Thursday, May 1, 2008

Food Deserts: Tesco's Fresh & Easy Neighborhood Market Won't Create A Retail Grocery Store Oasis in This Particular Oakland, California Food Desert

In our report some months ago about Tesco's march into Northern California's San Francisco Bay Area beginning early next year, we reported that it's likely the city of Oakland would be the Bay Area urban beachhead for that invasion.

We reported that Fresh & Easy was looking at four potential locations in the East Bay Area city in which to open its small-format, combination basic grocery and fresh foods grocery markets.

Tesco has confirmed thus far it will open one location sometime next year in Oakland. That store will be at 73rd and Bancroft Avenue in the city of nearly 500,000. Tesco also confirmed it will open an initial 18 grocery stores in the Bay Area.

We also reported, and it still is the case in our analysis, that Tesco is looking at opening at least three and maybe four of the 10,000 -to- 13,000 square foot Fresh & Easy markets in Oakland.

However, one of the potential Oakland locations, an empty building in the Jack London Gateway shopping center in West Oakland, won't become a Fresh & Easy grocery store after all, according to a report yesterday in the local Alameda Times Star newspaper, which has been confirmed by Fresh & Easy Neighborhood Market spokesman Brendon Wonnacott.

Plans had called for Tesco to split the 27,000 square foot empty building roughly in half, and to put a Fresh & Easy grocery store in one half of the building, while leasing the other half out to a non-grocery retailer like a drug store.

Wonnacott told the newspaper the Jack London Gateway shopping center site, which is in a low-income neighborhood, isn't viable for Tesco's Fresh & Easy. He gave no details as to why, except to say it has nothing to do with the low-income nature or high crime rate in the neighborhood. He added Tesco is looking for other sites in Oakland, including in West Oakland.

The neighborhood where the shopping center is located qualifies as a "food desert," which are inner-city neighborhoods underserved by grocery stores that offer a decent selection of basic grocery items, along with fresh and healthy foods at reasonable prices.

Recently, however, a Trader Joe's and a Whole Foods Market natural foods supermarket have opened not too far away from the neighborhood; not within reasonable walking distance but within about a 25 minute bus ride away. Many of the area's residents don't have automobiles and either must walk or take public transportation in order to do their grocery shopping, which is another characteristic of urban "food deserts."

The city of Oakland and community groups have searched for a number of years without success for a grocer to locate a store in the shopping center in West Oakland. They thought they had finally found a retailer who would do so when they began negotiating with Tesco last year.

However, the shopping center does pose a number of what might be considered problems for a retailer.

First, since the shopping center is in a city redevelopment zone, the city has slapped a number of specific conditions on any retailer who goes into the site.

One of those conditions is that the retailer must pay its workers in that store a "living wage," based on a scale the city of Oakland uses in such cases.

That "living wage" is higher than California's current minimum wage, which is $8 an hour. It's also likely slightly higher than the $10 an hour Fresh & Easy currently pays its store-level workers in Southern California, Arizona and Nevada.

In fact, the retailer is going to have to likely pay its Bay Area store-level employees more than $10 hour anyway when it starts opening its 18 Fresh & Easy grocery markets in the region next year.


For starters, San Francisco, where Fresh & Easy will open two new stores next year, has its own municipal minimum wage, which is currently $10 hour and will go up next January 1. Even most fast food and other entry level employers in San Francisco currently are having to pay a minimum of about $12 hour just to attract employees. The city's unemployment rate is just 4.3%, compared to California's overall unemployment rate of over 6%.

Additionally, wages in the Bay Area are much higher overall than they are in Southern California, Arizona and Nevada, especially at retail food and grocery stores, even if they aren't union shops.

For example, Whole Foods in the Bay Area, which isn't a union shop, has a beginning wage of about $13-$15 hour. Trader Joe's is close to that, as is Starbucks. Even mom and pop corner markets pay close to $12 an hour for clerks with no previous retail grocery experience.

The West Oakland shopping center site also has various controls on subleasing. Since in order to utilize the site properly, Fresh & Easy would have to sublease some of it out, since at 27,000 square feet it's too big for the store format, that might have made it impossible to put a store in the old building.

Oakland, especially West Oakland, has numerous other possible sites where Tesco could locate Fresh Easy grocery stores however. And West Oakland is still a "food desert" inner-city neighborhood. Such underserved inner-city neighborhoods are a key part of its retail grocery store location strategy with Fresh & Easy, Tesco says.

Our commercial real estate and city sources in Oakland continue to tell us the company is looking for other store locations in the city, and we still believe the grocer wants to have at least three and maybe as many as four stores in Oakland.

Of course, that could change. And we will know much more in September when, if as promised by Tesco PLC CEO Sir Terry Leahy, the corporation breaks out its sales and profit numbers for Fresh & Easy USA like it does for all of its other international divisions.

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