A retail revolution

A retail revolution

Britain's supermarket leader, Tesco, has embarked on a risky expansion to the U.S.

  • min read


A retail revolution

Britain's supermarket leader, Tesco, has embarked on a risky expansion to the U.S. At least that was the opinion of institutional investors when Tesco announced the move last Thursday, as shares in the company fell by 2% in a rising London market.

There's no doubt that Tesco faces challenges as it pursues a toehold in the world's largest grocery market, which Tesco estimates to be worth more than $600 billion a year now with the potential to grow by 40% over the next five years. Only one in every three international expansions by retailers achieves profitable growth, according to Bain & Company analysis.

But Tesco has a key advantage: It knows how to speak the local language—not just English, but the idiom of regional consumers. It's among the retailers, including that titan of uniformity, Wal-Mart, that recognize regional market share is even more important than national scale if they are to grow profitably. An industry built on the principle that success requires standardization is now widely adopting strategies of localization.

Why is that? Ironically, it's because of standardization's great success. For decades, leading chains such as B&Q and Wal-Mart fine-tuned store formats, merchandise mixes, operations and marketing, rolling out their winning formulas nationally at first and then internationally.

But the pendulum is swinging the other way. Local communities are growing more diverse in age, wealth, ethnicity and lifestyle. Moreover, many locales are saturated with big-box outlets and customers are rebelling.

In response, some leading retailers are customizing their offerings to appeal to neighborhood tastes and needs. It hinges on getting the balance right: Too much localization can cause costs to spike; too much standardization leads to stagnation. Industry leaders have focused on understanding which elements of a business should be considered for localization, how costly they are to customize, and how much impact they'll have from store to store.

Tesco has followed this approach in the U.K. By capitalizing on common information systems, supply-chain logistics and purchasing processes, Tesco has tailored its grocery stores to different communities, improving margins and service in the process. Through its loyalty card, Tesco sees what, where and when customers buy. Based on that knowledge, Tesco adjusts the marketing, the range of products, even the way groceries and merchandise are displayed on shelves, in order to appeal to consumers in that community.

Downtown Tesco Metro stores, for example, often provide sandwiches at lunchtime, and create prepared dinner meals for customers to pick up on their way home. The smaller Tesco Express store concept aims to appeal to convenience shoppers with a mix of groceries and household items. No surprise, then, that Tesco Express provides a model for the American convenience stores that Tesco plans to open in 2007.

Again, Tesco is not unique. When H-E-B, a supermarket firm operating in the fiercely competitive regional markets of Texas and northern Mexico, looked at its overall offerings, it found that it could provide better variety by tailoring them to local tastes. In its stores along the Rio Grande valley, for example, H-E-B focuses on traditional border customers and their ethnic preferences. Its Central Market division, however, offers a world of produce to upscale shoppers with "a passion for fresh and unique food." Yet all stores have a simple, standard operating model with similar ratios as targets for sales and gross margin.

Customization is also a cornerstone of Wal-Mart's "Store of the Community" strategy, with formats, products and even community-outreach programs tailored to local clientele. Stores near office parks, for example, feature readymade meals that workers can pick up during lunch breaks or in the evening. Stores near hospitals expand their pharmacies.

Through its Retail Link program, Wal-Mart works with suppliers to tailor store merchandise with precision. Retail Link provides both local Wal-Mart managers and vendors with a two-year history of every item's daily sales. It then creates maps of local customer demand, indicating which merchandise should be stocked when and where. For example, Wal-Mart stocks about 60 types of canned chili in the U.S. but carries only three nationwide. The rest are allocated according to local tastes. Five years ago, Wal-Mart used just five planograms—diagrams showing how and where products should be placed on retail shelves—to adapt its soup selection to local preferences. Today, Wal-Mart and its suppliers use more than 200 finely tuned planograms and have raised soup's growth rate by several points.

Behind the growth that retailers have generated through localization lies a host of operational advantages—higher sales productivity, fewer markdowns and faster inventory turns, among others. Just as meaningful, localization has kicked off a new round of innovation among retailers, by forcing executives and store managers to ask, "What if each store was our only store?" Indeed, the growing momentum of localization is a counterpoint to the assumption that the world will be packed with indistinguishable big boxes selling the same goods and services to everyone. As Tesco lays the groundwork for its foray into the U.S., we're heading toward a day when the business strategies of the most successful global companies will be as diverse as the communities they serve.


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