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 @ freshneasybuzz@yahoo.com 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.

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