Tesco's corporate director of finance and strategy Andrew Higginson tells the United Kingdom's Daily Mail newspaper in a story in this morning's edition that reports such as ours and those by London-based investment house Piper Jaffray, which suggest the retailer's USA Fresh & Easy Neighborhood Market small-format grocery stores are under-performing in sales expectations to date, are "a load of rubbish."
Our analysis, based on multiple sources, is that the Fresh & Easy grocery markets are doing about $60,000 -to- $100,000 per-store, per-week in sales, compared to internal Tesco sales targets of about $200,000 per-store, per-week, for this point in time. We published our sales analysis before the Piper Jaffray investment firm, which is quoted in the Daily Mail article, offered their sales estimates. The first Fresh & Easy grocery stores were opened in November, 2007. There currently are 59 units open in Southern California, Arizona and Nevada.
Higgins says some of the sales estimate numbers he's read "are not figures he recognizes." "I think it's a load of rubbish. You have competitors queuing up to knock it [Fresh & Easy]. The business is doing fine and the consumer reaction is terrific," he tells a reporter for the Daily Mail in this story in today's edition.
"To be honest," Higginson adds," it's a voyage of discovery, a bit like when the dotcom boom. If customers say they love it that's the key metric really and the rest is just logistics." (Scotty, the chief engineer of the Starship Enterprise (see pic at top) on Star Trek was from the UK after all, so that helps expalin the "voyage of discovery" metaphor. But, read further.]
First, we think the gloom and doom crowd who are saying Tesco's Fresh & Easy small-format, basic grocery and fresh foods grocery market venture is destined for failure are wrong. So we agree that it's rubbish to make that specific statement at this point it time. The jury is still out on that assertion.
However, to dismiss the fact the stores are under-performing sales-wise is just mere spin, which if course as Tesco's CFO, Mr. Higginson is permitted to do so by the laws of corporate public relations.
Additionally, to dismiss all criticism, including much that has been constructive, demonstrates in our analysis one of the reasons the USA Fresh & Easy venture is having serious problems in the first place. Call it ethnocentrism, with a bit of hubris tossed in for good measure. If Tesco is to move forward in a successful manner with the stores in the U.S. it must first take an objective view of the Fresh & Easy format, operations, marketing and merchandising elements, followed by tweaking aspects in each of those key areas, as we've suggested before. It's not rubbish; it's real.
Lastly, we find this quote from Mr. Higginson to be amazing in three ways (both good and not so good mind you): "To be honest, it's a voyage of discovery, a bit when the dotcom boom. If customers say they love it that's the key metric really and the rest is just logistics."
The first thing that strikes us about the quote is positive. We like the idea that a huge (the world's third-largest) retail corporation like Tesco is willing to go on a voyage of retail discovery, especially in a rough-and-tumble grocery market like the Western USA market. Doing so speaks to one of the reasons Tesco has been so successful under the helm of CEO Sir Terry Leahy, which is that the retailer has realized a huge corporation and retailer can still be an entrepreneurial and adventurous one. In fact, that's it's essential to be in order to grow.
This spirit of adventure (and understanding that its future lies outside the UK) has guided Tesco's international expansion since the early 1990's, when Sir Terry and company decided to take the retail company on its global voyage.
The second thing about the quote is: We are surprised a CFO would reference the dotcom boom (which resulted in a bust) in the U.S. We get the aspect of it in which Mr. Higginson likens it to a "voyage" regarding Fresh & Easy. However, so many hundreds of billions of dollars of equity and value were lost in the U.S. by corporations, investment houses and individuals during the 1990's dotcom boom and bust we aren't sure it's a good idea to compare ones multi-billion dollar grocery retailing venture in the U.S. to that phenomenon. Why? Well, lets just say the dotcom boom didn't turn out too well for most from a financial perspective. Although, we did like its "spirit of adventure" in many ways personally.
Webvan and the 1990's U.S. dotcom boom and bust
Further, one of the casualties of the dotcom boom was what was to be the future of grocery retailing in the Western USA, if not the entire nation. That major casualty of the dotcom era was an online grocery delivery service called Webvan.
Webvan, which was based in Foster City in the San Francisco Bay Area in Northern California, was an online grocery retailing company which was founded in the 'go-go' 1990's by Lewis Borders, who was the co-founder of the hugely successful Borders Book store chain, which he later sold for billions.
Speaking of billions, that's about how much Lewis Borders and his team spent of investor money to create, build, operate and market Webvan. Webvan, which was touted as the next revolution in grocery retailing--and was promoted as such by most of the U.S. media--spent $1 billion to have its huge order-fulfillment, distribution center and corporate headquarters built in Oakland, California, not far from the Oakland International Airport, as well as for satellite facilities in the other U.S. markets it served.
Webvan operated in seven U.S. markets: the San Francisco Bay Area (it's first); Los Angeles; Orange County (Southern California); San Diego;; Seattle, Washington; Portland Oregon; and Chicago, Illinois. It was a Western U.S. retail strategy, which it then rolled out to Chicago. Sound strategically familiar?
Webvan spent tens of millions more on a fleet of custom-made, state-of-the-art delivery trucks (the "Van" in Webvan), a cutting-edge computer and internet-based (the "Web" in Webvan) ordering and processing system, office and warehouse equipment, marketing, sales promotion, salaries and bonuses and other "essentials."
A little over a year into its launch, Webvan had burned-through its initial billion or so of initial capital, which it raised from cream-of-the-crop U.S. venture capital and investment banking firms. However, the revolutionary grocery company still raised millions more from these same platinum investment firms via additional rounds of financing.
The problems--chief among them sales under-performance vis-a-vis targets--continued to mount. A few analysts who had always been objective about the "Webvan grocery retailing revolution" sounded the alarm that there was trouble in paradise. However, most of the U.S. and international business and popular press continued to use phrases like "The Webvan revolution," "How Webvan is putting a chill in the hearts of traditional grocers," and the "Webvan invasion," in stories about the fledgling company.
And, Webvan kept putting the lipstick on the dying pig, so to speak. It told the world things were going great, that its national U.S. expansion into the east coast and other parts of the country were right on track, and that the online grocery ordering and delivery service was gaining new customers weekly. Webvan even acquired a rival online grocery retailer, Homegrocer.com as part of its expansion strategy.
Then, in early July of 2001, Webvan announced it had ceased all operation--including the immediate firing of about 2,000 employees--and that it was filing for Chapter 11 bankruptcy protection.
The company said all that was left to do was conduct an orderly winding-down of business operations and the sale of any remaining assets after creditors had been paid. Webvan's once soaring stock wasn't worth as much as the paper the stock certificates were printed on. Most of the U.S. business and popular press outlets were "shocked" at Webvan's demise.
We aren't suggesting Tesco will experience anything similar to the Webvan experience with its Fresh & Easy Neighborhood market venture in the USA corporately. After all, its an international retailing corporation with over $60 billion in annual sales, as well as being the market share leader at home in the UK, with over 30% of that nation's grocery sales market all to itself.
However, we do think there are some cautionary tales in the Webvan experience for Tesco's Fresh & Easy Neighborhood Market venture.
For example: there are similar operations, marketing and merchandising mistakes being made by Fresh & Easy, the similar upfront investment sums are close, the Western U.S.--then Pacific Northwest and on to Chicago regional-to-national rollout strategies are rather similar--and, perhaps most strikingly, are the similarities (at least until marketing chief Simon Uwins announced the three-month pause in new store openings which we reported here last Saturday) in the messaging strategies of the late Webvan and present Tesco regarding Fresh & Easy: "That it's all a bunch of rubbish" and things are going just fine, thank you.
Mr. Uwins took the first (right) step in saying all is not fine in paradise when he got out in front of the story by posting in his corporate blog that the retailer needs to "kick the [Fresh & Easy store] tires" a bit and evaluate operations and other aspects to date. Had Webvan done that earlier they might still be around--although we doubt it in their case, as time essentially ran out for them.
Tesco is one of the world's most innovative and successful retailers. It's not Webvan. But even the mighty--especially when doing business in a foreign land--can learn from the experience and mistakes of a dotcom voyager like Webvan.