James Thompson, a writer and columnist for the United Kingdom-based trade publication Retail Week, gave his homeland's number one retailer Tesco a bit of that famous British stiff upper lip and a vote of confidence in a column in yesterday's edition of the publication.
Responding to analysis last week by the New York-based investment firm Piper Jaffray, and additional analysis by people like us and a couple others, Thompson writes that in time he believes "Tesco will surely adjust its product proposition as it expands (Fresh & Easy) rapidly along the west coast and further inland" in the Western U.S.
In his above opinion, Thompson is referring to analysis--which we were one of the first to point out and have been strong in suggesting--that Tesco needs to better localize its Fresh & Easy grocery store product mix and retail operations to neighborhood demographics, traditions, history and culture. (In fact, we are just about the only voice talking about this regularly, as well as offering suggestions as to how Tesco could achieve this important merchandising element in American grocery retailing.)
To make his point that the British grocer will eventually alter its merchandising scheme in its U.S. Fresh & Easy stores, Thompson points out that Tesco plc. CEO Sir Terry Leahy did just that, and admitted so, with the retailer's supermarkets in Eastern Europe after they were introduced in the 1990's.
Tesco entered Eastern Europe with its supermarkets, first in Hungary in 1995, and in Poland, the Czech Republic and Slovakia in 1996. After some serious faltering with the stores in Eastern Europe, Tesco did make some changes as Thompson points out, paying more attention to local merchandising schemes, product selection, customs, culture and history.
[Of course, the U.S. is a far-bigger and historically less-forgiving market than Eastern Europe, simply do to its sheer economic size and hyper-aggressive competitive grocery retailing climate.]
Thompson also gives Tesco props for its rapid-fire Fresh & Easy store launch in the U.S. He argues the grocer has "launched it's U.S. operation (Fresh & Easy)--including a hugely impressive warehouse and vertically integrated food facility--bang on time and has not yet faltered in its roll-out program, which has surpassed 50 stores." There are 55 Tesco Fresh & Easy Neighborhood Market grocery stores open to date in Southern California, Arizona and the Las Vegas, Nevada Metropolitan region.
Thompson is right in the main about the store roll-out program. Tesco has essentially met its new store opening schedule despite some close calls. As we've written before, since the first stores opened in early November (the Hemet, California store actually soft-opened in late October), Tesco has opened a new store every two -to- three days on average, which is an impressive roll-out.
Thompson is wrong however regarding Tesco's huge 850,000 square foot distribution center in Riverside, California. It's is an impressive facility, that's for sure. That's not where he is wrong though. We agree on it's impressiveness, including its huge solar panel array on the roof.
Rather, Thompson fails to point out that Tesco didn't obtain the proper permits involving environmental and other aspects when it built the facility. As a result, Riverside County halted work on the DC, which ended-up costing Tesco additional money, and more importantly has affected its supply chain operations, as well as delaying the retailer's ability to fully-use the facility.
Chief among Tesco Fresh & Easy's distribution and supply chain problems has been frequent out-of-stock conditions in its stores. These out-of stocks are particularly serious in the fresh foods category, and especially among its fresh, prepared foods offerings.
This is the "vertically integrated" aspect of the Riverside distribution center Thompson is eluding to. Tesco has set up a commercial kitchen facility at the DC. There it prepares all of its Fresh & Easy brand fresh, prepared foods. It then distributes the prepared foods items to its stores on a daily basis in a direct-store-delivery (DSD) manner.
Prepared foods' out-of-stocks were horrible in the stores in November and December of 2007. This was particularly true in the late afternoon and evening hours. The conditions have improved somewhat in most of the stores--but the out-of-stock situation still exists.
In other words, Tesco's Fresh & Easy distribution center and vertically integrated prepared foods' operations have been less than problem-free. Thompson fails to mention these facts. But in fairness, he likely isn't aware of them. However, we do agree with him that Tesco's Fresh & Easy store roll-out process has been impressive. In fact, it might be too rapid.
We don't doubt that Tesco will fix the out-of stocks situation in the fresh, prepared foods category at some point. But that's not the key point. Rather, since many of the retailer's potential new customers went to shop at a Fresh & Easy store for the first time because they had heard so much about its extensive prepared foods offerings, but found major out-of-stocks in the category, their first impression wasn't a good one in many cases. If the problem isn't solved soon, it could come to define the chain in the short-to-medium run.
Essentially, as a start up, all of Fresh & Easy's customers are new ones. Making a bad first impression makes it very difficult to get return shoppers, let alone create primary shoppers, which is what the chain must do to achieve its goal of being a neighborhood grocery store rather than a convenience store chain.
We have received a number of emails from Fresh & Easy store-level workers, and have had conversations with others. They tell us training has been lacking a bit, and that turnover has been higher than it should be in their opinions. These correspondents attribute this primarily to the rapid-fire new store opening pace the retailer is conducting. They also tell us though, that in the main, they are enjoying working in the Fresh & Easy stores.
Our analysis also is that Tesco's rapid-fire new store opening pace has hurt the merchandising at the existing stores. We think the format has strong potential. However, the basic grocery, prepared foods, fresh produce and meat, and specialty products overall product selection needs lots of work. Of course, it appears to us Tesco has decided to follow a strategy of opening a critical mass of stores first, then fixing the problems later. Since timing can be everything at retail, it will be interesting to see if that strategy works.
Additionally, the pricing scheme, especially on the basic grocery items, also needs to be reviewed. Overall, the prices are low--perhaps too low to make margin--but the overall scheme is off in that many items are priced lower than need be and others are higher than they should be.
Tesco needs to spend more time studying Western USA supermarket pricing schemes and adjust Fresh & Easy's retail pricing to be more in line with the overall Western U.S. retail grocery industry pricing strategy. The U.S. is probably the most regional retail grocery market in the western world. Not only do product selections vary considerably in the west, Midwest and east coast, but so do the pricing schemes.
What we do agree with Thompson about is that Tesco is a good food retailer in terms of the nuts and bolts, along with innovation. Under CEO Leahy's leadership over the last years, the chain has doubled it's store count and sales, gone into parts of the world where U.S. supermarket chains seem to have no interest in going do to their largely non-global focus, and solidified its position at home in the UK as that nation's number one retailer, with a commanding 34% market share.
Ever the fair analyst, Thompson says "Tesco has no divine right to succeed in the U.S. and skeptics are right to question whether Fresh & Easy, in its present guise, is the ideal format." Further, he says, "Like other UK retailers that have gone before (Marks & Spencer and Sainsbury's for example), it (Tesco) could well find the U.S. market a tough nut to crack." However, he adds, "but the smart money is on the Cheshunt (Tesco's UK headquarters) retailer getting it right in the long-term--albeit with some refinements to Fresh & Easy along the way."
Tesco's UK "friends" in the business and trade press haven't been as optimistic as Thompson regarding Tesco's chances of making it with Fresh & Easy in the U.S. In our analysis, much of the "making it in the U.S." by the British mega-retailer will ultimately boil down to understanding and then practicing an important fact of U.S. grocery retailing: Localism.
Safeway Stores, Inc. learned the importance of the local approach after years of avoiding the fact. For example, in the 1980's you could go into a Safeway supermarket in San Jose, California, in a neighborhood where 70% of the residents were Hispanic. What you would find would be a six-foot or so Hispanic Foods section, containing mostly the basics of Hispanic or Latino grocery products and ingredients. The same in produce, the same in meat.
You could then drive 15 minutes outside of the neighborhood, to a neighborhood in a nearby city in which 65% or so of the residents were Asian. There you would find a three-foot section of Hispanic groceries--the chain's basic set.
The primary difference between the six-foot "expanded set" in the store with a 70% Hispanic demographic and the three-foot core set in the store where 65% of the shoppers were of Asian ethnicity, was that the six-foot set had more brands of the basics, and more facings. There were more brands and facings of peppers, beans, and other commodity items but very little if any key specialty items. In other words, with a few exceptions, there was no demographic product selection targeting based on a neighborhood's ethnic makeup and other variables.
Go in that same San Jose store today though, in that same neighborhood, which is now about 80% Hispanic, and you will find a store-within-a-store Hispanic foods section. Not only does the section have all the basics, it has scores of Hispanic specialty items, and even non-foods. The produce department is full of specialty produce used by Hispanic consumers. The fresh meat department is the same: specialty cuts of meat, poultry and fish designed to appeal to the ethnicity of the primary shopper in that store.
Safeway now does the same in the Asian foods' category. Further, the grocer micro-targets within a given category. For example, down the road from that San Jose store in the neighborhood with a 65% Asian ethnic demographic, is a neighborhood with a substantial population of immigrants from India. As a result, Safeway has a large Indian foods section within its Asian mix in that store.
The neighborhood marketing goes on and on: in the natural and organic foods' categories product selections are grown as the demographics warrant, foods targeted to African Americans are expanded in neighborhoods where the segment is high in population count, greatly expanded gourmet foods selections are created in high-income and "foodie-oriented" neighborhoods, and more. The local focus is where it begins, then its taken down to a neighborhood level and even looked at on a neighborhood-within-a-neighborhood level.I
It's no accident that when Safeway began implementing its local and neighborhood-oriented marketing programs in the mid-1990's as part of its Lifestyle store format development, the chain's fortunes began to dramatically improve. It was one of a number of key marketing and merchandising elements which has contributed to the grocer's success over the last decade.
Unlike some U.S. grocery industry analysts, commentators, consultants and grocery executives, we believe Tesco is in the U.S. for the long haul.
The retailer continues to roll-out a new Fresh & Easy grocery market in Southern California, Arizona and Nevada every few days, has signed leases for at least 18 stores (and has more in the pipeline) in the San Francisco Bay Area, has 19 store location leases inked (with more awaiting its pen) in the Sacramento region, is looking for store sites in the Chicago, Illinois area, has discussed going into Florida and New York, and may even be checking out the Pacific Northwest states of Oregon and Washington for store locations.
Fresh & Easy is far from a test for Tesco in the U.S. Rather, it's a long-term venture. As a result, the grocer needs to get it right. After all, it has about $2 billion riding on Fresh & Easy's success not to mention that strong British pride. [Read James Thompson's piece here or at the link above.]
Responding to analysis last week by the New York-based investment firm Piper Jaffray, and additional analysis by people like us and a couple others, Thompson writes that in time he believes "Tesco will surely adjust its product proposition as it expands (Fresh & Easy) rapidly along the west coast and further inland" in the Western U.S.
In his above opinion, Thompson is referring to analysis--which we were one of the first to point out and have been strong in suggesting--that Tesco needs to better localize its Fresh & Easy grocery store product mix and retail operations to neighborhood demographics, traditions, history and culture. (In fact, we are just about the only voice talking about this regularly, as well as offering suggestions as to how Tesco could achieve this important merchandising element in American grocery retailing.)
To make his point that the British grocer will eventually alter its merchandising scheme in its U.S. Fresh & Easy stores, Thompson points out that Tesco plc. CEO Sir Terry Leahy did just that, and admitted so, with the retailer's supermarkets in Eastern Europe after they were introduced in the 1990's.
Tesco entered Eastern Europe with its supermarkets, first in Hungary in 1995, and in Poland, the Czech Republic and Slovakia in 1996. After some serious faltering with the stores in Eastern Europe, Tesco did make some changes as Thompson points out, paying more attention to local merchandising schemes, product selection, customs, culture and history.
[Of course, the U.S. is a far-bigger and historically less-forgiving market than Eastern Europe, simply do to its sheer economic size and hyper-aggressive competitive grocery retailing climate.]
Thompson also gives Tesco props for its rapid-fire Fresh & Easy store launch in the U.S. He argues the grocer has "launched it's U.S. operation (Fresh & Easy)--including a hugely impressive warehouse and vertically integrated food facility--bang on time and has not yet faltered in its roll-out program, which has surpassed 50 stores." There are 55 Tesco Fresh & Easy Neighborhood Market grocery stores open to date in Southern California, Arizona and the Las Vegas, Nevada Metropolitan region.
Thompson is right in the main about the store roll-out program. Tesco has essentially met its new store opening schedule despite some close calls. As we've written before, since the first stores opened in early November (the Hemet, California store actually soft-opened in late October), Tesco has opened a new store every two -to- three days on average, which is an impressive roll-out.
Thompson is wrong however regarding Tesco's huge 850,000 square foot distribution center in Riverside, California. It's is an impressive facility, that's for sure. That's not where he is wrong though. We agree on it's impressiveness, including its huge solar panel array on the roof.
Rather, Thompson fails to point out that Tesco didn't obtain the proper permits involving environmental and other aspects when it built the facility. As a result, Riverside County halted work on the DC, which ended-up costing Tesco additional money, and more importantly has affected its supply chain operations, as well as delaying the retailer's ability to fully-use the facility.
Chief among Tesco Fresh & Easy's distribution and supply chain problems has been frequent out-of-stock conditions in its stores. These out-of stocks are particularly serious in the fresh foods category, and especially among its fresh, prepared foods offerings.
This is the "vertically integrated" aspect of the Riverside distribution center Thompson is eluding to. Tesco has set up a commercial kitchen facility at the DC. There it prepares all of its Fresh & Easy brand fresh, prepared foods. It then distributes the prepared foods items to its stores on a daily basis in a direct-store-delivery (DSD) manner.
Prepared foods' out-of-stocks were horrible in the stores in November and December of 2007. This was particularly true in the late afternoon and evening hours. The conditions have improved somewhat in most of the stores--but the out-of-stock situation still exists.
In other words, Tesco's Fresh & Easy distribution center and vertically integrated prepared foods' operations have been less than problem-free. Thompson fails to mention these facts. But in fairness, he likely isn't aware of them. However, we do agree with him that Tesco's Fresh & Easy store roll-out process has been impressive. In fact, it might be too rapid.
We don't doubt that Tesco will fix the out-of stocks situation in the fresh, prepared foods category at some point. But that's not the key point. Rather, since many of the retailer's potential new customers went to shop at a Fresh & Easy store for the first time because they had heard so much about its extensive prepared foods offerings, but found major out-of-stocks in the category, their first impression wasn't a good one in many cases. If the problem isn't solved soon, it could come to define the chain in the short-to-medium run.
Essentially, as a start up, all of Fresh & Easy's customers are new ones. Making a bad first impression makes it very difficult to get return shoppers, let alone create primary shoppers, which is what the chain must do to achieve its goal of being a neighborhood grocery store rather than a convenience store chain.
We have received a number of emails from Fresh & Easy store-level workers, and have had conversations with others. They tell us training has been lacking a bit, and that turnover has been higher than it should be in their opinions. These correspondents attribute this primarily to the rapid-fire new store opening pace the retailer is conducting. They also tell us though, that in the main, they are enjoying working in the Fresh & Easy stores.
Our analysis also is that Tesco's rapid-fire new store opening pace has hurt the merchandising at the existing stores. We think the format has strong potential. However, the basic grocery, prepared foods, fresh produce and meat, and specialty products overall product selection needs lots of work. Of course, it appears to us Tesco has decided to follow a strategy of opening a critical mass of stores first, then fixing the problems later. Since timing can be everything at retail, it will be interesting to see if that strategy works.
Additionally, the pricing scheme, especially on the basic grocery items, also needs to be reviewed. Overall, the prices are low--perhaps too low to make margin--but the overall scheme is off in that many items are priced lower than need be and others are higher than they should be.
Tesco needs to spend more time studying Western USA supermarket pricing schemes and adjust Fresh & Easy's retail pricing to be more in line with the overall Western U.S. retail grocery industry pricing strategy. The U.S. is probably the most regional retail grocery market in the western world. Not only do product selections vary considerably in the west, Midwest and east coast, but so do the pricing schemes.
What we do agree with Thompson about is that Tesco is a good food retailer in terms of the nuts and bolts, along with innovation. Under CEO Leahy's leadership over the last years, the chain has doubled it's store count and sales, gone into parts of the world where U.S. supermarket chains seem to have no interest in going do to their largely non-global focus, and solidified its position at home in the UK as that nation's number one retailer, with a commanding 34% market share.
Ever the fair analyst, Thompson says "Tesco has no divine right to succeed in the U.S. and skeptics are right to question whether Fresh & Easy, in its present guise, is the ideal format." Further, he says, "Like other UK retailers that have gone before (Marks & Spencer and Sainsbury's for example), it (Tesco) could well find the U.S. market a tough nut to crack." However, he adds, "but the smart money is on the Cheshunt (Tesco's UK headquarters) retailer getting it right in the long-term--albeit with some refinements to Fresh & Easy along the way."
Tesco's UK "friends" in the business and trade press haven't been as optimistic as Thompson regarding Tesco's chances of making it with Fresh & Easy in the U.S. In our analysis, much of the "making it in the U.S." by the British mega-retailer will ultimately boil down to understanding and then practicing an important fact of U.S. grocery retailing: Localism.
Safeway Stores, Inc. learned the importance of the local approach after years of avoiding the fact. For example, in the 1980's you could go into a Safeway supermarket in San Jose, California, in a neighborhood where 70% of the residents were Hispanic. What you would find would be a six-foot or so Hispanic Foods section, containing mostly the basics of Hispanic or Latino grocery products and ingredients. The same in produce, the same in meat.
You could then drive 15 minutes outside of the neighborhood, to a neighborhood in a nearby city in which 65% or so of the residents were Asian. There you would find a three-foot section of Hispanic groceries--the chain's basic set.
The primary difference between the six-foot "expanded set" in the store with a 70% Hispanic demographic and the three-foot core set in the store where 65% of the shoppers were of Asian ethnicity, was that the six-foot set had more brands of the basics, and more facings. There were more brands and facings of peppers, beans, and other commodity items but very little if any key specialty items. In other words, with a few exceptions, there was no demographic product selection targeting based on a neighborhood's ethnic makeup and other variables.
Go in that same San Jose store today though, in that same neighborhood, which is now about 80% Hispanic, and you will find a store-within-a-store Hispanic foods section. Not only does the section have all the basics, it has scores of Hispanic specialty items, and even non-foods. The produce department is full of specialty produce used by Hispanic consumers. The fresh meat department is the same: specialty cuts of meat, poultry and fish designed to appeal to the ethnicity of the primary shopper in that store.
Safeway now does the same in the Asian foods' category. Further, the grocer micro-targets within a given category. For example, down the road from that San Jose store in the neighborhood with a 65% Asian ethnic demographic, is a neighborhood with a substantial population of immigrants from India. As a result, Safeway has a large Indian foods section within its Asian mix in that store.
The neighborhood marketing goes on and on: in the natural and organic foods' categories product selections are grown as the demographics warrant, foods targeted to African Americans are expanded in neighborhoods where the segment is high in population count, greatly expanded gourmet foods selections are created in high-income and "foodie-oriented" neighborhoods, and more. The local focus is where it begins, then its taken down to a neighborhood level and even looked at on a neighborhood-within-a-neighborhood level.I
It's no accident that when Safeway began implementing its local and neighborhood-oriented marketing programs in the mid-1990's as part of its Lifestyle store format development, the chain's fortunes began to dramatically improve. It was one of a number of key marketing and merchandising elements which has contributed to the grocer's success over the last decade.
Unlike some U.S. grocery industry analysts, commentators, consultants and grocery executives, we believe Tesco is in the U.S. for the long haul.
The retailer continues to roll-out a new Fresh & Easy grocery market in Southern California, Arizona and Nevada every few days, has signed leases for at least 18 stores (and has more in the pipeline) in the San Francisco Bay Area, has 19 store location leases inked (with more awaiting its pen) in the Sacramento region, is looking for store sites in the Chicago, Illinois area, has discussed going into Florida and New York, and may even be checking out the Pacific Northwest states of Oregon and Washington for store locations.
Fresh & Easy is far from a test for Tesco in the U.S. Rather, it's a long-term venture. As a result, the grocer needs to get it right. After all, it has about $2 billion riding on Fresh & Easy's success not to mention that strong British pride. [Read James Thompson's piece here or at the link above.]
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2 comments:
Interesting comments in the article. I do not know only from what source is the info that Tesco opened Tesco Express format in Eastern Europe in 90's. The first Expresses were opened in Hungary and Czech Republic last year. Poland may have its first Express this year.
Thank's for your comment.
And you are correct in the time-line for the Tesco Express openings in the respective countries in Eastern Europe.
We looked our piece over again and it did sound like we were saying Tesco Express opened in the 1990's--which wasn't our intention.
We made a change to correct that impression in the peice.
We appreciate you pointing it out.
Do you live in Eastern Europe? If so, we would like to correspond with you as time permits regarding food and grocery retailing there. You can email us at: freshneasybuzz@yahoo.com in addition to posting your commnet here.
Thanks for participating.
Best Regards
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