Saturday, March 8, 2008

Fresh & Easy Neighborhood Market Northern California DC Likely to Be At Arch Road Site In Stockton

We first reported in December, 2007, and most recently earlier this week, that Tesco's Fresh & Easy Neighborhood Market plans to locate a Northern California distribution center (DC) in Stockton, California, which is located in the Northern San Joaquin Valley, about 30 miles from Sacramento, and about an hour from San Francisco.

We can now report it looks like the distribution site will be at Arch Road and Newcastle Road in southeast Stockton. The site is right off Highway 99, which is the major truck and freight transportation artery throughout the Valley and onto Freeway 580, to the San Francisco Bay Area. Numerous food and grocery industry companies operate distribution centers in the general region because the area is centrally located.

The potential distribution center site is 474 acres. We don't know how much of it Tesco will use. The land is owned by Opus West, a real estate development firm. Opus West is a division of the Opus Group, a $2.1 billion a year national real estate development company based in Minneapolis, Minnesota.

As we reported in December, 2007, the Stockton DC could serve Tesco's Fresh & Easy grocery stores as far south as Bakersfield in the Central Valley and in the Northern California region, including the Bay Area and Sacramento Metro region stores.

Tesco's Fresh & Easy has signed leases for 18 stores in the San Francisco Bay Area and 19 stores in the Sacramento region to date. The retailer is currently negotiating for more store sites in the Bay Area and in the Sacramento region. Fresh & Easy also is looking at sites in nearby Stockton--where the DC is likely to be located--and nearby Tracy, Manteca and Modesto. One of the grocer's 19 Sacramento region grocery stores is in Galt, which is only about 15 minutes from Stockton.

Tesco also plans to locate at least six stores in Bakersfield, in the heart of Central California. The retailer also is looking for sites in the Fresno Metropolitan area, which is only about 30 minutes away from Bakersfield. The Fresno stores could be serviced by either the Stockton distribution center or the 850,000 square foot Fresh & Easy Neighborhood Market DC in Riverside, in Southern California, as the distance to the region is about the same from either Stockton or Riverside.

The 37 stores in the Bay Area and Sacramento are only the beginning for Tesco in Northern California. Based on what our sources tell us, we believe the grocer wants to have at least 50 -to- 60 stores open in the region by the end of 2009. The first Fresh & Easy stores in Northern California are scheduled to start opening as early as late 2008, but most likely won't begin opening until early 2009.

As we often write, Tesco is pursuing a "critical mass" store strategy in California, the Phoenix Metropolitan region in Arizona and in the Las Vegas, Nevada Metro area. This strategy is to locate a "critical mass" of stores in a given region, similar to what the Starbucks and Walgreen's Drug chains' do for example.

As a result of doing this, not only is consumer awareness increased and marketing and advertising costs better leveraged, but from a positioning standpoint it serves the goal of attempting to become the logical or defacto neighborhood grocer in the region, in part by virtue of having so many stores in the area.

This strategy is especially key for Tesco in California, where it is opening the highest proportion of its stores in the three states. The retailer is pursuing what we call a "ring the bay" strategy in the San Francisco Bay Area, locating stores throughout the region in order to maximize the variables we discussed above. It's pursuing the same strategy (minus the bay) in the Sacramento region.

This strategy for Northern California is modeled on what Tesco has been doing in Southern California, which is choosing regions like Orange County, the Inland Empire and the San Diego region, building numerous stores there, and creating that "critical mass," so as to be seen as a logical neighborhood grocer for community residents. The philosophy is, that like Starbucks or Walgreen's, if you see us everywhere in a region, you will shop with us. It's similar to the version of the independent neighborhood grocer, accept its a chain model.

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