Metro Phoenix Arizona Market Report: Tesco Opens Store Number Twenty in Phoenix Market; We Use That Milestone to Offer A Market Overview and Analysis

Phoenix, Arizona, the center of the Phoenix Metropolitan region and the Arizona city where Tesco opened its 20th Fresh & Easy grocery market this morning. The region has become arguably the most competitive food and grocery retailing market in the United States.

Tesco opened its 20th small-format Fresh & Easy Neighborhood Market grocery store in Arizona's Phoenix Metropolitan region at 635 West Indian School Road in Phoenix this morning. The grocery chain, which operates convenience-oriented combination basic grocery and fresh foods markets averaging 10,000 -to- 13,000 square feet, plans to have about 37 of the stores opened in the Phoenix Metro area by the end of this year.

As Fresh & Easy Buzz has written often, Arizona, and especially the Phoenix-West and East Valley market region, is arguably the most competitive food and grocery retailing market in the U.S.

Market share leaders include Safeway Stores, Inc., the third-largest grocery chain in the U.S., and Arizona-based Bashas, which operates over 160 supermarkets in Arizona.

Additionally, Arizona, and particularly the Phoenix Metro region market, is one of Wal-Mart, Inc.'s key growth markets in the U.S. The world's largest retailer and now the number one seller of food and groceries in America, has over 70 of its mega-Supercenters in the state, with numerous more either in the pipeline set to open soon, under construction or on the drawing board.

Wal-Mart also operates about 20 of its Neighborhood Market supermarkets in Arizona, most in the Phoenix Metro area. Those stores are about 45,000 square foot supermarkets which feature a complete selection of fresh foods, grocery products and non-foods items. Wal-Mart plans to open a number of new Neighborhood Market supermarkets in Arizona this year and in 2009.

Additionally, this fall Wal-Mart plans to open its first four small-format (about 15,000 square foot) Marketside combination fresh foods and grocery stores in Arizona. All four of the initial Marketside stores will be in the Phoenix Metropolitan region, each fairly close to an existing Tesco Fresh & Easy Neighborhood Market grocery store.

In addition to Safeway, Bashas, Wal-Mart and Tesco's now 20 Fresh & Easy small-format grocery stores, Fry's supermarkets also is a major player in the Arizona market, as is Albertsons, which is owned by SuperValu, Inc., the second largest U.S. supermarket chain in the U.S., after number one Kroger Co.

Not enough competition for you?

Toss in fighting tiger small-format natural and specialty foods retailers Sunflower Farmers Market and Sprouts Farmers Market, which in addition to selling lots of fresh produce and meats, along with natural and organic food and grocery products at discount prices, also offer extensive fresh, prepared foods selections in their respective stores, which average 15,000 -to- 30,00 square feet. Both Sunflower and Sprouts have about 20 stores each in Arizona, and have targeted the state for rapid new store expansion.

Still not enough competition?

Let's not forget Whole Foods Market, Inc., which has a number of stores in Arizona and is planning to open more in the next couple years.

And when it comes to small-format category killers and competitors, one can't leave out Trader Joe's, which has a major presence in Arizona with about 20 stores, with more on the way.

Then there is Costco Wholesale, which also has a significant presence in Arizona and is growing its store count in the state. Costco, which sells basic groceries as well as upscale specialty, natural and organic foods in its huge membership-required stores, along with quality USDA Choice grade meats at discount prices, takes business away from every type of format food retailer, even Wal-Mart's Supercenters.

Arizona, which has a overall Hispanic or Latino population of about 35 -to-40%, as well as being located right on the Mexican border, also has numerous Hispanic format supermarkets which offer an abundance of fresh foods and groceries specifically catering to Latino consumers, as well as offering many traditional American grocery brands and products.

These ethnic Hispanic supermarkets are category killers for traditional food retailers just as Costco is. With 35 -to- 40% of the food shopping public in Arizona of Hispanic ethnicity, for all intents and purposes these ethnic supermarkets can really be viewed as mainstream grocers in the state, since they appeal to such a high percentage of Arizona consumers.

It's against this super-competitive climate that Tesco is currently making Arizona and specifically the Phoenix Metropolitan region market one of its three target markets for its small-format combination basic grocery and fresh foods Fresh & Easy grocery stores, which operate on an everyday low-price strategy, as well as offering regular specials.

It's this combination--low everyday prices for basic groceries and fresh foods, combined with convenient shopping--that Tesco hopes will set its Fresh & Easy stores apart in the Arizona market.

However, the retailer is far from alone in that hope. Wal-Mart's Neighborhood Market stores, its soon to come Marketside markets, Trader Joe's, Sunflower Farmers Market and Sprouts Farmers Market all operate on a similar strategy, although there are significant qualitative format, merchandising and positioning differences among all these retailers.

However, the point is they all are going for a share of the Arizona consumers stomach, and doing so with various versions of convenience-oriented small-format stores. There's only so much share-of-stomach to go around.

And size doesn't matter when it comes to gaining share-of-stomach. In fact, the jury is still out on whether Arizona customers will shop small-format grocery stores like Fresh & Easy on a regular, primary basis, or if they will merely use them as fill-in or secondary and tertiary food and grocery shopping venues.

Wal-Mart is betting that is the case. The mega-retailer has designed and will be positioning when they open in the fall its Marketside stores as fill-in or secondary and tertiary shopping markets. It's using a three-format food retailing strategy in Arizona with its average 180,000 square foot combination grocery and general merchandise Supercenters, it's 45,000 square foot Neighborhood Market stand-alone supermarkets, and its more upscale 15,000 -to- 20,000 square foot Marketside combination fresh foods and grocery stores.

Unlike Tesco's Fresh & Easy, stores which makes its prepared foods items at a central kitchen in Southern California and then ships them to the Arizona stores, Wal-mart plans to make all its fresh, prepared foods right in-store.

The retailer plans to argue in its marketing that this fact makes its prepared foods fresher than the competition. And in this case we know who the competition will be--Tesco's Fresh & Easy. Of course, this point of differentiation only has the potential of being successful for Wal-Mart's Marketside if its in-store fresh, prepared foods are "fresher," better tasting and healthier than Fresh & Easy's are. If they aren't perceived a such by consumers, it could backfire if Wal-Mart touts its in-store fresh, prepared foods "advantage."

Conversely to Wal-Mart, Tesco has positioned its small-format Fresh & Easy grocery stores as primary, neighborhood shopping venues, stating that its goal is to appeal to all shoppers and to have the stores shopped as primary food and grocery shopping venues.

Trader Joe's on the other hand doesn't expect or even position its specialty grocery stores to serve as most consumers' primary shopping venues. However, despite that positioning Trader Joe's sales in its 10,000 -to- 15,000 square foot stores exceeds the average sales per-square foot of most primary supermarkets in the U.S. In fact, with only about 300 stores currently, Trader Joe's is rated as the 25th largest supermarket chain by sales by the supermarket industry trade publication Supermarket News.

The fill-in, secondary and tertiary food and grocery shopping venue strategy also is the focus of Safeway Stores, Inc. with its new "The Market" small-format grocery stores.

This format, which so far is seen in one store called "the market by Vons" which opened in Long Beach, California in May, is an upscale, combination basic grocery, fresh and specialty foods store of about 15,000 square feet. The "The Market" format features fresh produce and meats, fresh, prepared foods, a selection of perishables and basic groceries, along with such features as an in-store hearth used to bake fresh breads and an in-store cafe called "Signature Cafe" which sells the fresh, prepared foods items.

As Fresh & Easy Buzz has reported, Safeway is currently negotiating to put its second and third "The Market" format stores in downtown San Jose, California and downtown Los Angeles.

The stores are named based on the name of the supermarket banner Safeway operates in a given market. For example, the chain uses the Vons banner in Southern California. Therefore the small-format stores are called "the market by Vons" in that market. Safeway also operates Vons supermarkets in Nevada.)

In Arizona, Northern California, Colorado, Oregon, Washington state and in other regions in the U.S., Safeway uses the Safeway banner. Therefore, if Safeway opens any of its "The market" small-format stores in Arizona, which is likely, those stores will go by the name "the market by Safeway," as will the San Jose store in Northern California.

Tesco is betting big on the Arizona market though, as it is in Southern California and the Las Vegas, Nevada Metro region.

Having 37 or so Fresh & Easy stores in the Metro Phoenix market by the end of the year should give Tesco, as well as its competitors, a pretty good idea as to consumer adoption rate of the notion of using the small-format, convenience-oriented Fresh & Easy stores as primary and to a lessor extent secondary, shopping venues.

Thus far, Arizona shoppers have not made the majority of the 20 Fresh & Easy stores their primary shopping venues based on our extensive observation and analysis. Rather, they are secondary and tertiary stores currently in the main.

However, the first Arizona Fresh & Easy grocery store hasn't even been open a year yet, and many of the 20 stores has been open for just a few months. (Store number 20 just opened today.) Therefore, it is far to early to tell if shoppers will adopt the small-format stores as primary and secondary shopping venues. However, by the end of the year, a good indication of that direction should be much clearer.

Further, with Wal-Mart opening the first four Marketside stores and more of its Neighborhood Markets, combined with Trader Joe's, Sunflower Farmers Market and Sprouts Farmers Market all opening different but also similar in some ways small-format stores, the end of the year also will bring a better assessment of the small-format food retailing climate in Arizona.

Lastly it's important to note in a food and grocery retailing market as competitive as Arizona's is, it can become hard to even determine what is and what isn't a primary shopping chain.

In fact, one could argue all of the food and grocery retailers in the super-competitive Arizona could potentially become secondary shopping venues since in such a market it could become the consumer norm, if it hasn't already, to shop at least two or three different chains regularly. Of course, the death in such a market then becomes being one of the primarily tertiary shopping chains if a retailers business model is built on being a primary and to a lessor extent secondary--but not tertiary--grocery retailer.

Sitting above all these retailers (and consumers) is a very poor U.S. economy which is being felt strongly in Arizona, California and other Western USA states that are experiencing higher than national average unemployment, gas prices and home foreclosures.

This poor U.S. economy is favoring food retailers like Wal-Mart and Costco that focus on low prices and value. This is evidenced by both retailer's recent sales and profit reports.

The current economy, especially in Arizona, Nevada and California, also should be favoring Tesco's Fresh & Easy, which offers retail prices comparable to Wal-Mart and Costco--and other discounters--on its fresh & easy store brand of groceries and fresh foods.

Based on the favorable prices on the fresh & easy brand, we aren't seeing the sales in the Arizona stores that we think should be happening. Of course, the fresh & easy brand, like the stores, are new and therefore have zero brand equity compared to Wal-Mart's, Costco's and Safeway's store value brands for example.

That could change with time. However, as we've suggested numerous times in Fresh & Easy Buzz, it's our analysis that in order for that sales situation to change in the retailer's desired more positive direction, Tesco needs to better position both the Fresh & Easy stores in Arizona (and in Southern California and Nevada for that matter) and the fresh & easy product brand better. It also needs to better communicate that brand message once it finds a better position for both the stores and the brand.

Tesco has an excellent marketing reputation in the United Kingdom and in some of the other countries where it operates. Therefore its potential to get it right with Fresh & Easy is there.

However, in our analysis, although we are seeing some progress, the retailer has yet to find a tight, solid marketing position for Fresh & Easy, and then develop a multi-media in-store and external marketing and merchandising program to communicate a message. Doing so by the start of next year seems to us to be crucial to the overall success of the retailer.

Don't bet against Tesco successfully doing that. However, time matters even to the world's third-largest retailer when it comes to losing money. Generally speaking, the start of year two marks a seminal point in terms of any start-up moving in to a less "start-up" phase if you will. Next year will mark that phase for Tesco with its Fresh & Easy Neigborhood Market USA.

The end of this year and the beginning of 2009 also will mark a time of having even more Arizona Fresh & Easy stores for Tesco. Of course, it also will mark a point in time in which all the retailers mentioned earlier will to one extent or another also have more stores open than they do now, particularly Wal-Mart, which is opening numerous Supercenters, Neighborhood Market supermarkets, and of course the new small-format Marketside food and grocery stores, throughout the rest of this year.

Wal-Mart is the fastest growing food and grocery retailer in terms of overall sales and new store square footage in Arizona. Every chain in the state sees it as the biggest threat to its business. In that regard, Tesco's Fresh & Easy is far from alone.