Wal-Mart’s Worst Nightmare

Wednesday, December 31st, 2008

Apparently British mega-retailer Tesco is Wal-Mart’s Worst Nightmare:

British retailer Tesco entered the U.S. market only last year but already it has managed to put Wal-Mart, the world’s No. 1 retailer, on the defensive. Tesco fired the first salvo, in a battle that retailing analysts expect will intensify, by launching Fresh & Easy, a chain of 10,000-square-foot convenience stores, in cities across California, Nevada, and Arizona in November 2007. Eleven months later, Wal-Mart returned fire, taking on Tesco in Arizona with the debut of the similar-size Marketside, its first new store format in a decade.
Back home in Britain, Tesco has long outpaced the Wal-Mart-owned discount chain Asda. The British giant currently has 34% market share, nearly double that of Asda. In a quarterly trading update on Dec. 2, Tesco reported that despite the economic slowdown, group sales rose 11.7% for the 13 weeks ended Nov. 22, compared to the same period the previous year, due in large part to the strength of Tesco’s international operations. While like-for-like sales in Britain rose a paltry 2%, the slowest growth rate in 15 years, Tesco’s international operations posted revenue growth of 28%. Analysts at Citigroup expect sales for the full fiscal year ending Feb. 28 to rise 13.6%, to $82 billion.

Tesco’s international momentum is expected to continue. A recent report from the Institute of Grocery Distribution, a British food industry group, forecasts Tesco will continue to grow at an average of 11% annually through 2012, enabling it to overtake France’s Carrefour to become the world’s second-largest retailer by 2012.

I thought this was WalMart‘s key strength:

Analysts say that Tesco’s big advantage over major international rivals, which also include Germany’s Aldi and Lidl, is its unrivaled ability to manage vast reams of data and translate that knowledge into sales.

Tesco’s strength lies just outside of Tesco actually:

While data crunching may sound dull, it has given Tesco two major advantages: an unmatched ability to operate multiple retail formats — ranging in size from convenience stores to hypermarkets — and the market knowledge to offer what many analysts say is the best and broadest range of house brands from any retailer.

Tesco uses information gleaned from Dunnhumby, a British data mining firm of which it has majority control, to manage every aspect of its business, from creating new shop formats to arranging store layouts to developing private-label products and targeted sales promotions. In 2003, U.S. supermarket chain Kroger copied Tesco’s example, setting up a joint venture with Dunnhumby in the U.S. Since then, Dunnhumby also has signed deals with a number of other U.S. retailers including Home Depot, Best Buy, and Macy’s.

Tesco’s other strength is its private-label goods:

While U.S. retailers have struggled to convince shoppers that supermarket brands are as good as big-name counterparts, Tesco’s private-label products account for as much as 60% of sales in many countries. According to the company, private-label products also account for more than 70% of Fresh & Easy’s sales. “Wal-Mart and France’s Carrefour are lucky to get 35% of sales from private label,” Flickinger says. The reason, he says, is that Tesco has a range of house brands to cover every price point. In fact, some of its premium-range products, such as Tesco Finest chocolate or yogurt, even sell at up to a 50% premium to established brands such as Cadbury and Danone.

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