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November 24, 2006 5:15 pm

Legal challenge as Tesco pursues store sites

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A medium-sized brown owl has emerged as a possible threat to Tesco’s ambitious drive into the US grocery market, as the UK’s largest retailer pushes ahead with acquiring store sites in southern California, Nevada and Arizona.

The alleged threat posed by Tesco to the burrowing owl, listed by California as “a species of special concern”, is cited in a lawsuit that calls for a full environmental review of its plans for an 88-acre distribution and food processing centre in Riverside, California.

Two petitions argue that the Tesco development should not have been approved in September without an additional environmental review – and public hearings – under the California Environmental Quality Act (CEQA).

Tesco said that “challenges of this nature, using the state’s environmental review process as the basis, are apparently common in California and we have every reason to believe the decision will be upheld”.

The legal action will not stop Tesco working on the first 825,000 sq ft stage of its project, at a business park located in the former March air force base. The project will provide the logistics foundation for its US operations, and will create about 600 jobs in its first phase. However, Ray Johnson, a lawyer at Johnson & Sedlack who filed one of the
petitions, said that “if they lose, they end up having to undo what they’ve already put in place”.

Mr Johnson said the Tesco petition had been filed by a group of local residents who were primarily concerned about the impact of diesel emissions from trucks using the distribution centre. He is also calling for an environmental review of two related projects involving Tesco’s suppliers.

John Brown, attorney for the March Joint Powers Authority, which approved Tesco’s plans, said the authority “has made it quite clear that they are prepared to do whatever is necessary to defend their approval of the Tesco project to be located on the business park”. However, the legal challenges add to recent problems at the March base development, which last year lost an environmental lawsuit over aircraft noise from DHL aircraft using its cargo airport.

The head of March’s managing commission also resigned unexpectedly last week, adding to possible distractions for Tesco’s schedule. Tesco remains otherwise tight-lipped about its efforts to acquire store sites in the US.

However, details of a handful of locations secured so far provide some insights into the retailer’s strategy of placing stores, which real estate agents have said will have about 12,000 sq ft of selling space, roughly a third of the size of a typical US supermarket.

The sites identified so far show that the retailer is taking a flexible approach when needing to obtain real estate in the Los Angeles area, where appropriate sites can be hard to find.

Within the city limits of Los Angeles, the retailer has signed a lease for a site previously occupied by a 32,000 sq ft Albertson’s supermarket, which it is expected to subdivide for the smaller store format.

The location is in Glassell Park, a gentrifying, densely populated neighbourhood located in the north-east of Los Angeles’s city limits.

George Braukman, president of the local residents association, said the neighbourhood was “in transition” with a lot of families with children moving in. “If they are looking for an under-served area that’s looking for something better, then they’ve hit the nail on the head here,” he said.

Matt Heslin, of Heslin Holdings, who leased the property to Tesco, said he expected the store “to be phenomenally successful”.

“There’s nothing here like they’re proposing, nothing at all,” he said.

More than 250 miles away on the western edge of Las Vegas, Tesco has two sites to be leased: an unoccupied building in a new retail plaza – next to Jerry’s Tux Shop evening wear rental store and offices whose occupants include doctors, dentists and other professionals.

Less than two miles to the south, it will build a new store on a site that will be next to a Walgreen’s drug store and a mini-storage facility.

And around Phoenix Arizona – where city officials say the retailer is looking for about 50 sites – Tesco is being touted as the main grocer at the heart of a new up-market housing and retail development called Downtown Ocotillo, in the adjacent city of Chandler.

According to the developers, the lakeside development will be architecturally reminiscent of the Spanish/Italianate style of Santa
Barbara, California, with “red clay tile roofing and smooth white stucco walls”.

Despite the differences between the locations, all the sites are characterised by being in the middle of either existing or planned neighbourhoods – rather than in larger shopping plazas on main roads, as preferred by big box retailers such as Wal-Mart, Costco and Target.

Tesco’s strategy of launching its distribution network at the same time as its stores is unprecedented in the US grocery industry. Both Wal-Mart, which launched its first Supercenter grocery and general goods stores in the early 1990s, and Target, its rival, initially used third-party wholesalers to deliver food to their existing store network.

Aside from the burrowing owl, Tesco will also face intense competition when it opens its stores next year in three of the most bitterly contested grocery markets in the US. Industry insiders are also waiting to see how Tesco sets about delivering its planned prepared meals and fresh salads to its store network, given the 300-mile desert drive from its main depot at Riverside to the stores in Phoenix.

Tesco is also pressing ahead with the complex business of securing permits to sell beer and wine in its stores, with applications lodged for seven counties in southern California, including Orange and San Diego counties, to the south of Los Angeles, and Santa Barbara and Ventura to the north-west of the city.

The retailer announced this year that it would initially spend up to £250m ($479m) a year on its US launch.

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