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.

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