• by Sarah Mahoney , October 31, 2007

Tesco is getting closer to introducing Fresh & Easy Neighborhood Markets. The first U.S. stores from the British retailing giant are scheduled to open on Nov. 8 in California, followed by Las Vegas stores on Nov. 14. And Tesco just announced that some San Diego locations will open on Nov. 16.

As the big day approaches, retail insiders are chattering about just how big an impact these smaller-format stores--which will focus on fresh, nutritious, prepared foods--might have on U.S. food retailers.

To find out whether the new stores will be the equivalent of the Beatles, Duran Duran or maybe just Wham!, Marketing Daily went to a guy with answers: Herb Sorensen, global scientific director of shopper insights for TNS North America.

MD: Everyone keeps talking about the Tesco launch. Why should we care?

HS: In some ways, it won't make much difference. The net economic impact of Tesco in the U.S. isn't going to jostle anyone economically. The industry is big enough so that you can add 100--or even 1,000--new stores. But, intellectually, food retailers will get substantially jostled.

I describe it as The Long Tail popularized by Wired editor Chris Anderson. Most companies would fill a warehouse with one million items, or SKUs. And a typical supermarket might stock 35,000 to 40,000 of them. But in fact, American consumers don't need that many. A typical family might have 300 to 400 different SKUs in the house, but most of their purchases will really fall within 150 items or so. So the typical American supermarket has taken the big head, and stirred it into the long tail. It's the shopper's job to find the few items they do want, sprinkled in with the tens of thousands they don't want.

Tesco's stores will reverse that--they're just going to present shoppers with items they actually want.

MD: It sounds too obvious to be original.

HB: It's really not original at all. Look at a very successful store like Stew Leonard's. A typical store might contain just 2,000 SKUs, yet have sales that are much, much higher than a conventional supermarket's, which stocks 30,000. H.E.B. Stores, a Texas chain, has a very similar concept with its Central Markets. Chains like Whole Foods Markets and Trader Joe's also do this. The difference is these stores are consumer-centric--they don't make the shopper do all the work.

MD: So why aren't grocery stores pursuing Stew Leonard-like formats?

HB: It's just never made economic sense for them to evolve that way. Consumers aren't the main source of revenue for food retailers--marketers are. Typically, the slotting allowances and promotional fees marketers pay for shelf space are a chain's biggest revenue source, followed by revenue earned from "float," or handling cash, followed by real-estate. And margin, the profit made on sales to customers, only comes in fourth. So from the point of view of brand economics, it all makes sense--brands need that long tail.

MD: Besides a more edited selection, what else might Fresh & Easy offer consumers that isn't available?

HB: Convenience. More than 50% of shoppers in a food store buy fewer than five items, but you'd never know that from the way most grocery stores are laid out. And the most common number of any items they buy is one. Tesco's stores will be clearly aimed at the short tripper, and that's smart.

MD: What other tricks might it have up its sleeve?

HB: Customer loyalty programs. It's been very successful with them in other markets.

MD: Okay, so Tesco is consumer-centric. What else might that mean for the industry?

HB: Tesco has done what I recommend all retailers do--it stopped defining itself by what it sells and started defining itself by the customers who came through its doors. Tesco now sells insurance. It sells vacations. And they are a very astute online retailer. The point is that Tesco knows how to target individual shoppers.