KEY POINTS:
Tesco's assault on the US market could be under threat from Wal-Mart, which plans to open smaller stores in Arizona to compete with the UK retailer's Fresh & Easy format.
The US giant, which owns Asda in the UK, is understood to be opening four pilot stores of
around 1850sq m in Phoenix, where Tesco launched its own new format at the end of last year.
"We trial and test different ways to serve our customers all the time, and this smaller neighbourhood market is an example of that," a spokesman for Wal-Mart said.
Experts say the move could have expensive implications for Tesco, which will deliver its Christmas trading update this week.
Allyson Stewart-Allen, a marketing expert and author of Working with Americans, said Wal-Mart's prices were likely to be lower than those at Fresh & Easy due to its "intense purchasing power, representing 2.5 per cent of US GDP". Furthermore, competition on the West Coast for retail property is likely to intensify, driving up rents while Fresh & Easy's points of difference may be eroded, she said.
"Wal-Mart has wider and deeper US consumer data than Tesco, which means it can potentially better align the merchandise mix and adapt it from day one," she said.
The reputation of chief executive Sir Terry Leahy would be at stake were Tesco to fail in the notoriously difficult US market, which has already seen off a slew of UK retailers.
Darren Shirley, an analyst at Shore Capital, said that although the Wal-Mart stores did carry a threat, Tesco would have expected competitors to open smaller-format stores following its incursion into the US.
Shares in Tesco dipped 1 per cent on Monday as the market awaited its trading update. The retailer is expected to report a 3 to 4 per cent rise in like-for-like sales, but the City will be listening carefully to what Leahy has to say about the economic environment. A resurgent Morrison's is believed to have taken market share away from Tesco.
Morgan Stanley on Monday hit Tesco with a double downgrade and slashed its target price on the supermarket by more than 20 per cent.
Geoff Ruddell, the investment bank's new retail analyst, said that although he believed Tesco was a great business, he did not expect it to outperform in 2008. The bank cut its target from 480p to 375p. Tesco closed the day 6p down at 420p.
"Tesco has recently been trading at its highest price-earnings rating, relative to the FTSE 100, in more than 20 years," Ruddell said.
"Historically, Tesco de-rates as UK interest rates fall, as is now happening. We believe that now is not the time to gain exposure to the long-term Tesco growth story."
- Independent
