Wednesday, February 20, 2008

Wal-Mart Heating-Up The Competition Against Tesco in the UK (As Well as At Home in the USA)

For the last month we've been writing about a major planned expansion by Wal-Mart, Inc.'s Asda retail division in the United Kingdom (UK), specifically targeted against UK market share leader Tesco. We also were one of the first publications to report as long as six months ago on Wal-Mart's small-format grocery store development (which we now know as Marketside), which will be targeted directly at Tesco's Fresh & Easy Neighborhood Market small-format grocery markets in the Western U.S.

Today, Wal-Mart confirmed and announced its Asda expansion plans in the UK. Asda chief executive Andy Bond said the chain plans to double its rate of expansion in the UK. The retailer will open 20 new (combined food and non-food) superstores a year, 10-12 Asda Living non-foods stores, remodel numerous existing superstores, and grow its Home Shopping business and Asda Direct internet business.

All told, Bond says Wal-Mart/Asda will create 9,000 new jobs in its first year by opening 10-12 new superstores and 10 new Asda Living stores in the UK. Additionally, Asda plans to create 1,500 more new jobs in the first year by expanding its online Asda Direct and Home Shopping businesses. Wal-Mart is investing about $780 million in the expansion.

This is the largest growth program for Asda, the UK's second largest retailer after number one Tesco, since Wal-Mart acquired it in 1999. Tesco has 31.4% of the UK grocery sales market, according to research firm TNS World Panel. Asda has a 16.9% share, followed by Sainsbury's with 16.4%, and fourth-place Morrissons', with 11.5% of the total UK grocery sales market share.

In conjunction with the expansion announcement, Bond also said Asda will immediatly begin a major price-reduction program featuring numerous food, grocery and non-food items in all of its existing 352 stores in the UK. (Tesco has 1,252 stores of various formats in the UK. Notice that Asda has less than a third of the number of stores as Tesco, but only 50% less market share.) Asda's immediate retail price-cutting program is designed to poach shoppers away from number one Tesco and other three of the UK's "big four" grocery retailers by capitalizing on consumers' currently pinched pocketbooks do to an economic slowdown in the UK.

A full-out offensive by Wal-Mart/Asda on Tesco in the UK

Although we've known this major expansion and retail price cutting move has been on the table at Wal-Mart for some time, we didn't know it would be of this size. The nearly $800 million initial investment by Wal-Mart/Asda represents a real, full-out offensive in the UK aimed straight at market share leader Tesco. It also shows Wal-Mart intends to be a major player in the United Kingdom. The creation of 10,500 new jobs in one year will be a welcome boost to that nation's economy.

This offensive move by Wal-Mart, the biggest retailer in the world, vis-a-vis Tesco in the UK, comes on the heels of a defensive Wal-Mart move against Tesco at home in the U.S.
Wal-Mart will open sometime this summer the first three or four of its new, small-format grocery stores named Marketside in the Phoenix, Arizona metropolitan region in the U.S. The 15,000 square foot or so "Small-Marts" are positioned to go head-to-head against Tesco's small-format Fresh & Easy grocery store chain. The British retailer currently has 50 of the small-format, combination discount basic grocery/semi-upscale fresh and specialty foods markets open in Southern California, Arizona and metropolitan Las Vegas, Nevada.

Tesco's entry into the USA with the Fresh & Easy chain--and its aggressive store development schedule which calls for the retailer to have 200 stores open and operating by the end of this year--took Wal-Mart a bit by surprise. However, the mega-retailer from Bentonville, Arkansas didn't take long to retaliate at home and across the pond in the UK, with its upcoming Marketside stores in the U.S., and now the aggressive Asda division expansion in the UK.

It's doubtful though that Tesco, the 3rd biggest retailer in the world, will merely sit still over Wal-Mart/Asda's expansion in the UK. Rather, we expect the chain to ratchet-up it own expansion plans, although they already are rather extensive.

For example, Tesco is moving into the "High Street-format" Department store-style business, with two-store, upscale stores wihich sell food, groceries, electronics and other higher-end goods in the UK. The retailer also is working on a "top secret" small-format, discount grocery store format which if developed would target Germsn discount grocery retailers Aldi and Lidl, which are both rapidly growing the number of stotres they have in the UK and increasing their respective grocery sales market shares.

We also suspect Tesco will match Asda's price discount scheme rather than risk loosing any market share to the retailer at home in the UK.

Depending on by how much, and on how many, grocery items Asda reduces prices on, the UK's other top chains--Sainsbury's and Morrisons'--will likely follow on the price reduction bandwagon as well. This will be good news to UK consumers, but could be bad news to all four of the retail chains' since the UK, like the U.S., is currently going through a strong patch of food cost inflation.

Further, putting Tesco aside for a moment, since Asda and Sainsbury's are so close in market share--Asda at 16.9%, Sainsbury's at 16.4%--we see the Asda move as having a major effect on number three Sainsbury's. To protect its position, the grocer will need to not only match Asda's price reductions, but look at its own current new store development plan in a new light. That new light is the one now being reflected by the Asda growth initiative confirmed today by CEO Andy Bond.

But the real action--and frankly the fun--is focusing on the Wal-Mart/Tesco battle. That's largely because its an across the Atlantic Ocean battle between two giants, both of which are the res[ective food and grocery sales market share leaders at home, as well as attempting to infiltrate each others' business in their respective home-base nations: the USA and the UK. ( Of course, the historic British/U.S. rivalry makes it doubly-interesting as well.)

Asda Likely to Benefit from 'Competion Commission' Report

Despite Asda's new, aggressive growth plan, we don't see the chain catching up with Tesco, which has a healthy UK growth plan of its own in place, anytime soon, considering the British retailer's near-double market share lead over Asda.

However, Wal-Mart/Asda's announcement of its growth program at this time is no mere accident. Some time ago the British government's 'Competition Commission," an economic regulatory body which exists to ensure retail grocery sales competition in the UK, launched an investigation into potentional monopoly power in the supermarket sector. Leading retailer Tesco has been at the center of this investigation by the commission.

The regulatory commission is soon due to present a report on its findings. Many UK retail analysts tell us Asda stands to be the prime beneficiary of the commission's findings in the report.

These analysts say its likley the "Competition Commission" will introduce a new "competition test" into the UK grocery retailing industry. This test will prevent any one supermarket chain from building up a dominant position (excessive market share) in a city or town. The Commission proposed the outlines of this test last Friday in fact. The group's final recommendations are do in May, and it's likely a version of such a test will be a part of that recommendation, our UK industry sources tell us.

Tesco already holds this "monopoly" position in numerous cities and towns in the UK. In fact, there's even a name for it: "Tesco Towns." On the other hand, with only 352 stores, compared to Tesco's 1,252 stores, Asda has much room to grow its new stores throughout the nation. Additionally, Asda doesn't have a similar dominant or "monopolistic" presence in any UK cities or towns at present.

The UK supermarket analysts' tell us if this "competition test" becomes law, it will open the door for Asda to grow nearly as much as it desires. At the same time, it will but a damper on Tesco's new store growth in many instances because the retailer will be limited in its opening of new stores in numerous UK cities and towns where its deamed by the commission to have "monopolistic" status.

The Wal-Mart/Tesco small-format store battle in the U.S.

Meanwhile, in the U.S. which is Wal-Mart country through-and-through, its too early to really speculate on the Wal-Mart-Marketside/Tesco Fresh & Easy Neighborhood Market small-format grocery store battle which will begin later this year.Wal-Mart won't open its first three or four Marketside grocery markets in Arizona until mid-to-late summer of this year.

Currently, Tesco's Fresh & Easy is on a new-store opening blitz. This month the British retailer is opening one new Fresh & Easy store every other day in Southern California, Arizona and Nevada. Today it opened its 50th grocery store in the Southern California desert region city of Palm Desert. At least 10 more new stores are scheduled to open in the next two weeks. The first stores' opened just a little over three months ago.

Based on our extensive store-level observations, interviews with shoppers, store-level workers, and Fresh & Easy suppliers, our analysis is that Fresh & Easy store performance to date is a mixed bag. Some of the stores, such as the one located in the City of Los Angeles and another unit in Orange County, are doing a brisk business. However, the majority of the stores are seeing fairly low overall store counts to date. Additionally, although it's still very early, most of the stores' haven't met Tesco's goal of being primary grocery shopping markets for neighborhood residents. Rather, our analysis shows most shoppers are using the small-format stores as secondary and tertiary shopping venues.

As we said, its still early though. The longest-open Fresh & Easy grocery market, which is located in Hemet, California, has only been open for a little over four months. Nearly half of the 50 stores have been open for just a little over one month.

When Wal-Mart opens its first Marketside grocery stores this summer however, Fresh & Easy will face a direct target in the form of the world's largest corportation and retailer, and the number one food and grocery market share retailer in the U.S. At least three of the first Arizona Marketside stores that will open this summer also are within a couple miles of a similar Tesco Fresh & Easy store. This is no accident, despite Wal-Mart's refusual to admit they are specifically targeting Fresh & Easy in the Arizona market.

When these first Marketside grocery stores open within a mile or two from the Fresh & Easy grocery markets, the battle will become joined. We will be able to see what the world's number one and number three retailers can do mano-a-mano with grocery stores of a similar size (about 13,000 square feet for Fresh & Easy, 15,000 square feet for Marketside) and very similar formats: basic groceries, fresh produce and meats, prepared, ready-to-eat and ready-to-heat foods, and specialty grocery items.

Further, Wal-Mart isn't confirming it, but our sources have been telling us for a couple of months that the retailer has been scouting (and in some cases has found) retail store locations in Southern California, Northern California and Nevada for its Marketside "Small-Marts." In addition to currently having stores in Southern California, Arizona and Nevada, Tesco's Fresh & Easy Neighborhood Market has signed leases for an initial 18 store sites in Northern California, with more to come. The retailer plans to open its first storess in the San Francisco Bay Area in late 2008 or early 2009.

The cross-Atlantic food retailing battle between Wal-Mart and Tesco is heating up. However, there's much more fire to come, both in the U.S. with the upcoming small-format grocery store battle and in the UK, with Asda's major expansion program and the release of the government's "Competition Commission" report in May. Stay tuned. We will be.

No comments: