To challenge Wal-Mart, Tesco needs to play its cards right

Britain’s biggest supermarket chain is planning an invasion of the US – using its hugely successful Clubcard as a not-so-secret weapon

The Upper East Side of Manhattan is one of those genteel areas with outrageous rents that guarantee two broad types of resident: the long-term ones whose families own huge apartment homes with an art collection that could compete with anything along Museum Mile, and the ex-frat boys and girls whose parents probably subsidise their rents, student loans and regular evenings out drinking.

Of course, there are plenty of us in between, who can’t always afford the huge variety of take-out and eating-out options available every night and, dare I say it, occasionally desire a decent grocery shopping experience.

It’s not that Upper Eastsiders don’t buy groceries – in fact they buy premium stuff. The streets in the neighbourhood are forever clogged with delivery trucks from online grocery shopping service Fresh Direct, usually parked in front of a health food store invariably located below a Bikram yoga centre.

However, there are hardly any decent mid-sized supermarkets in the area. I never thought I’d say this, but I miss a retail brand I never actually used in the UK: Tesco. And I might not be the only one who thinks it could find its feet here. A few weeks ago, The Wall Street Journal dedicated its front and back pages to discussing Tesco’s UK success and imminent arrival in the US. The article focused on how Tesco’s Clubcard played a crucial role in helping it to understand its customers’ changing tastes – and, more importantly, how Tesco used it to beat Wal-Mart (Asda) and could do so when Tesco arrives over here. Interestingly, Dunnhumby – the Tesco-owned data agency behind the Clubcard – is also working with the largest US supermarket chain, Kroger Co, one of the few major grocery names to consider loyalty schemes. This is especially noteworthy because Tesco’s first few US stores will be in Kroger’s West Coast strongholds.

Of course, in a world where Wal-Mart rules everything around it, loyalty schemes could end up being a moot point. Annual grocery sales of over $70bn (&£38bn) make it easily the largest grocer in the US. This is why even a hugely successful chain like Kroger might not always convince stock market investors that it can withstand the might of the Arkansas giant.

Trading up and trading down

As some analysts observe, a lot of mainstream supermarkets in the US get squeezed by Wal-Mart and Costco Wholesale on the low-end, and by upscale Fresh Direct and Whole Foods types on the high-end. This is what Boston Consulting Group’s Michael Silverstein describes in his new book Treasure Hunt – Inside the Mind of the New Consumer. He says there has been a “death in the middle” of American retail.

Silverstein argues that in the US, and around the world, consumer markets are “bifurcating into two fast-growing pools of spending”. At one end, Mrs Consumer is trading up and paying a premium for “high-quality, emotionally rich, high-margin products and services”. At the other, that very same consumer is scrimping and saving, “relentlessly trading down” by trying to spend as little as possible to buy basic, low-cost goods that still deliver acceptable quality.

This explains the phenomenon of a well-paid management executive driving halfway across town in her Mercedes-Benz to a wholesale retailer like Sam’s Club to buy food staples or other packaged goods in bulk at the lowest possible prices. It also explains why a construction worker will save up to splash out on designer jewellery from Tiffany’s on Fifth Avenue.

Put another way, the typical middle class consumer has a “want-list” of things she wants to buy, beyond the very basic necessities she needs – and it’s always being revised. Silverstein calls it a “treasure hunt” by the consumer because she gets nearly as much satisfaction from discovering a fancy novelty tin opener at a Dollar General store as she does buying a $2,000 (&£1,085) set of golf clubs. So a marketer of cruises might feel that his or her closest competition is from another marketer of cruises when it really comes from a 42-inch plasma TV.

Silverstein estimates that of the $3.7 trillion (&£2 trillion) annual consumer spend in the US, the trading-up market – which has been growing at a rate of 15% over three years – accounts for about $535bn (&£290bn). Trading down is worth $1 trillion (&£540bn), though he expects it to hit $1.5 trillion (&£810bn) by the end of the decade. This is where Tesco’s Clubcard could be important,in helping its US team understand trading up and down trends better.

So, can a retailer be all things to all men, trading both up and down? If there’s one thing that Tesco and Wal-Mart have in common, this is it. Even though it could be argued that Wal-Mart is responsible for most of the trading down in the US, it regularly trades up. Its latest reported move is to roll out organic foods in a big way this year. The brand leader in this area is Whole Foods, but that comes with all the elitist labels that mainstream Americans have an aversion to. As one New York Times writer explains: “Eating organic has been fixed in the collective imagination as an upper middle class luxury, a blue state affectation as easy to mock as Volvos or lattes.”

But when Wal-Mart does organic full-time, it is expected to change the game. This became apparent when it was reported to be talking about stocking organic food on its shelves for a mere 10% premium to the conventional pesticide and fertiliser-bred kind.

Strong lift in sales

Wal-Mart understands that everyday all-American consumers read the same articles exaggerating, or hinting at, the supposed carcinogenic, hormone-altering, obesity-inducing effects of the cheap food they buy on the aisles of the average American store. This in part explains why organic specialists like Whole Foods or speciality food chains like Trader Joe’s are seeing a strong lift in sales.

But the most important reason for a move like this is skipping the quicksand that is the middle market – understanding that consumers want to have it both ways.

Trading up is even easier to see with non-grocery brands like Starbucks, which sells more than just a cup of coffee when you buy the latest fancy drink for nearly $5 (&£2.70). Dunkin’ Donuts has taken a similar tack since it was revamped by new management . It now sells its own premium range of coffee drinks and shakes, expanding away from its conveyor belt $1.60 (87p) medium coffee. It is said to be considering upgrading some of its stores while trying not to lose its average Joe “we’re not Starbucks” appeal, and has backed this up with a huge advertising campaign. If it succeeds, it will have achieved a rare thing in fast-food retail – becoming a jewel in the consumer’s modern day treasure hunt.

Treasure Hunt, by Michael J Silverstein with John Butman, is published by Portfolio (www.bcg.com/treasurehunt)

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