• by Sarah Mahoney  @mahoney_sarah, March 16, 2007

While food retailers aren't any closer to knowing exactly what British supermarket giant Tesco has planned for the U.S. when it begins opening stores here later this year, some observers expect it to hit a sweet spot.

"Tesco has been doing an excellent job of throwing a bit of confusion into what people expect," says Ted Zittell, a Toronto-based consultant for McMillan/Doolittle, which specializes in retail. "But we do know that it is importing its own supply chain, and whatever its 'Aha!' surprise is, I expect it may change the way American food retailers do business."

Tesco remains tight-lipped about what its stores will look like, although a spokesman confirms it will be called Fresh & Easy Neighborhood Markets, located in Los Angeles, Las Vegas, Phoenix and San Diego. "We haven't yet said how many we plan to open but the first stores will open toward the end of the year," he says, adding that Tesco plans to invest $484 million a year in its U.S. expansion.

Industry experts have speculated the stores will closely model Tesco's popular Express stores and woo time-pressed shoppers looking for good food and a quick meal. Unlike U.S. convenience stores, Express emphasizes fresh foods and prepared meals. Industry observers expect the stores will be anywhere from 15,000 to 30,000 square feet.

In recent years, supermarket chains have been all about bigger-is-better expansion. The Food Marketing Institute reports that the average U.S. supermarket in 2004, the most recent year available, was almost 46,000 square feet, up from 35,000 square feet a decade earlier. And the big money has been concentrated on supercenters, which are much larger. Wal-Mart's supercenters, for instance, average 185,000 sq. ft. And even specialty retailers, including Whole Foods, have been pushing to build bigger and bigger stores.

Zittell anticipates that the consumer-centric Tesco will find surprising ways to pair fresh foods and prepared meals, "and the stores will be organized differently than customers expect. Tesco is all about being convenient, not just being a convenience store, and Americans have shown they are wide open to that - look at all the people who go into a Costco just for a hot dog and a drink or are willing to buy a cup of coffee at a Walgreen's. It's all about figuring out new solutions."

One caveat, he says, is how fresh Tesco can keep its food. "In England, which is about twice the population of California and about half its size, it's easy to get fresh sandwiches from Bristol to Scotland." Shipping distances in the U.S. will make that tougher, he says.

Still, there's plenty of room for growth: NACS, the association for convenience and petroleum retailing, yesterday said that the number of convenience stores in the U.S. grew 3.2% over the past year. Tesco hasn't yet announced whether its new stores will sell gas or not, but retailers are watching closely. Currently, NACS says, 79.2% of convenience stores sell gas, accounting for the majority of U.S. fuel sales.

Tesco, meanwhile, isn't the only retailer with its hands across the waters. Whole Foods, which already operates six Fresh & Wild stores in the U.K., announced last month that it would open its flagship store in London. The 80,000-square-foot store is scheduled to open in June. "It will really change things in the U.K." Zittell said. "Finally, someone will liberate those British fruits and vegetables from plastic wrap."