Is the Tesco management team regretting the implementation strategy for its US business, Fresh & Easy? Yesterday’s reporting of Tesco’s half-year results will do little to silence the analysts and investors who are questioning the performance of this format.

I know from experience that the one thing you can be certain of when you’re developing a new retail concept is that the initial format will be wrong.

In a past life I led the development of new retail concepts for Boots the Chemists, and, irrespective of the level of pre-launch customer research we carried out, each of them required intensive hand-holding and support before their initial ugly-duckling status was transformed into something that was even remotely close to resembling a swan.

Tesco’s approach to format development has, historically, followed a similar three-stage approach:

1. Develop a scalable model. Launch a handful of stores that enable you to learn quickly, try new things and build a model that works for customers as well as the business
2. Build scale. Use the evidence from the initial prototypes to fund a roll out that provides the business with material profit flows.
3. Market leadership. Leverage your brand and new-found advantages to move from being a strong competitor to a market leader.

This model, in various guises, has served Tesco well, both in the UK and abroad.

For example, Tesco spent several years developing a profitable model for its UK convenience format, Tesco Express, before reaching anything like a scalable business. By 1999, five years after its initial trial stores were launched, the company still had fewer than 20 stores.

In 2000, having finally established a profitable format model, the company agreed a co-location deal with Esso that enabled the business to grow more rapidly and establish scale. This growth was accelerated by the purchase of convenience retailer T&S, and catapulted the Express format into a market leadership position.

By contrast, Tesco, after a year of in-depth customer research, went straight to roll out with its Fresh & Easy business. Despite a slightly stop-start implementation approach there are now 126 Fresh & Easy stores in the south and west of the USA. Unfortunately, the losses are mounting and last year’s total revenue investment is, according to the FT, likely to be repeated with a $259 million profit hit.

My perspective is that the initial research, no matter how detailed, did not enable the team to build a winning format straight away. The real problem is that shoppers find it hard to tell you how they will react to a new offer or format ahead of it becoming a reality. Consequently you have to change the offer as you gain experience and learn.

This is what has happened to Fresh & Easy. The company has slowed down the rate of new-store openings and has changed both the offer and the chain’s marketing approach.

What’s certain, however, is that changing the offer and operational approach of 100 or more stores is a million times more difficult than similar changes in a handful of stores.

Tesco’s CEO, Sir Terry Leahy, blamed the recession on the format’s negative results and was relatively optimistic about the future. However, the trading performance of Fresh & Easy was already below expectations before the recession really bit.

I hope that Sir Terry’s optimism is proved right. Tesco is one of the few truly world class companies we have in the UK. However, my hunch is that Tesco’s future retail roll outs will revert to the ‘Test, Build and Lead’ model it has deployed so successfully in the past.

© Stuart Cross 2009. All rights reserved.

Click on the link to read my article, It’s Time To Redefine Your Market, which has just been posted on BNET.

© Stuart Cross 2009. All rights reserved.