Buffett, Tesco and Trader Joe’s

Discussion
Jan 31, 2007

By George Anderson

Don’t bet against Warren Buffett. The Oracle of Omaha and Berkshire Hathaway have cast a vote of confidence in the form of a two percent share of Tesco’s stock in the run-up to the retailer’s entry into the U.S. market.

While there is no such thing as a sure bet, Mr. Buffett takes the long-term view of investments and obviously feels as though Britain’s number one retailer is approaching its U.S. entry with the same attitude.

“It’s going to face some real hurdles because it’s a brand new market for them and one that is extremely competitive,” George Whalin, president and chief executive of Retail Management Consultants and a member of the RetailWire BrainTrust, told Bloomberg. “Having Buffett buying your stock, though, is a great endorsement, and he tends to get it right.”

Speculation until now on Tesco’s entry with a different kind of a convenience store has focused on the impact it would have on large operators, such as 7-Eleven, as well as smaller chains and independents. Supermarkets are also keeping a close eye, but the thinking is the channel will not have to deal with a Tesco onslaught, at least not yet.

Perhaps overlooked is the challenge Tesco may pose for Trader Joe’s. The U.K. retailer is looking to build stores with a similar footprint to Trader Joe’s and the focus will be on high-quality prepared food items and produce.

“The products they’re planning to sell are very much ready-to-eat, grab-and-go food,” said Mike Dennis, an analyst for PiperJaffray. “They command high margins which are sometimes as big as 80 percent.”

Trader Joe’s management has told stores to “Keep their eye on the ball,’ according to Richard Carlson, a store captain at a Trader Joe’s in Irvine, California. Michael Stephen, a first mate at Trader Joe’s in Riverside, said a headhunter for Tesco contacted him at work.

Discussion Questions: Do you see Tesco posing a more direct challenge to Trader Joe’s than to mainstream convenience store operators? What do you take from Tesco apparently looking to recruit management staff from Trader Joe’s?

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22 Comments on "Buffett, Tesco and Trader Joe’s"


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Bernice Hurst
Guest
15 years 3 months ago

I have to wonder whether anyone at Tesco in either the UK or the US is reading this. If they are, they must think they have found a fantastic focus group to speculate on all the PR they’ve done over the past couple of years and to draw conclusions about what might happen if they do this, that or t’other. Well done, all of us, for helping them to assemble a first rate team of professional forecasters on a single site. Personally, as a self-confessed anti-Tesco commentator and consumer I would rather wait and form my opinion after they open.

Stephan Kouzomis
Guest
Stephan Kouzomis
15 years 3 months ago

First, Buffett believes in branded businesses. This might suggest Tesco builds its brand equity through consumer marketing and, in turn, superior shopper loyalty!

The thought of Tesco and Trader Joe’s competing only means that more service minded personnel will have to be in the Tesco outlets. Many of its outlets in England rely heavily on wall size dispensing vending machines. But, you still pay at a checkout counter.

Not sure the U.S. consumer will embrace the offering of prepared foods and other dishes through vending machines. Hmmmmmmmmmmmmmmm

Ryan Mathews
Guest
15 years 3 months ago

Of course, until they actually open the store, a good deal of what it will look like is still pure speculation. I don’t know that Trader Joe’s success is tied exclusively to its inventory. The company’s strength is in buying, merchandising and marketing and, most importantly, in the creation of a best-of-class retail culture. So, just duplicating their offerings is, in and of itself, not a direct threat. Why recruit employees from Trader Joe’s? Because they’re great workers with a tremendous attitude trained in one of the best retail food cultures in the country.

Herb Sorensen, Ph.D.
Guest
15 years 3 months ago

There is a huge hole, in my opinion, in food marketing in the U.S., and yes, Trader Joe’s is closer to the bullseye than many. The original supermarket had serious failings for the modern world, but its size was not its major problem. It’s like the three bears: the convenience store is too small, the large supermarket or supercenter is too large. It looks like what Tesco has in mind is just right.

What is needed is a store about a third the size of the typical supermarket, with about a fourth the SKUs, more RTE and immediate consumption foods, etc. Then there is lots of room (neighborhoods) where a store like this would fit. And it would be great at competing with almost any major chain out there. Bracket any big store with two of these and you could eat their lunch.

But then, maybe that’s what Tesco has in mind?

Mark Lilien
Guest
15 years 3 months ago

Trader Joe’s has a great organization, so it makes sense to try recruiting their people. Until Tesco starts rolling out their American prototypes, no outsider can easily tell whose market share will be impacted. Chances are, Tesco’s initial prototypes will be modified anyway, based on responses from shoppers and competitors.

Joel Rubinson
Guest
15 years 3 months ago

I wonder if this is a little bit of a red herring. I’m not sure that Trader Joe’s is a big enough target for Tesco–wouldn’t they want to compete in the mainstream food market, meaning known brands and good assortment of household products? Perhaps a little bit of Trader Joe’s edginess, but I would have thought a more mainstream strategy.

This is as much a question as an answer….

Richard Alleger
Guest
Richard Alleger
15 years 3 months ago

Over time, Tesco will prove to be a formidable competitor to the grocery/supermarket class of trade. As was discussed previously, the best of class convenience stores offer fresh, ready to eat meals and cater to men and women. Look at Tesco’s keys to success in the UK and you’ll see monitoring, understanding and then catering to their core customer base as their best attribute. Now, in conjunction with Kroger, their customer management group, dunnhumby has come to the U.S. Tesco will bring their smarts and the consumers will like what they see.

David Livingston
Guest
15 years 3 months ago
First, no one is really sure exactly what these Tesco stores will look like. How long has this Tesco talk been going on? They have yet to get a store open. Gee, how long does it take to get a 15,000 sq. ft. store built? Since they have failed to get a single store open so far, they haven’t posed a challenge to any retailer. Trader Joes’s might be similar in size but their format and demographic profile is somewhat unique when compared to any other food store. With regards to recruiter targeting Trader Joe’s employees; that sounds normal. Recruiters are after warm bodies and are probably targeting every retailer. I don’t think I would be too quick to jump ship for a company that doesn’t have a store open. In a way this sort of reminds me of the time Food Lion decided to suddenly expand into Texas and Oklahoma. They pretty much just grabbed a bunch of real estate at random, told Wall Street how great they were, and opened a multitude of… Read more »
Charles P. Walsh
Guest
Charles P. Walsh
15 years 3 months ago

Tesco has the ability to challenge conventional wisdom for operators of every format that serves retail shoppers.

Retail is increasingly fragmenting; past models of what make a retailer successful must be reexamined. Wal-Mart changed the face of grocery retailing over the course of a decade, seriously challenging an industry that was satisfied with dividing up the country amongst them.

Consumers are redefining convenience and what is important to them with their pocketbooks.

It is impossible to gauge the impact that Tesco will have on Trader Joe’s; it is more interesting to contemplate how Trader Joe’s, and their customers, will react.

Kunal Puri
Guest
Kunal Puri
15 years 3 months ago

What if any do the gurus here believe will be the impact of Tesco on the front end sales of Walgreens, CVS or Longs drugs?

James Tenser
Guest
15 years 3 months ago

Sure, TJ’s should keep one eye on Tesco as it launches here in the Southwest, due to purported similarities in the format. So should Wal-Mart’s Neighborhood Markets and any other supermarket operator whose success depends on location and meal solutions. (That is, everyone.)

As to your question about convenience stores–that raises a different thought process. Will 7-Eleven or Circle K or Valero lose share to the new Tesco format? Seems unlikely, if only because they target shoppers in a different state of need. The new Tesco stores may prove to be convenient, but that doesn’t make them convenience stores.

Gene Hoffman
Guest
Gene Hoffman
15 years 3 months ago

Tesco is putting its U.S. canoe into fast U.S. rapids and it is currently recruiting where it perceives the most exciting fishing pool is for its goals, i.e., Trader’s Joe’s workers.

It would seem that Trader Joe’s is just one of Tesco’s evolving targets. With Tesco’s in-house conceptual skills, its drive plus its association with a talented giant, Kroger, I am inclined to think Tesco’s gun sites are on a much wider horizon just Trader Joe’s. We may or may not always agree with Warren Buffett but that’s the way to vote.

Justin Time
Guest
15 years 3 months ago

The consumer today wants fancy fresh prepared foods fast for home consumption.

Tesco found their best market in SoCal and Arizona. It takes time to roll out a concept.

They decided that the North East wouldn’t be the best entry point for them. And I agree. With all of the fresh stores being opened by A&P under its various banners, the number of competitors there is still too large. Hopefully the consolidation that Eric Claus and Christian Haub talk about, is in the works.

In the meantime, I think Warren Buffet is on to something. Whenever the first Tesco opens, it will definitely competitive.

They don’t want to make the same mistake as Eatzi’s.

Ben Ball
Guest
15 years 3 months ago

IF structured as postulated above, the Tesco stores will attract the same shopper Trader Joe’s does–the intrepid shopper who is looking for something a little bit different in the items, service and shopping experience offered. This also happens to be the Safeway/Kroger/Wal-Mart shopper by the way–just in a different mood or need state.

The rumored Tesco format will offer yet another attractive alternative for high quality fresh and prepared food and a pleasant shopping experience. As a dual career couple, Tesco could easily fill our shopping needs for about 80% of the trips we now devote to the local Jewel–single meal ingredient buys focused on tonight’s dinner, with a quart of milk to go. We shouldn’t underestimate how important the real estate factor is here though. Our nearest Trader Joe’s (which we love) is 10 miles from our home. We get there a couple of times a month. Our Jewel is less than a block away. We get there practically every day for something.

Ed Dennis
Guest
Ed Dennis
15 years 3 months ago

I don’t think C-stores or Trader Joe’s has much to worry about. However, the thought of a “right sized” store that actually focuses on food is great. I personally am offended by grocers who waste my time and block the isles with bicycles and lawnmowers. It would be great to have someone who offered products because of their quality rather than on who bought shelf space for what.

Camille P. Schuster, Ph.D.
Guest
15 years 3 months ago

Whether or not Tesco offers direct competition to Trader Joe’s depends upon the mix of products in the store. We won’t really know that until it opens. Yes, opening a store in this market will be challenging for Tesco but from what I can tell they have been doing a good deal of research before deciding what kind of store to open. From what I’ve read, they appear to be going up against the convenience store and/or neighborhood store concept of Wal-Mart. With new entrants from Japan as well as remodeled 7-Elevens, this is likely to be a very competitive space in the near future.

John Lansdale
Guest
John Lansdale
15 years 3 months ago

Had to ask my daughter, who lived in London for a while and also likes Trader Joe’s. Here’s her reply.

“Oooh, interesting question. I do absolutely love Tesco’s. It’s my favorite grocery store in London. Cheap and quite popular there. There was definitely talk about them expanding to America while I was living there but I was never quite sure how they’d do. I’m not sure their product is quite as upscale as Trade Joe’s but maybe it would be here. I have noticed Boots (a British pharmacy chain) has started selling their products in Target stores now so you might look up how they are doing with that as some indication.”

Michael Tesler
Guest
Michael Tesler
15 years 3 months ago

Tesco is neither going to copy, emulate or try to fit their store into a convenient box or descriptive category for all of us so called experts and analysts. Like Apple, they are a little bit smarter than that. Like Apple, they see consumers whose needs are not being properly met by current retail stores and they are designing and merchandising to those needs. Most all the energy today is at the ends of the spectrum; that is, either in low price emporiums or high quality stores and stores in the middle are getting killed (i.e. Gap). Tesco sees opportunity in selling quality food in convenient locations–if I had Warren Buffet’s money, I wouldn’t hesitate to invest in this, for if they can deliver just that and that alone–quality + convenience–it is a simple formula that absolutely cannot fail.

Li McClelland
Guest
Li McClelland
15 years 3 months ago
I don’t know what Tesco stores will actually look like but I know what I hope they’ll look like……a much scaled-down-in-size version of a traditional supermarket…because this is a space I believe is sorely needed and can be profitably filled. (See Herb’s comment above.) Any realistic look at the demographics of the US shows that an aging population needs viable alternatives to the mega marts that include Costco, Wal-Mart, Kroger and Safeway, with their massive parking lots and huge interior spaces. In my local Safeway, one has to walk the equivalent of a city block and back just to grab a “quick” jug of milk. In another ten years, a lot more shoppers with creaky knees and weakish hearts will be trying to find stores where they can safely maneuver the parking lots and comfortably shop. My elderly mother-in-law, for example, is spry and independent but I usually drive her to do her grocery shopping because of the parking lot problem. I either join her, or drop her off to do her shopping while I… Read more »
Daryle Hier
Guest
Daryle Hier
15 years 3 months ago
Whether Tesco is aiming at Trader Joe’s remains to be seen. The reasons for TJ’s taking off had as much to do with what others didn’t do as it did with their style–granting TJ’s management is excellent. With all the stories I’ve heard and read, Tesco’s store sizes seem to wander from a large C-store up to a small supermarket. I agree the “just right” size may be accurate in a general sense in describing Tesco’s dimensions. In the end, Circle K and other C-stores, along with Albertsons and the many other supermarkets in the Southwest, will feel the sting of Tesco. I don’t believe TJ’s has as much to be concerned with due to their niche and relatively small target. Supermarkets are trying to add more “fresh and easy” products every day, which is what Tesco will specialize in; of course a lot of this is supposition since we don’t really know what their strategy of engagement is. How they manage their stores along with their approach to the fresh convenience theme will reveal… Read more »
Anthony Ruback
Guest
Anthony Ruback
15 years 3 months ago

A previous correspondent asks if anyone from the UK is reading this thread…well here we are in London, and watching with interest how Tesco will succeed in the USA.

The issue isn’t just Trader Joe’s or any other individual competitor to Tesco, but the market overall. Tesco’s approach at home and internationally is based on the single premise of delivering what’s good for the customer, and they have a single minded fixation on achieving this efficiently and with high impact.

The folks who ought to be taking action are suppliers. They will be faced with a new trade channel that potentially will be the source of substantial revenues. Tesco is a demanding customer, requiring a level of service hitherto unknown in the US. We are already being asked by major CPG organisations to help them prepare for doing business with Tesco. If the “Tesco way” represents a new retailer-supplier paradigm, other retailers will have to reappraise their supplier relationships to compete with Tesco.

Let the party begin!

shawn leahy
Guest
shawn leahy
14 years 9 months ago

Over the past 15 years, we at Trader Joe’s have seen numerous attempts to emulate and reproduce the magic that is Trader Joe’s. Trader Joe’s Central Management, Store Management, and Crew Members are the “X” factor. We are “foodies” that happen to love being on stage with our customers. There is enough room for everyone in the grocery game.

The impact Tesco will have on our business is minimal. We blaze our own trail into the hearts of our customers through our employees. We keep an eye on the horizon, not the rear view mirror. We are a fun group of grocery stores being led by a brilliant CEO (Dan Bane) and a committed group of eclectic food fanatics. If that can be copied, then Tesco deserves to have success.

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