Make room for Tesco and Target

J.P. Morgan has published a study on the U.S. supermarket industry. It is a 76-page PDF file that I've uploaded to the Fresh Produce Discussion Group. You can find it here. To view it, you may have to join the group, but all the better, right?

The 2007 report takes an honest look back at last year's analysis:

We subtitled the 2006 edition of this report “Consolidation moves toward the end game.” We were right—and we were wrong. Even as major supermarket operators took important steps to consolidate the industry, two players with very deep pockets, British supermarket giant Tesco and discount merchant Target Stores, began to establish what are likely to become very important positions in food retailing.


TK: Clearly JP Morgan's analysts are infatuated wth Tesco. Here is why:

Tesco, in our view, is possibly the best food retailer in the world. It is one of the very few whose international record is as strong as its domestic performance. Success overseas has been founded on a commitment to doing advance homework properly and building scale quickly. What little information we have about the expansion suggests the company’s move into the US will follow this pattern. Tesco has been studying the US market for more than 10 years. It has gone to such lengths as building a mock-up of an entire store (apparently disguised as a film set) and having its senior executives stay with US families to understand their needs and shopping habits. In short, unlike many of the other foreign operators that have entered the US market, we think Tesco knows precisely what it is doing.


What to expect, JP says

Tesco is likely to scale up in short order. Tesco has shown an ability to build quickly when it enters a new market. If its Fresh & Easy format proves successful, we think the company will move rapidly to enter additional markets within the US. Competitors can be expected to react to Tesco’s entry. Incumbents, however, have the disadvantage of trailing their existing business models, including larger stores not well suited to quick visits. Tesco’s main defenses against competition will be its rapid roll out and the secrecy surrounding its intentions. Based on its initial choice of markets, Kroger, Safeway, SuperValu, Stater Bros., and the privately held Basha’s chain all are exposed to market-share loss from Tesco’s entry.

About Target, JP says that the chain is gaining significant market share of groceries in more and more markets.

Target is now moving aggressively to expand its role in food retailing. Beginning in 2006, all new discount stores have at least 34 aisles of food, up from 24 previously, and 40 freezer/cooler doors. Its P2009 store prototype, scheduled to be launched in the fall of 2008 or early 2009, will further increase its mix of consumables. Target is rapidly expanding its food distribution system to support this new selling space, including construction of its first distribution center for perishables. All told, 32% of Target’s sales in 2006 were in the Consumables/Commodities category, up from 30% a year earlier. We think that almost all of that amount represents supermarket-type items.


TK: JP Morgan says traditional supermarkets will feel the pain. Wal-Mart will keep growing.

JPMorgan estimates that Wal-Mart sold $106 billion of supermarket items through its supercenter division and another $25 billion at its Sam’s Club warehouse stores. The total of $131 billion gives Wal-Mart nearly twice the sales of supermarket items of Kroger, the largest
traditional supermarket operator.

Later..

TK; It's not getting any easier for the traditional supermarket. JP Morgan said that a full line supermarket needs a share of 15% to have a viable and sustainable position. Wal-Mart has this share in 75 of the top 100 food markets in the U.S. With Target's growth accelerating broadly and Tesco expected to ramp up quickly in selected markets, supermarkets will be hard pressed to find space to grow.