[BTinSF]

The British are coming! The British are coming!

Tesco Net Rises Ahead of U.S. Launch
U.K. Grocer Girds To Face Wal-Mart; Sales Slow at Home
By CECILIE ROHWEDDER
October 3, 2007; Page B10

British retailer Tesco PLC, set to open stores in the U.S. next month, posted strong fiscal-first-half results, showing deep pockets and earning prowess as it takes on Wal-Mart Stores Inc. on the world's largest retailer's home turf.

The U.S. expansion by Tesco, which controls around one-third of the British food market, is among the most widely watched events in the global retail industry this year. In response to Tesco's plans to open U.S. convenience stores focusing on fresh and healthy food as well as upscale prepared meals, Wal-Mart is studying a new, smaller store format of its own.

Trader Joe's, a specialty food chain owned by closely held Aldi Einkauf GmbH of Germany and concentrated on the East and West Coasts of the U.S., has been promoting upscale and healthy products, too.

On Nov. 8, Tesco plans to open its first five stores in greater Los Angeles, Los Angeles County, Orange County and San Bernardino, Calif. By the end of February, Tesco plans to have 50 stores across California, Arizona and Nevada. It already has a staff of 200 at its U.S. headquarters in El Segundo, Calif., and a large distribution center.

Tesco Chief Executive Terry Leahy said the British retailer already has a "substantial number of sites secured for next year and beyond" for its U.S. store chain, which will be called Fresh & Easy Neighborhood Market. Tesco said it has a "blueprint" to roll out Fresh & Easy beyond the Western U.S. Tesco is spending $510.9 million this financial year on its move into the U.S., and Mr. Leahy said he expects the new U.S. store chain to break even at the end of its second year of operation.

Mr. Leahy said Tesco won't run a major marketing campaign to accompany its U.S. launch and instead will rely on media and word of mouth.He said local interest is strong because the stores are up with banners and signs. By opening in rich and poor neighborhoods and courting shoppers of all income levels, Mr. Leahy said Fresh & Easy will be a novelty in the generally more segmented U.S. retail market.

Tesco, which is based outside London, said net profit rose 19% to £936 million ($1.91 billion) in the 26 weeks ended Aug. 25, from £788 million in the year-earlier period. The increase came mostly from Tesco's growing international business and from real-estate deals. First-half sales rose 9.2% to £24.7 billion.

But in its British home market, Tesco suffered weaker first-half sales growth, which it blamed on the cold and rainy summer weather. Sales at stores open at least a year, and excluding gasoline sales, rose 3.5% in the first half, the slowest growth rate in years.

Mr. Leahy said he was confident about Tesco's business in the United Kingdom for the second half of fiscal 2008, as consumers continue to spend despite a string of interest-rate increases over the past year.

"We've had to go through some real challenges to produce these results, with reviving competition and the British summer [weather], while we are also investing in our future with Tesco Direct and our plans to go into the United States," Mr. Leahy said.

The company started Tesco Direct, an online and catalog business selling nonfood items, about a year ago.

Tesco operates some 2,800 stores, of which 1,500 are in the U.K. and Northern Ireland and the remainder in Eastern Europe, Turkey and Asia. The retailer's stock rose 6.3% yesterday in London Stock Exchange trading to close at 463 pence.



--Lilly Vitorovich contributed to this article.

Write to Cecilie Rohwedder at cecilie.rohwedder@wsj.com1

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