Wal-Mart's Best Strategy to Combat Tesco's Fresh & Easy
Tesco's strategy in the U.S. is to enter the grocery market with small, local stores specializing in organic and ready to eat meals. The market is dominated by Trader Joe's, who, with roughly 300 in the Southwest, has an average store size of about 10,000 square feet per store. Trader Joe's has had a successful run in California, a place where Wal-Mart's big box retail locations have been met with opposition and little success.
Entering the market with store roll out plan of 100 stores to be developed over the next 5 years and investing around $500 million, Tesco's strategy is a bold one. Known for aggressive tactics in Europe, Tesco is planning on focusing on low-income and poverty stricken locations usually abandoned by larger grocery chains that average anywhere from 40,000 to 55,000 square feet per store. By focusing on these "deserts," as Tesco calls them, Tesco will attempt to gain a foothold within the U.S. market. If Tesco can become successful in building a chain of 100 stores within the Southwest U.S. market, the company can expect to see gross profits of approximately $600 million per year and sales nearing $2 billion.
Whole Foods, which recently acquired Wild Oats, is the next closest competitor to Trader Joe's. Whole Foods' stores average 34,000 square feet and specialize in a similar assortment to the proposed Fresh & Easy product offering, mainly perishable, healthy grocery and nutritional food products. As compared to Trader Joe's, which stocks roughly 2,500 private label products - approximately 85% of its total offering, Whole Foods' private label program accounts for 16% of grocery and nutritional sales for the chain. While Trader Joe's is a privately held company, Whole Foods, a publicly traded company, has grown in average store size by over 50% in the last 10 years and its current store development program contains 88 new stores through 2010 with an average of 56,000 square feet per store (62% larger than existing store size). The proposed development strategy will bring the average store size to over 41,000 square feet.
Though because Trader Joe's is a privately held company it is difficult to grasp the growth of its average store size, but its most recent store development plans appear to involve store sizes greater than 12,000 square feet and could indicate a growth in the average store size for the future of the company.
The trend of developing larger store sizes could lay the groundwork for Tesco increasing its average store size to compete with the typical grocery retail channel; Wal-Mart has been attempting to enter the grocery retail market for many years and sees the grocery store segment as viable competitor to its big box style of retail.
Wal-Mart's plan to enter the local grocery store market includes store sizes roughly 20,000 square feet in size and it appears, by looking at their recent Trade Mark applications, that it will enter the market with a heavy dose of private label product offerings - similar to the tactics employed by Trader Joe's.
Looking at the long term outcomes for Wal-Mart and Tesco, Wal-Mart clearly sees the writing on the wall if Tesco were to enter into the U.S. market with any success. If Tesco were to gain a foot hold within the U.S. market, it appears the average store size would gradually grow and, most likely with additional acquisitions, Tesco would compete with Wal-Mart within the typical grocery store market and look to eat away at Wal-Mart's market size. Wal-Mart's options to combat Tesco are very clear and point to one direction, compete with Tesco head on.
With this scenario, there are only two likely outcomes; both Tesco and Wal-Mart succeed or both will fail. The outcomes are limited and universally the same because both companies are taking similar approaches and employing similar tactics that if one succeeds, the same will be true for the competition. It will be very unlikely that one company will succeed while the other fails.
This appears to be a strategic move on Wal-Mart's behalf in an attempt to keep Tesco out of the U.S. Market. Strategically, it is worth the $500 million investment to flood the market with an additional local, fresh grocery store to dilute the market place, confuse consumers and see Tesco fail in its attempt to enter in the U.S. market. On the other hand, if both companies were to be successful within the local, fresh grocery store market, Wal-Mart's investment will pay dividends in a market that currently only has three large players; Tesco, Wal-Mart and Trader Joe's.