Following the same exclusive brand awareness campaign program, Top-Shop now has stores in Las Vegas, Los Angeles, as well as Chicago. Tesco and other United Kingdom should embrace the fact that there is a substantial competitive challenge in for entrants to the United States retail market and thus it is highly necessary to develop strategic brand awareness campaigns before venturing there.

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