Tesco reinvents the 7-Eleven

The British retail giant is out to break the mold with gourmet mini-supermarkets in Southern California, reports Fortune's Matthew Boyle and Michael V. Copeland.

The first Fresh & Easy mart in Hemet, Calif.
The players in Cokes-'n-smokes
7-Eleven (6,150 stores)
Owned by Japanese conglomerate Seven & I Holdings, the nation's largest chain now offers such ans slurpees.
The Pantry (1,642 stores)
The publicly held (PTRY) Southeastern chain operates mainly under the Kangaroo banner and is currently on an acquisition spree.
Wawa (572 stores)
Made-to-order deli sandwiches at this much admired Pennsylvania outfit come via touchscreen kiosks.
Kwik Trip (328 stores)
New $14 million food-production facility at its Wisconsin headquarters features a test kitchen to cook up new ideas.

(Fortune) -- Convenience stores have long been a place to pick up beer and pork rinds. Earlier this month Tesco launched a $2 billion, five-year plan to change that. The British retailing giant just opened the first gourmet mini-supermarket in Hemet, Calif. Dozens more of these Fresh & Easys are scheduled to open over the next three months throughout California and the Southwest. Analysts think Tesco could grow their ranks to more than 1,000 in the next five years.

So how will this British invasion conquer a retailing niche that even Wal-Mart (Charts, Fortune 500) couldn't crack?

A nondescript strip mall off Hemet's main drag is the insertion point. Rather than hot dogs spinning beneath a heat lamp, bags of pomegranates, rose-gold apples, and watercress are the first things you see when entering through the door. Next in prominence are prepared foods, including Japanese shrimp dumplings, Mexican-style burritos, and Indian samosas. The food for sale is a combination of Fresh & Easy's store brands and national and regional ones. The vibe, given the eight aisles and the kinds of items for sale, is much more akin to Trader Joe's than to ei­ther a true conven­ience store or a full-size supermarket.

On its second official day of operation the store is by no means bustling. At 10 a.m., retirees are checking the aisles. Lucille Clift, 84, has a quart of nonfat milk and a bag of granola in her grocery cart. She and her husband are Trader Joe's loyalists, she explains as she navigates the unfamiliar self-checkout system.

"I am sure the food here is tasty," she says as an animated Tomb Raider-looking woman on the screen (there are no cash­iers) guides her through the payment process. "But we are going to have to find more useful things if we are going to shop here much."

The other "shoppers" -- incognito ­execs from the competition with BlackBerrys hanging off their belts and no baskets -- stare at the food displays with an intensity normally reserved for the Super Bowl. The location and format that Tesco chose for its launch are a result of in-depth research that dates back 20 years and includes videotaping the contents of refrigerators and living with American families to monitor their every habit. (The retailer did the same before entering China in 2004.) Fresh & Easy CEO Tim Mason, 50, whose baby this is, even moved his family to a bungalow in Santa Monica last year.

Breaking the mold in retail is not for the squeamish, however. Nine years ago Wal-Mart launched Neighborhood Markets, trying to work its low-price magic in a box one-quarter the size of a Supercenter, but the concept never caught on. Also, the Southern California retail market is competitive, featuring all three big traditional grocers, a huge Whole Foods (Charts, Fortune 500) presence, Trader Joe's, Costco (Charts, Fortune 500), and Mexican retailer Gigante.

Tesco CEO Sir Terry Leahy knows the risks: "We think Tesco has found a gap in the market, but is there a market in the gap?" The quirky denizens of Southern California will soon give him an answer. To top of page

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