Sunday, March 2, 2008

Tesco Fresh & Easy Chief Tim Mason Sidesteps Questions on Store Performance But Says its Full-Bore Ahead for Fresh & Easy

Tesco Fresh & Easy Neighborhood Market CEO Tim Mason was in Sacramento, California last week as we reported here to announce the grocer's signing of leases for an initial 19 grocery store sites in the Sacramento region, including seven in the city of Sacramento.

While Mason was in Sacramento, he sat down with Jon Ortiz, a business reporter for the Sacramento Bee, for a Question and Answer session, which is published in today's edition of the Bee.

In the Q&A piece with the Sacramento Bee's Ortiz, Mason addresses the topic we were one of the first to report on--and one of only three industry analysts to put numbers to--which is that Tesco's Fresh & Easy grocery stores' are under-performing based on the company's sales goals.

Here is the reporter's question, and CEO Mason's answer:

Reporter Ortiz: "Some industry experts have speculated that Fresh & Easy isn't meeting its sales goals. How is the business performing?"

Tim Mason: "We are delighted with a lot of things about the business. We're delighted with the quality of staff that we've been able to attract. We're delighted with their morale and enthusiasm for the business. We're delighted with the response that we are getting from customers to the quality of the products and the value of their money, the ease of the shopping trip and the quality of the service.

Every week we get more customers. Every week we take more money. And nearly every week our basket size (average amount of spending per customer) [Our note: It's almost always called 'average ring' in the U.S. grocery retailing industry.] goes up. So the board of Tesco and I are pleased with the progress that we're making, and we think we've made a very good start."

In journalism, public relations and politics, CEO Mason's answer to reporter Ortiz's question is called a "non-denial denial." However, in our opinion it is as close to an admission as is going to be given that our--and others'--analysis is correct that Tesco's Fresh & Easy stores are under-performing in gross sales compared to corporate targets for this point in time.

However, unlike other analysts reporting on this issue, we believe Fresh & Easy's Mason--and Tesco CEO Sir Terry Leahy--are worried about this sales under-performance, but not critically. We argue this is the case because our analysis tells us Tesco is employing what we call a "build enough stores as fast as we can and they will come" strategy. In other words, the retailer's strategy is to first get open and operating a critical mass of stores as fast as possible, then fix the problems. We aren't suggesting they are right, by the way.

However, as we have pointed out in numerous pieces (read through our February and January archives on the blog) this is a gamble.

It's particularly a gamble because four months' after the first Fresh & Easy store opened in late October, 2007 in Hemet, California, the grocer still faces serious out-of-stock conditions in many of its stores, especially in the fresh foods and fresh, prepared foods' categories. Unfortunately for the retailer, this problem is one of its logistics and distribution system, rather than being caused by massive sales.

If Fresh & Easy doesn't fix this problem soon it could define the chain in consumers' minds as "that store that's always out of what I want." Such adverse positioning is very difficult for a grocer to overcome.

There are other problems as well. We detail some of them, and offer suggestions for moving forward in this piece we wrote on February 21, 2008

Additionally, unlike some other analysts, we believe despite these serious operations and merchandising problems that need immediate attention--and fixing by Tesco--that the British grocer is in it for the long-haul--good or bad--in the Western USA.

The retailer is building a new store about every three days in Southern California, Arizona and Nevada. Tesco has signed leases for an initial 18 sites for its small-format, convenience-oriented grocery stores in Northern California's San Francisco Bay Area, and inked deals on 19 sites in the nearby Sacramento region in Northern California. The first stores in Northern California are set to begin opening in late 2008 or in early 2009.

Tesco's Fresh & Easy also plans to build a distribution center in Stockton, California to service its Northern California grocery markets. (Sacramento Bee reporter Ortiz asked Mason about this distribution center in the Q&A. Mason confirmed the retailer would locate a DC in Northern California to serve its stores in the region when they open. However, he didn't go on the record regarding the Stockton location.) We stand by our report that the DC will be in Stockton.

Further, Tesco has explored potential store sites in the Chicago, Illinois region and has looked at possible opportunities in Florida and New York. The Pacific Northwest regions of Oregon and Washington are on the retailer's longer-term planning sheets as well, according to our sources.

Since, as we suggest, Tesco plans to be in the U.S. for the long-haul with its Fresh & Easy grocery store venture, unless it starts fixing its most serious distribution, logistics and store-level problems soon, the retailer is going to burn far more cash than it's budgeted for the venture. In fact, that $2 billion investment could double.

And, perhaps even far more serious, if it doesn't fix the out-of-stocks and other most serious problems now, they could come to define the grocer with shoppers, and not in a positive way.

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