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UK Giant Tesco Tiptoes into U.S. Supermarket Wars

When U.K. supermarket operator Tesco PLC announced in February that it would invest $472 million a year to establish a beachhead in the U.S., it tried to allay fears that it would further complicate the Darwinian struggle in the supermarket business. Instead, company officials said, their U.S. efforts would center on Express stores, which average between 2,000 and 3,000 square feet in size.

But when the notoriously secretive company signed its first U.S. lease last week it turned out to be a supermarket site--a 32,500-square-foot former Albertsons in Glassell Park, Calif. And, California brokers say, it is in the market for more.

The Glassell park space is in line with Tesco’s standard supermarket format, which has floor plates greater than 30,000 square feet and offers both groceries and a selection of non-food goods, such as health and beauty products, electronics, clothing, stationary, furniture and seasonal items like barbecue grills. Tesco officials declined to comment on their U.S. strategy, saying that they wanted their customers to be the first to learn about their stores.

But Tesco is tipping its hand as it shops for similar sites. According to Don MacLellan, managing director of Irvine, Calif.-based Faris Lee Investments, Tesco has been talking to several developers about supermarket buildings.

“We have two or three clients who are negotiating with them right now and they are very aggressive,” MacLellan says. “I’ve been told that the spaces they are looking at are 15,000 square feet to 30,000 square feet and there are a number of former Albertson’s locations in the market, so I think Tesco is going directly to a lot of those owners.”

Tesco officials have also told their future landlords in Glassell Park, a partnership between Newport Beach, Calif.-based Heslin Holdings, Inc. and San Diego-based Retail Holdings, LLC, that they are concentrating on locations with an average size of 15,000 square feet in freestanding buildings.

Another sign of Tesco’s growing ambitions: The company is building an 88.4-acre warehouse/distribution center at Meridian Business Park on Highway 86 in TK, Calif. that is expected to open by mid-2007.

“In the Southern California Basin, they are looking in Los Angeles, San Bernardino, Riverside, Orange and San Diego Counties and they also want to be in Phoenix and Las Vegas,” says Matthew J. Heslin, founder and president of Heslin Holdings.

“They want to get significant presence here,” adds MacLellan. “They are looking for quite a number of locations. It all depends on the market opportunity and the size of the space. And they are also going to shift their merchandize based on demographics.”

Heslin says he can’t disclose the details of the Glassell Park lease, but says the store is scheduled to open in the fourth quarter of 2007.

The Glassell Park property is part of a 370,000-square-foot, six-unit Albertsons portfolio Heslin and Retail Holdings purchased earlier this year for $68 million, but Heslin said Tesco hasn’t expressed serious interest in the firm’s remaining Marino Valley stores. Two of the Albertsons in the portfolio have already been sold and two have been leased to another grocery operator.

“This is a highly desirable property; one of the more advantageous things about it is that you do not have a lot of retail availability in that market,” Heslin says. “And the community is ethnically diverse, with middle- to upper-middle income. It’s a very stable and desirable market, with very minimal population growth – less than one percent a year.”

Tesco is the fourth largest retailer in the world and operates more than 2,500 stores in 13 countries, but this is the fist time in its 97-year history that it has attempted to penetrate the U.S. market. CEO Terry Leahy told British papers earlier this year that Tesco did not previously have enough insight into the habits of American consumers to take such a big risk.
Indeed, a number of British supermarket chains have previously tried to make it in the U.S., but met with limited success. Marks & Spencer was forced to sell its U.S. operations in 2002 after a 14-year-run, hurt in part by its insistence on using only British suppliers and its lack of appeal to the younger demographic. And J. Sainsbury, a one-time U.K. supermarket leader, sold its U.S. arm Shaw’s Supermarkets to Albertsons in April of 2004.
According to the LondonTimes, last year, to prepare itself for entry into the U.S., Tesco dispatched 50 senior directors and researchers to live with California families for two weeks and study their eating and shopping habits. The families, recruited by a market research firm, were not aware of their guests’ true identity. The company also tested the market’s waters with a dummy store at a warehouse property in Santa Monica, Calif., allowing more than 200 focus groups to sample its products and provide feedback on what would sell in the U.S.

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