INTRODUCTION TO MARKETING

TESCO CASE STUDY

Question One
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Tesco should not have entered the U.S. market. With the necessary analysis, one can shed light on how the risks of U.S. market penetration outweigh its benefits. Its understandable that Tesco had good reason to perceive the U.S. market as an attractive investment opportunity. From an international strategic standpoint, having a profitable stake in the U.S. market could afford Tesco a higher degree of risk diversification. For example, if Tescos Asian supermarkets are flooded by monsoons and become nonoperational, the revenue lost from that geographic area can then be better offset via gains from operational chains in Europe and North America. The case also suggests that Tesco has already saturated its home market. The company already has 2,482 stores in the U.K., and has diversified its services to offer everything from personal finance to travel planning. International expansion will allow Tesco to acquire a new source of revenue, and allow them the possibility of continued financial growth. Despite the promise of these benefits, Tesco faces considerable and potentially insurmountable challenges in choosing to enter the U.S. market. Setting up a chain of grocery stores that offer fresh, organic produce in the U.S. would force Tesco to lease or build its own regional distribution center. This would be at a considerable cost to Tesco, and further reduce the benefits the company enjoys from economies of scale. Tesco also runs a high risk of financial losses with its decision to enter the competitive U.S. groceries market. The case explains how previous British grocery chains that have taken on the task of U.S. expansion eventually failed and lost their North American operations. Tescos success in both its U.K. home market and other international ventures was achieved through their managements superior understanding of consumer demand and shopping trends. For example, Tesco ensured that their Japanese grocers catered to shoppers who were mostly interested in purchasing small amounts of very fresh food every day. In contrast, Tesco created wet market

shops in Thailand to accommodate the traditions of grocery shoppers there. This expertise, as we shall observe further on, unfortunately did not exist in respect to the U.S. Tescos success in foreign markets was achieved in many cases by opportunistic entry via acquisition. For example, Tesco entered Poland and Thailand by acquiring, respectively, HIT and Lotus. These existing chains would have had valuable experience in running a grocery retailer in their respective foreign market. This expertise would have helped Tesco's upper management construct a more fitting operating and marketing strategy which most optimally fits the needs of consumers within that specific country. Finally, Tesco's positive performance in Asia and Eastern Europe was bolstered by an improving economic environment through the 80s and 90s. Strong macroeconomic growth and a lack of competitors in these foreign markets primed Tesco to become a major international chain. All such factors did not exist when Tesco decided to expand into the U.S. via greenfield subsidiaries.

Question Two Fresh & Easy's subpar performance can be attributed to a variety of causes, the majority of which resulting from managements failure to adequately understand and communicate with the chains consumer base. The case reports how American consumers initially questioned the freshness of Fresh & Easy meats and produce when stores first opened in 2007, and were hesitant to purchase the chains unfamiliar brands. Consumers also balked at the limited opening hours and the overly stark dcor, which was described as hospital-like. Consumers were unhappy with how stores initially rejected American Express cards, and didnt tolerate frequently empty inventory. As a result, U.S. customers may have viewed Fresh & Easy as a lower quality provider of grocer staples, and quickly shopped elsewhere, at where they may perceive to be a better substitute. In 2008, the quantitative data showcased in the cases Exhibit 11 tells us that Fresh & Easy initially experienced a trading loss of an alarming -400% the year they opened. However, this dropped significantly in 2009, to -68% after management decided to address the issues of bad shopping experience (through improving store dcor and providing in-store deals) and lack of advertisement of their brand (by advertising on the radio, billboards, etc). Fresh & Easys U.S. marketing strategy was not altogether flawed. The company was extremely effective at reducing operational costs to provide the cheapest products in an extremely competitive market. The companys decision to implement everyday low pricing versus weekly specials is indicative of a penetration pricing strategy, which is reasonable in such a competitive environment, where pricing is a valuable means of attracting customers. Fresh & Easy also sought to create products which they felt satisfied the benefit and psychological needs of U.S. consumers. In their preliminary research, Tescos U.S. research staff found that

American consumers were very much interested in wholesome, health conscious foods and onthe-go consumption, and the case declared that consumers eventually reacted positively to the Fresh & Easys product quality. Yet, we must make note that Fresh and Easys offerings, their product, goes beyond the grocery items on their shelves. Fresh & Easy also provides their customers a servicea shopping atmosphere. Their stores initial pallid dcor, limited operating hours, product shortages and temporary rejection of the commonly held American Express credit card can all be indicative of bad service, or a neglect of consumer needs. In this sense, Fresh & Easy failed to consider all aspects of their brands product with respect to the American consumer, which in this case pertains to both their physical goods and service. Fresh & Easy also faced the problem of communicating their offerings to their target market segment. The chain sought to represent an untargeted niche market in which consumers could purchase healthy produce in a neighborhood-grocer styled store. Fresh & Easy thus aimed to establish stores that were in a convenience store format. But instead of mainly offering and promoting sin goods like cigarettes, alcohol, and candy bars, the chain chose to offer healthy items, like freshly prepackaged produce and meats. Exhibit A showcases Fresh & Easys initial positioning. Perhaps because of Fresh & Easys small store size, consumers behave as though they are shopping at a convenience store, and spend less per purchase (15 dollars vs 41 dollars at an average U.S. supermarket), as seen on Exhibit 12 in the case. As a result, though the average customer makes 75 visits per year to Fresh & Easy (16 more visits than to an average U.S. grocery store), this average customer spends only 1125 dollars per year at Fresh & Easy as opposed to 2419 dollars per year at a regular U.S. grocery store.

After initially building their stores, Fresh & Easys management team did little to educate their target consumers about the Fresh & Easy format or brand. As a result, consumers were reported to be hesitant about the quality of Fresh & Easy produce. The case also provides quantitative evidence that consumers were hesitant to purchase the brand because they were unfamiliar with the name. This problem of unfamiliarity is indicated by Exhibit 12, which shows that over 4550% of Fresh & Easys merchandise is private label, as opposed to 19% for an average U.S. grocery store.

Question Three To increase performance, Fresh & Easy should first focus upon improving its service to retain what existing customers they have, then hone their promotional strategy to increase their customer base. The case reports that, after its initial bout of negative performance following its opening in 2007, Fresh & Easy responded by decorating their stores with pastel colors, banners, and slogans on their walls. The chain has also taken on an advertising campaign focused primarily on the low prices of their products. However, the case neglects to mention whether Fresh & Easy has been able to extend their operating hours, or whether theyve changed their restocking policies so that products are rarely sold out. Because of the competitive nature of the U.S. groceries market, Fresh & Easy should foremost ensure that they are just as competitive in their operations as their peers. Firstly, Fresh & Easy should extend their hours of operation, such that they are open twenty-four hours per day. This would allow Fresh & Easy to cater to a greater number of customers who do not normally shop from 8AM to 9PM. The chain should also adopt a restocking plan such that the probability of a stock shortage on any given day falls below .1 percent. By increasing operational hours and improving their restocking procedures to decrease shortages, Fresh & Easy becomes much more available (theyre always open), reliable (you can shop whenever), and consistent (they dont run out of stock) in the eyes of their existing

consumers. These changes will ultimately work to ensure that the chain doesnt bleed out any more existing customers due to poor service. Through 2009 onwards, the case appears to report Fresh & Easy as adopting an advertising strategy which focuses most primarily upon low prices. This strategy is certainly valid in appealing to the benefit oriented needs of the chains customers, who perceive Fresh & Easy as offering cheap products that help them save money. However, one may argue that the chain focus too heavily upon advertising their low prices than their focus on sustainability and on-thego consumption. Despite being an exceptionally environmentally and health conscious chain, Fresh & Easy prioritized their honest low prices through their various ads, commercials, and billboards. The case further states that the grocery chain responded to lagging revenue by aggressively pushing couponing and in-store promotions, and even partnered with WIC, a government sponsored nutrition program for the poorer members of American society. Though this promotional strategy could attract more lower-income consumers, Fresh & Easy could stands to gain more customersespecially higher spending customers in the middle to uppermiddle class by appealing to psychological benefits associated with their chain through advertising how environmentally consciousness, convenient, and health-focused they are. Thus Fresh & Easy could stand to gain by advertising their distribution center (with its solar roof), their incredibly efficient store setup (having stores that are 30% more energy efficient store comparables), and their assortment of fresh, prepackaged goods. Certain higher income consumers may respond to these new advertisements by coming to realize that shopping at Fresh & Easy store matches their own principles about being environmentally conscious and physically healthy. Because Fresh & Easy was projected to have 45-50% of their products as private label

items, focusing their advertising more on product as opposed to pricing help educate customers about Fresh & Easys brand. Tertiary to increasing operational competitiveness and promoting the psychological benefits of their brand, Fresh & Easy should also add another dimension to their existing market map promoting their stores as more social, friendly, and personal than their competitors to further entrench the Fresh & Easy brand as a chain of neighborhood grocers that cater to local communities whose members may be much more connected with one another. Promoting a friendly, social atmosphere will not only entice consumers to shop at Fresh & Easy, but also encourage them to stay longer and perhaps purchase more as a result. As seen in exhibit B, Fresh & Easy seeks to attract new customers by employing the three listed changes.

Question Four Tesco has sunk a great deal of money and effort in its attempts to expand into the U.S. groceries market. It would be near impossible for them to gain a return from their investment if they decide to sell off their U.S. Fresh & Easy chain in the condition they were in at the end of 2010. One can argue that there may still be a chance that Fresh & Easy can be profitable in the U.S., enough so that they can make back their losses. There is quantitative evidence showing that Fresh & Easys revenue to sales ratio is in fact increasing since their opening in 2007. Exhibit C showcases a graph showing yearly ratios of trading profits over sales. Despite being negative, this ratio has been steadily rising, indicating the possibility of a fiscal recovery if the ratio were to eventually rise above zero. Furthermore, average sales per store has also been dramatically increasing since 2008, from .18 million pounds in 2008 to an over 10-fold 2.43 million in 2010. These pieces of data tell us that Tescos Fresh & Easy chain is improving in terms of generating sales. Looking at the graph showing average sales/store, we can interpret that older stores are considerably less effective at generating revenue, but the trend is equalizing, such that older stores are in fact becoming more effective at creating income for the brand. If we take the average revenue generated per new store for 2010, and multiply that by total number of stores

(145), the optimistic hope of one day achieving approximately 835 million pounds (and a profit per store of 2.19 million) is certainly foreseeable. From a qualitative stance, one can indeed argue that Fresh & Easy is capable of temporarily satisfying a unique need for neighborhood grocers that offer fresh, healthy fare at extraordinarily low prices. Through the establishment of a sound consumer base via the adoption of a more robust marketing strategy, one may posit that Fresh & Easy can generate enough profits as to break even, despite having to operate in such a competitive groceries market. EXHIBIT A: INITIAL POSITIONING WHEN STORES OPENED IN 2007

Healthy & Wholesome Goods

Fresh & Easy Trader Joes Whole Foods

Small Store Size Format

Large Store Size

Mom & Pop Convenience Store

Sin Goods

EXHIBIT B: IDEAL POSITIONING AFTER PRESCRIBED STRATEGIC CHANGES

Healthy & Wholesome Goods

Fresh & Easy Trader Joes More Formal, Impersonal Atmosphere Whole Foods

Small Store Size Format

Large Store Size

Friendly & Social Shopping Atmosphere Mom & Pop Convenience Store

Sin Goods

EXHIBIT C: BASIC QUANTITATIVE ANALYSIS

AC T UAL& E S T IMAT E DF R E S H& E AS YF INANC IALPE R F OR MANCE(MIL L IONS ) YE ARE ND ING F E B UR AR Y 2008 2009 2010 2011E 2012E SALES () 16 208 353 523 703 TRADINGPROFIT () -62 -142 -165 -158 -116 LIKE FOR LIKE SALESINCREASE () 29% 6% 10% 7% NEW SPACE INCREASE () 965 52 32 30 SALESGROWTH () 70 48 34 NUMBER OF FRESH & EASY STORES 90 122 145 AVERAGESALES/STORE 0.18 1.70 2.43 TRADINGPROFIT/SALES -387.50% -68.27% -46.74% -30.21% -16.50% PROFIT FROM NEW CHANGES 187.36 132.52 134.7 143.39 PROFIT FROM INITIAL STORES 20.64 220.48 388.3 559.61 PROFIT/NEW STORETHAT YEAR 5.86 5.76 PROFIT/OLD STOREBUILT PRIOR THAT YEAR 0.92 2.97 3.82 HIGH ESTIMATE FOR POTENTIAL REVENUE 835.45 HIGH ESTIMATEFOR POTENTIAL PROFITS 317.45 HIGH ESTIMATEFOR POTENTIAL PROFITS/STORE 2.19

Works Cited

Quelch, John A. Tesco PLC: Fresh & Easy in the United States. Boston: Harvard Business Review, 2010. Print.