Will Tesco get a Rocky Mountain high?

The U.K. retail giant's $2 billion U.S. invasion later this year may hit Colorado, discovers Fortune's Matthew Boyle.

By Matthew Boyle, Fortune writer

NEW YORK (Fortune) -- British retail giant Tesco's invasion of the U.S. might be more ambitious than the company has so far let on, Fortune has learned. A search of public documents reveals that Tesco - which plans to open hundreds of small grocery stores on the West Coast beginning later this year - has designs on the Colorado market as well.

In May of 2006, the name "Tesco Stores West," a Tesco subsidiary, was registered with the Colorado Secretary of State. The name was also registered in California, Nevada and Arizona. (Earlier this month, Tesco changed the subsidiary's name to Fresh & Easy Neighborhood Market, a moniker it had reserved, but not registered, in October 2006.)

A Tesco spokesman denied that the company had any immediate plans for the Rocky Mountain region, but left open the possibility that something could happen sometime down the road. "We have confirmed that we will be focusing on Los Angeles, Las Vegas and Phoenix," says Tesco spokesperson Greg Sage. "We do not plan to open any stores in Colorado in the near future, but we never say never."

Tesco has committed upwards of $2 billion over the next five years to its U.S. foray. The stores, dubbed "Fresh & Easy Neighborhood Market," will be based on the retailers' "Express" store format: mini-supermarkets which are heavy on fresh foods and prepared meals. According to one analyst who covers the company, the Express stores have a higher return on investment than any other Tesco store format.

Tim Mason, a much-admired, 25-year company veteran who earlier ran Tesco's wildly successful Club Card loyalty program, is heading the U.S. launch. Industry observers said it's common for Tesco to not show all its cards when it enters a new market. "Everything I know and see indicates that Tesco has much more in mind than they are publicly stating," says Don Delzell, a partner at consultancy Retail Advantage.

Indeed, Tesco kept tight wraps on its U.S. plans for much of last year, leaving retail wags - and rivals like Safeway, Whole Foods (Charts) and Trader Joe's - to speculate as to what exactly it had in store. Tesco execs reportedly even went so far as to pass off their trial store in a Santa Monica warehouse as a film set. To add another level of stealth, Tesco originally registered the fictitious name "Buttoncable West" with state authorities, but later changed that to Tesco Stores West.

While it is new to U.S. shores, Tesco dominates the retail scene in its homeland - even Asda, owned by Wal-Mart (Charts), plays second fiddle - and its market share in the U.K. grocery sector rose to 31.5 percent in January, according to Taylor Nelson Sofres World Panel market share data. In fact, Tesco is so dominant that Asda has appealed to the British government to throw up some sort of regulatory roadblock to slow Tesco down. (Talk about the pot calling the kettle black.) Overall, Tesco is the world's fifth largest retailer.

Tesco's American excursion is risky - while the company is a household name in Britain, it's as foreign as spotted dick to us Yanks - but Tesco is known for its meticulous planning when it enters new regions. "They go into a country and hit critical mass quickly, and have developed some world-beating tricks," says David McCarthy, a Citigroup managing director who previously worked for Tesco. "They are pretty damn good when they decide to go - and much more successful than our buddies in Bentonville," adds Ted Zittell, a retail consultant who works with many European firms.

Meanwhile, the international misadventures of Asda's parent Wal-Mart have been well documented. It pulled out of South Korea and Germany, and has struggled just about everywhere outside the U.S. save for Mexico. What's more, Wal-Mart's presence in California is so limited that the state could qualify as a foreign country, as far as Bentonville is concerned. It has just 22 Supercenters in California, compared with 279 in Texas.

Of course, Tesco is keenly aware of Wal-Mart's inability to saturate the nation's most populous state, and it's one of the many reasons why the Brits have targeted the West Coast. But once they establish a toehold there, Colorado may well be next.  Top of page