From: Reuters
Published December 3, 2007 03:32 AM

Britain's Tesco starts small in U.S. to win big

By Rachel Sanderson

LAS VEGAS (Reuters) - British retailer Tesco's new U.S. venture Fresh & Easy has unveiled ambitious expansion plans including wanting shoppers in the urban centers it targets never to be more than a mile from one of its stores.

Three weeks after launching near Los Angeles, Fresh & Easy's Chief Executive Tim Mason told reporters on a road trip to some of the discount chain's first 15 stores that the number of outlets would swell to around 200 by February 2009.

Plans are also advanced to open a second distribution centre in Stockton in northern California. Like the first one near Los Angeles, the centre could serve up to 500 stores.

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Mason said he saw "enormous possibility." "We want the stores to be no more than two miles apart so no one has to travel more than a mile to get to a Fresh & Easy," he said.

Fresh & Easy's roll out in Las Vegas, Los Angeles, San Diego and Phoenix is being closely watched, with Tesco, the world's third-largest retailer after Wal-Mart Stores Inc. and Carrefour , bankrolling it to a tune of 250 million pounds ($516 million) per year over five years.

Industry analysts predict the small, 10,000 square-foot convenience markets will cause a shake up of what is the world's most competitive retail market and the home of Wal-Mart.

TNS research analysts this week forecast Fresh & Easy could be the 10th largest U.S. retailer by 2015 with revenues of $10 billion. Fresh & Easy has said it will pass through breakeven in its second year of trading.

HARD DISCOUNT

Among the surprises of Fresh & Easy is its hard-discount model, which is unusual for Tesco but is crucial to its aggressive U.S. expansion plans, allowing the chain to sell higher-quality produce at lower-than-average prices.

Although Fresh & Easy draws on the Tesco Express convenience store format that has brought success in Britain, Thailand and Turkey, the layout at the three stores visited in Los Angeles and Las Vegas was sparser, with cement floors and rudimentary shelving recalling European discounters Aldi and Lidl.

Mason, who is a Tesco board member and viewed as a possible successor to Tesco CEO Terry Leahy, said Fresh & Easy's prices were as much as 25 percent lower than industry rivals such as Trader Joe's, Ralphs and Albertson's.

Fresh & Easy's 3,500 product lines combine with higher quality fresh produce and all-important ready meals targeted at the growing number of time-pressed but health- and environmentally concerned U.S. shoppers.

Citigroup analyst James Anstead in a note this week said Fresh & Easy's mix of convenience and low prices made it appear "a compelling format" that could be "rolled out across much of the United States with a dense footprint." The potential of the U.S. business may boost earnings forecasts from 2008 as hard data becomes available, Anstead added.

But there are risks particularly linked to its novelty. The stores' sparse appearance compared with the homey atmosphere at Trader Joe's could put off some shoppers, as could Fresh & Easy's self-service checkouts, analysts caution.

A legal wrangle over the distribution centre key to Fresh & Easy's ready meals and low prices may also weigh.

For Clara Kane, 70, one of the shoppers in Fresh & Easy's Los Angeles Glassell Park store those fears were irrelevant.

"It's a winner. There's nothing like it here. It love it, it's healthy but it is for everybody," Kane told Reuters while filling her cart with ready meals and a bunch of flowers.

"What is greatest is that Wall Street now has to come up with a new business model for the other food stores."

(Editing by Quentin Bryar)

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