OPINION: The ‘convenience gap in the US, and UK local stores

In its second feature on Tesco this week, the Financial Times discusses Terry Leahy’s vision for 10,000 small convenience stores “on every junction of every major city in the US”. His working name for the chain was Fresh & Easy.

Interviewing the executive who Sir Terry picked to develop Fresh & Easy, Colin Smith, the newspaper finds that, after 18 months of research, his team came up with a vision very close to that of Sir Terry: the gap was for neighbourhood stores selling fresh, cheap food that was easy to access in terms of range and location.

The target sales density was between $14-$20 a square foot, above the US average of $10 a square foot. But most US stores are much bigger than the Fresh & Easy model. In contrast, the UK Tesco Express stores achieve £20-£30 a square foot ($31-$46).

The speculation is that Tesco may give up on F&E because it can make more money in Asia, where its incoming chief executive Philip Clarke has made his name. However, this does not mean that Sir Terry got the concept wrong.

Pricing in the Fresh & Easy shops is 10% to 25% cheaper than in other supermarkets, as it is pegged against Wal-mart’s supercentres. If you take the US blueprint and overlay it on the UK market, you could imagine that Wal-mart is Tesco and Fresh & Easy is Tesco Express. The big difference is that Tesco Express does not have to compete on price with Tesco. Another big difference is that, in the US, Fresh & Easy will take shoppers from a competitor, Wal-mart. In the UK Tesco Express will take shoppers from its own superstores.

As local shops who compete with Tesco know, it is a fantastic operation. However, it is also now at a size where its outlets are competing with each other. A few year’s ago the Starbucks model of owning every coffee shop in an neighbourhood seemed unbeatable. Not so now.

There is much to learn from Tesco, much to fear, but for the courageous retailer, much to gain by taking it on.