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In the shadow of a military air base about 100km east of Los Angeles, diggers clear an area the size of 80 football fields.
Behind a wire-mesh fence, Britain's largest retailer is building the command centre for an invasion of the world's biggest consumer market.
Tesco plans to create a US convenience store brand, taking on chains such as 7-Eleven and locally run grocers used by southern California's time-pressed shoppers.
"It's going to be a problem if they start opening stores all around us," says Dave Rann, vice-president of Super A Foods, a family-owned chain that has 12 outlets in the region. "We're sprucing up our stores."
Tesco's US expansion has attracted billionaire Warren Buffett, whose Berkshire Hathaway snapped up at least 177.8 million Tesco shares, a 2 per cent stake, after the retailer announced its plans last February, according to Berkshire filings.
Tesco, which has filed trademarks for three variants of the name "Fresh and Easy" for its outlets, expects to tap demand for high-quality fare.
The company will spend as much as US$490 million ($704 million) in the US this year and plans to open stores in southern California, Phoenix and Las Vegas, say people familiar with the situation.
"It's going to face some real hurdles because it's a brand new market for them and one that is extremely competitive," says George Whalin, president of Retail Management Consultants in California.
"Having Buffett buying your stock, though, is a great endorsement, and he tends to get it right."
Tesco shares have risen 29 per cent to £4.13 in the past 12 months, in line with the 29 per cent gain in the nine-member Bloomberg Europe Food Retailers' Index.
The US has been a graveyard for British merchants. J. Sainsbury, Britain's third-biggest food retailer, sold Massachusetts-based Shaw's Supermarkets for US$2.48 billion when it abandoned the US in 2004.
Marks & Spencer sold Brooks Brothers in 2001 for less than a third of the US$750 million it paid for the clothing outlet 13 years earlier.
"Other retailers failed because they either expanded too quickly or didn't do enough research on the market before entering it," says Ted Scott, of F&C Investment Management in London. "Tesco's done its homework."
Tesco rang up a record £39 billion ($110 billion) in sales last year at its 1897 British outlets, including 1171 One Stop and Tesco Express convenience stores.
The company says it collects £1 of every £8 spent in Britain.
Lawmakers and community leaders have criticised Tesco's market domination, saying it mirrors Wal-Mart in its ability to crush smaller rivals.
"Tesco is living proof of a winner-takes-all dynamic in British retail," says Andrew Simms, policy director for the New Economics Foundation. "Tesco's expansion has resulted in the mass extinction of local retailers."
The London-based group says small stores closed at a rate of 50 a week from 1997 to 2002 as supermarkets offered a wider variety of products.
In January the British competition regulator said it was concerned that supermarkets, led by Tesco, may control too much of the country's £124 billion grocery retailing industry.
The regulator said it would look more closely at "land banking" - the buying of property to deny access to rivals - and its effect on competition at a local level.
Tesco is looking abroad for growth, and half its floor space is now outside Britain, chief executive officer Terry Leahy says.
The company has stores in China, Poland, Hungary and nine other countries.
"Tesco is seen as the Wal-Mart of the UK," says Bryan Roberts, an analyst at Planet Retail in London. "Being virtually unknown in the US will be viewed as a clean slate for the company and somewhere where it can make its mark."
It also faces a more competitive environment where consumers aren't tied to neighbourhood shops.
"California is all about automobiles and traffic, and it's not uncommon for people to drive 45 minutes to see a movie," Whalin says.
Tesco's profit margin was 3.8 per cent in its most recent six-month period. That compares with a 1.46 per cent margin at Kroger, the biggest US supermarket chain.
To prepare for its US move, Tesco sent directors to interview 60 southern California families to get a detailed understanding of eating and shopping habits, says Lucy Neville-Rolfe, executive director for corporate and legal affairs.
The company even built a full-scale outlet in a warehouse so focus groups could provide feedback on Tesco's range of goods.
Tesco told onlookers in Santa Monica that it was a movie set, says Matt Heslin, a real estate developer who leased Tesco one site in Los Angeles and is negotiating three other deals.
Tim Mason, a 25-year company veteran, is heading the US push. Mason helped to create Tesco's Clubcard loyalty programme, and analysts say he is a possible successor to CEO Leahy.
"The decision to send Mason underlines how much Tesco wants to succeed here," says Jonathan Pritchard, an analyst at Oriel Securities of London.
Tesco officials describe the "Fresh and Easy" stores as selling high-quality readymade meals and fresh produce, Heslin says. In Britain, consumers can buy an entire meal, from appetisers to dessert, in one package. The retailer's high-end range, "Finest", generates about £1 billion of annual sales in Britain.
To ensure a steady supply of food for its stores, Tesco is building a 76,200sq m distribution centre in Riverside, California, says Dan Fairbanks, planning manager of the March Joint Powers Authority.
The facility will include two warehouses and a 9400sq m office and food processing area on property that was once part of March Air Force Base, Fairbanks says.
The size of the project shows that Tesco plans to open more than the 250 stores the British press has reported, says Roberts of Planet Retail.
"It's a typical distribution centre size when you compare it to other retailers that serve about 1000 stores," he says. "Tesco won't be stopping after opening outlets in California. It'll be looking to roll out the concept nationwide."
For now, Tesco is focusing on lower-priced communities such as Glassell Park, 10km north of downtown Los Angeles.
The community has attracted young professionals with its relatively cheap housing, says Laura Guttierez, president of the Glassell Park Improvement Association.
Finding affordable sites in California may be difficult.
The average price of land is The average price of land in California is US$203,897 an acre, compared with US$45,208 for the entire US.
Tesco is seeking stores of 1100 to 1400sq m, a size that places it in direct competition with 7-Eleven, the world's largest operator of convenience stores, Heslin says.
Dallas-based 7-Eleven is moving away from its Slurpees-and-cigarettes reputation by boosting fresh food offerings.
The company plans to expand sales of items carrying its own brand to 10 per cent of revenue from 4 per cent by 2010 and open about 2000 new stores in the US and Canada, says chief executive Joseph DePinto.
"We're really trying to differentiate into a broader area of convenience," he says.
"I think their approach to how they want to go to market is going to be much different to the way we do."
The Tesco concept may encroach on the territory occupied by Aldi Group's Trader Joe's. California-based Trader Joe's specialises in imported cheeses, wines and artisan breads, with stores decorated in a South Pacific theme.
The company, which has 255 outlets in 22 states, has told store managers to "keep their eye on the ball", says Richard Carlson, manager of the Trader Joe's in Irvine, California.
Investors say Tesco planning is only the first step to building a new brand in the fiercely competitive US market.
"It doesn't matter how much Tesco plans this, it's bound to run into some difficulties," says Grahame Exton of Tilney Investment Management in Liverpool, England.
"It just needs to hope its shareholders are patient and remain committed."
- BLOOMBERG
