Thursday, April 10, 2008

Southern California Supermarket Industry Produce Pros Say They're Not Seeing Any 'Fresh & Easy Effect' on Sales in Their Stores

Yesterday in this piece about Arizona-based family-owned supermarket chain Bashas', we wrote that recent conversations we've had with two of the grocery chain's executives--along with numerous other conversations we've had with various members of the Arizona Retail Association, which is the state's trade group for retail grocers--local food brokers and manufacturers representatives, all turned up the same answer: That none of these local grocery industry players and observers have yet to notice what we call a "Fresh & Easy Effect" from the 17 Fresh & Easy Neighborhood Market grocery stores Tesco currently is operating in the state's Phoenix Metropolitan region.

In other words, the Bashas' executives told us they aren't seeing any sales diminution in the chain's stores since Tesco's Fresh & Easy Neighborhood Market entered the market in December, 2007, to the present.. Further, the numerous other local industry sources we've talked to, as mentioned above, have echoed the same observation independently.

And that's not all: In this March 17 piece titled: (Scroll down a little from the top at the link), "Stater Bros. CEO Brown says the grocer isn't feeling a 'Fresh & Easy Effect'," we reported that Jack Brown, the CEO of Southern California's Inland Empire-based Stater Bros. Markets, said in a speech at a grocery industry function that his chain, which is the market share leader in the region, hasn't seen any competitive pressures or loss in sales from the numerous Tesco Fresh & Easy small-format, basic grocery and fresh foods markets which have opened in the market region in the last five months.

Yesterday, a panel comprised of four Southern California-based senior-level supermarket chain produce executives essentially repeated the same observations offered to us by the Bashas' executives, the Arizona grocery industry players sighted above, and Stater Bros. CEO Jack Brown, when they spoke at a meeting of the Southern California-based Fresh Produce and Floral Council, a long time industry group in the region.

The panel included: Mike Yuro, a produce buyer for Southern California-based supermarket chain K.V. Mart Co.; Roger Schroeder, VP of produce and floral for Stater Bros. Markets; Rob McDougal, senior director of produce and floral, Gelson's Markets, Encino, California; and Liane Mast, director of floral for Stater Bros. Ms. Mast also is the current chairwoman of the Fresh Produce and Floral Council, which is located in La Mirada, in Southern California.

All of the supermarket industry participants on the panel are senior members of the grocery retailing industry business in Southern California, with decades of experience in the industry and market region.

The veteran retail produce and floral industry panel members took questions on a wide variety of topics from members of the audience, which included fellow retailers, suppliers, brokers and others.

Among the topics brought up by audience members, and addressed by the panel members, were a number of questions asking the supermarket industry produce and floral category veterans for their analysis, observations and comments about what effect they think Tesco's coming into the market with its Fresh & Easy Neighborhood Market stores, which sell fresh produce as well as groceries and other fresh foods, is having on their respective company operations and on the grocery retailing market in general.

All four of the panel members said they haven't observed or felt in their own retail operations, nor seen in the Southern California market which they track closely--any appreciable "Fresh & Easy Effect" in terms of the small-format grocery chain either taking sales away from their respective stores or having a significant impact overall in the market thus far.

Tesco currently has a little over half of its 61 small-format, convenience-oriented basic grocery and fresh foods markets in Southern California.

Rob McDougal, the senior director of produce and floral at upscale chain Gelson's, said he was very concerned before the first Fresh & Easy stores opened in November, 2007--and remained concerned for a number of months after--that the store's focus on convenient grocery shopping might take a bite out of Gelson's business. However, he told the audience that concern appears to be unfounded, as he said he has not seen any diminution of Gelson's business from Fresh & Easy being in the market to date.

Roger Schroeder, the produce VP for Inland Empire-based Stater Bros., agreed with McDougal's analysis, adding that the opening of any new, competing grocery stores generally has an effect on business at nearby Stater Bros. stores.

However, he said he is surprised because he has not been able to detect any measurable effects of the numerous Tesco Fresh & Easy grocery markets that have opened in the Inland Empire region, which is one of Tesco's key target markets for its Fresh & Easy grocery retailing venture. Tesco has stated it hopes to have as many as 44 of the Fresh & Easy grocery markets opened and operating in Southern California's Inland Empire before the end of this year.

K.V Mart, which also is based in the Inland Empire region in the city of Carson, has seen "some ripple in sales," because of the numerous Fresh & Easy grocery stores that have opened in the region, but "nothing drastic," produce buyer Mike Yuro told an audience member is response to a question about a possible "Fresh & Easy Effect" on the retailer and in the market region.

The comments from the panel at yesterday's Fresh Produce and Floral Council meeting, along with those of Stater Bros. CEO Brown, the Bashas' executives, and the many food and grocery industry players and observers we talk to regularly in Southern California, Arizona and Nevada where Tesco has its current 61 Fresh & Easy store, are all in concert. All the same.

We have yet to hear from one grocery retailer, supplier or broker, market researcher, industry analyst or observer, that they believe (or have evidence of) Fresh & Easy is making an impact or taking away any sales from competitors in the markets it is in to date.

It's true there are only 61 Fresh & Easy grocery markets open to date. And it is fair in part to suggest that perhaps as more come on line the competitive "Fresh & Easy Effect" will be more apparent. However, since Tesco is using what we call a retail store "critical mass" strategy, locating the stores nearby each other in selected regions, we think at least a minimal "Fresh & Easy Effect" should have started to emerge by now, especially in the Phoenix, Arizona Metro region, where there are currently 17 stores within a very short distance from each other.

The same is true in Southern California's Inland Empire region, where Tesco's Fresh & Easy Neighborhood Market has its corporate headquarters--as does Stater Bros. and K.V. Mart--and has thus far located close to half of all of its Southern California stores in.

In fact, one reason Tesco has employed what we call it's "critical mass" store location strategy is so that it could have this effect--the "Fresh & Easy Effect"-- in the market as fast as possible. The entire positioning of the Fresh & Easy grocery stores is to be the majority primary and minority secondary shopping venues for people who live in the neighborhoods where the stores are located.

This isn't happening, as we've argued before. The mounting evidence from industry players and observers like those we've reported on in this piece, is leading to a fairly obvious conclusion: Thus far, Tesco's Fresh & Easy small-format basic grocery and fresh foods retail venture isn't succeeding.

It's not that we expect--or are even suggesting--that with 61 stores, Fresh & Easy should have chains like those the panel members at yesterday's meeting represent on the ropes and experiencing significant drops in sales because of a "Fresh & Easy Effect."

Rather, what we are arguing is that a consensus has emerged in Southern California, Arizona and Nevada--the respective markets where Tesco is operating--that thus far the Fresh & Easy stores aren't having a real or material effect in the market. That's not good news for any retailer; even one that's still in start up mode in many ways.

Taken with the store underperformance we've reported (doing about $60,000 - 100,000 per-store, per-week while Tesco would like them to be doing about $200,000 week, according to our source information and our analysis of it),this consensus further suggests Tesco needs to make changes and significant improvements in the following areas:

(1) Store format (tweaking it in a number of ways), (2) operations (dump the self check out scheme for example) (3) merchandising (improve the national brand representation and overall selection mix), (4) marketing (run radio ads as part of a comprehensive marketing plan and program) and (5) overall approach (localize the stores better to the neighborhood as well as on the merchandising front feature more locally-produced products). [If you look through the last couple weeks on the blog you will find more detailed suggestions for going forward for Fresh & Easy.]

Tesco is far from failure with its Fresh & Easy Neighborhood Market USA small-format grocery store retailing venture. It's historically too good of a retailer for anybody to write off at this point in time. However, at this point in time, Tesco also is far from success with Fresh & Easy as well.

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