Monday, April 7, 2008

USA Today Covers Tesco Fresh & Easy in Today's Edition: We Offer A Brief Analysis and A Couple Observations

The national U.S. newspaper USA Today has an article about Tesco's Fresh & Easy Neighborhood Market USA small-format grocery store retailing venture in its "Money" section in this morning's edition.

The piece is well-written although it doesn't offer much new information to those readers who follow Fresh & Easy Buzz and a few other select more industry-specific publications like ours. It shouldn't really, since USA Today is a general interest news, feature and business publication.

The USA Today story does offer some good insight from the reporter who visited Tesco Fresh & Easy facilities, and offers some good consumer comments about the stores, as well as providing a thoughtful overview of the retail venture to date.

Further, since USA Today is one of the top-three U.S. newspapers in terms of circulation and readership (it's not waiting for you outside your hotel room door every morning in nearly every state in the U.S. for nothing), many Americans who've never heard of Fresh & Easy Neighborhood Market (or Tesco for that matter) will learn about the company and its basic grocery and fresh foods' retailing venture in Southern California, Arizona and Nevada by reading the story. Good or bad; they will learn about it.

A little analysis and a couple observations:

First, the writer quotes a Piper Jaffray investment firm report in which he attributes estimates the Fresh & Easy stores are doing $170,000 per-store, per-week in average gross sales (compared to internal Tesco sales targets of $200,000) to Mike Dennis, an analyst at the firm who has been quoted in a number of press reports in which the reporters interviewed him for their stories as using this number as a sales estimate.

Recently however, as we've reported on Fresh & Easy Buzz, Piper Jaffray's Dennis said in a number of press reports that the firm has done further research since its first report referenced above and in the USA Today article. Most recently in those press reports Mr. Dennis has been quoted as saying Piper Jaffray is estimating current Fresh & Easy average per-store, per-week sales at $60,000.

This sales estimate number is similar to that of another person quoted in today's USA Today story, who the reporter quotes as saying Tesco's Fresh & Easy grocery stores could be doing less than $60,000 per-store, per-week in sales.

As our readers know, a couple months ago we first reported that based on information from a number of sources, Fresh & Easy Neighborhood Market stores were underperforming in terms of Tesco's internal sales targets. (We agree that about $200,000 per-store, per-week has been a Tesco target for this point in time for Fresh & Easy. However, it hasn't been a hard-and-fast sales target internally at Tesco.)

We offered a sales estimate, based on our source data and analysis, of average weekly per-store, per-week sales for the Fresh & Easy grocery markets of $60,000 -to- $100,000. We've stuck by that range ever since we first reported it--and continue to.

We've also suggested that sighting a single number (for example, if we said the stores are doing $60,000 or doing $100,000 per-store, per-week as an average) isn't likely valid--although people are welcome to if they feel confident in their number--because based on our sources, which have been good, a sales range like we sight is the most externally valid form of estimate in our personal view.

Lastly, in terms of comments on the article, a couple of analysts quoted in the USA Today piece speculate on the billions of dollars of sales the Tesco's Fresh & Easy Neighborhood Market could have in the next five -to- ten years. One suggests potential sales in the U.S. of $10 billion by 2015, making it one of the top ten U.S. grocery chains.

Another goes even further, suggesting possible gross sales at Fresh & Easy of $60 billion by 2020 (with 5,000 stores throughout the nation).

Assuming SuperValu, Inc. (number three in U.S. grocery sales) and number four Safeway Stores, Inc. [Kroger Co. is number two; Wal-Mart is number one in U.S. grocery sales market share] didn't grow at more than natural rates (say through acquisitions or major new store opening blitzes) that would make Tesco the third-largest grocery retailer in terms of gross sales in the U.S., just behind Wal-Mart and Kroger Co. (assuming only 12-year moderate sales growth for Kroger) in just 12 years. Wal-Mart is Wal-Mart; nobody is going to pass them in grocery sales anytime soon based on their current growth rate.

It could happen.

So could many things in the dynamic international and U.S. grocery retailing world: Wal-Mart and France's Carrefour (the world's second largest retailer; Wal-Mart is number one, Tesco number three) could merge, creating Walfour, which would be bigger than most nations.

Additionally, Kroger, Safeway, SuperValu and Tesco could merge, making number one, two, three and four fairly meaningless rankings in terms of U.S. grocery sales market share leaders... and so on. [A merger like the latter would make Wal-Mart number two in grocery sales in the U.S. Of course, if Wal-Mart and Carrefour merged; who would care?]

We aren't picking on these projections (or the analysts) because the analysts offered them. Rather, we just think such long-range prognosticating about Tesco's potential huge sales growth in the U.S. is much putting the cart before the horse at this point in time, and thus is meaningless. Right now the retailer needs to figure out how to stop the underperformance at the 61 small-format grocery stores it currently has open and operating in the Western U.S.

Tesco also needs to rethink its format, merchandising, marketing and operations approaches vis-a-vis Fresh & Easy. Further, it needs to create an identity for the stores, as well as create much more consumer awareness that the low-price positioned basic grocery and fresh/specialty foods stores exist. Thus far, Tesco's "if we build them, they will come" philosophy, along with strictly using PR or free media as a marketing and awareness strategy isn't working to drive consumers into the stores.

We don't rule Tesco out in this regard though. Not at all. And those who do are making a big mistake. Tesco is one of the world's best multi-format grocery chains. It's also a learning institution which has proven in the past it can recognize mistakes, correct them, and then do well. The United Kingdom-based international retailer also is a pioneer in small-format grocery retailing.

Therefore, the jury is still out on the success or lack thereof for Fresh & Easy in the U.S. As we've written many times, Fresh & Easy isn't a mere test for Tesco in the USA, it's a venture Tesco CEO Sir Terry Leahy is betting his and the company's success on, as well as his legacy in grocery retailing in many ways. Like the British in World War II, Tesco is one British retailer who isn't keen on giving up.

This story is far from over.

Click here for the complete USA Today article.

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