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.

If you have any suggestions, comments or information, you can email us at freshneasybuzz@yahoo.com. Our policy is that after vetting any information you give us, if we do feel comfortable using it (if it passes our fact-checking tests) we will keep you 100% anonymous, unless you tell us it is OK to use your name. Comments also are welcomed here on the blog.