TESCO'S APPAREL STRATEGY PAYS OFF

NEW YORK -- Supermarket operators in the United Kingdom do a large and growing business in apparel. Why don't supermarket operators in this country do the same? According to John Hoerner, Tesco's chief executive of clothing, the reason may be no more complex than a reticence on the part of retailers in the United States to build stores large enough to accommodate both what is known to sell well --

NEW YORK -- Supermarket operators in the United Kingdom do a large and growing business in apparel. Why don't supermarket operators in this country do the same? According to John Hoerner, Tesco's chief executive of clothing, the reason may be no more complex than a reticence on the part of retailers in the United States to build stores large enough to accommodate both what is known to sell well -- core food categories -- as well as extra space that could be devoted to experimentation with promising nonfood categories, such as apparel.

Hoerner was a keynote speaker at the WWD/DNR CEO Summit conference here. The two sponsoring publications, Women's Wear Daily and Daily News Record, are units of Fairchild Publications here, as is SN.

As to his observation about U.S. supermarkets, Hoerner, himself an American, said it appeared that in this country, "the return on space [devoted to food sales] is high. A fledgling business [such as a new nonfood category] can't compete for space with the established part of the business. At Tesco, we had the vision to build big stores with the idea that we would decide how to fill it up with product and that we could learn to sell what customers wanted. And part of that was apparel."

There are indications, though, that the notion of selling clothing in supermarkets could gain traction in this county. Whole Foods Market reportedly is to offer organic fiber clothing and home bedding products in Austin, Texas, next year. The product lines, according to the report, are made from natural fibers like cotton, hemp, linen, wool, bamboo and soy.

The Tesco executive's remark about U.S. supermarkets came during a question-and-answer session at the conclusion of his talk. During his talk, Hoerner described how Tesco -- which is Britain's fourth-largest clothing retailer after Asda, Marks & Spencer and Matalan, with an estimated 6.3% share of the market -- operates with the strategy of offering the highest quality possible at the lowest price point possible. That is accomplished in apparel and other lines by buying directly from manufacturing sources, employing the best technology, keeping labor costs low and, at the same time, using "enlightened" management techniques to keep the workforce happy, Hoerner said. Efficiencies obtained by such methods are plowed back into price, creating a "virtuous circle" of continuously lowered price points. The strategy is more than a little reminiscent of that used by Wal-Mart Stores. Hoerner remarked in response to a question, though, that Tesco's strategies are different in that it seeks to sell somewhat higher-quality product than the apparel represented by the George line, Asda's private label. Asda is a division of Wal-Mart.

Tesco's apparel strategies were further delineated during an interview with Hoerner conducted in London prior to his appearance at the three-day CEO conference here, which concluded Nov. 5.

Tesco offers three clothing brands -- Florence and Fred; Cherokee, a younger, more casual line; and Tesco Value, a line of basics -- which together generated an estimated 459 million pounds, or $826 million at current exchange, in revenue in the fiscal year ended February. That figure is set to rise to 640 million pounds, or $1.15 billion, by next February, according to estimates from Verdict Research, the London-based retail consultancy. Based on those projections, clothing generates about 2% of Tesco's 24 billion pounds, or $43.2 billion, in revenue. Hoerner said Tesco treats the Cherokee line as if it were its own label, although it isn't.

Tesco's clothing sales are growing at about eight times the market rate, and are rapidly snatching share from retailers like M&S, which saw its slice of the clothing market shrink this year. Together with Asda, the British subsidiary of Wal-Mart, that boasts a 1 billion pound, or $1.8 billion, clothing and accessories business, Tesco is rewriting the fashion retail rule book.

Stephen Marks, chairman and chief executive officer of French Connection, said during an interview this fall that supermarkets are changing the face of the U.K. clothing business. "It's a difficult market nowadays because they've started off a whole new pricing structure. Consumers are now 'buying' low prices."

Richard Fitzpatrick, managing director of Retailmap, a retail research consultancy, said Asda and Tesco have radically changed the way consumers think about clothing. "They're looking at the low price tags at Asda and Tesco, and asking themselves why they're being asked to pay 9 pounds [or $16] for a T-shirt at M&S," he said.

Tesco's icon product is the 4 pound, or $7, pair of jeans that, depending on the style, sells up to 30,000 pairs each week from blue plastic crates in the stores' no-frills clothing areas. The jeans belong to the least-expensive Tesco Value line, which also offers $7 T-shirts and undershirts for 1.50 pounds, or $2.70.

In Tesco's Sandhurst store, one of the company's largest units, fake-fur jackets are selling for 60 pounds, or $108; dark-blue velvet tuxedo suits are selling for 70 pounds, or $126; and little black halter dresses cost 20 pounds, or $36.

Cherokee, meanwhile, features Marc Jacobs-esque jackets and striped sweaters for 15 pounds, or $27, each. Everything is created by a freelance team of designers, and prices are about one-third less than those of Britain's major apparel stores.

Hoerner said Tesco's mentality from the start -- Tesco Value and Florence and Fred were both launched in 2001; Cherokee was unveiled in 2002 -- was to offer the highest possible quality at the lowest price.

Tesco is able to do that because of its large economies of scale, low-cost supply chain and direct sourcing. The retailer, Britain's largest food chain, is the U.K.'s largest private employer, with more than 1,000 stores (the clothing is sold in about 200 of them). The company owns its stores, and Hoerner said bookkeeping is so tight at Tesco that building costs are lower than they were 10 years ago.

While it may seem odd to U.S. shoppers to buy women's trousers along with produce, Tesco has made every effort to make its clothing areas blend in with the rest of its stores. "From the start, we wanted clothing to be part of the store. So we put it right there in the middle like cat food," said Hoerner. The average selling space is 8,000 to 9,000 square feet, although the areas can range from a tiny corner to 12,000 square feet.

"Our marketing is not very splashy. We won't say the blouse is amazing. We'll just say it's a 15 pound, or $27, blouse. The product speaks for itself," said Hoerner. Stock turns about every six, 12 or 18 weeks, depending on the styles.

Hoerner said for a store like Tesco, moving into the clothing business made sense. "It boils down to this: Tesco is such a big business, even if a small percentage of customers caught on to the line, it would do well."

Supermarkets are discovering that nonfood categories also happen to be a cash cow, which is why most of Tesco's food retail competitors in the United Kingdom now sell apparel, beauty and other nonfood products, too. Retailmap's Fitzpatrick said margins can be as high as 50% for clothing and other nonfood items, compared with 8% to 25% on food and toiletries. While nonfood sales may be lower than food sales per square foot, the profits are far higher. Indeed, in the first half, Tesco's nonfood sales -- including bed linens, bicycles, toys, motor oil and yoga mats -- rose 17%.

Maureen Hinton, senior retail analyst at Verdict Research, credited Hoerner with the success of the clothing division. "Tesco didn't know a lot about clothing until he arrived, and they were a latecomer on the market. But now they've found their feet, and they are making rapid gains behind George. They are now a strong contender in the supermarket clothing business," she said.

Fitzpatrick of Retailmap stated that Tesco's clothing business has enormous potential.

"There is significant growth opportunity in the short- to medium-term. And after about two-and-a-half years, Tesco managers can start asking themselves what other clothing requirements they need to fulfill -- like more fast fashion, for example. They're building a very strong base right now and will get plenty of mileage out of the business."

Samantha Conti is the London Bureau Chief for WWD.