Rocky, Not Rocking, Start to this British Invasion
(US article)
Tesco's stumbling entry in U.S. shouldn't lull c-stores on a new threat from small-format grocery
competitors
So far not so smashing. But that could change fast as the U.K. giant refines its fresh convenient and
value-oriented offerings, connects with more consumers, and kicks expansion into gear. Imitators from
the grocery, mass and drug channels are already surfacing, and experts believe convenience store
operators could even find keys to their own future in Tesco's initiative.
C-store owners may remain,
roughly five times the size of
lived up to the early hype; or
watch closely, warned experts
indifferent to Tesco because its properties are 10,000 square feet,
the typical c-store; or because its performance and expansion haven't
because it hasn't sought classic c-store locations yet. But they need to
interviewed by Convenience Store News.
In their collective opinion, Tesco is an expert at bonding with shoppers of all kinds. Its success with
Tesco Express (2,100square feet) in England proves the retailer's competency in small formats, and
its competitive tenacity has earned Tesco an international reputation. And Tesco, one of the world's
largest retailers, has deep pockets, like many of its domestic copiers, among them Wal-Mart
Marketside, Jewel Urban Fresh, Market by Vons (Safeway), Wal-greens Café W, Giant Eagle Express,
and a possible Stop & Shop entry.
"They're not targeting the traditional convenience store consumer, but the consequences of their
format pose some threat to c-stores," said David Bishop, managing partner at Balvor, a sales and
marketing consultancy in Barrington, Ill. "Fresh is what c-stores are focusing on. Tesco is learning a
lot about how consumers react to their initial concept and will align to that. Their presence in
convenience foods on the go is much less than their meal solutions for at-home consumption. But if
consumers tell them they want food they could eat right away, Tesco could well introduce deli
counters and sandwich bars like White Hen [now part of 7-Eleven] had in Chicago."
Tesco is not a c-store, according to Neil Stern, senior partner at McMillan/Doolittle LLP, Chicago. "Eat,
drink and smoke now defines c-stores. Fresh & Easy is about home meal replacement with the chance
to buy other groceries on the trip. Pricing, assortment, the core target market and shopping occasions
are all different from c-stores. These formats are designed to take from the grocery business, and
supermarkets will be harmed most." Looking past these differences, however, it's still understandable
that the Tesco stores, the Wal-Mart Marketside stores [at 15,000 square feet] and others could be
positioned as quick trip destinations for milk, beer and snacks, all central to c-store traffic.
"Smaller formats such as Trader Joe's do a terrific job of satisfying a niche. Everyone is in the
convenient space these days, and people are really watching their trips more with the energy crisis,"
said Harry McHugh, chief people officer at Wawa, one of the top 20 c-store chains in the U.S.,
according to the CSNews Top 100. "If quality and service are there, they'll definitely be in our
competitive set. In England, people buy breakfast to eat and lunch for later from the [much smaller]
Tesco Express stores [many of which are situated] by public transit. If similarly located, people might
be inclined to do the same here."
The convenience industry needs to expect opposition from outside its traditional competitive set. "We
offer what everyone wants, which is more time," said Richard Oneslager, president of Balmar
Petroleum and chairman of NACS: the Association for Convenience and Petroleum Retailing. "C-stores
are more in the rhythms of where and when people are going, and what they're doing. But in the near
term we should be more concerned about quick-serve restaurant (QSR) competition."
Though the U.S. Tesco stores sell neither cigarettes nor gasoline, Bishop urged c-store owners to
"look down the road 10 years. Philip Morris USA anticipates unit sales of cigarettes in the U.S. will
decline by 2.5 percent to 3 percent annually over the next few years. Even if c-stores gain a larger
share of a shrinking market, eventually they have to look in other directions for growth. Fresh is it."
Urging more nimble format decisions by c-stores based on location, Todd Hale, senior vice president,
consumer and shopper insights, The Nielsen Co., said, "an urban setting close to more affluent
consumers gives retailers a lot more opportunity in assessing where they can expand fresh foods."
Yet fresh isn't the only way to compete, McHugh suggested. As consumers clamp down on spending,
Wawa prices for value storewide and imposes no surcharges on its ATMs, but also weighs the value of
other appeals. "We have to be faster and more flexible, consider smaller portion sizes, and engineer
products better so we have less labor cost. We want process improvements in every transaction so we
can deliver on our value proposition," he said.
To stand up to the new formats, "our intention is to do what many others aren't willing to do —
improve our operation," stressed Kyle McKeen, president of Alon Brands for Alon USA, a 7-Eleven
licensee. "Talk is cheap. People who really do product mix, convenience and people well, will succeed.
"Stores like Tesco provide a valuable lesson in what we need to do to broaden our appeals to women.
They do a lot for raising the reputation of c-stores. Yes, they're a threat, but they'll also make us
better marketers," he added. "There will be a greater convergence of food and convenience. People
will raise their standards. Fresh variety will be key. And operators will rivet their focus on enhancing
margins and attracting customers with food done right."
There's plenty c-stores can do to determine if they'll emerge stronger from the competition, or
become collateral damage in supermarkets' battle with Tesco for fresh food share.
If c-stores don't innovate, said experts, they could wind up hurt in two critical areas:

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Higher real estate costs by the new formats' pursuit of either corner locations for gasoline/food
operations, or inline urban sites where populations and traffic are dense. "I think these formats are
better for urban, gentrified and population-dense areas where people are somewhat insulated from the
economy," observed Hale.
Loss of quick trips, although the new formats are designed to snatch them from bigger box formats like
supermarkets and mass, their primary targets.
STATE OF SMALL-FORMAT COMPETITION
Tesco's initial stakes in America remain quite distant from the $10 billion opportunity initially touted
for its small-format stores. Sales per store are well below targets of $200,000 per week, according to
analyst reports. One source pegged initial sales at only $60,000 per store per week.
Yet when juggernauts like Tesco and Wal-Mart commit to a new retail approach, who is going to bet
against them or has the resources to beat them?
Tesco currently has approximately 70 stores in Los Angeles, San Diego, Phoenix, Las Vegas and
central and northern California. It is also looking for additional sites in Chicago, New York and Florida.
Citigroup forecasted Fresh & Easy's sales could hit $7 billion to $10 billion by 2012.
In a recent job advertisement, Wal-Mart described its new Marketside format as "expected to start
with 10 stores and evolve to between 1,000 and 1,500 stores with over $10 billion in annual sales." In
response to additional media queries, the chain later re-termed Marketside as a "pilot" project and
removed the ad from its Web site.
This downplaying of Market-side's potential comes from the retailer that was quiet about toys until it
ravaged Toys 'R' Us, and played coy when it introduced $4 generic drugs and later identified pharmacy
as one of its primary growth areas.
It is known that Wal-Mart is expected to launch Marketside this fall with four "pilot" stores in the
Phoenix area. Billed as a "smaller, urban convenience-type store," Marketside will be targeted to
higher-income shoppers than is typical for the low-price retailer. The Bentonville, Ark.-based retailer
has had good track record with new formats — its Sam's Club and Supercenter formats are enormous
success stories. However, even the world's largest retailer stumbles occasionally. It has also tested
and abandoned other new concepts, including a discount drug store, a closeout division and a crafts
chain. And the jury is still out on its Neighborhood Market, a downsized supercenter store that
debuted a decade ago.
LEARNING FROM TESCO AND WAL-MART
C-stores should have lots to explore in how a British chain comes to grips with American consumers,
and how a fierce discounter tries to take food upscale while making it convenient. Most other players
are grocers who are likely unsure whether small formats will succeed, but don't want to be left behind
and don't want to lose more food share to more convenient outlets.
Is Tesco so smart, or is everyone playing follow the leader? "That's the $10 billion question. I'm on
the pessimistic side based on performance so far. I didn't see a lot of customers in their stores," said
Stern of McMillan/Doolittle. "But it takes time to change shopping patterns. Habits are ingrained. With
all the warning that Tesco was coming, U.S. competitors were hard at work preparing their response.
Wal-Mart is sending a message it'll make it tough on Tesco by putting its stores right next to theirs."
While a Fortune magazine report last December said fewer than three out of four Fresh & Easy
shoppers (74 percent) were satisfied with stock levels on the shelf, and attributed it to unexpected
demand, Stern felt this figure represented a matter of Tesco needing to "re-educate shoppers" about
the way it reinforces its fresh image. "In Europe, they sell down the shelf to be bare each night. By 6
p.m. shelves are empty, then they restock with fresh product in the morning," Stern said. "When
Americans don't see full shelves, they think goods have been picked over, and they question the
quality of what remains. It will take consumers a long time to see empty shelves and think that is
excellent customer service. It may never take."
McHugh of Wawa was less critical. He noted "people who are used to shopping fresh in open markets,
fish stores and bakeries are familiar with selling down, and see it as a reinforcement of the fresh
image."
How C-stores Could Improve Their Competitive
Retailers and industry experts interviewed by Convenience Store News provided these eight
suggestions on how c-stores can improve their competitive positions in light of this new rivalry from
small box grocery stores:

Visit the new stores.

Be fast followers.
Size up the customer base and whether their needs are being met. Ask
shoppers what they're buying. Are they seeking specific products? Do they overlap with what you're
trying to sell more of? Ask why they tried an item, and whether it was advertised.
Benefit from the vast efforts these chains will make to redefine fresh for
consumers so they understand fresh product can come prepackaged. For c-stores this could mean a
switch to packaging that lets people see the food more easily. Expanding fresh foods in c-stores could
also mean more commissary or on-premise preparation of ready-to-eat meals — perhaps with
sandwiches wrapped in white translucent butcher paper to connote high quality, food displays on black
wire racks with wicker baskets to lend the feel of a farmer's market, or other perception shifters.
It could also mean a program where stores build customer trust in fresh coffee by marketing "we
throw away coffee older than 20 minutes." Live with the waste to build the reputation and
demonstrate the commitment.

Do service when you do fresh.
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Get cleaner, lighter, brighter and safer to be more femalefriendly. Prepare the next generation of women to regard c-stores as a more palatable alternative.
The premium will be on people — not product or place
— who can serve well and comply with the regulatory environment of fresh (date coding, country of
origin labeling, traceability, etc.).
Change the vernacular from "oh, it's a gas station" to "oh, that's a c-store."

Lead in prices on key items.
Lower margins in categories that overlap with the new
small-format stores, but resist giving away margin dollars unnecessarily elsewhere in the store.
Tesco has already shown its heavy private label hand (often with no national brand alongside for
price comparison), and is encouraging consumers to try private label fresh food in the process. This
opens the door for c-stores to develop private label well beyond bottled water, convey value and reap
high margins, such as Valero is doing with Fresh Choices snacks.
Consider incenting consumers to buy pastries with prices that fall later in the day, a tactic that would
also reduce waste.

Redefine convenience to differentiate.

See how customers accept
Three ideas: Wawa drive-ins in Virginia
and Sheetz' sit-down restaurant concept, which blend convenience and foodservice; and Family Express'
grocery like pricing to promote a fast fill-in trip between visits to distant supermarkets.
Tesco's
self-service checkouts.
they could work in your c-stores, given shrink, merchandising and service concerns.
Whatever you try, stick close to your core consumers and core capabilities.
Consider if