Walmart vs. Tesco: Why the Odds Favor the British Retailer

Last Updated Aug 26, 2010 2:41 PM EDT

Walmart (WMT) has launched an ambitious program to boost its presence in the U.K., an effort with implications for Tesco (TSCO) in both Britain and the U.S.

As it turns out, though, Walmart is facing a struggle similar to that which looms with Target as British consumers return to more easygoing spending.

Walmart plans to grow its U.K. business by emphasizing low prices. Among its tactics will be a global Internet operation it is consolidating to provide enhanced customer service, convenient purchasing and online promotions (subscription req'd). What that means is that Walmart will allow online purchasers to ship goods free to company stores for pick up. It will use the Web to facilitate more efficient global purchasing to drive price cutting. And to highlight its prices, ASDA, Walmart's U.K. division, is introducing a Web-based tool that permits shoppers to more easily compare its prices with those of its competition.

Walmart also plans alternative store initiatives, including development of small supermarkets that will help it serve more urban areas and compete with Tesco's Express stores. Walmart also will expand ASDA Living by fivefold to 150 stores. An experiment since early in this decade, the store offers home furnishings but also is a showcase for Walmart's George apparel line, which has been a winner in the U.K.

Walmart's immediate U.K. goal is to establish itself as the clear runner up to Tesco, but that's not going to be easy. Although it's the least expensive of Britain's four major grocery retailers, Walmart's market share has slipped slightly in recent weeks. According to Nielsen, ASDA sales rose just two percent ASDA in the 12 weeks ending April 17, trailing a four percent rise at Tesco, a similar gain at Sainsbury's (JSBRY) and a seven percent increase at Morrison's (MRW).

The recent success of its more-posh rivals is one reason U.K. retail observers believe British consumers are becoming looser with a pound.

Walmart, of course, may also simply be trying to keep Tesco from investing in other markets such as the Western U.S., where Tesco operates the Fresh & Easy chain. Fresh & Easy has been on a roll lately, opening its 150th location a couple of weeks ago, and more since.

Fresh & Easy stores are, in many ways, blown up versions of Tesco Express outlets, and they've been fitting into more populous environments where Walmart rarely ventures. But Mike Duke, Walmart's CEO, promised last month that the company would produce innovative new formats to build business in major metropolitan markets.

So Walmart will take on Tesco globally. The world's fourth largest retailer, Tesco competes with its American rival from California to Cardiff to China. Walmart will use its international experiences to devise small store formats that will challenge its rival's urban advantage.

Yet Tesco has its own advantages including store operations that are a bit trendier than Walmart's, and, potentially, better positioned in the recovery. As in the case with its Target (TGT) travails, Walmart continues to gain customers -- but Tesco may accumulate them faster in a sustained recovery.