Steve Smith, head of thought leadership at SMV Group, says Tesco needs to focus on shoppers' community values...

When I heard about the launch of Tesco's Fresh & Easy brand in the US, one of the reasons I felt certain of its success was the lengths to which its executive team had apparently gone to understand the Californian market. Using ethnographic type research, members of the team visited households, looked in their refrigerators, shopped and cooked with them, got their views on diet and health, and discussed their purchase and eating behaviour.

Fast forward four years. Like-for-like sales over the six week holiday period grew 19.3% - overall sales during the same period grew by 40.6% - and the chain is also set to open in 25 new locations by the end of March this year.

Yet all is not well. The store has announced it will 'temporarily' close 12 stores across California, Nevada and Arizona, which is on top of the 13 stores it closed in late 2010. On top of this, a recent analysis estimates accumulated losses of around £700 million, on capital expenditure of more than £1 billion.

Why have these closures happened, and what can Tesco UK learn from Fresh & Easy's experience?

The answer is twofold. Firstly, there has been an insufficient understanding of the characteristics, expectations and demands of local communities and their members, that shape what they want from smaller format stores. Secondly, its commitment to price obscures its core proposition in the minds of some shoppers. This is because Fresh & Easy will always find it difficult to compete over price with much larger stores. It is caught in the middle between larger stores that can compete on price, and stores that better meet the needs of local communities.

How similar this sounds to the UK, where Tesco is caught in the middle between ASDA on the one side over price, and Sainsbury on price and a slightly more upmarket experience on the other.

The first thing that Tesco can learn from its US subsidiary is to continue to accelerate its understanding of community, and deliver accordingly. Tesco's decision to tailor product ranges according to the socio-demographic profiles of the surrounding area of each of its stores, and its support of local communities are recognitions of the communities in which it operates.

However, Tesco needs to understand how it can deliver beyond just local communities, to include all of the elements of shoppers' personal communities (see below). SMG Research has looked at the values of shoppers across the big six supermarkets and has found that values around community top the value profiles of Tesco shoppers. However, its research also shows that Tesco is at risk from losing out to Sainsbury's on delivering to shoppers' community values.

Delivering on values around community beyond just local community will provide Tesco with three opportunities (i) a significant point of differentiation from its competitors, (ii) make it more attractive to shoppers of its closest competitors who share the same values, and (iii) build loyalty among its own shoppers.

Tesco is able to achieve this by creating rich experiences that are relevant to shoppers and their personal communities. In so doing, they can provide content for conversations and interactions between customers and their families, friends, colleagues, local communities and the like; facilitate relationships between them; and enhance their lives. In addition to funding and sponsoring local community initiatives (which Tesco is already doing), three areas in which Tesco can provide these are:

• In store, through staff/customer interactions, design, communications, products and the overall shopping experience
• In media and social-media communications
• Associating itself with media products that help customers in their conversations and interactions