LONDON (Dow Jones)--"Location, location, location" is the age-old mantra for shopkeepers planning a new outlet. Now Tesco's upgrading it, to "location, format and timing."
The U.K. retail giant's plans to set up a chain of convenience stores across the Atlantic comes as this format's enjoying impressive growth in the U.S.
According to the National Association of Convenience Stores, roughly 140,000 such stores reported 17% sales growth last year to nearly $395 billion, with profits swelling 23.5% to $5 billion.
In the U.S., a convenience store is defined as less than 5,000 square feet of retail area with lots of aisle space, selling over 500 different items. They're open long hours, often seven days a week.
Their recent success is largely linked to time-constrained American consumers who stop by to fill the gas tank and then walk out with prepared food for dinner or donuts for the next day's breakfast. These aren't full-on shopping stops, but smaller, often impulse purchases, usually at higher-than-supermarket prices.
So by attacking this segment, on the lines of its own Express outlets, Tesco's avoiding a direct fight with the likes of Wal-Mart and Costco - and yet has a good chance of grabbing the U.S. shopper's attention.
In the current U.S. retail landscape, choosing the West Coast is also wise. This region - especially Washington, California and Oregon - has the highest percentage of one-store owners. This lack of retail chains gives Tesco plenty of room to use its buy-and-refurbish strategy without much pain.
It's a strategy Tesco has followed effectively closer to home, in Ireland, where it bought the Quinnsworth and Crazy Prices stores. No surprise, then, that Tesco's sending one of its Ireland experts, Tim Mason, to head the U.S. operation.
It's also sending some American executives from Thailand, where Tesco's operations are now self-financing.
Tesco's U.S. foray is not without its risks. It will have to deal with volatile gasoline prices - fuel is a major convenience store item - and increasing credit card fees. Credit card fees, a drag on margins, accounted for 6.1 percent of overall gross margin for retailers in the U.S. in 2004, up from 5.8 percent in 2003
Even so, Tesco promises its U.S. operation will break even in the second year - a heady target, though given the homework the retailer seems to have done, it hardly sounds unreasonable.
(Arindam Nag has covered business and finance for 15 years in Asia, Europe and the United States. He can be reached at +44 207-842-9289 or by e-mail: firstname.lastname@example.org)
(END) Dow Jones Newswires