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While Tesco's North American foray has been besieged with challenges and setbacks, criticism this week that the unit's lack of profitability is a sign of the retailer's complete and utter failure in the country is perhaps calling the death knell too soon.

Tim Mason, the CEO of Tesco's US division, has in the past admitted the company got it wrong in the US.

He has said how during the "in-depth" market research the company undertook, it neglected to poke around people's garages, where they would have found huge freezer chests bulging with stockpiled meat bought on special offer.

And it was not until after the company entered the market that it realised the average US consumer is not particularly loyal and makes up his or her mindson where to go each week based on the special offers they see. Since learning these difficult lessons late last year, the retailer has refined its concept by expanding its range and introducing more promotions and value packs.

However, this week's damning letter from investment group CtW, which calls for the company's incoming senior independent director, Patrick Cescau, to address the poor performance of the company's US division and Mason's pay, fails to look at the full picture.

Yes, its US operations are haemorrhaging money. Fresh & Easy posted a GBP165m loss last year (it has to be noted that those losses were 7.9% down on the previous year), but sales for the year grew by 58%.

Fresh & Easy is a growing operation whose initial bullish expansion plans have been aversely impacted by the recession. Economic conditions meant it has had to put on hold many openings, despite having numerous outlets in California, southern Nevada and Metropolitan Phoenix, Arizona ready but remain empty.

These empty stores and sites have inflated its overheads, which does not give a true indication of how how the concept itself is faring. Placed in context of the GBP3.34bn profit Tesco booked for 09/10, the losses are not really significant enough to cause the current levels of consternation.

The store concept is based around providing fresh, high-quality, wholesome food at affordable prices. The stores are approximately 1,000 sq m and have a focus on convenience food.

Following the lead, Wal-Mart quickly began testing its Marketside by Wal-Mart concept in Arizona shortly after Tesco entered. Like Fresh & Easy, it also has a strong prepared meal offering, but has stalled with only four outlets.

However, this format may soon be rolled out more broadly as Wal-Mart plans to rapidly expand its smaller store format. All of this suggests that perhaps the concept isn't flawed enough to require the company to completely pull out of the country.

The reasoning behind Tesco's acquisition of its two suppliers this week has been the subject of a great deal of spin. Wild Rocket Foods and 2 Sisters Foods agreed to follow Tesco to the US some five years ago and were owned by two of the company's main suppliers in the UK.

Mason told the FT the move would lead to "synergies and economies by putting the management teams of the units together. We think will be very beneficial for the business."

However, CtW has attributed their sale as a vote of no confidence by the suppliers in the US venture's viability. "We can only assume these effective insiders saw the writing on the wall and concluded that Fresh & Easy was unlikely to achieve critical mass to be viable," the letter said.

Regardless of Fresh & Easy's long term prospects, at its AGM tomorrow Tesco needs to move to rebuild shareholder faith in the venture, which may mean that it has to capitulate to at least some of CtW's demands.

Source:

http://www.just-food.com/comment/what-is-the-future-for-tesco-in-the-us_id111580.aspx