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.

1 comment:

Anonymous said...

The meat in the newly-opened Danville, CA store is horrible. Tried it twice; never again.