Monday, March 31, 2008

The London Times: Time to Check the Well-Oiled Tesco Motor?

Tomorrow morning's edition of the United Kingdom's TimesOnline has a commentary piece by business writer David Wighton about Tesco's competitive and other challenges at home in the UK and abroad in the U.S.

In the U.S., as we reported here on Saturday, Tesco's Fresh & Easy Neighborhood Market is taking a three-month pause from opening new stores in order to review the Fresh & Easy format, corporate and store operations, merchandising, supply chain and other key aspects of the business to date.

The first of the current 59 small-format combination basic grocery, fresh and specialty foods' grocery markets opened in late October in Hemet, a city in the Southern California desert region.

In addition to our Saturday report, Fresh & Easy Buzz is full of analysis on the Fresh & Easy grocery markets--from format and store location strategy, to merchandising and marketing. Just look through our archives. [You can read a recent analysis piece, with suggestions on ways of going forward, here.]

At home, as we've also reported, Tesco, which is the UK's largest retailer with about a 33% share of the grocery sales market, is facing increased competition from number-two Asda (which is owned by Wal-Mart), number-three Sainsbury's, and a host of other retailers; including Morrisons (the UK's fourth-largest grocery chain), Marks & Spencer and upscale Waitrose. [Scroll down a bit near the bottom of this link to read two of our pieces about Tesco's competitive challenges at home in the UK.]

Below is the lede paragraph from Mr. Wighton's commentary piece, "Time to check the well-oiled Tesco motor?" in tomorrow morning's TimesOnline.

Could that possibly be the sound of crunching gears emanating from the normally well-oiled Tesco motor? The bold move into the US has stalled and the mechanics have taken the Fresh & Easy vehicle into the garage for a bit of tinkering. Back in the UK, the experiment of selling clothes online has come to the end of the road and may or may not return after some retuning. Tesco says that that was all it ever was - an experiment. Yet it would surely still be running if it had performed better.

To read the entire commentary piece click here. We suggest reading it.

Small Format Grocery Store Retailing: Giant Eagle Express Combines Basic Grocery Shopping With C-Store Ease; Tossing in an Upscale Twist

As part of our on-going feature about the small-format grocery store revolution occurring today in the United States and elsewhere around the globe, we first brought you this piece on March 21: "The Small-Format Grocery Store Revolution in the U.S.: Hy-Vee, Inc. to Open its First Small-Format Grocery Store in Lincoln, Nebraska.

We followed that piece up on March 27 with this feature story, "Small-Format Grocery Retailing Feature: Stretching the Boundaries of Convenience Store Retailing; Some Say Japan's Natural Lawson is Awesome," which talks about the Japanese hybrid convenience store/small-format basic food, specialty and natural products' chain Natural Lawson.

Today, we bring you a feature piece about Giant Eagle Inc.'s Giant Eagle Express hybrid convenience store/small-format upscale grocery market format, which was published in the food and grocery publication Natural~Specialty Foods Memo in October, 2007.

Pennsylvania-based Giant Eagle, Inc. operates 158 corporately-owned and 65 independently-owned and licensed supermarkets, along with 130 conventional convenience and fuel stores in the states of Pennsylvania, Ohio, West Virginia and Maryland.

In addition to operating conventional supermarkets under the Giant Eagle banner, the grocery chain also operates upscale, specialty foods-oriented supermarkets called Giant Eagle Market District. The retailer's conventional convenience stores are named GetGo (from Giant Eagle).

The grocery and convenience retailer's newest format, Giant Eagle Express, is a combination small-format neighborhood grocery store and convenience store which sells a limited-assortment of basic grocery items, fresh produce and fresh meats, as well as dairy and other perishable products.

The Express format store (soon to be stores), which is open 24 hours a day, also has an in-store cafe which offers premium coffee drinks and fresh-baked goods (as well as free Wi-Fi access), a small in-store deli, and sells gasoline outside near the entrance to the store using a branded GetGo fueling kiosk or station.

The hybrid, small-format upscale convenience and grocery stores offer an extensive selection of fresh, prepared foods in addition to the categories and items mentioned above.

Lastly, the Giant Eagle Express format has an in-store pharmacy (branded as Giant Eagle Pharmacy), which includes a drive-through window for customer convenience.

Giant Eagle Express offers all this in an average store size of 13,000 square feet.

The first store Express store opened in May, 2007 in Pittsburgh, Pennsylvania. Two others are currently on the drawing board, with more to come, according to a company spokesperson.

Giant Eagle's strategy with the small-format Express stores is to use them as part of the retailer's overall format mix. That mix is: the conventional Giant Eagle supermarkets, the upscale Market District food stores, the conventional GetGo C-stores and now the Giant Eagle Express markets. In other words, when the company spots a location where they determine an Express store is best suited rather than a supermarket or Get Go conventional convenience store, that's where the company will locate one.

Below are the first two paragraphs (in italics) of Natural~Specialty Foods Memo's feature, "Giant Eagle Beats Tesco's Fresh & Easy Neighborhood Markets' to the Punch With its Upscale, Express Format," on the Giant Eagle Express grocery markets. After the opening paragraphs, there's a link to the full story.

Tesco's Fresh & Easy Neighborhood Market grocery stores have been all over the media in the past few months, including here at Natural~Specialty Foods Memo (NSFM). Far less attention and coverage (virtually none really) has been given to Pittsburgh, Pennsylvania-based Giant Eagle, Inc.'s new Giant Eagle Express store format and its first (and currently only) store which opened in Pittsburgh, Pennsylvania in May of this year.

The Giant Eagle Express stores are a hybrid, upscale neighborhood grocery and convenience store. Sound familiar? The Pittsburgh store which opened in May is about 13,000 square-feet and features a large, fresh prepared foods selection, basic and specialty groceries, fresh meats, fresh produce and in-store service deli and bakery departments featuring upscale offerings.

To read the full feature article,"Giant Eagle Beats Tesco's Fresh & Easy Neighborhood Markets to the Punch With it's Upscale, Express Format," click here.

Sunday, March 30, 2008

Tesco World: Tesco plc. News Roundup

Fresh & Easy's (New Store Opening) 'Pause'

Today's newspapers in the United Kingdom are all reporting on Tesco Fresh & Easy (USA's)Neighborhood Market's three month 'pause' in opening new grocery stores as we reported here yesterday. The British papers don't have as much information in their reports today as we had yesterday in ours...However, you might want to read what they're saying about the 'Pause.'

Read what today's edition of the UK's Guardian has to say on the Fresh & Easy 'Pause' here. The Daily Telegraph also has a piece which you can read here. Read what the Irish Examiner says here, and read the report from the Scotsman newspaper here.

To Russia With Love: Is Russia Next on Tesco's Agenda?

The London Times is reporting that Tesco plc. is poised to continue its international retailing march by opening up its first stores in Russia, according to its sources who told the publication and Bloomberg News that Tesco representatives have met with at least three property agents in its search for possible store locations in Russia. Read the report here.

Tesco Getting More 'Local' in the UK

Representatives of the food and agriculture sector in the Midlands UK community of Melton were recently successful in pressing Tesco, the UK's largest retailer with a 33% share of the grocery sales market, to agree to buy more locally-produced food products from the area's farmers and food and grocery purveyors, according to a report in the local Melton Times.

Melton is a "rural capital" of food (and beverages like micro-brewed beer) in the region. It's farmers and food suppliers have long been questioning why Tesco wouldn't buy more of the local region's foods to sell in its areas stores. Last week Tesco revealed plans to put more of the local food (and beverage) products on its store shelves. Are you listening Fresh & Easy USA?

Tesco also recently agreed with farm groups and others throughout the UK to source more "local" food products, including fresh produce, fresh meats, dairy and other goods, for the retailer's stores. Read more about these local initiatives here. Still not listening Fresh & Easy USA?

More Tesco in the UK: The is reporting a UK seaside resort is set to lose its only nursery, along with hundreds of jobs, because Tesco bought the town's Lyme Bay Holiday Village resort in Seaton, Devon and plans to close it in January, 2009 to make way for a Tesco supermarket. Read the piece here. Spare the rare bird...please: Tesco recently hired a marksman to shoot a gaggle of birds inside a Tesco Extra store in the UK town of Greenock, according to a report here in the Greenock Telegraph. However, a woman who lives in the neighborhood where the store is located, has begged store officials to spare one of the birds, a rare"leucistic" sparrow, which she spotted on the store's grounds. Read more here.

Additional Tesco UK News

The case of the missing trout: Tesco plc. has launched an "urgent investigation" into a Scottish fish supplier after 4,000 farmed trout escaped into one of Scotland's most famous salmon rivers, according to a report in the Scotsman newspaper. Read the story here. Tesco is considering dropping the fish supplier in light of the "fishy" circumstances surrounding the incident.

Tesco wind turbines get approval: As part of its green retail initiative in the UK, Tesco is looking at renewable wind energy to provide part of the energy to power its supermarkets and other retail stores in the UK.

A major part of that renewable energy strategy involves putting wind turbines right in the parking lots of its stores. Of course, such actions require permits and approvals from town councils and the like. One such town council, in the city of York, just gave the retailer the go ahead to install two tall wind turbines in the parking lot of one of its stores in the city. Read all about the development here

Category Compitition: 7-Eleven to Rollout Prepared Foods Line in May

Tesco's U.S. Fresh & Easy Neighborhood Market chain, which currently has 59 stores open in Southern California, Arizona and Nevada, is basing much of its merchandising philosophy (and potential success or failure) on consumers' beating a path to its stores for the retailer's extensive selection of fresh, prepared foods, ranging from basic sandwiches and entrees like macaroni and cheese, to more upscale ethnic foods offerings.

Convenience store giant 7-11, which has a store on nearly every corner in the U.S., is getting into the prepared foods business in its stores in a big way beginning in May. The C-store chain is introducing an extensive line of ready-to-eat and ready-to-heat prepared foods it's calling its Signature 7 store brands line.

Among the offerings in the Signature 7 line include: 31 snacks, including cookies, chips, trail mix and candies; a line of ready-to-heat upscale Asian food products called "Asian Rollers," which include varieties like orange chicken and szechuan beef; a line of sandwiches such as Cuban-style ham geared to Hispanics (or those who love Hispanic foods); and a line of fresh fruit pastries flavored with such Latin and island-inspired flavors as guava fruit and pineapple.

The C-store chain also is introducing a line of upscale, artisan sandwiches to its stores on May 5. The gourmet-quality sandwiches will sell for $3.99 each, compared to the same quality sandwich which CEO Joe Pinto tells us generally sells elsewhere for seven bucks each. Interesting.

Pinto says the new fresh, prepared foods offerings will be high quality but low-price. They will be produced at a central commissary, then delivered daily to the stores. The first region in the U.S. to get the new Signature 7 line of prepared foods will be Florida. If all goes well, the chain expects to then rollout the higher-quality but value-priced prepared foods products to other parts of the U.S.

If the across the category Signature 7 fresh, prepared foods items are as good tasting as Pinto says they are, at the prices they're going to sell for, 7-Eleven could become not only an even bigger retailer of prepared foods than it currently is, but also a player in higher-quality fresh foods retailing just by the mere virtue of all the stores it operates in the U.S.

Tesco to Build Compact, Mini Malls in Thailand

Tesco plc's Tesco-Lotus retail operation in Thailand recently said it would build compact, community mini malls in that country as a way to jump-start and increase the retailer's market share in the nation.

The first mall, a prototype, just opened less than a month ago in Nonthaburi, Thailand.

Tesco-Lotus tells us it will build three different types of community, mini malls, based on an area's demographics, spending power and lifestyle orientations. Each type of mall even has its own name. Those names are: The Park, The Garden and The Oasis.

The community malls are targeted to suburban neighborhoods with populations of between 30,000-50,000 residents. Suburbs are a fairly new but fast-growing phenomenon in Thailand. Tesco-Lotus wants to "own" the mall category in these fast-growing suburbs, which tend to have far more affluent residents than the country's urban centers.

We aren't aware of a retail chain doing anything similar to this concept which Tesco-Lotus is introducing in Thailand. It should prove to be an interesting development, especially since a single retail chain is building the entire mall. The second Tesco-Lotus community mall is scheduled to open in the next few months in Soi Pravit Lae Pern, according to a Tesco-Lotus spokesperson.

End-Piece: Waitrose's 'Chubby Grocer' Loves to 'Dig' His Rivals in Blog

Grocery retailing in the United Kingdom is overall much more fun than it is in the United States, or most elsewhere in the world for that matter. Just ask Mark Price, the CEO (official title is Managing Director) of UK supermarket chain Waitrose, which is among other things a bit of a rival of Tesco in the UK, although its much smaller and more high-end customer focused.

Price, who calls himself the "chubby grocer" because of his ample girth, writes a blog on the Waitrose website. In his blog, the "chubby-grocer-in-chief" chronicles his efforts to reduce his girth, as well as using the platform to write about whatever suits him, which often means making friendly digs at his rival UK supermarket CEO's, including Tesco plc. CEO Sir Terry Leahy.

The food and grocery industry publication Natural~Specialty Foods Memo has two pieces from last week about "chubby grocer" Price and his blog. We suggest you have a read here.

Saturday, March 29, 2008

Tesco's Fresh & Easy 'Taking a Pause' From New Store Openings: A Full Review In the Works

Writing in his blog on Wednesday, March 26, Tesco Fresh & Easy Neighborhood Market chief marketing officer Simon Uwins says the fast-growing grocery chain is taking a three-month break from new store openings to "allow the business we've created to settle down a bit."

In a post titled, "pausing for breath at fresh & easy," Uwins says the grocer has opened 31 stores in 60 days..."now we're pausing for a breath."

Further, Uwins says the grocery chain planned to take such a three-month "pause" after opening it's 50th store, which occurred in February. Currently, there are 59 Fresh & Easy small-format, convenience-oriented grocery markets open in Southern California, Metro Phoenix, Arizona and the Las Vegas, Nevada Metropolitan region.

In his blog post, Uwins says Fresh & Easy plans to spend the next three months "kicking the tires, smoothing out any wrinkles (in store operations and the like) and make some improvements customers have asked for."

Since we were about the first (and really the only thus far) analyst to suggest to Tesco here on the blog that it would be a good idea to take such a pause, we obviously think its a good idea for the retailer to do so. We've written extensively about the to-date under-performance of the 59 stores, always however qualifying this analysis with a caveat that Fresh & Easy is still in start-up mode, it's first stores only opening five months ago. Further, on average nearly half of the stores have only been open about 75 days.

The three month "pause" is needed, as we've argued often on Fresh & Easy Buzz.

We also know it's more than a mere three-month "pause." Rather, Fresh & Easy CEO Tim Mason plans to use this time to review the grocery store's format, operations, marketing and merchandising philosophies and practices to date. Of course, the success of that review process depends on taking an objective, serious, wide-open eye view of the problems and potential fixes, even if they require eating some humble pie and making some key personal changes.

We reported last week (thus far the only publication we can find that's reported it) that Fresh & Easy Neighborhood Market has been interviewing public relations firms in Southern California. This review, and the likely retention of one of these firms, also is part of the three-month "pause" plan. Fresh & Easy believes it needs a new, more proactive marketing and general communications program. It's been soliciting ideas from the PR firms its been interviewing in this regard, as well as having a few ideas of its own.

This probably isn't a bad idea. But its at best a tertiary solution. The key changes and fixes are format-oriented, operations-based, and marketing and merchandising focused, as we've been discussing--and even offering concrete examples of--here on the blog for the last four months.

Additionally, we were the first in the U.S. to report that U.S.-born Jeff Adams, who currently is CEO of Tesco's Thailand retail operations, is moving back to the U.S. and will assume the executive position of number two man at Fresh & Easy, reporting directly to CEO Mason.

Adams' move from CEO (number one man) of Tesco-Lotus in Thailand, to number two at Fresh & Easy Neighborhood Market in the USA, demonstrates the importance of the U.S. grocery retailing operation to Tesco CEO Sir Terry Leahy. Not only does Sir Terry have a couple billion dollars of stockholder investments invested in the U.S. retail venture, he's got a full head of pride and Tesco's international reputation invested in Fresh & Easy's success.

Since taking over United Kingdom-based Tesco plc., Sir Terry has been on an international rapid-growth mission compared in its scope only to U.S.-based Wal-Mart (the world's number one retailer) and perhaps France's Carrefour, the second largest retailer in the world. Tesco is the world's third-largest retailer.

Leahy has taken Tesco into Eastern Europe, Asia and elsewhere--including now into the U.S which is without a doubt not only the retailer's boldest gambit but also the most competitive international market Tesco has launched into to date. UK industry players and observers close to Sir Terry say its also the most important market of all to him personally.

We aren't sure if Tesco's Fresh & Easy Neighborhood Market actually originally planned to take a three month pause after opening its first 50 stores. Based on what the chain's key executives have been saying about their store roll-out plan, it sure didn't come up before--until Uwins blog post and some rumbles about it we heard about a week before the post.

However, as we've suggested here, it's a needed first move. It will be interesting now to observe how Tesco uses the three month pause--and review. That's something we will be writing about next.

Adams' will be in Southern California in time for the three-month new store opening "pause" and the extensive review we discussed above, according to our sources.

Critical Mass Retail Strategy: The Only Remaining Town in the United Kingdom Without A Tesco Store Likely to Get One Soon

As our readers know, we often talk about what we call the retail "critical mass" strategy Tesco is employing in Southern California (Northern California soon as well), the Phoenix, Arizona Metropolitan area and the Las Vegas, Nevada Metro region, with its small-format Fresh & Easy Neighborhood Market grocery stores.

Briefly, the "critical mass" strategy essentially means opening numerous stores fairly close together in given geographical areas or neighborhoods. For example, fast food retailer McDonalds, coffee chain Starbucks, and drug retailer Walgreens are three examples of retailers who employ this "critical mass" strategy nationally in the U.S.

For Fresh & Easy, the theory behind this "critical mass" strategy is to position the grocery chain as the "neighborhood grocer of choice" to residents in regions like those mentioned in our opening paragraph. It's all about convenience, yet offering a limited-assortment of everyday grocery items, along with fresh foods and specialty products, in the Fresh & Easy grocery stores. The goal: Be a neighborhood residents primary food and grocery shopping venue.

Least dear readers you think we have no empirical evidence to back up our "critical mass" description for Tesco's Fresh & Easy retail strategy, in addition to the fact you need only to look at the high concentration of grocery markets the chain has already opened so close together in Southern California, Metro Phoenix and the Las Vegas, Nevada Metropolitan area, we also would like to share a fact with you about Tesco in its home country, the United Kingdom.

That fact is, there's only one city or town in the United Kingdom that Tesco doesn't have either one of its hypermarkets, supermarkets, small-format Express grocery stores or other format Tesco retail store in. That's right, there's just one town in the entire UK without a Tesco store.

The last remaining area in the UK without a Tesco store in the UK is Harrogate, which is located about midway between London and Edinburgh, Scotland.

But not for long. Tesco is currently is in the process of re-drawing plans for a huge, new supermarket in Harrogate. The retailer is re-drawing the plans because the world's third-largest retail chain already had plans drawn-up for a 107,000 square foot grocery and general merchandise store in the relatively small town. However, some thought it too big for the site, so the British retail chain is revising the store's plans and blueprints, according to a story in tomorrow's (Sunday, March 29) edition of the Yorkshire Evening Post.

Up until last week, there were a number of other areas, all in the remote Scottish Isles, where Tesco also didn't have retail stores. However, with last weeks' purchase of six supermarkets from the UK's Somerfield supermarket chain, Tesco now has a presence in the Northern and Western Isles, where the six stores are located, and where it previously has been without stores.

The Somerfield chain, which is the sixth-largest food retailer in the UK, according to researcher TNS Worldpanel, has put the supermarket company up for sale at auction. It's also selling off some of its stores on a piecemeal basis. Somerfield operates about 900 supermarkets and convenience stores in the UK. Thus far, the UK's Co-op grocery chain is the only bidder for the entire Somerfield company.

The six store acquisition, which Tesco paid about ~100 million British Pounds for, was a strategic purchase on the part of the UK's leading retailer because it gave it stores in the Northern and Western Scottish Isles towns where it previously had no presence. Further, by acquiring the Somerfield stores there, Tesco didn't have to go through application and permit processes like they would if they built new stores in the regions.

Therefore, the last remaining town in the UK without a Tesco store is Harrogate.

There's organized, aggressive opposition to Tesco opening any more new stores at all in the UK. Organized community and national groups, in a manner similar to what Wal-Mart currently is experiencing in the U.S. with its Supercenters, have successfully stopped a number of Tesco stores from being build in their towns.

There's even a town, Iverness, which is called "Tesco Town" because the world's third-largest and the UK's number one retailer has three stores in what is a relatively small community. Tesco recently wanted to build and open a fourth store in Iverness. However, an organized petition drive, which obtained 1,000 signatures against the retailers application for the fourth store, convinced the town council to deny Tesco's application and reject there permit to build that store in the community.

Granted the UK is much smaller geographically and in population than the U.S. However, it's not all that much smaller geographically than the Western U.S. is. Further, it's about on-par population-wise with California, Arizona and Nevada combined.

As you can see, "critical mass" is the name of the game for Tesco in the UK. It's also been the retailer's strategy in other parts of Europe. With 59 Fresh & Easy small-format grocery stores open in just the last five months in Southern California, Arizona and Nevada, with as many as 200 more to come this year and next, we expect lots more "critical mass" to come in the U.S., as well as in elsewhere in the world for Tesco.

Things Are Improving Over at the Fresh & Easy Corporate Blog: Perhaps They've Been Listening to Us?

On January 21, we wrote this piece, "Click, Click!: Who's Minding the Fresh & Easy Corporate Blog?" In the piece, we noted how infrequently Fresh & Easy Neighborhood Market corporate marketing director Simon Uwins and his marketing staff post in the corporate blog they created as a marketing and communications tool for the small-format grocery stores prior to the first stores' opening in November, 2007.

We likened proper maintenance (frequent posting of quality information) of a corporate blog to proper maintenance of a retail store, in that websites and corporate blogs are an electronic extension (or electronic storefront) in many ways of a retailer's brick-and-mortar stores. And, just like poorly maintained stores, infrequently updated corporate blogs can actually be a negative for a retailer rather than a positive.

Then, a couple weeks after our January 21 piece, we started to notice more frequent Fresh & Easy corporate blog posts in February. The electronic storefront seemed to be starting to be better maintained.

As a result, we wrote this piece, "It Looks Like Somebody is Minding the Fresh & Easy Corporate Blog a Bit Better of Late," on February 14, in which we noted the fact we were seeing more frequent (and better) posts on the Fresh & Easy corporate blog by Mr. Uwins and/or his marketing staffers. In this piece and in our original January 21 piece, we suggested at least one post, once a week, should be the minimum for the F&E corporate blog.

Between late February and early March we were a bit saddened to see that once again the blog posting frequency started to revert to the old ways--weeks passing without a post and poor quality posts. In fact, we even considered another "Click, Click" piece on the topic.

However, things started to improve on March 18. Between March 18 and March 28, the Fresh & Easy corporate blog has had four posts: one on March 18, another on March 21, a third post on March 28, and the most recent on March 28. That even beats our suggested minimum of at least one post per-week. It seems Spring is coming in like a lion over at the Fresh & Easy corporate blog. Congratulations.

We've also noticed a new aspect to Mr. Uwins' and staff's blog posts. They're now quoting what bloggers are saying in some cases about their experiences (only the good ones of course) at and with Fresh & Easy Neighborhood Market grocery stores.

Since this is something we started doing in December, 2007 (and continue to do today), the very first month we began publishing Fresh & Easy Buzz, we obviously like it. [Just don't use our megaphone graphic please.] Most specifically, we created a feature called "Vox Populi: The People and Bloggers Speak on Fresh & Easy" many months ago, which we use to bring our readers consumer and blogger opinions on the small-format, convenience-oriented Fresh & Easy grocery stores.

If Mr. Uwins and company got the idea from Fresh & Easy Buzz, we're fine with it. [it's good to know the blog is being read.] If they didn't, it's still a good addition. After all, it isn't an uncommon practice in the blogesphere. Of course, in our "Vox Populi" we will continue to bring a balance of the positive and less-positive consumer (and blogger) opinions and posts about Fresh & Easy stores and operations.

So, we tip our organic cotton, Fair Trade hats to Mr. Uwins and company for a good mid-to-late March in terms of better maintenance of the Fresh & Easy corporate blog. As we argued in our January and February "Click, Click" pieces, a corporate blog--like a retail grocery store--is part of the whole of a retailer's operations, customer service and marketing strategies and practices. Further, just like with a store, if a company lets the electronic communications storefront of its business lie fallow, it will hurt that retailer's customer service reputation.

We've noticed more--and more positive--comments on the Fresh & Easy corporate blog since the posts have been more frequent. That's no accident. More frequent and better quality communications leads to a better perception of customer service, both at the brick and mortar store level and with a marketing and communication tool like a corporate blog.

We suggest Mr. Uwins and company not let March come in like a lion, but then allow April (in corporate blog terms) go out like a lamb (infrequent posts). After all, it's a customer service issue. And the improvements are already being noted.

Thursday, March 27, 2008

Small-Format Grocery Retailing Feature: A Visual Look at Japan's Natural Lawson Hybrid Convenience Store, Small-Format Grocery Store Chain

Someone once told us something to the affect that a picture is worth a thousand words. In fact, sometimes a picture (or two or three) can actually be worth 3,000 words. Even better, we happen to think words and pictures go best together to illustrate a story, such as ours below or linked here about Japan's Natural Lawson upscale small-format convenience store chain.

A Natural Lawson upscale convenience mart (or combini in Japanese) located on the ground floor of a residential development in urban Tokyo.

The Natural Lawson store above, which also is in Tokyo, is slightly smaller than the first store pictured at top. Although most of the chain's upscale convenience stores have the same features generally speaking, each of the stores' design elements are customized based on the neighborhood they're located in.

Natural Lawson's primary target market is women. Many of the chain's upscale, natural products-oriented hybrid convenience stores-small-format grocery markets have female managers, which is far from traditional in Japan's convenience store industry. Picture above is a Natural Lawson store manager named Shodo Yuka in her store.

Natural Lawson stores sell numerous international brands of specialty and natural food and beverage items like the Starbucks Espresso and other coffee drinks pictured on the top shelf in the refrigerated case above.

Japan's upscale Natural Lawson convenience stores even have specialty and natural pet products' sections for man's best friends; or in this case, since Natural Lawson's primary target market is women, woman's best friends.

Above is a refrigerated case natural beverage set from a Natural Lawson convenience market in Japan. On the left are Starbucks brand premium, pre-made coffee drinks, in their cups and ready to heat-up and drink, or drink cold. On the right (top) are a selection of natural and organic soy milks in cartons. On the bottom shelf at right are various flavors of Natural Lawson's own store brand, ready-to-drink fruit smoothie beverage.

Read our feature piece, "Small-Format Grocery Retailing Feature: Stretching the Boundaries of Convenience Store Retailing; Some say Japan's Natural Lawson is Awesome," below or click here.

Small-Format Grocery Retailing Feature: Stretching the Boundaries of Convenience Store Retailing; Some Say Japan's Natural Lawson is 'Awesome'

Convenience stores are as ubiquitous in Japan as grains of white rice and packages of Ramon noodles are. There are about 40,000 combini, as convenience stores are called in Japan, in the nation, or one for every 3,200 residents.

One of the largest combini operators in Japan--in addition to market share leader Seven-Eleven Japan, Circle K Sunkus (number two) and number three FamilyMart,--is Lawson, which operates 8,400 convenience stores in all 47 of the nation's prefectures.

If the name Lawson sounds American that's because it is. The origin of the Lawson name originated in the U.S. state of Ohio in 1939. A man named J.J. Lawson started up a milk business there called Lawson's Milk, and opened a chain of store's in the state to sell his milk. The milk stores evolved into convenience-type stores and in 1959 Consolidated Foods Co. bought out Lawson.

In 1974, Consolidated Foods partnered with Japanese food retailer Daiei to open the first Lawson branded convenience store in Osaka in 1975. Daiei opened many more Lawson stores throughout the 1970's and 1980's. In 1989, Daiei merged another chain called Sun Chain which it operated in Japan, with Lawson and created Daiei Convenience stores. In 1996, the combined operation was renamed Lawson, Inc., with all the stores getting the Lawson banner.

The Lawson banner is long gone in the U.S. Its stores all became Dairy Mart convenience stores in the states over a decade ago.

The majority of the 8,400 Lawson combini (c-stores) in Japan are conventional convenience stores similar to those in the U.S. and Europe. However, Lawson also operates two other formats in Japan. The first is called Lawson Store 100, a 20-store chain which sells various items for 100 yen each. It's similar to a dollar or 99-cents store in the U.S.

Lawson's other format, and the one of interest in this piece, is called Natural Lawson. It's an upscale, high-end convenience store format positioned to serve Japanese women and the nation's seniors rather than salarymen. Salarymen are working men in Japan. Like their counterpart convenience stores in the U.S. and Europe, which traditionally target men, the majority of Japan's c-stores still do the same.

There currently are about 24 Natural Lawson small-format convenience stores in Japan, with 12 located in Tokyo. The stores' offer a broad selection of foods and other items for shoppers. The focus is on health and wellness, and increasingly on upscale, fresh prepared foods, along with natural and specialty groceries and non-foods.

Specialty foods brands line Natural Lawson's shelves and perishable cases. There's locally-grown produce, including organic, provided by a local Japanese farming collective. Organic groceries, coffee, teas and other foods and beverages are plentiful in the stores. High-end, all natural cosmetics for woman are offered for sale along with other natural health and wellness-oriented items, including those for pets.

An area Natural Lawson is moving further into is offering a diverse selection of healthy, upscale-quality fresh prepared foods, breads and related items. For example, the natural c-store retailer sells an all-natural healthier version of the popular bento lunchbox, which is a staple of Japan's working class. Basic bento boxes are sold in all of the nation's conventional convenience stores.

Natural Lawson recently entered into an alliance with NaturalBeat, which operates a chain of high-end sandwich and delicatessen stores in Japan. The stores' prepared food items are all homemade, using natural ingredients with no food additives, preservatives or artificial colors. NaturalBeat also has a subsidiary called Wholesome Co. Ltd. which produces all natural healthy fresh breads and other baked goods.

All Natural Lawson convenience stores are now selling NaturalBeat's healthy, upscale-quality prepared foods, including sandwiches, salads, entrees and other grab-and-go items. The stores also are featuring the healthy fresh breads and baked goods produced by Wholesome Co. Ltd. Fresh, prepared foods--especially all natural and upscale--are a rarity in Japan's combini, so natural Lawson is blazing a new trail in the category for convenience stores in the nation.

In addition to focusing on its product selection, Natural Lawson is taking great care in how its stores look, something that wasn't evident at all when its first stores opened in 2001.

Today's stores reflect the retailer's target market and positioning. Soft colors and natural woods are used inside the stores, appealing to the retailer's prime target shopper--women. There's no neon lighting like in Japan's typical conventional combini. Instead, soft, recessed lighting is used throughout the stores, complementing the natural woods and pastel colors. Many of the stores have a bar area where shoppers can lounge, and where trained staff members give out health, wellness and beauty tips. Additionally, Natural Lawson uses an upscale, attractive font-style and natural motif graphic for its logo on the signs outside each store, inviting shoppers to come inside.

The stores' brand--via its design, merchandising and product offerings--says Natural Lawson is the place to shop for premium, natural and healthy merchandise in a convenient format. This is still new to Japanese shoppers who are used to going to a combini to get coffee, tea, soft drinks, pastries and other basic convenience items. Conventional c-stores in Japan also are popular for offering mobile phones, fax services, ticket sales, photocopies and other similar service-type offerings.

There's a space in Japan's huge convenience store market for something other than traditional combini retailing, which is what Seven-Eleven Japan, Circle K and in the main Lawson itself does with all but its 24 Natural Lawson and 20 100 yen format stores. This is especially true when it comes to quality fresh prepared food and meals merchandising. It's nearly non-existent in the nation's c-stores. You can get a sandwich, standard bento box and other very basic grab-and-go prepared foods' items, but that's about it.

In fact, Natural Lawson is getting some competition in Japan in this yet to be proven merchandising niche of fresh prepared foods from British retailer Tesco. Tesco is opening a Japanese version of its popular and successful Tesco Express format stores in the nation that loves convenience stores. Tesco Express stores are a mix of convenience store and small supermarket, typically selling high-quality fresh foods, prepared meals and other offerings found in Tesco supermarkets but offered in convenience store-sized urban settings.

The British retailer, parent company of small-format Fresh & Easy Neighborhood Market in the U.S., is opening 25 of these Express stores to start in Japan. The stores will sell basic grocery and other items along with lots of fresh prepared foods, meal solutions and quality grab-and-go items, as well as some other fresh and specialty grocery items. Tesco already has some of its Express format stores in Thailand through its Tesco Lotus division in that country.

Meanwhile, Natural Lawson is in the process of perfecting its merchandising mix, positioning itself not only as a higher-end combini for fresh, natural and quality foods, but also as a destination for busy urban Japanese women who want quality natural health and beauty items in an attractive and comfortable setting designed with them in mind.

There's no question Japanese consumers love their combini. After all there's one convenience store for every 3,200 Japanese. In Tokyo, there's literally a combini on every corner. And a joke in Japan says the only difference in the more rural areas is that there's a combini on every other corner. To put it in perspective, the U.S. has about 24 times more land mass than Japan does--but it has only half as many 7-Eleven's.

Natural Lawson is stretching the definition of "convenience store" not only just in the c-store capital of the world Japan but internationally as well. Just as Tesco is importing its brand of "Express" convenience retailing to places like Eastern Europe, Japan and the USA, it will be interesting to see if retailers in these western countries pick up on what Natural Lawson is doing with its 24 stores in Japan and try a similar format at home, in the U.S. or Europe.

To a degree it's happening in the U.S. already. In addition to Tesco's Fresh & Easy stores, 60 of which have thus far opened in California, Arizona and Nevada, there's Trader Joe's (a somewhat similar format to Natural Lawson), Wawa, an upscale convenience store operator in the Eastern U.S. which puts a major focus on fresh prepared foods, Giant Eagle Express and a couple others.

Additionally, as we've reported, Wal-Mart plans to open it's own version (4-5 stores) of a small-format, hybrid basic grocery and fresh and specialty foods market called Marketside in the Phoenix, Arizona region this summer. Safeway Stores, Inc. also plans to open 4-5 new, small-format hybrid grocery markets in the San Francisco Bay Area as well this summer.

Further, Whole Foods Market, Inc. is in the process of opening its own upscale, all natural convenience-type store in Boulder Colorado. The store, called Whole Foods Express, will be a prototype for the supernatural foods retailer in terms of natural products retailing in a smaller, convenience-oriented format. The store will be about 14,000 square feet. In Japan that's considered a big store, especially in Tokyo. For Whole Foods its radically small, especially since the grocer's average new lifestyle natural supermarkets range from about 55,000 to 80,000 square feet.

In Western Europe, Tesco pioneered the Express convenience format. There are a few other players who've joined the market niche as well, with more considering doing so. Tesco's also taken it's Express format creation to Eastern Europe, especially Poland, where its small-format, hybrid Express stores are doing extremely well. And, of course, Tesco Express was the inspiration for the retailers small-format, combination basic grocery and fresh and specialty foods Fresh & Easy Neighborhood Market grocery stores in the U.S.

None though are doing quite what Natural Lawson is doing in Japan, with it's combination of quality natural-organic foods, non-foods and health, wellness and beauty offerings. If Natural Lawson can bring a new definition to convenience retailing in Japan--or at least add to the current definition--it could create a solid niche for itself among those its targeting--busy women and seniors who many think aren't currently being fully-served by the nation's conventional combini.

Men like natural products offerings too, even if they aren't the primary target market. And in Japan, like elsewhere, men buy lots of gifts for the women in their lives. That's another market Natural Lawson should look at.

Note: Click here to view our pictorial of the Natural Lawson stores.

Wednesday, March 26, 2008

Mid-Week Tesco Fresh & Easy Roundup

Will Tesco's Fresh & Easy Open 100 Grocery Stores in The Phoenix, Arizona Region?

Adam Mayfield, the director of real estate for Tesco's Fresh & Easy Neighborhood Market, told a group of retail industry folks today at a conference held at the Phoenix Convention Center that the Phoenix, Arizona Metropolitan and East Valley region could support 100 small-format Fresh & Easy grocery stores rather easily.

Tesco opened its first Fresh & Easy grocery market in the region in early December, 2007. There currently are 19 of the small-format, convenience-oriented neighborhood grocery stores in the Phoenix Metro and Easy Valley region.

If Tesco does plan on opening 100 Fresh & Easy stores in the area, it would be considerably more than the retailer initially planned for the Phoenix region.

With all do respect, Mr. Mayfield's argument that the region could support 100 Fresh & Easy stores is...well, very arguable. Why?

First: Experienced grocers and analysts in the Phoenix area will tell you the region is already in danger of becoming overstored; some say it already is. In addition to Tesco's full-court blitz in the area with its Fresh & Easy markets, Wal-Mart has been opening numerous huge, 200,000 square foot supercenters, along with its 45,000 square foot neighborhood Market supermarkets in the region in just the last year. Wal-Mart also plans to open four or five of its brand new, small-format Marketside banner grocery stores in the area this summer.

Additionally, specialty grocer Trader Joe's is opening numerous new stores in the Phoenix region, as are natural foods grocers Sprouts Farmers Market and Sunflower Farmer's markets. Whole Foods Market, Inc. recently opened a huge, new supernatural foods store in the region and has another unit set to open before the end of the year.

On top of all this, region grocery market share leaders Safeway and Basha's are opening a number of new stores this year and next. In the case of Basha's, its also opening a new A.J.'s Fine Foods (it's upscale banner) specialty supermarket, in addition to Basha's banner stores in the Phoenix area.

Second: As we wrote here on March 11, Tesco's Fresh & Easy has now surpassed (it had 15 stores open on March 11; it has 19 open as of today in the region) a number of grocery chain's like Sprout's Farmer's Market's (14 stores), A.J's Fine Foods (14 stores), Wal-Mart Neighborhood Market (13 stores) and Trader Joe's (10 stores) in total store count in the Phoenix Metro and East Valley region.

Despite being number one among this group in store-count however, Fresh & Easy is last in terms of total grocery sales market share among the five mentioned. Even with nearly double the number of stores as Trader Joe's for example, TJ's still beats F&E out in market share.

Fresh & Easy is still new in the region (and new in general) so we give allowance for that. However, based on our sources and analysis as we've been reporting here regularly, we know the 60 Fresh & Easy stores open to date in Southern California, Arizona and Nevada are seriously under-performing, including the 19 Phoenix region grocery markets.

The empirical fact is that as of today, any objective analysis would have to say the Phoenix Metro and Easy Valley region is not supporting the 19 Fresh & Easy grocery stores currently operating there at present--let alone being able to support 100. As we said, we give allowance for the chain being in near start-up mode--but there are problems far beyond start-up ones, in our analysis.

As a result of this empirical fact, we can only conclude one of three things: Either Mr. Mayfield is a genius who has more tricks up his sleeve than the late Harry Hudini; or...Tesco has a huge October surprise which will cure the Fresh & Easy stores' sales under-performance in one fell swoop...or, there's just a bit of hubris still left on the podium at the Phoenix Convention Center from Mr. Mayfield's speech today.

We are having a little fun at Mr. Mayfield's's been a long day. And, we mean no disrespect to him. However, any close analysis of the Phoenix market, especially conducted by those of us with considerable experience in it, will tell you that 100 stores total--let alone 100 grocery stores from just one retail player like Fresh & Easy, will likely be more than the tipping point for the region being overstored, especially when you add in all the other new stores opening and planned from the region's grocery chains and independents.

While it's true that at an average 10,000 square feet the Fresh & Easy stores are designed to do about $200,000 per-store, per-wee--which means two or three Fresh & Easy grocery stores can count as one standard (45,000 -to- 60,000 square foot) supermarket in terms of doing a weekly gross sales comparison test--100 stores is still too many for the region (unless you want to close a bunch later on). This is especially true since there are obvious format flaws and serious marketing and merchandising problems with the current 60.'s not our money; and as we write often, the format, operations and marketing problems can be fixed we think. But doing so first requires a recognition of the flaws, then taking a more focused, localized overall approach across the board, and then finally probably making some key personal changes, or at least additions.

More Fresh (& Easy) News...

An inconvenient truth at the corner store: As we reported here on March 10, Tesco plans to open five of its Fresh & Easy small-format grocery stores in the Bakersfield, California Metropolitan region beginning either at the end of this year or more like in early 2009. Bakersfield, which is located in Kern County, is a low-to-middle income city and region and often has one of the highest unemployment rates in California do in large part to its agricultural-based economy, all that is changing do to more service-sector jobs.

Kern County also has a higher percentage of convenience stores than the state of California does as a whole. A whopping 35% of the retail food outlets in Kern County are convenience stores, compared to 25% statewide, according to a 2007 report from the non-profit California Center for Public Health Advocacy group.

This high percentage of convenience stores, which generally don't sell the healthiest of foods such as fresh fruits and vegetables, poses some problems in terms of healthy food options for many people in the region who often shop the convenience stores regularly because they're the stores closest to where they live. The Bakersfield Californian, the region's main daily newspaper, has an article here in today's edition of the paper which discusses this issue and offers healthy eating options for convenience store format shoppers.

The Bakersfield Metro region does have numerous supermarkets. However, some of the more rural towns in the region are "food deserts." It's in these outlying smaller cities (and some Bakersfield city neighborhoods where there aren't many supermarket choices) in the main where we think Fresh & Easy stores have the best chance of succeeding in the region.

Bring Trader Joe's to Palm Springs...Please: On February 14 we wrote this piece in response to a report in the Palm Springs, California Desert Sun newspaper that a group of the city's residents had organized a petition drive and marketing campaign to get Trader Joe's to open one of its small-format specialty grocery stores in the Southern California desert city of about 75,000.

Tesco has a recently-opened small-format Fresh & Easy (F&E) grocery store in Palm Springs, along with an F&E grocery market right next door in Palm Desert.

The Palm Spring's community coalition's goal at the time we wrote the piece was to obtain 5,000 signatures on its petition from community residents by April 1. The group had 3,500 signatures when we wrote the piece (Feb. 14). Today's edition of the Desert Sun reports the coalition, called the Barristo Neighborhood Organization, has already obtained 6,000 signatures on its petition, 1,000 more than there April 1 goal.

The organization plans to formally present the petition to the Palm Springs city council at its meeting next week. The group also has the backing of the city's mayor. The city says it will in-turn present the petition to Trader Joe's executives at the specialty grocery chain's corporate headquarters in Monrovia, which also is in Southern California. In fact, a city spokeswoman says the mayor plans to bring up locating a Trader Joe's in Palm Springs to representatives of the specialty grocery chain at the Council of Shopping Centers convention in Las Vegas, Nevada in May.

This demand by city and neighborhood residents for a Trader Joe's store in their communities isn't unusual. For example, groups in Albany, New York, Nashville, Tennessee, West Covina, California, Frederick, Maryland and other U.S cities are currently conducting petition drives and public relations campaigns designed to get Trader Joe's to open a store in their respective cities. Talk about demand. If they built it, we will come.

Dave Carden, who is heading up the 'Bring Trader Joe's to Palm Springs' petition drive and campaign for the coalition, has issued a call to all 6,000 of the folks who signed the petition. Carden told them to show up at the next City Council meeting wearing Hawaiian-themed clothing, which is what Trader Joe's store employees wear, as a way to rally support for the cause.

Note to Fresh & Easy: In our February 14 piece, we suggested if "we were" a Tesco Fresh & Easy executive (which we are not), we would have met with Mr. Carden and the 'Bring TJ's to Palm Springs' organization (read our Feb 14 piece for details) as soon as we heard about the group's devoted efforts to bring one of the specialty grocer's stores to their city.

The meeting wouldn't have been to try to stop them...not at all. Rather, to inform them (and extend a warm welcome with lots of freebie coupons, ect.) that Fresh & Easy is coming to town. We talked to a couple members of the organization today and they said they weren't aware of any such meeting. If we are wrong, and a Fresh & Easy rep did meet with the 6,000-strong group, let us know F&E. We will run an item here about the meeting.

United Food and Commercial Workers Union Begins its Spring 2008 Organizing and Communications Campaign Directed at Tesco's Fresh & Easy

On December 30, 2007, we broke the story that the United Food and Commercial Workers (UFCW) was planning to step up its campaign to organize store-level employees at Tesco's Fresh & Easy Neighborhood Market stores in Southern California, Arizona and Nevada beginning in early 2008, with a focus first on Southern California.

Additionally, we reported in that December 30 piece, the union would combine its organizing efforts with a much stronger communications campaign aimed at various aspects of Tesco's business practices worldwide.

Tesco's Fresh & Easy Neighborhood Market is one of the few major grocery chains in the threestates that aren't union. The others include Trader Joe's, Whole Foods Market, Inc, Wal-Mart Supercenters, Sprout's, Henry's and a couple others.

Today, we can report the union's intensified and more aggressive store-level employee organizing campaign and Tesco/Fresh & Easy corporate-centered communications campaign have started. It looks to be the beginning of a Spring offensive for the UFCW.

The union, which represents retail clerks working for supermarket chains like Vons, Ralph's, Albertsons, Stater Bros., Basha's, Gelson's, Bristol Farms and others (nearly all of the chains and large independents in fact) in Southern California, Arizona and Nevada, has started an aggressive flier mailing and distribution campaign outside Fresh & Easy grocery stores in Southern California.

In addition to handing out the fliers to customers outside of the Fresh & Easy grocery stores in the region, the union also is mass-mailing them to store neighborhood residents' homes.

The fliers being distributed by the union question the handling practices, food-safety and freshness of the fresh meats and produce being sold at the Fresh & Easy grocery stores. On the fliers are testimonials from union butchers and union produce specialists (who work at the union supermarkets mentioned above) stating they're "concerned" about Tesco Fresh & Easy food-safety standards and practices.

The fliers site a situation that occurred in Europe in which Tesco was found to be selling out-of-code and old food in its stores there. Tesco's corporate headquarters in the UK has said the retailer resolved that issue in Europe after learning about it.

UFCW spokesman Mike Shimpock says the union doesn't think its unfair to point out the incident in Europe. He argues Tesco isn't using its corporate name (Tesco) in the U.S. (as part of Fresh & Easy Neighborhood Market) because of issues like the selling of the out-of-code or bad food in Europe and other similar incidents.

Fresh & Easy Neighborhood Market spokesman Brendon Wonnacott says Tesco resolved the European food safety issue, and that the company follows all U.S. food-safety laws. Further, he says the retailer stands behind all of the fresh foods it sells in its stores and said the grocer invites consumers to come into the Fresh & Easy stores and see the fresh meats and produce selections and judge the quality for themselves.

Neighborhood residents who live near the Southern California Fresh & Easy grocery stores where the UFCW is doing the mass mailings, have been somewhat startled to receive the fliers questioning the freshness and safety of the fresh meats and produce at the grocery markets.
One of our correspondents, who lives in a neighborhood with a Fresh & Easy grocery store in Southern California, told us a number of her elderly neighbors asked her about the fliers and the food safety issue after they received the mailings.

Food safety is a hot button issue currently, especially with all the recent recalls of fresh hamburger, alfalfa sprouts and other fresh food items. Most shoppers tend to rely on either their supermarket or the news media to alert them about food safety or recall issues. As a result, receiving an "official looking" flier in the mail which questions the safety of certain fresh foods at a local grocery store could have a chilling effect on residents, leading them to avoid the store even if they are unsure if the information on the flier is correct.

Based on the under-performance to date of the Fresh & Easy grocery stores, Tesco really can't afford anything that might decrease bodies coming into its stores. To date, we've seen no organized or proactive communications response from Tesco's Fresh & Easy Neighborhood Market to the UFCW flier mass-mailings or leafleting in front of the grocery stores.

Note: We've written a number of pieces about the UFCW and its campaign to organize Tesco Fresh & Easy Neighborhood Market store-level employees. You can read a selection of those pieces here

Monday, March 24, 2008

The Analysis of Tesco's Fresh & Easy From Piper-Jaffray's Mike Dennis in This Interview Published Today Sounds A Lot Like Ours For the Last Few Months

In an interview published today by McClatchy-Tribune News Services, Mike Dennis, an analyst with the Piper-Jaffray investment firm which has offices in the U.S. and London in the United Kingdom, sounds alot like what we've been reporting, analyzing and writing about here on Fresh & Easy Buzz for months in terms of Tesco's Fresh & Easy Neighborhood Market's sales performance to date, its format, positioning and other variables.

Additionally, Mr. Dennis--with a few differences and less comprehensively--offers some very similar reasons and explanations in the interview published below for the current sales underperformance and problems with the 59 Fresh & Easy, small-format grocery stores currently operating in Southern California, Arizona and Nevada. The interview piece is below:

Tesco struggles in U.S. debut
McClatchy-Tribune News Service: Monday, March 24, 2008

Fresh & Easy, the produce stores that British retail giant Tesco introduced to the United States last fall, has underperformed during its first months in business, according to an analyst with a U.S. investment bank.

Most of the chain's stores have failed to meet Tesco's reported goal of $200,000 a week in average sales, said Michael J. Dennis, senior research analyst with Piper Jaffray, a middle-market investment bank and securities firm based in Minneapolis.

Most of the 59 Fresh & Easy stores operating in Southern California, Arizona and Nevada as of last week average $60,000 a week in sales, Dennis said during a telephone interview from his London office.

"Once you get past the first two aisles, the fresh fruits and vegetables and the fresh bakery items, everything has been bad," Dennis said. "The rest of their sales have been a disaster. They thought they could get $200,000 a week in sales based on all of the research they did, but it hasn't happened."

Dennis -- who specializes in finding investments for retirement pensions in the food and general merchandise industries -- changed his evaluation of Tesco stock from "buy" to "neutral" in his report.

"Tesco officials must be concerned that the Fresh & Easy concept is not right for the United States market and that they need to find out quickly what their issues are," Dennis wrote in his 11-page report, which was released Feb. 20.

Much of the report's information came from suppliers and grocery industry analysts, Dennis said. "Maybe Fresh & Easy isn't as robust a concept as we first thought, especially if their reduced prices aren't attracting customers in a near recessionary U.S. environment," Dennis wrote.

A Fresh & Easy official cautioned against giving up on the chain too soon.

"We opened our first stores in November, so they haven't been operating that long," said Brendan Wonnacott, spokesman for the El Segundo-based chain. "It's too early to speculate on overall performance."

Tesco officials are "very encouraged" by Fresh & Easy's performance so far, Wonnacott said. "Every week we're getting increased sales and increased customer traffic," he said. "We haven't closed any stores, and we don't plan to close any."

But Fresh & Easy, which operates a warehouse-distribution center at March Air Reserve Base near Moreno Valley, quickly encountered problems with U.S. shoppers, including stores stocked primarily with automated check-out stands, no push-carts and too many wrapped fresh fruits and vegetables.

"In the U.S., people like to handle those kinds of foods before they buy them," Dennis said. "They also like to buy those things individually, and Fresh & Easy sells a lot of things in packs of four and six. The idea was to emphasize fresh produce, but a lot of U.S. grocery stores sell fresh produce."

Food-industry analysts were optimistic about Fresh & Easy's chances for success in the United States last summer, after they visited a test store that Tesco officials operated in a warehouse outside Los Angeles.

"They flew people in from all over to shop there," said Dennis, who attended the test opening. He felt confident about the Fresh & Easy concept. "Tesco really believed they had found a hole in the market, which was people who were looking for a place where they could stop quickly on their way home from work and shop for food."

To improve its performance, Fresh & Easy might speak with its store managers to find out what works and forge a stronger marketing presence, the Piper Jaffray analyst said. "I think they really need to do some national marketing. They should find some celebrities and piggyback on them."

Fresh & Easy stores might not be suited for the U.S. market, said Mindy McBain, associate editor of The Shelby Report, a grocery industry newsletter in Gainesville, Ga. "They have automated check-out stands, and a lot of U.S. shoppers aren't ready for that," McBain said. and Nevada.

Fresh & Easy Buzz: In the published interview, Piper-Jaffray's Dennis is quoted as saying: "Last week the (Fresh & Easy) stores were doing $60,000 a week in sales."

This is a dramatic change from when Dennis first released Piper-Jaffray's Tesco Fresh & Easy research in which he said the stores were doing about $170,000 per-store, per-week. At the time, he said the stores were falling about $30,000 per-store, per-week short of Tesco's target of $200,000 a week per-store gross sales. It sounds like Piper-Jeffray has revised its numbers downward significantly. (We agree about the $200,000 Tesco target.)

We were one of the first analysts to report--at least a week before Piper-Jaffray released it's research report and $170,000 per-store, per-week estimate--that based on information supplied by our sources , Tesco's Fresh & Easy grocery stores, which average about 10,000 square feet, we're (and still are) doing about $70,000 -to- $100,000 in sales per-store, per-week.

We further explained a number of the Fresh & Easy markets were doing even less than the lower-end $70,000 a week amount in gross sales, but that a few stores, like the unit in Los Angeles and a few others which have been doing better, accounted for bringing the average to the range we have estimated.

Piper-Jaffray's sales numbers seem now to be closer in line with ours. We stick by our $70,000 -to- $100,000 weekly store gross sales numbers however.

Dennis also makes an excellent point in the interview piece about most U.S. analysts being taken-in with the Tesco Fresh & Easy format. This is true. Accept for a handful of analysts and grocer's who looked closely at the format and didn't depend primarily on the popular press reports about it, most wrote glowingly of Fresh & Easy, even though the only information they had was given to them by Tesco.

We believe this fact actually hurt Tesco with its launch of the Fresh & Easy small-format, convenience-oriented grocery store chain. The retailer spent a little too much time perhaps basking in the glow of what the majority of the U.S. business press and industry analysts said was going to be the second coming of grocery retailing in America that they took their eyes off the ball a bit. It can happen to anyone--positive press can be a heady drug after all.

This phenomenon also has resulted in Tesco being taken a bit off guard by current analytical commentary about the Fresh & Easy stores' underperformance. Remember, not all analysts, grocers and observors were writing those "British Grocer to revolutionize American grocery retailing" articles. A few were more balanced and thoughtful.

As our readers are aware, one of the key merchandising problems we've been harping on at the Fresh & Easy grocery stores is the pre-packaged produce.

This is fine for a specialty grocer like Trader Joe's which isn't positioning its stores to be basic grocery shopping primary venues. But for Tesco's Fresh & Easy, which needs its grocery markets to be primary shopping venues, it's a prescription for failure. Were pleased to see Mike Dennis makes this same argument in the interview piece today.

American consumers love lots of variety of fresh, bulk produce. Why do you think the hundreds of farmers' markets in the U.S. are so widely popular. New farmers' markets are opening at a rate of over 25% this year over last, for example.

Additionally, talk to any successful grocery executive, and he or she will tell you--at least in nine out of ten cases--that merchandising lots of fresh, bulk produce--abundance and variety--is one of the top-three merchandising keys to that respective chain's success. Conversly, if you want to look for indicators of failure at an American supermarket that's not doing well, make sure you check out the store's produce department as one of the first three or so things you do in evaluating that supermarket's sales underperformance.

As we've said on Fresh & Easy Buzz often, we don't believe failure is the only option for Tesco's Fresh & Easy format and grocery stores. Rather, we suggest change is the needed option to survive. These changes include format adjustments, along with merchandising, marketing and positioning changes.

The key changes we've previously outlined include:

>Changing from a primary pre-packaged fresh produce operation to a primarily bulk one, with some pre-packaged specialty produce items being ok.

>Increasing the Fresh & Easy store brand and national branded basic grocery items mix in the stores from its current about 65% (store brand) and 35% (national brand) mix, to at least a 50%-50% store brand, national brand ratio.

>Analyzing the stores' merchandising mix, particularly in the basic grocery categories. Fresh & Easy grocery markets are missing some key brands and items in key categories. In many cases, these missing items are the number one or number two selling items in their respective categories. Additionally, Tesco's Fresh & Easy merchandising executives need to better understand there is a distinctive western U.S. product mix (compared to the Midwest and eastern U.S., for example) in both the basic grocery and specialty grocery segments.

Most of the tops brands in the basic grocery segment are national in scope--but there are some significant western region mixes that every supermarket chain that's successful (Safeway, Ralph's, ect.) in California and Arizona understands. The western U.S. (and even within the western states) product mix is even more significant in the specialty, natural and organic foods' categories.

>Creating more of a sense of place (or putting the "neighborhood" in Fresh & Easy Neighborhood Market) in the Fresh & Easy grocery stores. Tesco has positioned the grocery markets as primary, neighborhood grocery stores. However, the fact is customers are shopping the stores like they shop convenience stores. Rather than doing their primary--or often times even secondary--shopping at Fresh & Easy markets, customers are using the stores more like C-stores. The stores' average-ring or market basket is evidence of this, by the way.

Tesco's Fresh & Easy Neighborhood Market can't make it if the stores only serve tertiary and secondary shoppers. Tesco knows this well based on its positioning and sales targets for the grocery store chain. Rather, the grocery markets have to obtain and retain a significant percentage of primary shoppers in order to generate the sales and profits required to be a financial success.

We've suggested Tesco needs to tweak the format to create a better sense of place in the grocery stores and put the "neighborhood" in Fresh & Easy Neighborhood Market. By doing this, the markets will become more attractive to neighborhood residents and motivate them to spend more time in the stores--and return more often--thus leading to a higher percentage of needed primary shoppers.

As we've written before, we suggest their are two ways to do this. First, Tesco needs to "localize" the grocery stores more. A Fresh & Easy store in a lower-income Los Angeles neighborhood can't look identical to, and offer the exact same merchandising mix as, a Fresh & Easy store in Metro Las Vegas. Rather, the stores need to respect and reflect the given neighborhood's history, culture, practices and ethnic make up far better than they do at present if they are to succeed. Remember: chain grocery stores aren't the same retail business model as chain fast food restaurants. The criteria is different.

This "localization" needs to include some individual format adjustments to the stores based on the neighborhoods they are located in, along with "localizing" the product merchandising mix in a number of cases so it better reflects the actual people (potential customers) who live in that respective neighborhood.

Second, we suggest that overall the Fresh & Easy grocery stores are not particularly inviting. In order to get shoppers to linger longer in-store--and thus to buy more--a grocery store needs to give shoppers a sense of place and a compelling reason or two for wanting to stay in it and shop rather than run-in and run-out like is the case--and design--of the C-store format.

One concept we have would be to put what we call a "Fresh & Easy Cafe," in some or all of the stores. This would be a smaller version (respective of the stores small-footprint) of Tesco's popular "Tesco Cafes," which are located in many of the retailer's UK supermarkets.

Further, we've suggested Tesco should think about format innovations or tweaks which would make the Fresh & Easy stores more "neighborhood-centric." By this we mean adding features in the store--perhaps a "UPS Store-like mail center which includes postal and other essential neighborhood-oriented services--and similar neighborhood basics which drive local residents to the stores, as well as enhancing the grocery markets' overall sense of place to the shoppers and potential shoppers. "It's my neighborhood store in my neighborhood, for example."

There are a few more format changes, as well as merchandising, marketing and positioning fixes which we believe in our analysis would help put Tesco's Fresh & Easy Neighborhood market grocery stores on better sales performance footing. But, that's a good start for now.

Sunday, March 23, 2008

Beware the 'Ides of March': Fifty Percent Item Markdowns Are A Further Sign of Low Traffic Counts and Sales Problems At Fresh & Easy Grocery Stores

As we've reported on Fresh & Easy Buzz in the past, many of Tesco's Fresh & Easy Neighborhood Market grocery stores were tossing so much fresh foods--produce, meats, bakery goods, prepared foods--in the stores' dumpsters because it had either spoiled do to slow (or in the case of the spoiled product no) sales or near-code date expiration, customers began noticing and were complaining to store managers about the wasted food.

Our correspondents in Southern California, Arizona and Nevada who shop the Fresh & Easy stores, then told us some of the grocery markets' had started marking down fresh, prepared foods items (especially the more expensive skus) fresh meats, produce and bakery items a day or two before the products were set to go out of code. And, in the case of the fresh produce and bakery goods, prior to the items' going bad.

Our correspondents tell us the fresh foods' price reductions are generally 50% off the regular retail price, which we've seen with our own eyes as well in a number of Fresh & Easy grocery stores.

These fresh foods' price markdowns have become a regular pattern at many Fresh & Easy stores; sort of like a daily version of a department store clearance sale. However, instead of the clearance sale being on white goods once a year or fall sweaters on the eve of spring like at department stores, the items at the Fresh & Easy stores being marked down each day are fresh foods' staples (and premium items) like steaks, poultry, fresh fruits and vegetables, fresh donuts and breads, and ready-to-eat prepared foods items. Many are higher-priced fresh products as well, which means significant dollar losses with each reduction, which is better (but not much) than having to toss it in the dumpster

For example, below (in italics) is a report we received this week from a correspondent named Michael, who lives in Las Vegas, Nevada and has been shopping at a Fresh & Easy grocery store (Lake Mead@ Del Webb) in the city because of the daily 50% markdowns on items like steaks:

"Hello, Just wanted to let you know that I just got back from one of the Las Vegas Fresh & Easy's, where I see they've begun addressing the criticisms regarding their food dates and potential waste of throwing out food on a daily basis. Today (the 22nd), I found plenty of goods marked down with "Today's Special" stickers. These items were usually 50% off and included produce, meat, etc. $20 Angus steak dated the 21st being sold at $10? I'll take two!

Near the checkstand was a bakery cart with more 50% off items, such as donuts and other baked goods. While I suppose these kinds of sales aren't good news for F&E (combined with their $5 off coupon you can get quite a bargain), it's got to be less of a loss than throwing the stock away entirely, and the store does seem a bit busier because of it, though I'm not sure morale is holding up (in my location, at least.)

Many American supermarket chains mark down items in their stores for a variety of reasons. Usually, each day the meat department will put a few markdown items in a small, designated area in the self-service meat case. Produce managers often do the same with a handful of items each day in the produce department, as do bakery department managers. Additionally, some supermarkets will put discontinued packaged and canned grocery products in a basket or bin with a reduced price for quick sale.

However, these practices are tiny in scale at the vast majority of U.S. supermarkets. The main reason meat and produce managers do it is that their bonuses are in part based on minimizing department shrink. As a result, every little bit helps them to meet their bonus goal. The same is true with the discontinued dry grocery items, although most stores have so little of such product they generally just give it to the local food bank.

The situation at the Fresh & Easy stores is far different however. It's a chronic problem thus far. The problem is due to slow sales. The volume in the stores (and there are numerous stores doing the daily markdowns) with the active 50% daily markdown program is so slow relatively that product turnover isn't happening at anywhere near the rate Tesco has budgeted for or predicted. The result: fresh foods go bad regularly. The solution is to either toss them in the dumpster, give them to the local food bank (which is a good idea) or discount them by 50% so hopefully you won't have to throw as many of the items in the garbage, and can at least recover a little of the dollar loss.

This problem is further evidence of the overall sales under-performance of the Fresh & Easy grocery stores to date. We've reported that based on information from sources, and our analysis of that information, it's our estimate that overall the 59 small-format Fresh & Easy grocery markets open to date are doing in the range of $70,000 -to- $100,000 per-store, per-week in gross sales. This is compared to Tesco's target of about $190,000 -to- $200,000 per-store, per-week in gross sales for this point in time. Fresh & Easy grocery markets average 10,000 -to- 13,000 square feet.

Add to the daily 50% markdowns the fact the stores regularly give out $5 coupons to shoppers, which are good for $5-off any order of $20 or more, and one can see even more clearly the lack of adequate foot traffic and sales volume to date in the stores. Five dollars off a $20 grocery order is 25% folks. That's on top of what are already low everyday prices on the Fresh & Easy store brand and national brand basic grocery items sold in the stores, and very competitive prices on the items in the fresh foods categories. (We've done price-comparisons of Fresh & Easy stores and other supermarket chains in the market areas and Fresh & Easy's prices are in the main among the lowest.)

Based on the already low everyday prices in Fresh & Easy grocery markets, coupled with the daily 50% markdowns on many items, along with the stores' aggressive price advertising program via its mass-mailed advertising circular and the $5 coupons, price obviously isn't the problem in the stores, which is something even the most junior analyst should be able to figure out.

As we've suggested on Fresh & Easy Buzz numerous times, Fresh & Easy's problems are format-driven, operations-oriented and marketing-based. To paraphrase former two-term U.S. President Bill Clinton's winning slogan or tagline, "It's the Economy... Stupid," in his first campaign for the U.S. Presidency in the early 1990's, we say: "It's Not a Pricing Issue...Stupid."

Meanwhile, Fresh & Easy shoppers like Michael from Las Vegas (and others) are loving being able to buy $20 worth of Angus Steak for half price. They also are loving the $5 coupons so they can get 25% off a $20 order. In fact, they can even buy $20 worth of 50% discounted fresh foods items (a $40 value at regular prices) and use one of the $5 coupons to knock another 25% off the 50% discount. That's pretty close to free, isn't it?

As every grocery marketer of even moderate intelligence and experience knows, price is the double-edged sword of the business. No grocer--not even the most deep-discount, no frills operators--wants too many customers who are in the main only shopping at his or her stores because of the prices. Some of that is great--it's a positioning factor for sure.

However, a grocery retailer must have more than one hook to hang its merchandising and operational hat on besides price. Why? Price-focused-only shoppers tend to be the most disloyal. They generally will leave a grocer hanging at the checkstand if they find what they believe is a better priced store in the same way a runaway bride will leave her fiance at the least minute for a host of either conscious or unconscious reasons.

Since it's March, we recall some good advice once given to Julius Ceasar prior to the beginning of the "Ides Of March," which is around March 15-20, depending on the particular year. "Ceasar," a loyal subject and soothsayer warned him, "Beware the Ides of March." Of course, we all know what happened to Julius Ceasar because he didn't listen to and head the warning.

Our unsolicited advice to Tesco's Fresh & Easy Neighborhood Market, since we've all just concluded the "Ides of March," is (another paraphrase): "Beware the low-price and discounting trap, it could come back to haunt you." While it won't render onto the Fresh & Easy Neighborhood Market executives a finality like that which was rendered onto Ceasar, the results could be equally disastrous from a business standpoint.