Tesco will make an initial investment of £250 million funded entirely through existing resources and expects the operation top break even after two years. It will start the planned expansion on the West Coast in 2007.
Neil Saunders, director of consulting at Verdict Research, said: "While Tesco is the clear leader in the UK grocery market, international operations have become increasingly significant to the group, accounting for just over one in every £5 of its sales in 2004/5."
"Until now, Tescos focus has been on developing markets that provided a solid springboard to international success. It is already a market leader across a raft of countries in Europe and Asia."
Saunders added that the fact that the US grocery market is over ten times the size of that in the UK and its low barriers to entry make it a very appealing option to investors.
However he is keen to point out that it is a tough business once you are there and many traditional players, including Kroger, Albertsons and Safeway, are struggling under the pressure.
The major challenges for the retailers are customer loyalty, with constant shifts in where the consumers are buying their groceries.
Verdict estimates the percentage of total food bought from traditional grocery stores fell from 69 per cent in 1980 to 47 per cent in 2005.
The research group claims there has been a shift away from the traditional grocery store towards discounters such as Wal-Mart, Target and Kmart who have developed their food ranges while competing fiercely on price. And in the last five years higher end retail has begun to expand, taking advantage of foodies and health conscious consumers.
Many retailers in the US have also struggled to function because, unlike the UK players, many do not carry large stocks of non-food; which is the job of the warehouse and discount retailer. This has left them without large non-grocery revenue streams to bolster sales and margins that can then be ploughed back into reducing the price of food products.
Verdict predicts the UK retailer's choice to develop organically is the correct decision as it will not be burdened by the problems of a company it takes over nor will it be encumbered by stores which are unsuited to its operation. Moreover, this route will allow the company to manage its capital expenditure and learn from experience as it expands store numbers.
However this will by no means be an easy task and Tesco must work hard at establishing a good reputation on the other side of the water where it is virtually unknown.
Saunders explained"There is a significant opportunity for Tesco to impose its good, better, best ranging model on the US market. Traditional grocers have, generally, been unsuccessful at developing a credible high end food offer: Tesco has this skill and uses it to great effect in the UK market. There is no reason why the same principles should not work in the US."
Saunders also believes the convenience route is a sensible one to take. "There is scope for a new player to carve out a niche in this market and take advantage of some of the weaker convenience operators. Moreover, by focusing on convenience Tesco will not be directly competing with the likes of Wal-Mart and will, at the same time, differentiate itself from the larger format traditional players."
"A smaller format will also require less capital investment, will be easier to roll out and should, potentially, generate a much faster return. Furthermore, convenience consumers are typically more promiscuous and therefore willing to test new store formats and brands."