Thursday, February 28, 2008

News & Analysis: Tesco's Fresh & Easy Confirms 19 Store Locations for the Sacramento-Vacaville Region in Northern California

Tesco's Fresh & Easy Neighborhood Market confirmed today it plans to open 19 stores in the Sacramento Metropolitan region, as well as in nearby Vacaville and Galt.

Seven of the small-format grocery stores, which average 10,000 square feet -to- 13,000 square feet, will be in the city of Sacramento. Nine of the markets will be in the nearby suburbs (see the graphic above). Two of the Fresh & Easy stores will be in Vacaville, which is about 25 minutes from Sacramento, and one store will be in Galt, which is less than 15 miles from Sacramento, and is about midway between the capital city and Stockton, where Tesco plans to locate its Northern/Central California distribution center.

On Monday, January 28 we reported that Tesco had applied for liquor licenses for four Fresh & Easy grocery stores in the city of Sacramento (2 stores) and two stores in the nearby suburb of Folsom. We discovered this fact via liquor license applications, which are public data. As a result, we were one of the first publications to report that Tesco would enter the Sacramento region in Northern California, along with signing leases for 18 stores to date in the nearby San Francisco Bay Area. [Read our January 28, 2008 piece here.]

Tesco's confirmation of the 19 Sacramento/Vacaville-area grocery markets, along with the confirmation it will begin opening the first of its initial 18 Fresh & Easy stores in the San Francisco Bay Area at the end of this year or in early 2009, brings to a total of 35 the number of Fresh & Easy Neighborhood Market small-format grocery stores the retailer has thus far confirmed for Northern California.

Vacaville is located about 20 miles from Sacramento, off Interstate I-80, which is the primary route from Sacramento to the San Francisco Bay Area. Vacaville is about an hour drive from San Francisco and a little over 30 minutes to the East Bay Area cities of Berkeley and Oakland. Interstate 80 rings the Bay from the Bay Bridge east, out to Fairfield (where Fresh & Easy is locating a store), then on to Vacaville, the University city of Davis, and into Sacramento.

Locating a critical mass of stores in the Sacramento Metropolitan region, then out to Vacaville and Farfield, then into the Bay Area, is the same strategy Tesco is using in Southern California. This "critical mass" strategy emulates retailers like Starbucks and Walgreen's Drugs, small format retailers which locate a critical mass of stores in city's and neighborhoods so as to position their stores as a "neighborhood" retailer.

Additionally, we can report that Tesco is looking for additional new store locations in both the Sacramento and Bay Area regions. In fact, the British grocer already has a number of other location leases locked-up (in addition to those announced) and is in negotiations for more store sites in both the Sacramento and Bay Area regions. We hope to be able to report some of those locations soon here.

As we reported first in December and again in the January 28 piece, Tesco also plans to open a new distribution center in Stockton, California to serve its Bay Area and Sacramento region Fresh & Easy stores. Stockton is located in the Northern San Joaquin Valley, about 30 miles from Sacramento, and about 60 miles from San Francisco. The location is generally no more than one hour's drive-and in many cases less--to all of the 35 confirmed Northern and Central California store locations to date. Tesco's Fresh & Easy Neighborhood Market has not yet confirmed the Stockton distribution center. Additionally, Stockton is about a 15 minute drive from Galt, where one of the 19 Sacramento-area stores will be opened.

Sacramento's Mayor joins F&E CEO Mason for AM presser

Tesco's Fresh & Easy Neighborhood Market CEO Tim Mason made the Sacramento region new store announcement with a splash this morning. He was joined by Sacramento Mayor Heather Fargo and City Councilman Ray Tretheway in front of an empty commercial building located at Northgate Blvd. and San Juan Blvd. in the city of Sacramento. The grocer will remodel the empty building into a Fresh & Easy grocery market.

By having the city's mayor at his side, Mason signaled Fresh & Easy wasn't just another grocery retailer opening a new store in town, but rather is a grocer that's making a major commitment to the city and region by opening an initial 19 stores in the region next year, with more to come. Having Mason at her side also was good for the Mayor. Sacramento, like all of California is being battered by the sub-prime housing crisis, increasing unemployment and a host of other economic ills. Being able to announce a new business venture like Fresh & Easy moving into her city at this time will score her some major political points with voters.

The retailer also made another smart move by choosing the empty Tower Records building on Watt Avenue in Sacramento as one of its future Fresh & Easy grocery store locations. Tower Records, which later grew into a national chain, which went bankrupted in 2006, was founded in Sacramento in the 1960's--and the Watt Avenue location was its flagship store.

When the Watt Avenue Tower store closed, there literally was a period of mourning in Sacramento for the local independent record store that went on to be a huge mega-chain, then fell on hard times and was shut down. Tesco's Fresh & Easy should gain considerable goodwill from the community for leasing, remodeling and opening one of its grocery markets in the Tower building, which is what it's called. The building has been empty for over two years.

[Note to Fresh & Easy Management: It would be wise, and good business, to preserve aspects of the former Tower Records building when you remodel it into a Fresh & Easy market. Perhaps you should call it "Tower Fresh & Easy," or some version of that. Remember, everything is local in America, especially in Sacramento. And, in the case of an iconic building like the Tower Records' site, retaining some aspects of the building's history and culture (a plaque on the front of the new Fresh & Easy store with the history of the building would be a nice touch) will not only go a long way towards creating excellent community relations--but customers as well.]

The timing and style of the announcement was particulary good for Fresh & Easy since analysts like us and others have been writing about how the retailer's current 55 stores in Southern California, Arizona and Nevada are not performing up to expectations. [You can read our most recent analysis on Fresh & Easy store performance in posts made on Tuesday and yesterday on the blog.]

Of course, marketing an PR are only part of being a successful grocer. As we've suggested in our pieces this week, Tesco's Fresh & Easy has major operations challenges to solve and improve in addition to opening dozens of new stores and creating good PR events.

The retailer shouldn't be counted out though. Doing doing so is foolish. Tesco is the world's number three retailer, and it's track record at home in the UK and elsewhere in the world is impressive. Tesco also has lots of cash. That's helpful to any start up. What we believe Tesco hasn't learned yet though is: it can't do retailing in the U.S. in the same way it does retailing in the UK and Europe.

Fresh & Easy is missing a key American element: localism. This missing element can't be fixed as easily as the operational problems we've pointed out in our analysis. However, its just as important--maybe even more so. And, it's essential.

Competitive environment: Welcome to Sacramento

Nowhere does Tesco need to grasp the importance of tailoring its Fresh & Easy stores better to the local environment and neighborhoods than in Sacramento and its metropolitan and surrounding region.

Sacramento has been one of the fastest-growing cities in California throughout the last decade. The Sacramento Metropolitan region has a population of nearly 2 million people. The city of Sacramento has a current population of about 600,000. In addition to being California's capital city--which means lots of well-educated state government workers--Sacramento has a mixed economy. Agriculture and agribusiness remain huge in the region, as does light manufacturing, warehousing and transportation.

The fastest growing sector in the Sacramento region's economy is in the service sector, both in state government, associated non-profit organizations like law and lobbying firms, and in the private sector. This includes the health professions, law, finance and retail. In the last 15 years the city has been transformed from being a central city in a primarily agricultural region (with the exception of state government), to the urban city center of a booming metropolitan and somewhat cosmopolitan area.

Grocery retailing in Sacramento and the surrounding region has a decidedly local flair. The region's number one (in market share and store count) grocer is Raley's, which is based in the nearby city of West Sacramento. Raley's is a prvately-held, family-owned supermarket chain that's been in business in the Sacramento region for 73 years. The locally headquartered grocery chain has 120 stores and does about $3 billion a year in sales.

The Sacramento-based food retailer operates four store banners: Raley's, Bel-Air Markets, Nob Hill Foods and Food Source. Raley's stores are 55,000 square foot -to- 80,000 square foot superstores. The stores are fairly upscale and offer lots of prepared and other fresh foods, along with tons of grocery products (including lots of organics) and a huge selection of non-foods. Most of the new Raley's banner stores are closer to the 80,000 square foot size. The Raley's banner is the chain's original retail brand.

The Bel-Air banner is an upscale supermarket format. The stores average 40,000 square feet(older stores) -to- 60,000 square feet (newer stores). They're similar to the Raley's stores--lots of upscale fresh foods, but fewer nonfoods do to their size (but still plenty). Bel-Air was an acquisition for Raley's. The Bel-Air chain at one time was Raley's chief competitior in the region. In the 1980's, Raley's acquired the grocery chain from the Wong family, who founded and operated the chain for over 50 years.

Nob Hill Foods also is an acquisition for Raley's. Like Bel-Air, Nob Hill was a long-time family-owned chain. It was based in the South Bay Area city of Gilroy, where two generations of the Bonfonte family operated it for about 60 years. Raley's acquired Nob Hill Foods in the 1990's and consolidated its headquarters in its West Sacramento facility.

Food Source is Raley's discount warehouse-type store format. The grocer created the banner in the 1980's as a way to get into the growing no frills, discount warehouse store category in the region at the time. It's the grocer's smallest banner in terms of the number of stores, but does significant sales volume in its niche.

Citizen Raley's

Raley's also is a leading corporate citizen in the Sacramento region. Sacramento's semi-pro baseball team, the River Cats--which in a big city like Sacramento without a professional baseball team serves as a very popular popular equivalent--plays it games at Raley Field, a state of the art baseball stadium in the city built in large part by the grocer.

The grocer is the number one donor to programs that feed the hungry and homeless in the region. Last year it gave over $15 million dollars to food pantry's and other programs which provide food assistance to families and individuals in need.

In fact, Raley's has its hand in nearly every charitable venture in the region--from Boy Scouts and Girl Scouts, to educational scholarship assistance, environmental causes and literally many dozens more. Additionally, the Raley-Teel family, majority-owners of the Raley's grocery chain, also has its own charitable foundation, which gives additional millions each year to local non-profit groups and supports other charitable causes locally.

The other two major grocers in the Sacramento region--Safeway Stores, Inc. (number two market share) and Save Mart, Inc. (number three market share) are fairly local guys as well. Safeway, which has about 21% of the region's grocery sales market share, has its corporate headquarters in the East Bay Area city of Pleasanton, which is only about 70 miles from Sacramento. Save Mart, which entered the Sacramento region market for the first time last year when it bought Albertsons' Northern California Division from an investment banking firm, is headquartered just 60 miles away in the Central Valley City of Modesto.

Between the three grocery chains--Raley's, Safeway and Save Mart--they control about 85% of the total grocery sales market share in the Sacramento market region. The remaining 15% share is split between Food-4-Less, a multi-store deep-disount warehouse format grocer, numerous independents, Longs Drugs, a couple Trader Joe's stores, and the one Whole Foods Market, Inc. store in the region, which is located in Sacramento. (Note: Whole Foods' is looking to add at least one, and maybe two stores in the region in the next two years.)

Union supermarket chains vs. non-union Fresh & Easy

Raleys, Safeway Stores and Save Mart also are union supermarket chains. On average, the three chains pay their full-time store-level retail clerks about $21.00 hour. Full-time means the clerks' have one full year of full-time hourly experience as a union grocery clerk. Part-timer pay ranges from about $12.00 hour -to- the $21.00 hour amount. The $12.00 hour is an entry-level wage for some positions, and it goes up in increments about every three months per the agreed upon contract between the grocery chains and the union. Nearly all store level workers with six months' to a year's experience make between $15.00 and $21.00 hour.

The union contract also provides store workers with one of the best medical insurance plans in the U.S. It is comprehensive, has lower than average employee contributions, doctors office co-pays and prescription drug out-of-pocket costs for the workers. The plan also offers very affordable dental, vision and mental health plans for reasonable employee contributions.

The union supermarkets also provide a career path for workers who choose to make a career out of the retail grocery industry and work at store-level for 25 -to- 30 years and then retire. The joint employer-union pension plan pays out about $3,500 -to- $4,000 month to union clerks who retire after 25 -to- 30 years in the industry. This is in addition to collecting monthly Social Security pension payments.

Employers make the largest contribution to the worker pension plan. Employees contribute a small percentage out of their paychecks every two weeks as well. Additionally, all three of these union grocery chains--Safeway, Raley's and Save Mart--offer some form of additional retirement plans on their own to workers. Safeway offers a discount stock-purchase plan, while Raley's and Save Mart offer profit-sharing-type programs, since both are privately-held companies. Save Mart has 255 stores throughout Northern and Central Califronia, and annual sales of about $6.5 billion.

Tesco's Fresh & Easy Neighborhood Market currently pays store-level workers $10.00 hour. There currently is no established higher hourly wage for current workers when they achieve one year's experience like at the union supermarket chains.

The 10,000 square foot -to- 13,000 square foot grocery stores employee about 20 workers per-store, according to the company. All of the store employees, with the exception of a couple managers, work part time. Those part-timers who want to can work up to 20 hours a week, which qualifies them for a health insurance plan.

However, we've compared a Fresh & Easy store employee's health plan to the union food retail chains' plan, and the union plan wins across the board: it's more comprehensive, has less of an employee contribution, provides for lower employee co-payments, and offers a number of other benefits.

According to a Tesco Fresh & Easy spokesman, the retailer also offers bonuses of up to 10% to store-level workers if they meet certain performance criteria. The bonus is once a year. Fresh & Easy doesn't currently offer store-level employees a retirement plan. They also don't get discounts at present on Tesco plc. stock, like Safeway employees do with Safeway stock.

Trader Joe's, which has only a couple stores in the region, Whole Foods (it has one store), and Wal-Mart, which only has a handful of Supercenters in the Sacramento area, also are non-union shops like Tesco's Fresh & Easy Neighborhood Market.

Sacramento shoppers are historically 'local-loyal'

Sacramento region shoppers have long been super-loyal to Raley's. Just ask Safeway Stores, Inc. Despite the fact that its a chain based nearby, has more than 10 times the number of stores and does at least $40 billion more in annual sales than Raley's, its never been able to overtake the local grocer in market share in the region, despite trying hard to do so for at least four decades.

Tesco's Fresh & Easy Neighborhood Market would be wise to learn as much as it can about the "local nature" of grocery retailing in the Sacramento region. Over the last 40 years, Safeway left the market twice, under two different ownership structures, because of Raley's domination. It was only again in the 1980's--and particularly in the 1990's with its Lifestyle format stores--that
Safeway began to make some inroads in the market.

Fresh & Easy senior management can expect a strong response by Raley's, Safeway and Save Mart when it enters the Sacramento market next year. For example, in terms of retail pricing, all three--but especially Raley's and Save Mart--won't hesitate to lower prices if Fresh & Easy comes in with its discount pricing structure on basic grocery items like it has in Southern California, Arizona and Nevada, which it will do in Sacramento because doing so is key to its format and positioning. As the ancient Chinese saying states: 'May you live in interesting times.

Related Reading:

>Read our January 28, 2008 piece, "Fresh & Easy Applies for Liquor Licences for four Sacramento, California Stores.

>Read our February 21, 2008 analysis piece on Fresh & Easy's sales problems,and suggestions for improvement.

>Read this February 8, 2008 piece from the blog Natural~Specialty Foods Memo about one of Fresh & Easy's stores which will go in the low-income Oak Park neighborhood in Sacramento.

>Read what the Sacramento Bee, Sacramento's largest-circulation daily newspaper, wrote about Tesco's Fresh & Easy coming to town in today's addition

Note: Thanks to the Sacramento Bee for allowing us to use the store location graphic at the top of this story.

Wednesday, February 27, 2008

Tesco's Fresh & Easy Management Comments Further on Poor Store Performance Analysis

Tesco's Fresh & Easy Neighborhood Market senior management has issued a statement in response to analysis by various observors that its USA Fresh & Easy small-format grocery store chain is currently underperforming in sales, and not meeting the retailer's projections, which calls for the stores to be averaging about $200,000 a week in gross sales at this point in time.

In its statement, Fresh & Easy said the convenience-oriented grocery stores "are proving very popular" with shoppers. Further, the statement said, "What we are seeing is growing sales, growing customers."

We've been one of the first analysts and publications to report that Fresh & Easy has been having numerous start-up problems, including missing its target sales numbers. Chief among these difficulties is that the stores are underperforming in weekly gross sales.

Based on information from our multiple sources, we pegged average weekly sales at the currently open 50 Fresh & Easy grocery markets in Southern California, Arizona and Nevada at between $60,000 -to- $100,000 per-week.

Recently, industry analyist Jim Prevor said his analysis shows even lower weekly sales. Prevor's estimate is in the $50,000 -to- $60,000 a week range.

Yesterday, the New York-based investment house Piper Jaffray, said its research suggests Tesco's Fresh & Easy grocery chain currently has average weekly sales of no more than $170,000 per-week. Further, the stock brokerage said Tesco needs to dramatically retool the stores' format if it expects to succeed in the U.S. Mike Dennis of Piper Jaffray added the firm estimates it would cost Tesco about $400,000 million to exit the U.S. market at this point in time.

As we reported yesterday, a Fresh & Easy spokesperson pushed-back against the analysts' who have reported this data. However, Fresh & Easy has not publicly denied, or questioned, any of the estimated weekly sales figures reported by Fresh & Easy Buzz, Prevor or Piper Jaffray.

In our recent pieces--and in fairness to Tesco's Fresh & Easy venture--we have said it's too early to call Tesco's small-format hybrid basic grocery store/fresh and specialty foods stores a failure. Half of the small-format grocery markets have been open for a blended averate of about 90 days. The other 50% have been open and operating for less than 60 days on average. It is, after all, a start up--and start ups underperform, eat cash, and do various things even the most brilliant strategists thought they had built-in safeguards against.

However, we've sited a number of serious structural problems with Fresh & Easy's store format and operations, which if aren't fixed soon, we believe could contribute to a failure of the venture in the U.S.

Chief among these serious problems are:

>A "format muddle" in the minds' of shoppers as to what a Fresh & Easy store is. The stores are a hybid discount basic grocery store and semi-upscale fresh and specialty foods market. The grocery markets are sort of a Supervalu, Inc. Save-A-Lot meets Trader Joe's. We aren't ready to say the Fresh & Easy format itself is doomed to failure. However, we do have questions in terms of its positioning. A major problem is that Tesco has done a poor job thus far in communicating to consumers through its marketing and merchandising what these "Fresh & Easy" stores are. This must be fixed, and fast.

Further, the product mix--both in the basic grocery and specialty categories--isn't correct. The stores aren't selling enough major branded grocery items in key categories, and enough of the top-selling specialty items aren't on the stores' shelves. Fresh & Easy needs to regionalize its stores' product merchandising mix better (much better) and offer many more locally-produced items as well.

On the basic grocery category front, the pricing needs to be reworked. Fresh & Easy's positioning in the everyday grocery product category is "low-price," and many of the prices are good relative to nearby supermarkets. However, the "low-price" scheme isn't integrated enough--many items are too high, others are too low. It needs reworking to better reflect the stores' respective neighborhoods and its retail competion in the "everyday low price" retail grocery store segment.

>A very serious second problem is the regular out-of-stock situation in most of the grocery stores. These out-of-stocks are particulary chronic in the prepared and other fresh foods categories.

Many consumers are trying Fresh & Easy because they've heard much about its prepared foods offerings. The out-of-stock situation is not only losing sales for the retailer, but is badly affecting its ability to retain customers. Shoppers make their first trip into a Fresh & Easy, see the out-of-stocks in the prepared foods cases, and never return.

This out-of-stock condition is most apparent in the late afternoon and evening hours. It's a logistics and distribution problem, not one of massive category sales. If Tesco doesn't fix this problem soon, it will come to define Fresh & Easy as "that store which is always out of stuff."

>A third serious problem we strongly believe is that the Fresh & Easy stores have little or no sense of place to them. Think Starbucks or Whole Foods Market and you will understand what we mean by a retailer that creates retail stores with a strong sense of place.

Tesco needs to put the "Neighborhood" in its Fresh & Easy Neighborhood Markets. There just isn't enough "there," "there," as a writer once commented about 1960's downtown Oakland, California. (Note: If you visit downtown Oakland today, you will see its getting its groove on, and that there is much "there," "there" today compared to the 1960's. So it is doable for Tesco.)

In this earlier piece, we suggested a few ways Tesco could create a better sense of place in its Fresh & Easy grocery stores. One key reason for doing so is that in order to succeed as a neighborhood grocery store, Fresh & Easy needs to create primary shoppers, rather than just secondary and tertiary ones, which primarily is the case at present.

Regarding the stores' sales analysis, the Tesco Fresh & Easy Neighborhood Market spokesman says the retailer is continuing to go forward with its rapid new store-opening program and plans. Fresh & Easy is on target to have 150 -to- 200 of the small-format grocery stores open by the end of this year.

Additionally, it plans to enter the Northern California market with an initial 18 stores in the San Francisco Bay Area, opening the first stores either in late 2008, or more likely in early 2009. Tesco has signed leases for empty retail buildings to be remodeled or for property to build new stores on for all 18 of these initial Bay Area locations.

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Tuesday, February 26, 2008

Tesco Hits Back at Piper Jaffray (and Our) Analysis on Fresh & Easy Sales Performance

No sooner than 30 minutes after we published our piece earlier today about U.S. investment firm Piper Jaffray essentially confirming our weeks-long analysis that Tesco's Fresh & Easy Neighborhood Market chain in the USA is having difficulty meeting its own projected weekly sales targets, the emails from our various sources and correspondents started coming in. [Read that piece here.]

We've been responding, asking questions and following-up with additional sources most of the evening.

Tesco's Fresh & Easy has been busy as well. Earlier this evening a Tesco Fresh & Easy Neighborhood Market spokesman hit back at Piper Jaffray's Mike Dennis, who said the stores are underperforming, and that it would cost Tesco $400 million to exit the U.S. market if they decided to do so.

Dennis also said Tesco's Fresh & Easy Neighborhood Market's business concept was not as "robust as thought" and he added the grocer's low-price positioning on basic grocery items isn't low enough to lure shoppers in the U.S., who are suffering from a cocktail of economic bad news--soaring fuel and food prices, the sub-prime residential housing crisis, increasing unemployment and other maladies. Half of the professional economists in the U.S. are predicting the country is either already in or will soon slip into a recession. The Western U.S. states of California, Arizona and Nevada, where Tesco's Fresh & Easy has its current 50 stores, are three of the hardest economically hit states.

The spokesman for Fresh & Easy Neighborhood Market said this evening Mr. Dennis' claims "are a bit ridiculus, given that we only opened (our first stores) four months ago," Additionally, he pushed-back at the investment firm's claim it would cost Tesco about $400,000 million to close its Fresh & Easy operation and pull out of the U.S. "We are not even considering pulling out," the spokesman made clear in response to Mr. Dennis' claim and estimate earlier today.

As our readers are aware, we have been pointing up most of these problems for Tesco's Fresh & Easy Neighborhood Market operations for some weeks now. On February 21, we published a piece, "A Look at Fresh & Easy at 50 (Stores): An Analysis and Some suggestions for Going Forward." In that piece we pointed out Fresh & Easy's weekly sales problems, along with some other difficulties the retailer is having, including a format muddle, a lack of a sense of place in its stores, and labor issues.

One of those difficulties, the grocers's struggle in attracting and retaining employees because of its $10.00 hour starting wage, only ofering a maximum of 20 hour work weeks, and limited health insurance plans for store-level workers, hasn't even been discussed by other analysts. [Read more about what we wrote about this issue here.]

In terms of Piper Jaffray's analysis that it will cost Tesco $400 million to pull out of the U.S., based on our extensive conversations with numerous sources, our analysis is that Tesco hasn't even considered such a move (pulling the plug on Fresh & Easy) at this point in time.

Further, we believe Fresh & Easy's target of about $200,000 per-week in average sales for its stores at this point in time was way off base (too high of an estimate) for achieving in even the first year of operations in the Western U.S. states of California, Arizona and Nevada.

Southern California, Fresh & Easy's main retail beachhead, and Arizona, its second front in the grocer's small-format grocery retailing venture, are two of the most competitive food retailing markets in the U.S. Being a start-up in two such markets--and one from across the Atlantic as well--requires marketing and operations magic that Tesco has yet to introduce, in our analysis.

We have reported that based on our sources' information, we estimate Fresh & Easy's overall weekly sales at its 50 stores opened to date to be in the range of about $70,000 -to- $100,000. If Piper Jaffray is right--they estimate Fresh & Easy weekly sales at about $170,000 per-week--the chain is doing better than we have estimated its weekly target sales should be at this point in time. A full one-half of the small-format grocery markets' have only been open for about 6 weeks. The other half has been open for a blended average of about 12 weeks. The first stores (about 5 total) opened in November, 2007.

The fact is, however, even if Tesco's Fresh & Easy is doing better at $170,000 average weekly sales (if that figure is correct, which we believe is too high) the retailer is still having serious problems. And as we pointed out in our February 21 piece, these problems are fundamental. They involve store format, product mix, logistics (serious out-of-stocks), marketing and merchandising. In that piece we offered some suggestions to the retailer for going forward.

We're continuing to report on, analyze and offer insight on this story. We welcome emails @ and comments here on the blog. We respect confidentiality 100%. And if we do decide to use any source information once we feel it is vetted properly, your name is protected unless you tell us we can use it for attribution.

Piper Jaffray Confirming Our Recent Analysis: Tesco's Fresh & Easy Sales Significantly Below Targets

Fresh & Easy CEO Tim Mason (right) recently sold ~1.3 million worth of Tesco stock.
Wall Street's Piper Jaffray is the first U.S. or international investment firm to report what we have been writing about here for a number of weeks: That Tesco's Fresh & Easy Neighborhood Market small-format, convenience-oriented grocery store chain in the Western U.S. is in trouble.

The United Kingdom-based business publication, was the first to report the Piper Jaffray research, which confirms what we have been reporting on and analyzing from our sources, in this morning's addition.

Piper Jaffray's Mike Dennis says, based on "in-depth research" the firm has conducted, that "weekly Fresh & Easy store sales are far short of target and the stores need an urgent overhaul."

"The Fresh & Easy concept is not right and they need to quickly find out what the issues are and reset the concept," Dennis says.

Dennis claims the 50 Fresh & Easy stores opened to date are averaging about $170,000 a week. Further, he believes Tesco was aiming for sales of at least $200,000 a week at this point in time, with an eventual target of $270,000 a week in gross sales.

Ironically, Piper Jaffray's $170,000 a week is far higher than what our sources have told us is the case. (These are multiple sources, and we averaged and double-checked the sales numbers each has provided to us.) As we reported last week, our sources have been telling us Fresh & Easy store sales are averaging more like $60,000 -to- $100,000 overall, with just a few doing higher weekly sales.

Jim Prevor, who publishes the Perishable Pundit online newsletter, and who has also been doing extensive writing and analysis about Tesco's Fresh & Easy Neighborhood Market operations like we have, pegs the fledgling 50-store chain's weekly sales even lower--at about $50,000 -to- $60,000 per week average.

A Tesco spokesman told that Piper Jaffray's Mike Dennis didn't speak to him, or to his knowledge spoke to any other Fresh & Easy USA executives, prior to releasing the report. However, this isn't an uncommon practice for Wall Street investment firms when researching a company--especially a start up. After all, the likelihood the company would confirm negative performance indicators turned up in research isn't extremely probable, especially if that company's parent firm is a multi-national public company. Such confirmations can cause dramatic overnight drops in stock-share value (and thus in corporate value), something the parent company and its major stockholders aren't going to approve of.

The investment firm's analysis--which comes on the heels of what analysts and writers like us and Prevor have been discussing--will likely spur other investment houses in the U.S and UK to begin researching Tesco's performance with its Fresh & Easy chain in the U.S. more closely.

Meanwhile, if Piper Jaffray's weekly sales averages are correct (we think they are too high), then in our analysis Tesco's prospects for success with its Fresh & Easy chain is actually higher than we previously believed it to be, based on the $70,000 -to- $100,000 a week average sales numbers our sources have provided to us.

We are continuing to work this story, and will have additional reporting and analysis coming up on Fresh & Easy's performance soon, as a follow up to this piece. In the meantime, we suggest you read's full story from this morning's edition here. also reported in the story that Tesco Fresh & Easy Neighborhood Market CEO Time Mason recently sold ~1.3 million worth of Tesco stock shares. They may or may not have something to do with Fresh & Easy's current performance. We will be asking Mr. Mason that question in an upcoming email.

Friday, February 22, 2008

Fresh & Easy Ends the Week With a Three-Store Trifecta in Vegas in its February New Store Opening Horse Race

Tesco's Fresh & Easy Neighborhood Market ended the last two days (Thurs. and Fri.) of this week by opening three new grocery stores (a Trifecta) in the Las Vegas, Nevada metropolitan region. February has been a new store-opening horse race-style sprint for the retailer. It's opened an average of one new grocery store every other day so far this month.

Two of the three new Fresh & Easy stores opened yesterday and today are in Henderson, Nevada, which is just a few miles outside of Las Vegas, and is part of the Vegas metro area. The third grocery market opened in North Las Vegas. This brings to 53 the total number of Fresh & Easy Neighborhood Market grocery stores opened in Southern California, Arizona and the Las Vegas, Nevada metropolitan region to date.

The first Fresh & Easy store officially opened the first week in November, 2007, in the Southern California Inland Empire desert region city of Hemet. (The store actually opened via a "soft opening" about two weeks earlier in late October.)

In a little over 14 weeks (roughly 100 days), Tesco has opened 53 Fresh & Easy grocery markets. That's an impressive overall new store opening pace of about one new store every other day. We call that a "new store rollout on steroids."

Tesco doesn't plan on slowing that pace down much either. The British retailer hopes to have between 150 and 200 Fresh & Easy Neighborhood Market grocery stores in the three states by the end of this year.

Fresh & Easy Neighborhood Market, which is headquartered in Riverside, (Southern) California, is the U.S. division of British retailer Tesco plc. Tesco is the United Kingdom's number one retailer, and the third-biggest retailer in the world.

The Fresh & Easy grocery stores are small-format (10,000 -to- 13,000 square feet) neighborhood-style grocery markets. The store's are a hybrid basic grocery store, selling a limited assortment of Fresh & Easy store brand and nationally branded grocery products, along with an extensive selection of ready-to-eat and ready-to-heat fresh, prepared foods items.

The prepared foods offerings range from ready-made sandwiches, pasta, tuna and chicken salads, to prepared entrees and side dishes like meat loaf, beef tips in wine sauce, garlic mashed potatoes and numerous other prepared foods' entrees and side dishes, including many different ethnic cuisine items.

Fresh & Easy stores also have fresh meat and fresh produce departments. The fresh meats are packaged and merchandised in a self-service manner. The fresh produce is packaged in containers or bags similar to how the items are sold in Trader Joe's stores.

The convenience-oriented grocery markets also sell a selection of specialty, gourmet, ethnic, natural and organic grocery products, alongside the more basic, everyday groceries. Additionally, the stores' sell fresh flowers and plants, fresh baked goods, and have a selection of imported and domestic wines, spirits (in most stores) and craft beers.

Tesco's target market for its Fresh & Easy Neighborhood Market small-format, convenience-style grocery stores are the western U.S. states of California, Arizona and Nevada. Currently, the grocer has stores throughout Southern California, in the Phoenix, metropolitan and suburban areas' of Arizona, and in the Las Vegas, Nevada metropolitan region.

The company will start opening the first of an initial 18 stores in the San Francisco Bay Area region of Northern California either beginning at the end of this year or in early 2009. Tesco has signed leases in the Bay Area for those initial 18 stores already. However, the retailer is currently negotiating (and signing some new leases) with commercial building and property landlords in the region for additional store sights.

Additionally, Tesco has signed leases for at least three stores in the Sacramento, California metropolitan region as part of its late 2008-2009 push into Northern California. More stores will come in the Sacramento area on top of those three we currently know about. The retailer hasn't officially confirmed any stores for Sacramento to date.

Tesco's Fresh & Easy Neighborhood Market also plans to build a distribution center in Stockton, California to serve its Northern California grocery stores. Stockton is about 30 miles from Sacramento and about 60 miles from San Francisco. It's a good central location to serve stores located in the Bay Area, as well as in other parts of Northern California and the Central Valley. Tesco hasn't officially confirmed the Stockton distribution center location either.

Wal-Mart and Tesco Locked in Heated Cross-Atlantic Competitive Battle in the USA and UK

Arkansas, USA-based Wal-Mart, the number one corporation and retailer in the world, and United Kingdom-based Tesco, the world's third-biggest and the UK's number one retailer, have commenced a full-scale "cross-Atlantic" grocery retailing battle, after Wal-Mart announced yesterday a major expansion program in the UK for its Asda supermarket chain.

The battle also is joined in the U.S., where Tesco is challenging American food retailers including Wal Mart (which is the number one grocery market share leader in the USA) with its Fresh & Easy Neighborhood Market venture.

In less than four months, Tesco has already opened 50 of its small-format (average 13,000 square feet), combination basic grocery and fresh foods' convenience-oriented Fresh & Easy grocery stores in Southern California, Arizona and Nevada. The British retailer plans to have 200 of the grocery markets' open in California and the other two Western U.S. states by the end of this year, with many more coming in 2009.

To fight back against British invader Tesco's Fresh & Easy Neighborhood Market on its home turf in the U.S., Wal-Mart will open its own small-format grocery store version named Marketside this summer. The first three -to- four stores will open in the Phoenix, Arizona metropolitan area. The first Marketside stores will be located very close to existing Fresh & Easy grocery markets in two Phoenix suburbs.

The publication Natural~Specialty Foods Memo has an analysis piece which was published yesterday that discusses and analyzes the Wal-Mart/Tesco competitive battle and how it's heating up in both the United States--with the small format grocery stores--and in the United Kingdom, where Tesco and Wal-Mart/Asda operate numerous different format grocery, combination and general merchandise stores, including superstores and hypermarkets.

We suggest the piece to our readers as it provides not only a good background on the current battle lines being drawn between the two mega-retailers, but offers analysis on where the situation might be going, as well.

Thursday, February 21, 2008

A Look at Fresh & Easy at @ 50 (Stores): An Analysis and Some Suggestions for Going Forward

Fresh & Easy Not Achieving Sales Goals: Consultant
From: Supermarket News, February 21, 2008
BOCA RATON, Fla. — Fresh & Easy Neighborhood Markets have not yet come close to achieving the sales levels Tesco officials were originally hoping for, according to an industry consultant here. Speaking yesterday with investors in the U.S. and the United Kingdom in a conference call sponsored by New York-based Citigroup, Jim Prevor said the 52 Fresh & Easy stores that have opened since November are averaging weekly sales volumes of $50,000 to $60,000, or about $5 a square foot — below the goal of $200,000 a week and $14-$22 in sales per square foot the company had projected. A spokesman for Fresh & Easy declined comment when contacted by SN. Prevor said the volume estimates are based on discussions with competitors, vendors, industry observers and Fresh & Easy store managers, "who all confirm each other." Prevor also said Fresh & Easy is paying rent on stores in the Bay Area in Northern California after deciding to open them early in 2009 instead of later this year as originally planned. The Tesco spokesman told SN the company never intended to move into the Bay Area until 2009. In other comments, Prevor said Fresh & Easy is not laying off employees but is not replacing any who leave. The company spokesman declined comment on that assertion.

Our Analysis: The State of Fresh & Easy Neighborhood Market @ 50 Stores

The above report on Tesco's Fresh & Easy Neighborhood Market's store performance to date is from today's issue of the supermarket trade publication Supermarket News.

Our sources (industry analysts, commercial real estate agents, suppliers, food brokers, consumers, store-level workers, and others) have been telling us similar things--and more--regarding the Fresh & Easy store's overall sales performance to date. Our regular readers know we've written about this fact--and that we've suggested some possible solutions in past pieces based on our research and analysis.

Regarding weekly Fresh & Easy store sales, we've heard from our sources weekly figures as low as those Mr. Prevor reported at the industry conference, and as a high as around $100,000 per-week for some of the stores. In particular, we've been told by two good sources the Glassell Park neighborhood Fresh & Easy grocery market in Los Angeles is doing about $100,000 in average weekly sales. However, we don't disagree in the main with Mr. Prevor's overall sales numbers. Even if all the stores were averaging $100,000 per-week, which they aren't, that would be far from what they should be doing.

Of course, it's important to keep in mind that the longest-open Fresh & Easy store, which is store number one in Hemet, California, has only been open since late October, 2007, which is less than four months. Further, many of the stores have only been open for one month. In other words, if Tesco's estimates for the Fresh & Easy grocery stores really is $200,000 per-week in start-up mode (which sounds close to right based on our research) they were too high to begin with, which is something we mentioned months ago.

The plain fact is, however, the stores' need to do at least $200,000 per-week--and do so in a time not too far down the road--to be viable. This is even more true because Fresh & Easy's retail prices on the stores' basic grocery items are relatively low, thus meaning they earn relatively lower gross margins overall than say Whole Foods Market or even Trader Joe's.

Since the bulk of the stores' total sales will come from these private label and national brand basic grocery items, the only way the retailer can make up for the low gross margins is to sell more; something the Fresh & Easy stores aren't currently achieving. Brisk sales of higher margin prepared foods will help increase overall margins, but it isn't enough all by itself. Unfortunately for Fresh & Easy, logistics problems, which in-turn is suppressing prepared foods' sales makes it all the more difficult at present to boost those overall gross margins.

In terms of the labor issue, that "Fresh & Easy isn't laying off employees, but isn't replacing those who leave", we are hearing a bit of a different twist on why this is the case from our sources, who include current store-level employees.

We're being told that in Southern California especially, but also in Arizona and Nevada, Fresh & Easy stores are having a difficult time finding employees who will work for the starting salary of $10.00 hour the retailer is paying. Additionally, with the exception of a couple full time store-level managers, Fresh & Easy is only offering employees a maximum of 20 hours a week. [Although, in those stores where workers have left, employees who want extra hours are being given them, but they still aren't 40 hour a week jobs. And the extra hours are only temporary and not guaranteed week-to-week.]

We aren't saying Prevor is wrong that Fresh & Easy is trying to cut back on store-level labor by not hiring replacements at times when employees leave. Rather, we're just adding an additional twist we recently learned from our sources. Further, we believe it's this hourly wage/labor issue that's key, not only in the case of replacement workers, but in an overall labor case as well for the retailer. We see Tesco having to raise entry-level wages, especially when they open stores in the San Francisco Bay Area of Northern California, beginning late this year or in 2009.

Part of this labor problem is that especially in Southern California, $10.00 hour isn't a particularly decent starting wage. The state of California's minimum wage is currently $8.00 hour. It was raised beginning last year, and again this year, from a minimum wage of $6.75 just two years ago.

With the exception of Whole Foods Market, Inc., Trader Joe's, Wal-Mart Supercenter and Fresh & Easy Neighborhood Market, all of Southern California's (and Arizona's too) major supermarket chains and independents are union shops.

Entry-level retail clerks start off at a far-higher hourly wage than they can get at Fresh & Easy, and have a health benefits packaged that's more than twice as good in both quality and employee contributions as the one currently offered by Tesco. (Fresh & Easy offers all employees who work 20 hours or more a week a minimal health insurance plan. It has far higher employee contributions across the board compared to the union clerks' plan.)

These union supermarkets in Southern California include: Market share leader Ralph's (owned by Kroger Co.), Safeway Stores, Inc.'s Von's chain, Albertsons (owned by SuperValu, Inc.), Stater Bros., Bristol Farms (also owned by SuperValu, Inc.), Gelson's--and frankly nearly every other chain and independent in the region accept those listed above and some small, family-owned markets and the mom and pop stores, which aren't union. It's estimated union shop supermarkets make up about 85% of the total grocery dollar market share in Southern California, according to the California Grocers' Association, based in Sacramento.

Most of the chains and independents in Arizona and Nevada are union as well. The retail clerks in those states' union shops make slightly less per-hour than those in Southern California, but have the same health plan. Their hourly salary is still far higher than the $10.00 hour Fresh & Easy is paying however.

Additionally, the clerks in the union shop supermarkets have a clear career path if they choose. A clerk with the equivalent of one year of hourly experience (this generally takes about one year for a full-timer and two years for a part-timer to achieve) makes about $21.00 hour in Southern California, and about $19.00 hour in Arizona and Nevada. In addition, they get the excellent union health benefits plan, which is one of the best private sector plans in the U.S.

Most of the union shop supermarket chains also offer discount stock purchase programs (if public companies) or profit-sharing plans (if privately held), and the retail clerks' union has a retirement plan, which employers pay into in addition to workers. A union clerk with 25-30 years of experience upon retirement can get about $35,000 -to- $40,000 per year in union retirement benefits in addition to collecting Social Security.

It's not only union supermarkets that Fresh & Easy is competing with on the labor front. In Southern California, for example, Starbucks, major retail department stores and many other retail stores pay a starting wage of more than $10.00 hour. Even McDonald's pays $10.00 hour in Southern California. Then there are receptionist jobs, administrative assistant jobs--the types of jobs that don't generally require a post high school education--that also pay over $10.00 hour in the region. We recently saw an advertisement in the Los Angeles Times' for "character mascots" at Disneyland. The hourly pay was $12.00.

Fresh & Easy Neighborhood Market 2.0

Based on the data offered by Mr Prevor, and the information we continue to get from our sources, along with much personal participant observation in the Fresh & Easy stores, we suggest Tesco needs to do at least the following three things in terms of their Fresh & Easy grocery store retail operations to help create success:

1. Solve the frequent fresh foods' out-of-stocks problem

In the last eight weeks we've interviewed at least 100 shoppers inside and outside of Fresh & Easy grocery stores in Southern California and Arizona. In addition, we've read at least 100 reviews of the grocery markets' on online review boards like yelp and others. Using basic content analysis research methodology, we've scored the most frequently made consumer complaints by category and subject.

One of the most often repeated consumer complaints we've identified is frequent store-wide out-of-stocks of fresh, prepared foods and fresh produce in Fresh & Easy stores. This is particularly the case beginning in the late afternoons and into the evening nearly every day.

Further, we've seen this situation with our own eyes in over a dozen Fresh & Easy grocery stores. In the evenings we've observed the prepared foods' refrigerated case shelves with many out-of-stock items, and in some instances the shelves were nearly empty. Unfortunately, this fact has more to do with logistics problems than massive sales.

Not only are Fresh & Easy stores losing sales from this serious logistics problem, the grocery chain is losing customers as well. This is especially the case as it concerns first time shoppers. And, since all of the stores have only been open for a short time, new shoppers means most shoppers. These shoppers' come to the store in their neighborhood for the first time--in many cases because they've heard about the markets' extensive prepared foods offerings--see the out-of-stocks, and often don't return for a second visit. A grocer can never build a strong core of primary shoppers with these kinds of logistics problems. This is something Tesco's Fresh & Easy needs to fix right away, before it defines the retailer.

2. Spread the Fresh & Easy message: Targeted radio advertising

While it's true Tesco's Fresh & Easy Neighborhood Market has obtained lots of "free media" or publicity for its new venture and stores, the fact is most of that publicity has been either in grocery trade publications--which consumers don't read--or has been in local newspapers, which if one checks newspaper company financials' these days, will notice aren't being read by people in very large numbers. Further, most of this publicity in the local newspapers happens when a new Fresh & Easy store opens in a city. After that, there isn't much mention of the stores.

In our research interviews with consumers, we've frequently been asked, "Why doesn't Fresh & Easy advertise more, other than sending out it's mass-mailed product advertising circular?" We've been asking that same question to ourselves for some time. The fact is, despite all the newspaper articles--and some television coverage--about new store openings, consumer awareness of Fresh & Easy in Southern California, Arizona and Nevada is low.

A start-up venture on the scale of Fresh & Easy can't rely on this minimal publicity to create the awareness needed to drive shoppers to its stores. The three states where the grocer currently has stores--(Southern) California, the metropolitan Phoenix region in Arizona, and the Las Vegas, Nevada metropolitan area, are all "car culture," commuter cities. People spend hours in their cars in these places daily. They generally commute by automobile back-and-forth to work, use their cars to even run the shortest of errands, and in many cases even eat while driving since they spend so many hours of their day in the car.

The other thing these millions of commuters do is listen to the radio while spending all these hours in their automobiles. Tesco's Fresh & Easy Neighborhood Market is missing a huge opportunity to reach and communicate with all these potential new customers by not running frequent, and high-quality, 30-second radio spots in these regions.

The great thing about radio advertising is that it can be targeted. For example, in Arizona it can be focused only in the Phoenix metro and suburban areas where the retailer has its stores. The same is the case in Nevada. Radio ads can be targeted only in the Las Vegas metro area and not elsewhere in the state.

For Southern California, where the grocer has a more spread-out store base, the radio ads can still be focused, and the time bought accordingly. For example, Orange Country, Los Angeles and San Diego can all be selected as separate radio advertising markets, and time buys made on that basis.

Compared to other mass media, radio is cheap. It also can be micro-targeted. Most importantly, in the regions' where Tesco has Fresh & Easy stores, the radio spots will reach potential customers where they live--in their cars. Tesco needs to create awareness of the Fresh & Easy brand and most importantly its stores. We believe the retailer is making a big mistake by not using radio extensively as a media tool in its marketing toolbox.

3. Create A sense of place: Put the 'Neighborhood' in the 'Neighborhood Markets.'

It's our analysis that a major problem with the Fresh & Easy grocery stores is they lack a sense of place. The stores' are positioned as neighborhood grocery markets--places where local residents will do most of their shopping rather than just shopping them like they would a convenience store.

The fact is though, based on our research, consumers are doing just that: shopping the Fresh & Easy neighborhood markets more like they shop convenience stores rather than using them as their primary--or even in most cases secondary--neighborhood grocery store. If this becomes the norm, the format will fail. It's not a format (or business) based on a convenience store operating model.

We believe one of the primary reasons consumers are shopping the stores in this manner (against the format positioning) is simply because the grocery markets' lack a sense of place, or neighborhood feel. The Fresh & Easy store's need more warmth. They need to offer more reasons for shoppers to linger in them and to spend time buying more of their groceries once in the store. They are called "Fresh & Easy," rather than "Quick & Easy," after all.

We have two suggestions on how Tesco can create more of a sense of place in the grocery stores, or how it can put the "neighborhood" in its neighborhood markets:

First, add a small in-store "Fresh & Easy Cafe" to the store format. This can be a 600 or so square foot in-store cafe, serving coffee drinks, smoothies, fresh-baked goods and the like. It's nothing new. It just has to be created on the scale to fit the store's 10,000 -to- 13,000 square foot size, which is why we suggest about 600-700 square feet.

The "Fresh & Easy Cafe" needs to reflect the neighborhood. It also needs to offer a good selection of food and drinks at reasonable prices. But there's no need to low-ball on those prices.

Such an in-store feature will provide a place for neighborhood residents to come to, and to spend time in, while shopping the store. Many will even come to the cafe when not shopping. And that's part of the point. When the cafe becomes a "third place" for neighborhood residents, you can bet they'll end-up doing much more of their grocery shopping there, and more often too. It's a proven fact such in-store features create more primary customers. They also extend shoppers time in a store, which generally leads to purchasing more groceries. It's all about getting primary shoppers, along with growing that average customer ring.

[Note to Fresh & Easy Neighborhood Market executives: We suggest the following to you: First, do a Google search using the keyword Third Place. (We even linked it for you.) Read some of the many articles about third place theory as it relates to American (and British for that matter) culture, society and retailing. One key book on the subject is: "The Great Good Place," by Ray Oldenburg. It's really must reading for any company trying to create a neighborhood-oriented grocery store chain, cafe chain or other "neighborhood-oriented" retail businesses.

Starbucks has often been sited by you (Fresh & Easy executives) as a model for Fresh & Easy. Starbucks uses "third place" theory and practice extensively in its store design and operations. In fact, it's a key to the chain's success. Whole Foods Markets, Inc. has employed third place theory very well in food retailing. In fact, at home in the UK, Tesco plc. does a decent job of it in some of its stores, using among other things its popular in-store "Tesco Cafe."]

Second, in keeping with this need to create more of a sense of place in the Fresh & Easy stores--and thus increase the average customer ring and create more primary shoppers--we suggest Fresh & Easy Neighborhood Market take a cue from its parent company, Tesco. But that's too logical you say?

In the UK, most Tesco stores (it varies depending on the particular format) offer a wide variety of basic everyday-type services to customers and potential customers. You could call these basic services "neighborhood-oriented" needs in fact. Among these basic "neighborhood" sevices include: mobile phone sales and mobile phone plan sales, insurance services, internet service plans, postal-type services, and other similar everyday services one would love to have available to them right in their own neighborhood grocery store.

Taking that cue from its parent, Fresh & Easy might consider, for example, setting up small neighborhood service centers in the grocery stores. These small centers would offer postal services like sending packages via UPS or Federal Express, the use of fax machines for a nominal fee, perhaps a computer or two with free internet use for customers, and a few other services. The store centers' might even want to get into the automobile and other insurance segment businesses down the road, perhaps leveraging on the Tesco plc. model. Fresh & Easy doesn't even have to operate these centers themselves if they don't want to. Rather, they could carefully outsource them to someone like the "UPS Store," which has similar freestanding franchises all over the U.S.

The specifics of what these in-store "Neighborhood Service Centers" offer isn't what's significant at this point. Rather, it's that the concept of having such centers helps to achieve the much needed goal of creating a better sense of place in the Fresh & Easy grocery stores. And, as we've said, we believe doing so will lead to the ability to better achieve two key metrics in the retail grocery business: increasing the average customer store-purchase ring, and creating primary shoppers.

Wednesday, February 20, 2008

Fresh & Easy to Open Three Stores in the Las Vegas, Nevada Metropolitan Region Tomorrow and Friday

Continuing its February new store opening blitz, Tesco's Fresh & Easy Neighborhood Market will open three new stores in Nevada on Thursday and Friday. Two of the new small-format, convenience-oriented grocery stores will be in the city of Henderson, Nevada, which is only about seven miles from Las Vegas, and the third new Fresh & Easy neighborhood grocery market will be in North Las Vegas.

The stores' will be about 10,000 -to- 13,000 square feet--the standard size for the Fresh & Easy market format-- and feature the grocer's combination of Fresh & Easy brand and national branded basic, everyday grocery products, fresh produce and meats, fresh, prepared ready-to-eat and ready-to-heat foods, and a selection of specialty, natural and organic grocery items.

Each Fresh & Easy store also has a food sampling area in it, where a store clerk offers shoppers various selections of the store's prepared foods' offerings as tastings during store hours. The stores, which are neighborhood discount grocery store meets Trader Joe's in their format style and product selections, also sell fresh flowers and plants, some non-foods items, a selection of wines, including a line of Australian wines which retail for $1.99 a bottle, craft beers and (in most locations) spirits.

Tesco is making a major push into the Las Vegas, Nevada metropolitan region with its Fresh & Easy grocery stores. The city of Henderson is located about seven miles southeast of Las Vegas, making it part of the city's metropolitan region even though it is an incorporated city. Henderson is Nevada's second-largest city after Las Vegas, with a population of about 180,000 residents.

The Las Vegas metropolitan region has a population of nearly 2 million people. The region's population was the fastest-growing in the U.S. between 1990 and 2000, soaring by a whopping 83% during that 10 year time period. A third of all new arrivals to the region are from California, according to the city of Las Vegas and the U.S. Census Bureau.

With the three new stores opening before the end of this week, Fresh & Easy will have a current total of nine Nevada stores, all located in the Las Vegas metropolitan region. More new stores are planned for the area and state before the end of 2008.

Inside Tesco Fresh & Easy Neighborhood Market's Riverside County, California Distribution Center

[Photo: Courtesy T. Galvin]
As a major element of its Fresh & Easy Neighborhood Market small-format grocery store venture in the Western U.S. states of California, Arizona and Nevada, Tesco has constructed an 850,000 square foot distribution center in Riverside County, which is located in the Inland Empire region of Southern California. The distribution facility is designed to serve all of it's current and future--as many as 300 total--Fresh & Easy grocery markets in the Western United States.

In addition to hundreds of thousands of square feet of warehouse space, tens of thousands of product picking locations, and 74 truck bays, the Riverside County Fresh & Easy distribution center also includes a large commercial kitchen and related facilities, where Fresh & Easy brand fresh, prepared foods' products are produced.

T. Galvin, a Southern California-based real estate economics researcher who publishes the Inland Empire Economics blog, recently toured the Fresh & Easy Neighborhood Market distribution center in Riverside County. He was so impressed with the massive facility, he asked Ted S. Oyama, the lead senior architect for the Tesco project for an interview about the design of the distribution center. Mr. Oyama is the manager of architecture for the firm AEPC Group, LLC., whcih was the lead firm on the project.

Read T. Galvin's interview with Fresh & Easy Neighborhood Market distribution center lead architect Ted S. Oyama here. It's the first interview we're aware of with the distribution facility's lead designer. The interview offers some specific and detailed information on the massive distribution center not previously covered in press reports about the facility. It's also a first-person discussion, since Mr. Oyama was the man at the helm when it came to desiging--and then making real--the 850,000 square foot distribution center.

Tuesday, February 19, 2008

Tesco's Fresh & Easy Serving as an Economic Stimulus Package of Sorts for California's Troubled Commercial Retail Real Estate Industry

Tesco's Fresh & Easy Neighborhood Market venture is providing a major benefit to the troubled commercial retail real estate industry in Southern California: it's giving the region's suggish commercial-retail building economy a big boost by buying and renovating numerous long-empty retail buildings, purchasing abandoned lots to build new stores on, and in some cases signing leases in mixed-use developments which have long been searching for a retail anchor.

Of the about 30 -to- 35 Fresh & Easy grocery stores currently open in Southern California (out of 50 total stores open to date), the majority of those units have gone into previously empty retail buildings, which the company has gutted and completely remodeled to fit its 10,000 -to- 15,000 square foot Fresh & Easy grocery market format.

Many of these previously empty buildings were former Albertsons' supermarkets. Before Boise, Idaho-based Albertsons, Inc. sold the supermarket company a couple years ago to SuperValu, Inc., it closed numerous underperforming Albertsons' stores throughout Southern California. Tesco's Fresh & Easy has leased many of these empty supermarkets and remodeled them for their Fresh & Easy stores. In addition, Fresh & Easy also has leased a number of empty CVS and Rite-Aid drug stores, along with a few other empty retail buildings, for their Fresh & Easy grocery market locations in the region.

Tesco decided on this combination strategy of renovating abandoned commercial retail buildings and building some from-the-ground-up new stores for a couple of reasons.

First, with the existing stores, since the building's shell, electrical, plumbing and other infrustructure is already in place, it's much more inexpensive to simply gut the store's interior and redo the outside, and create a Fresh & Easy store, rather than having to build from the ground-up. The cost savings can be considerable.

Additionally, because most of these retail buildings had been empty for some time, Tesco was able to get rather favorable lease costs and terms on them. This combination of lower building costs and cheaper rents allowed the retailer to have lower upfront costs and overhead, which makes sense considering Fresh & Easy's low-price positioning on basic grocery items and prepared foods. Since the stores average only about 13,000 square feet, the ongoing operating costs are much less than for example the previous tenent, Albertsons, which operated 35,000 -to- 55,000 square foot stores in the same boxes.

Further, since Fresh & Easy's strategy is to open as many stores as fast as it can, especially in Southern California, the rapidity in which the grocer can renovate one of these empty retail buildings is such, compared to building a store from the ground-up, that it allows for it to meet this goal of opening a critical mass of stores in a very short period of time.

In the situations where Tesco has thus far build stores from the ground-up, such as the just-opened store in the Southern California city of Compton, the grocer was able to negotiate very good financial terms for the location because the city of Compton offered the retailer a package of financial incentives to build and open a store in that community which is underserved by grocery stores. Before the Fresh & Easy store opened in Compton last week, the city of 100,000 had only one decent-sized grocery store.

Commercial real estate agents in Southern California have told us Fresh & Easy is grabbing locations nearly wherever it can--the empty retail stores, locations in shopping centers that are looking for a retail food store anchor, and in lower-rent districts which are avoided by most other grocers.

For example, one commercial real estate agent told us about a Fresh & Easy store set to open late this year in the city of Murrieta. The store is located in a shopping center that won't even be completed when the Fresh & Easy store opens. The neighborhood is a relatively new one in the city. Most of the houses and condominiums in the area were just completed in 2004, the agent told us. Further, there are numerous vacant lots where houses have yet to be built.

The Fresh & Easy store is nearly right next to the residences, the commercial real estate agent said. The neighborhood isn't expected to actually have enough residents to support a store until at least two years from now. However, he told us Fresh & Easy wanted to grab the location and get the store up and running long before that happens, or if it happens.

City officials and commercial landlords in Southern California communities ranging from Anahiem and Orange in Orange Country, to Riverside and Upland in the Inland Empire, to Fallbrook and Vista near San Diego, are all happy that Tesco has been renovating so many of these abandoned retail buildings at such a fast clip. The chain has become a corporate commercial real estate stimulus package in and of itself for the region's depressed market.

We do wonder though, with such rapid new store development, if the grocer won't have to take a hard look in a year or so at many of its locations and seriously evaluate the store performance in those neighborhoods. Keep in mind that Albertsons and the drug chains abandoned those locations--and the buildings--primarily because the stores were underperforming. While its true because of their smaller size and start-up nature that Tesco will likely define performance much differently than Albertsons did for example, many of these locations still are suspect in the medium -to-long run.

Right now though Tesco isn't concerned about that. In fact it's employing a similar strategy in its plans to move into Northern California, opening its first stores in the San Francisco Bay Area in late 2008 or early 2009. The grocer has already inked deals for 18 locations throughout the Bay Area. Many of these 18 locations are leases on empty commercial retail store buildings--and a number of those buildings are, you guessed it, former Albertsons stores, which were closed as part of that acquisition a couple years ago and have remained vacant.

Additionally, Tesco has worked two deals in the city of San Francisco similar to the Compton deal. The retailer is locating two stores in the low-income Bayview-Hunters Point neighborhood in the city, and will receive incentive packages for doing so. Both of these stores will be built from the ground-up, like the Compton store. Bayview Hunters Point is an underserved (by grocery stores) neighborhood in San Francisco which has been actively trying to lure a grocer which sells lots of fresh foods to locate in the neighborhood for over two decades.

Tesco's Fresh & Easy Neighborhood Market venture in California comes at a much needed time for retail commercial real estate in the state. Unemployment is rising rapidly in the Golden State, the state government is facing a multi-billion dollar deficiet, three of the state's counties are numbers one, two and three on the top ten list of U.S. counties with the most foreclosed homes, and California's commercial and residential building industry is at a standstill. Many economists in the state believe California is already in a recession.

In the commercial real estate sector layoffs are growing. Many agents are leaving the field before being layed off. Retail building landlords are seeing numerous tenants go out of business. Empty buildings in the main are staying empty. For many of those in the commercial retail real estate industry Tesco's British invasion of California is welcomed with wide-open arms. Right now, it's the hottest deal working in the industry.

Tesco's Fresh & Easy Neighborhood Market's new store building and opening program is serving as a healthy economic stimulus to the state's depressed commercial retail industry. This should continue for the rest of 2008 and through 2009.

The jury is still out on whether many of these stores have medium to long-term viabiltiy in certain locations. We believe a major evaluation by Tesco of many of these stores will come in about two years, towards the end of 2009. We also believe that when that evaluation comes, many of the locations will be deemed underperforming.

However, Tesco doesn't seem the least bit concerned with that issue at present. And, local governments, retail commercial real estate agents, and retail building and shopping center landlords in California aren't complaining. Right now, many of them are competing for the Fresh & Easy account, trying to be the one who can find the British grocer the best locations and empty retail buildings the fastest, and for the best deal.

A New Fresh & Easy Store Opening About Every Two Days In February

Despite the fact February is the shortest month this year, with only 29 days, Tesco's Fresh & Easy Neighborhood Market is opening a new store about every other day, in a frenetic February, 2008 new-store opening blitz in Southern California, Arizona and Nevada.

In a January 27 post in the Fresh & Easy corporate blog, company marketing chief Simon Uwins said the grocer will open 16 stores in the four weeks from January 28 -to- February 29. That's on average an opening of about one new store every two days, if the retailer is able to get all 16 new grocery markets opened by the end of this month as planned.

Nearly all of these 16 stores are being opened in Southern California, Fresh & Easy's number- one target market region, and Arizona, the grocer's number two region of focus.

Tesco will open store number 50 tomorrow morning at 10:am in the Southern California desert region city of Palm Desert. The store is located at 72885 Hwy. 111. Palm Desert is in Southern California's Inland Empire region, an area where Tesco plans to open as many as 48 stores before the end of this year.

The British grocer will open two more of its 10,000 -to- 13,000 square foot grocery stores in the nearby city's of Riverside and Upland one week from tomorrow, on February 27. The Riverside store will be the first Fresh & Easy grocery market in that city. The Upland store will be the grocer's second in that community. The Riverside store is at 8765 Trautwein Road. The new Upland grocery market is at 829 West Foothill Blvd.

The Riverside location is an interesting--and will be a competitive--one. SuperValu, Inc.-owned Albertsons is opening a remodeled supermarket tomorrow right across the street from where the Riverside Fresh & Easy, opening next week, is located.

The Albertsons' store has been remodeled under SuperValu's "Premium Fresh & Healthy Format." That format is an upscale one, featuring lots of fresh, prepared foods, expanded fresh produce departments which feature lots of organic produce, large combined self-service and old fashion butcher- block type meat departments, as well as more natural, organic and fresh foods offerings across all departments.

Riverside, and the Inland Empire region also is home to Stater Bros. markets, a local supermarket chain which is the market share leader in the region. Stater Bros. is an Inland Empire institution. In addition to being the region's number one grocery retailer, it's also the area's number one corporate citizen, giving millions of dollars a year in donations to local educational institutions, community groups, charities and other not for profit organizations.

Stater Bros. has fought-off any and all attempts by other supermarket chains to challenge its market share dominance in its home region. Tesco's Fresh & Easy can expect the supermarket chain to do everything in its power to make sure it doesn't lose any significant grocery dollar share to the British-based retailer.

Sunday, February 17, 2008

Tesco's Fresh & Easy Venture in the USA, and the Ironic Challenge to its Food Retailing Dominance at Home in the UK

Tesco, parent company of Fresh & Easy Neighborhood Market in the U.S., is not only the third-largest retailer in the world in terms of sales volume, it's also far and away the number one retailer at home in the United Kingdom, with an impressive 30% share of all the food and grocery products sold in the country.

Number-two Asda (owned by Wal-Mart, Inc.), number-three Sainsbury's, Morrison's, the UK's fourth-largest food retailer, the Co-op, Waitrose, Aldi, Lidl (both German-owned chains) and a few others split up the remaining 70% of the market share. That's a lot of retailers to fight over that 70% pie. In other words, Tesco stands alone in its dominance of the UK food retailing market. Currently it does.

We use the word "currently" in the above sentence, because despite Tesco's present status as the dominant food retailing market share leader in the UK, a serious challenge is being waged against the retailer's market share ownership.

The grocery chains primarily waging that battle are Wal-Mart-owned Asda, Morrisons, and the two German grocers, Aldi and Lidl, which operate small-format, no frills, limited assortment discount stores throughout Europe. (Aldi operates its small-format discount stores in the U.S. as well. It also owns Trader Joe's in the U.S.) It's the two small-format discount grocery chains, Aldi and Lidl, we focus on in our piece today.

The Aldi and Lidl grocery stores in the UK average about 15,000 square feet. The stores design is basic and no frills, but attractive. The product mix is similar for both Aldi and Lidl: a mix of private label (about 60% -to- 65% of what they sell) and national brand grocery products (about 35 to- 40% of what the stores' sell.)

Both German-based chains put a major focus on price, and offer a limited assortment of basic grocery items. The stores also offer a small selection of higher-end specialty foods and grocery products at hot, discount prices. In the UK, the stores are called "downmarket" supermarkets in the industry.

Aldi's and Lidl's stores' in the UK may sound a bit familar to you. In a number of ways--store size, the limited assortment basic grocery products' offering with a focus on low price, specialty items offered at disount prices, for example--Tesco's Fresh & Easy small-format grocery stores in the U.S. are similar to the German "downmarket" stores in the UK.

There are differences however. Unlike Aldi and Lidl, Fresh & Easy in the USA has a second focus in its stores--which is an extensive selection of fresh, prepared foods. All three--Aldi, Lidl and Fresh & Easy sell fresh produce and meats. The Fresh & Easy stores also are somewhat more upscale in design, but not much.

Tesco also has a small-format grocery store in the UK called Tesco Express. It's similar to Fresh & Easy in the USA in many ways. However, unlike Aldi and Lidl in the UK--which focus on selling groceries for as cheap as they can, Tesco Express in the UK offers more mid-range prices, and is more upscale in its positioning and store design.

The Tesco irony: While Tesco if trying to get its fledgling small-format Fresh & Easy Neighborhood Market venture off the ground in the U.S.--and is garnering lots of attention for launching a small store competitive challenge in California, Arizona and Nevada to large-format supermarkets like Safeway, Ralphs' Wal-Mart Supercenters, Albertsons and others--its large supermarkets and even larger hypermarkets (along with its smaller Express stores) are about to get the biggest challenge they've seen to date. That challenge is coming from Aldi and Lidl--the German invaders--both of which have embarked on massive growth plans in the UK, designed to take market share from Tesco.

Aldi plans to open at least 50 new no frills, small-format discount grocery stores a year in the UK for the next few years. By the end of 2008, Aldi should have a t least 400 of the discount grocery markets in the UK. The German grocer says it plans to build at least 1,500 total stores under this fast-growth plan.

Tony Blain, Aldi's UK managing director in charge of buying, recently said the German grocer could very well have a store in every town in the UK in the next 15 -to-20 years. Blain also said Tesco is the most vulnerable UK chain in terms of Aldi's growth plan. "If you've got someone with 30% of the market [Tesco], you can assume most of our growth is going to come from that," he says.

Aldi also has launched a massive growth initiative in the U.S. The grocer recently announced that beginning this year, it will build about 100 new stores a year in the USA over the next five years. The grocer already has almost 900 Aldi small-format, discount grocery markets in the U.S. The stores are located in the Midwest and eastern portions of the country.

Lidl also has been building and opening its no frills, small-format discount grocery markets in the UK at a fast pace, and plans to not only continue but to excelerate that new store opening pace. the grocer currently has more than 450 stores in the UK and has said it plans to double that amount in the next few years.

Tesco is very worried about these two German invaders and their no frills, little discount grocery stores. So concerned is giant Tesco that it's set up its own version of a mock German small-foramt grocery store in an old warehouse facility in the UK which is owned by Tesco's founder.

Tesco is using this mock Aldi or Lidl to test merchandising strategies and related concepts. It's also highly believed in UK grocery industry circles that Tesco is using this mock store--like they did in the U.S. in developing the Fresh & Easy format--to create its own version of a small-format, no frills discount grocery store on the order of Aldi and Lidl.

The key to Aldi and Lidl's success in the UK and elsewhere throughout the world is that the grocers use a super low-cost model across the board. The retailers first try to find the cheapest sites to build their stores, and often buy empty retail buildings at a discount and then remodel the buildings to fit their store formats.

Since the store-format is small (average 15,000 square feet), it also costs less to build (or remodel an existing building) than the typical supermarket, which can range from 35,000 -to- 70,000 square feet, or a hypermarket, which is anywhere from 100,000 -to 200,000-plus square feet.

The small-format stores' require less shelving, refrigeration cases, checkout stands and the like. Additionally, because the stores' are no frills in design, the design costs also are lower than those of an even semi-upscale supermarket. Further, the small-format stores are low-overhead: less montly fixed costs for energy and water use for example, lower property taxes and more.

Aldi and Lidl also are able to extend their respective low-cost models to the all important area of labor. The no frills, discount grocery stores often have no more than 4 or 5 employees working in them at any given time.

Store employees multi-task, stocking shelves when not running the cash register, doing clean-up work when needed, and working in mutiple departments, unlike larger-format supermarkets, which have seperate produce department and meat department clerks, for example. Aldi and Lidl store managers also are working managers. They stock shelves, work at the checkstands and do other day-to-day tasks, along with managing store operations and employees.

Lastly, the two German discount grocers employ this super low-cost model in product buying. Private label grocery product development plays a major part in operations and merchandising. And both grocers are very good at it. The retailers' obtain the lowest cost of goods possible from suppliers, have extremely cost-effective packaging operations, and cut-costs aggressively throughout the entire supply chain.

Aldi and Lidl also buy lots of national brand grocery products and non-foods items on an "in-and-out" basis at steep disounts. (Aldi even makes key buys on items like small appliances, gas energy generators and other hard goods, and sells them a super-low prices.) The grocers' agree to buy scores of truckloads of an item from a supplier in return for getting a very low cost. The retailers' then create massive displays of these items in their stores and sell the goods for low prices, making only a small gross margin, but selling a huge volume of product.

Both grocers--especially Aldi--have recently increased the amount and variety of specialty, gourmet, natural and organic grocery items they sell in their UK stores as well, as a way to reach more upper-end shoppers.

The stores' offer these items a deep disounts. For example, Aldi recently offerred fresh, whole Canadian Lobsters for sale at about 40% less than the UK's leading supermarkets. There was a stampede of shoppers to Aldi stores to buy the Lobsters, which the grocer sold out of in a couple days. Aldi recently was said to offer the best quality food items among all grocery retailers in a UK consumer survey.

So, as British food retailing invader Tesco struggles to achieve success with its new, small-format Fresh & Easy grocery store venture in the highly competitive Western U.S. market, two German invaders--Aldi and Lidl--are posing a major challenge to the British-based, global retailer's dominance at home in the UK.

The irony of that fact is, Aldi and Lidl are launching their respective challenges against Tesco with small-format grocery stores, which are similar in a number of ways to the Fresh & Easy grocery markets Tesco is using to launch its competitive challenge against U.S. home-grown, larger-format supermarkets with.