Quick Take: Tesco's Japan Expansion Plans

There are a handful of retailers around the world that can go toe-to-toe with Wal-Mart (NYSE: WMT) and have a legitimate shot at success. Britain's Tesco (OTC BB: TSCDY.PK) is one of them.

Wal-Mart's growth strategy in Japan, via the turnaround of Seiyu, is fairly well known. Tesco, which also owns a grocery store chain in Japan, appears to be taking a different strategy. Instead of going after the large grocery store market, where Aeon (OTC BB: AONNY) and Ito Yokado have very strong positions, Tesco is going after the convenience store space.

Convenience stores are extremely popular in Japan, and the market for them is very crowded. 7-Eleven, Family Mart, Lawson, AmPm, and Circle-K Sunkus are among the largest players, and in central Tokyo it's not uncommon to have more than one of them on every single block. 7-Eleven alone has 11,700 stores in Japan and more than 1,500 in Tokyo. Lawson and Family Mart aren't too far behind, with close to 8,500 and 6,500, respectively.

Tesco's plan is to compete on price. Convenience stores in Japan carry prices typical of what you would find in the United States. That is to say, convenience stores are more expensive than grocery stores and customers pay a premium for convenience. From what I have seen in the Japanese press, Tesco will offer a number of pre-packaged food items at grocery store prices or close to it. Convenience store profitability in Japan is already suffering from competitive forces and it looks like Tesco is going to add to the pain.

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Nathan Parmelee had a beneficial interest in shares of Wal-Mart at the time of publication, but had no interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.