Tuesday, September 30, 2008

News & Analysis: Tesco Reports Half-Year Financials; Reports Loss For Fresh & Easy USA and Sales Per Square Foot Averages

United Kingdom-based Tesco PLC, which owns and operates Fresh & Easy Neighborhood Market USA, reported today its interim (half-year) net income rose 11% to 1.04 billion pounds ($1.9 million) in the six months ended August 23, from 936 million pounds a year earlier.

The gain was the smallest for Tesco since 2001. However it out-performed the estimates of most financial analysts who follow the global retailer. Citibank, which we quoted here yesterday, pegged the 11% number ahead of today's reporting. Tesco PLC stock added 4.8% in trading today on the London Stock Exchange on its report of the 11% gain in half-year net income.

Sales excluding value-added tax increased 13 percent to 25.6 billion pounds, Tesco said. However, non-food same-store sales growth in the U.K., Tesco's number one trading region, slowed to 4 percent from 8 percent in the second half of last year.

You can view Tesco PLC's complete half-year financial report here.

Fresh & Easy Neighborhood Market USA

Tesco reported sales and profit/loss numbers for its small-format Fresh & Easy Neighborhood Market combination grocery and fresh foods retailing chain today for the first time since launching the venture in the Western U.S. states of California, Nevada and Arizona.

Tesco reported sales of 76 million pounds ($150 million) for Fresh & Easy, which currently operates 90 stores in the Western U.S.

Tesco reported a loss for Fresh & Easy of 60 million pounds ($118 million), based on a 9 month trading period. The first Fresh & Easy store opened in late October, 2007 in Hemet, California. Therefore, using November 1, 2007 as a fair start date, Fresh & Easy stores have been trading for an actual 11 months total. Tesco however used a 9 month period based on its half-year fiscal analysis.

Here's how Tesco reported Fresh & Easy's sales and income loss in the report today:

"A segmental report on the United States is included in International for the first time with these results. US sales and initial trading losses were previously reported within the UK segment. Fresh & Easy had no stores trading during the first half of last year so comparatives are available only in respect of start-up losses in 2007/8. US sales were £76m in the first half and trading losses were £60m, (last year trading losses were £17m). These planned losses reflect the fact that the US business – which has been trading for nine months – has been built with the necessary infrastructure in place from the beginning to support hundreds of stores. At this stage, it is therefore operating with high overhead and other costs in relation to the scale of the business, whilst also trading from immature stores."

Andrew Higginson, Tesco PLC's chief financial officer, said today in a statement he expects Fresh & Easy Neighborhood Market USA to break even by the next fiscal year.

Tesco also released some additional sales data today for Fresh & Easy.

Tesco said the average Fresh & Easy store is trading at $11 per square foot per week. According to the Food Marketing Institute (FMI) , the major U.S. food and grocery retailing trade association, U.S. supermarket industry average sales per square foot are $11.27 (2007 figure).

Tesco also said its best performing Fresh & Easy stores are trading at more than $25 per square foot per week. However, there's no mention if "best performing stores" means 2 stores, 5 stores, 10 or 25 "best stores." Therefore it's not a very meaningful number in terms of comparing it to the $11 per square foot sales average. Obviously it can't be more than a handful of stores. If so, the $11 average number would therefore be higher.

Additionally, Tesco said Fresh & Easy stores that have opened since spring, 2008 "also appear" to be performing above the average, at $13 per square foot per week.

Fresh & Easy Buzz has previously reported, based on information from sources, that a few of the Fresh & Easy Stores, such as the Manhattan Beach, California unit which opened on July 2 and a couple others opened after that this summer, are averaging about 200,000 in weekly sales. However, that's far from the $25 per square foot per store sales Tesco reported "some" of its best stores are doing. Perhaps we've missed those stores?

However, the $13 per square foot per store number fits with those handful of stores, like Manhattan Beach, our sources tell us are doing in the $200,000 per week average range. However, our information is that those stores are units opened this summer after July rather than in the spring as Tesco reports. Perhaps we've missed a couple of those stores as well?

Mike Dennis, an analyst at the Piper Jaffray-UK investment firm who follows Tesco PLC and has been closely following Fresh & Easy since Tesco set up shop in Southern California about three year's ago, said about the reported $118 million loss for Fresh & Easy Neighborhood Market: "The interesting point on US losses was the $118 million loss could be $25m start-up and $93m trading losses which if right would imply negative margins of 62% obviously due to discounting and lack of op leverage on high depot fixed costs." By depot he is referring to the 800,000-plus square foot Fresh & Easy distribution center in Riverside County, (Southern) California.

"I assume to get to $200m FY (fiscal year) loss (breaking even by the fiscal year as Tesco CFO Andrew Higginson suggest will occur) they (Tesco) will need to do a sale and leaseback on (the) Riverside (County) depot," Dennis added.

Tesco analyst Dennis also says the idea the $11 sales per square foot per store Tesco reported for Fresh & Easy "is good is laughable" because rather than benchmark the sales strictly based on supermarket (like Vons and Albertsons, two chains in Southern California) format average sales per square foot ($11.27 according to FMI), it should be measured closer to convenience store (because the Fresh & Easy stores are a hybrid grocery and convenience-oriented format) sales per square foot, which are higher than supermarket averages.

Fresh & Easy Buzz's most recent sales per square foot estimate for Tesco's Fresh & Easy Neighborhood Market essentially matches the $11 per square foot per store number reported today by Tesco PLC.

Our most current average per store sales estimate range for Fresh & Easy is 125,000 -to- 150,000, with our average per store sales estimate single figure at $130,000

Fresh & Easy stores range in size from 10,000 -to- 13,500 square feet. If you pick the mid-range square footage number between that store average range and multiple it by $11 (sales) per square foot, you will see we are right in the ballgame with our numbers. For example, using 11,500 square feet as the mid-range, and $11 sales per square foot, the total is $126,500 in average weekly sales. Our estimate is $130,000, within a range of $125,000 -to- $150,000.

Not only is Fresh & Easy Buzz the only publication (that we can find) that's gone out on the limb to offer such an estimate in recent times, we're obviously pleased with its accuracy.

In fact, you can read this piece from yesterday, "Tesco PLC to Report Interim Financials Tomorrow; Including Guidance on Fresh & Easy Neighborhood Market USA,," in which we published our sales estimates. We also published our estimates in this September 26 piece, "Tesco PLC, Fresh & Easy and the Numbers Game; Will Tesco Release Hard Numbers For Fresh & Easy Next Week? If So, Will They Be Meaningful?." We've published the estimates in a number of other stories prior to September 26 as well.

Tesco's original average per store weekly sales target for its Fresh & Easy stores for this point in time was about $200,000, rather than the current numbers.

While current average sales are a considerable shortfall from that target, they are much better that what the stores were averaging in the first quarter of this year. At that time our estimate was sales of about $70,000 -to- $100,000. At current averages of say between $120,000 to- $130,000 it's a considerable improvement.

However, it's our analysis a significant portion of that sales lift has come from Tesco Fresh & Easy's aggressive use of its deep discount $5-off coupons, which can be redeemed for full face value by shoppers on purchases of $20 or more in the stores. That deep discount amounts to a whopping 25%-off on a $20 grocery purchase.

These coupons are mass-mailed to residences and handled out in the stores in multiples to customers. They also are used frequently by shoppers. Tesco has been using them since the stores first opened last year.

It's our analysis the aggressive use of the deep-discount coupons has provided an "artificial" sales lift to the Fresh & Easy numbers, well beyond the type of lift average supermarket chains get from coupon use and redemption.

We aren't going to quantify the percentage of the sales lift attributable to the aggressive use of the deep discount coupons since we don't have sufficient information at present to do so in our estimation.

However, the coupon use is significant -- and it's our analysis if the 25% deep discount value coupons were either reduced by say 50% (which would still be a deep discount compared to what competitors offer) or eliminated completely (very few U.S. retailers use such coupons on any regular basis, let alone for nearly a year like Fresh & Easy has been doing) there would be a significant shortfall in the grocery chain's current $11 per store per square foot average sales number.

But in the longer view, Tesco's Fresh & Easy certainly is doing far better than many other analysts have suggested. Since our most recent sales estimates are in line with today's reported numbers for Fresh & Easy, we've been far less likely to sound the third alarm bell -- maybe 1.5 at this point in time -- like a number of other analysts have been continually doing.

However, that doesn't mean it's our analysis Fresh & Easy is on solid footing. Far from it. For example, we disagree with Tesco's chief financial officer that the company will likely break even in the next fiscal year. Maybe. But we doubt it.

We disagree for a number of reasons, but chiefly because starting next year Tesco will enter the Northern California market, opening a distribution center and the first of what so far are about 45 -to- 50 stores, some confirmed by the retailer and others we've identified in our reporting. (This doesn't include the Bakersfield and Fresno region stores set to begin opening next year in the Central Valley.)

Northern California is a very different market in many qualitative ways than Southern California, Southern Nevada and the Phoenix, Arizona Metropolitan region, where the current Fresh & Easy stores are operating.

In our analysis, Tesco will find itself burning up far more investment money (on a per-capita basis at retail) in entering and operating in the Northern California market (San Francisco Bay Area and Sacramento/Vacaville Metropolitan region) than it has so far in its retail operations and marketing/merchandising (we aren't talking about start-up costs for distribution, ect.) in its current three market regions.

We will save our extensive analysis of the reasons why this will likely be the case for another time -- and for another piece devoted exclusively to that topic.

For now, suffice to say the competition for Fresh & Easy will be stronger and more varied in Northern California, the consumer base is qualitatively different, and the external issues are much more difficult for a retailer to deal with than is the case in Southern California, Nevada and Arizona.

As a result, we doubt Tesco will see break even as soon as the fiscal year.

On the other hand, we suggest those who continue to count Tesco out with Fresh & Easy do so at their own peril, so to speak.

If Tesco's Fresh & Easy can execute its operations better, improve its merchandising and marketing significantly, and stop having such high employee turnover in key areas like corporate merchandising and buying (along with doing a few other things differently and better), there are a number of current trends in Western U.S. food and grocery retailing (and externally) that suggest a smart, savvy, well positioned small-format grocery chain could do extremely well.

For Tesco's Fresh & Easy, time -- and those improvements and changes -- will tell.

Monday, September 29, 2008

'Will it Play In Peoria?' Wal-Mart Will Open its Fifth Arizona Marketside Store Later This Year in Peoria, Arizona

With still a week yet left until it opens its first four small-format combination grocery and fresh foods Marketside stores in the Phoenix, Arizona Metro region cities of Gilbert, Chandler, Mesa and Tempe, Wal-Mart already is preparing another store to open later this year in the Arizona city of Peoria, Fresh & Easy buzz has learned. [The Mesa Marketside store is pictured above.]

The Peoria, Arizona store will be Wal-Mart's fifth Arizona Marketside store thus far.

Two new additional Marketside stores in Southern California, one in San Diego and the other in nearby Oceanside (both which we've reported on), are scheduled to open this year before the Peoria, Arizona store does, according to Amee Chande, vice president of strategy and marketing for Wal-Mart, Inc.

Additionally, as we've previously reported, Wal-Mart has identified other Arizona and Southern California locations for its Marketside stores, as well as looking for locations in Northern California, primarily in the San Francisco Bay Area.

Peoria, which is located in the Northwest Valley region in the Phoenix Metropolitan area, is Arizona's ninth-largest city with a population of about 153,592 (2007) residents.

Wal-Mart chose Peoria as the location for its fifth Marketside location based on research and demographic data the retailer has collected due to its extensive retail presence in Arizona with its Wal-Mart Supercenters, Sam's Club stores and Wal-Mart Neighborhood Market supermarkets, which all offer food and grocery items, according to a Wal-Mart source.

Peroria has a mix of residents including young professionals and high-income retirees. Wal-mart believes the community offers a good consumer base for its Marketside stores, which will offer about 5,000 -to- 10,000 ingredient skus (shelf-stable groceries, beverages and fresh foods like meat, produce, dairy and the like) and ready-to-eat and ready-to-heat fresh, prepared foods items made right in the stores.

Wal-Mart is referring to all of the food and grocery items the stores will offer as ingredients, positioning the Marketside stores as "food-centric," yet affordable combination fresh food and ingredient (read grocery) markets.

Marketside stores will offer basic groceries and natural, organic and specialty products; fresh produce, meat and bakery; beers, wines and spirits; and fresh, prepared foods, featuring an in-store kitchen and even a small sit-down eating area for customers to have breakfast, lunch or dinner at in the store.


Recent related stories from Fresh & Easy Buzz - Wal-Mart and Marketside

Wal-Mart Offers its Own 'Peek' Inside it's Small-Format Marketside As Part of A One-Week Countdown to the Stores' Oct. 4 Openings in Arizona

In this September 26 piece, "Fresh & Easy Buzz Gets A Peek -- And it Was Only A Peek -- Inside One of the Four New Wal-Mart Marketside Stores Opening in Arizona On October 4," we shared with our readers what we were able to see inside one of the four Wal-Mart Marketside combination grocery and fresh foods markets set to open on October 4 in the Phoenix, Arizona Metropolitan region cities of Glibert, Chandler, Mesa and Tempe.

Today Wal-Mart is offering a "preview peek" of its own into Marketside, having added a new section to its Marketside website here.

Just seven days before the first four Marketside stores open, Wal-Mart is pulling back the figurative window shades a bit to reveal, as you can see at this link, the floor plans, departments, some of the products, and a few of the prices at Marketside.

The Marketside stores will be divided into 11 sections or departments, according to Wal-Mart. Among those sections or departments include: The Corner Deli, The Bakery, The Butcher Shop and The Garden (produce). Click here to learn more about the Marketside departments.

Additionally, as we've been reporting, the Marketside stores' grocery selection will include basic food and grocery items, along with specialty, natural and organic items. There isn't a mention of store brand food and grocery items in the new website section. But the stores will have them. Look for the store brands "Field & Vine" and "Wild Thyme" (and perhaps others)when the markets open on October 4, for example.

Further, as we've reported previously, Wal-Mart confirms on the website the Marketside stores will sell a selection (about 200 they say) of domestic and imported craft beers and wines. All of the wines will be $10 or under, according to Wal-Mart.

The Marketside stores also will sell a selection of spirits. Tesco's Fresh & Easy Neighborhood Market stores sell beer and wine but not spirits, making the fact the Marketside stores do so a point of differentiation between Wal-Mart's and Tesco's respective small-format grocery store offerings.

As we've reported all along on Fresh & Easy Buzz, a major offering of the small-format Marketside stores will be in-store fresh, prepared foods prepared in an in-store kitchen.

The new Marketside website section offers a sampling of the types of in-store fresh, prepared foods the stores will offer. These ready-to-eat and ready-to-heat foods include prepared meals like chicken tamales with Spanish rice and steak fajitas with grilled onions and red rice, which range in price from $6 for single-sized entrees to $8 for family-sized entrees. They also offer $4 appetizers and $2 side dishes like salads.

Marketside stores also will offer different weekly complete ready-to-eat or take home and heat meal solutions at affordable prices, like the two family meals here; one for $14 and the other for $18, along with lots of other grab-and-go, lunch, dinner, side dish and related prepared foods offerings.

As we've reported previously, the Marketside stores have in-store kitchens, along with an in-store eating area that can seat 9-10 customers/diners at a time. The major focus of the stores' prepared foods offering though is take home.

Having in-store kitchens where the food is prepared right in the store, along with offering the in-store eating area, is another point of differentiation between Wal-Mart's Marketside and Tesco's Fresh & Easy.

All of the Fresh & Easy prepared foods are made at a central kitchen in Southern California then delivered to the stores in Southern California, Nevada and Arizona. There currently are 87 Fresh & Easy combination grocery and fresh foods markets in those three states.

Wal-Mart also has added an expanded "Who We Are" section on the Marketside website, describing a bit more from a marketing standpoint what the store format is, as well as discussing the store associates, the food-oriented mission of the stores, and related topics. [Click here to view that new section.]

Wal-Mart also is using its http://www.marketside.com/ website to conduct a "countdown" between now and October 4 regarding the four stores opening on that date in Chandler, Mesa, Gilbert and Tempe, Arizona. View the bottom of the screen here [The map locations and addresses of the four stores are here.]

Wal-Mart's Marketside team has been taking a leaf from Tesco Fresh & Easy Neighborhood Market's marketing playbook, having it's headquarters and store associates visit residents in the neighborhoods where the four Marketside stores will open on October 4, handling out brochures, store coupons and welcome bags full of free Marketside store products to the residents. Wal-Mart has a separate office for Marketside in Tempe, Arizona where operations will be run out of.

This is the text of the letter or brochure the members of the Marketside team are giving neighborhood residents along with the free goodies, coupons and related promotional materials as they go door-to-door in the neighborhoods.

Each of the four Marketside stores, in each of the four Arizona cities, are located about 1 -to- 2 miles from a Fresh & Easy grocery market. In other words, those Marketside team members are going door-to-door in basically the same neighborhoods where Fresh & Easy does its neighborhood-oriented promotion.

We've also learned the Marketside stores will have food sampling stations set up throughout the markets. Prepared foods and other food and grocery items sold in the stores will be sampled throughout the day and evening at the stations.

Wal-Mart's philosophy behind doing this is it wants to catch shoppers where there are at the point-of-purchase in the store -- the produce department, meat department, bakery and the like -- so they can generate impulse sales right there rather than have shoppers go to a central area in the store for product samples like is the case at Fresh & Easy stores.

In each Fresh & Easy store there is an in-store sampling area or station called "The Kitchen," where various prepared foods are offered for customer sampling. The shoppers have to go to the area to sample though, rather than having the samples come to them like is the case with the sampling stations located throughout the Marketside stores.

Most U.S. food and grocery stores do the same as Wal-Mart plans to do with Marketside, offering sampling throughout the various store departments.

Wal-Mart also has added a new tag-line to its Marketside logo. That tag-line, as we reported the retailer would be doing in its marketing and positioning for the small-format chain, emphasises the stores' value proposition as well as its focus on food. It reads: "marketside: deliciously affordable."

Special Report: Wal-Mart, Inc. Studying Second Small-Format Food and Grocery Store Concept; the 'Bodega' or Modern Version of the Corner Grocery Store

Wal-Mart, Inc. CEO Lee Scott mentioned a rather interesting future U.S. small-format food and grocery retailing possibility for the mega-retailer at the 15th annual Goldman Sachs Global Retailing Conference held earlier this month in New York City.

The new Wal-Mart small-format possibility isn't Marketside, the retailer's new small-format combination grocery and fresh foods stores, the first four units of which are set to open this Saturday, October 4 in the Phoenix, Arizona Metropolitan market cities of Gilbert, Mesa, Chandler and Tempe. Rather, it's a new and second possible Wal-Mart small-format grocery store format for the U.S.

During his speaking time at the conference, Lee Scott discussed format development at Wal-Mart, Inc., including the 15,000 -to- 20,000 square foot Marketside stores, as well as offering some of his views on Tesco and its Fresh & Easy Neighborhood Market format, venture and stores, as we wrote about here.

What was the most interesting part of the Wal-Mart CEO's talk though was when he said this:

"I think there's lots of opportunity for (new smaller) formats (for Wal-Mart) in the U.S. A store that might remind you of a Bodega store is clearly possible." (A Bodega is a small grocery store typically found in Spanish-speaking neighborhoods.)

Yes, Wal-Mart, Inc. is investigating creating and opening small-format, bodega-like grocery stores in selected U.S. market regions -- and not just small grocery stores geared only to Hispanic shoppers -- but a modern version of the corner grocery store positioned to mass consumers of all ethnic backgrounds.

This wouldn't be a new development for Wal-Mart, at least when it comes to its Wal-Mart- Mexico division, where the retailer has opened a number of these small-format bodegas or grocery stores as part of its multi-format strategy which has made Wal-Mart the number one food and grocery retailer in Mexico today.

Additionally, Wal-Mart also has been demonstrably improving and growing its Hispanic and Latino food and grocery category expertise across all store categories over the past decade. Its added Hispanic products (and improved the merchandising) in all of its existing format stores, and as we reported here on May 7, 2008 opened its first large-format store (in Garland, Texas) positioned specifically to Hispanic consumers.

But when Lee Scott uses the term "bodega" he isn't saying exclusively that these small-format U.S. grocery stores would be markets geared only to Hispanic or Latino consumers. Instead, the small grocery stores could be in some cases geared to Hispanic shoppers, and in other cases small grocery markets positioned to the public or consumer base at large. They would be more mainstream grocery stores, unlike having the more upscale combination fresh, prepared foods and grocery format of Marketside.

The inspiration for the discussion of these small-format grocery stores comes from how well the retailers bodegas are doing in Mexico, along with its decision to develop the Marketside stores in the U.S., combined with Wal-Mart's observations about what we call the small-format food and grocery store international revolution going on throughout the world.

Wal-Mart also is looking at opening small-format stores via its Asda division in the United Kingdom. Small-format food and grocery retailing is hot in that nation, where Tesco, Sainsbury's, the Co-operative group, Marks & Spencer, Waitrose, Aldi, Lidl and Netto all operate various styles and format types of small-format stores.

Here's what Wal-Mart CEO Lee Scott said earlier this month at the Goldman Sachs retail conference about Wal-Mart's current and future expansion, including small-format stores, in the U.S.:

"We (Wal-Mart) are going to take the opportunities to expand that are presenting themselves now because of the weakened economy. With prices on fuel and food going up, we now are having an increased number of communities contacting us and asking us to build a Wal-Mart store in their town or state and some of those are the very towns or states you would have read about historically that are not enchanted by a beautiful Wal-Mart store."

Scott also commented at the conference that Wal-Mart's smaller Supercenters, which we've reported on and written about, are doing even better than the company had hoped they would:

"It turns out our move to a capital efficiency (opening fewer new stores than originally planned and opening numerous smaller Supercenters) focus this past year was absolutely the right thing to do. What we're seeing worldwide is those stores closest to the customers seem to be doing the best. In the U.S., we're finding our 100,000-square-foot supercenter in the metro areas being very successful and the 175,000-square-foot store, versus the 190,000-square-foot store, is doing very well."

The fact the smaller Supercenters -- something Wal-Mart avoided doing for decades before trying it a couple years ago -- are doing better than the retailer imagined they would also is stoking the optimism at corporate headquarters in Bentonville, Arkansas over smaller-format retailing in general, particularly in the food and grocery categories. This includes lots of optimism about Wal-Mart's existing 40,000 -to- 45,000 Neighborhood Market supermarkets, along with the soon to open Marketside stores. And like hope springing eternal, such hope, reinforced by reality, also can be the springboard for smaller (format) thinking.

As a result, we've learned the small-format "bodega" or more basic grocery store concept is being discussed and studied extensively at Wal-Mart corporate headquarters, which was why Lee Scott mentioned it as a trial balloon of sorts at the Goldman Sachs retail conference earlier this month.

In fact, there's a growing "Small-Mart" brain trust at Wal-Mart that is studying the U.S. mini bodega/modern version corner grocery store concept, along with a number of other small-formats for both the U.S. and elsewhere throughout the world where the retailer has divisions.

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Click on the headline links to read the stories.



Tesco PLC to Report Interim Financials Tomorrow; Including Guidance on Fresh & Easy Neighborhood Market USA

Tesco PLC, which owns the Fresh & Easy Neighborhood Market grocery chain in the Western USA, will release its interim (quarterly) financials tomorrow in the United Kingdom.

Although Tesco, which is the number one food and grocery retailer in the United Kingdom and the third largest retailer in the world, is a bit under assault at home in Britain, primarily from Wal-Mart-owned Asda (the UK's number two retailer) and the small-format, no frills deep discount grocery chains Aldi, Lidl and Netto, industry analysts aren't expecting any major great surprises in Tesco's overall numbers tomorrow.

In terms of in the UK, which accounts for the largest portion of Tesco's global sales, the retailer's sales share has dropped slightly, from 31.7% to 31.5%, in the latest (released last week) market share figures. However, Tesco remains far and away the UK's leading retailer. Number two Asda has about 17.5% of the UK's food and grocery sales market share, for example. Number three Sainsbury's has about a 16% share.

Of most keen interest though is that Tesco has said it will report some sort of guidance tomorrow on the performance of its small-format, convenience-oriented, combination grocery and fresh foods Fresh & Easy Neighborhood Market USA chain, which currently operates 87 stores in Southern California, Metropolitan Las Vegas, and in the Phoenix, Arizona Metropolitan region market.

As we reported on September 26, it's unknown at present if Tesco will report any specific sales, profit or loss numbers to date for Fresh & Easy. We will have to wait until tomorrow to find out what form that guidance takes.

A number of analysts are expecting positive overall financials for Tesco PLC when its interim numbers are reported tomorrow.

US-based Citibank is predicting an 11% increase in trading profits to £1.39bn for Tesco, and second quarter same store sales growth of 4%, for example.

We've estimated per-store, per-week average sales of the 87 U.S. Fresh & Easy stores are currently in the $125,000 -to- $150,000 range. This is compared to a target of about $200,000 in weekly average sales Tesco had hoped its Southern California-based Fresh & Easy Neighborhood Market would be at at this point in time.

U.S. supermarket average sales per square foot in the U.S. are $11.27 per square foot, according to the Food Marketing Institute (FMI), the leading food and grocery retailing trade association in the U.S. Tesco's Fresh & Easy stores average 10,000 -to- 13,000 square feet in selling space.

Stay tuned for tomorrow's financials.

Reader Resources:

Recent related Fresh & Easy Buzz stories:

September 26, 2008: Tesco PLC, Fresh & Easy and the Numbers Game; Will Tesco Release Hard Numbers For Fresh & Easy Next Week? If So, Will They Be Meaningful?

September 26, 2008: News & Analysis: Employees At Two More Fresh & Easy Grocery Stores Could Soon Request UFCW Union Recognition From Tesco's Fresh & Easy

September 23, 2008: Investment News Break: Major Tesco Plc. Investor Warren Buffett to the Rescue

September 22, 2008: Key Personnel Breaking News: Co-Vice President of Retail Operations Brian Pugh No Longer Employed At Tesco Fresh & Easy Neighborhood Market

September 16, 2008: United Kingdom Market Share Report: Small-Format Disounters Aldi and Lidl Gain, as Does Asda, Morrison's and Iceland; Tesco and Sainsbury's Lose Share

September 16, 2008: Tesco and Wal-Mart-Owned Asda Launch Price War in the UK; Small-Format Discounters Aldi, Lidl and Netto Nipping At Both Giants' Merchandising Heels

September 15, 2008: Wal-Mart's Chief Merchandising Officer Reiterates CEO's Words that it's 'Keeping Tabs' On Tesco's Fresh & Easy Today at Bank of America Conference

September 12, 2008: CEO's Can Say the 'Darndest Things': Wal-Mart CEO Lee Scott Says He Has Faith Tesco Will Succeed With Fresh & Easy; It's A Small-Mart World After All

Friday, September 26, 2008

Tesco's Fresh & Easy Neighborhood Market Experiments With A $1-Off Online Discount Coupon; But its Paper Coupons Offer More Than Twice the Value

Tesco's Fresh & Easy Neighborhood Market has created it's first online store discount coupon, which the retailer is offering at a special link on its website for a limited time, ending on September 28.

Consumers can download and print the coupon from the website here, then use it while shopping at the Fresh & Easy stores.

The online coupon, which has the marketing message above at the link, offers shoppers $1-off total purchases of $10 or more at Fresh & Easy markets. The online coupon is of a far less value (less than half ) than the retailer's now famous $5-off total store purchases of $20 or more paper coupons, which it direct mails to households near its 87 stores in Southern California, Nevada and Arizona, and gives out in its stores.

The online $1-off coupon isn't a replacement or substitute for the $5-off coupons, which the grocery chain continues to use. Rather, it's being offered in addition to those coupons, along with being an attempt to further target frequent online users and visitors to the company's website freshandeasy.com.

Few people (including the consumer press) are aware of the online coupon though, since Fresh & Easy hasn't promoted it in its usual fashion of issuing a press release. As of Wednesday we hadn't seen or heard of any signs advertising it in the Fresh & Easy stores either. Tesco Fresh & Easy Neighborhood Market director of marketing Simon Uwins does have a one sentence September 25 post about it on his company blog though.

In fact, unless you use this link you can't access the $1-off coupon directly from the Fresh & Easy website home page. At least that's the case as we write and publish this piece.

Go figure.

In large part, we think the online coupon, particularly because of its limited duration and lack of widespread promotion, is a way for Tesco's Fresh & Easy to test the potential of using the Internet and its website more than it currently is doing for store promotions and discounts.

However, since Fresh & Easy shoppers are used to the $5-off on purchases of $20 or more (a 25% savings if used for a $20 purchase), paper coupons they receive in the mail and at the stores, we doubt they will be nearly as excited about the $1-off purchases of $10 or more online coupon, since it represents only a 10% value on a $10 purchase, which is less than half the value of the $5-off on $20 paper coupons.

The $1-off value coupons are probably more in-line with what Fresh & Easy should be offering in terms of coupon value though to avoid what we believe is to a large degree a perception in the minds of consumers (which we believe is occurring with the ubiquitous use of the $5-off coupons) of Fresh & Easy as a "Hi-Low" retailer rather than the everyday low-price image it wants to create, along with the fact that at some point the retailer will have to reduce the value of those $5 coupons if it wants to increase its margins, which are far lower than the U.S. industry average at present.

A retailer can charge-off as a "promotional or advertising" expense deep discount coupons like Fresh & Easy's $5-off on a minimum $20 purchase vouchers for a given period of time, theoretically protecting on paper its gross margins.

However, at some point it has to deal with real gross margins, and the use of 25% value deep discount coupons at the high level in which Tesco's Fresh & Easy uses the coupons has a significant suppression effect on those gross margins. This is particularly serious for Tesco's Fresh & Easy Neighborhood Market since its gross margins, even taking away the extensive $5 coupon use, need significant improvement, according to sources who have been and are in positions to know such things.

That Tesco's Fresh & Easy is experimenting more with its website and online marketing is smart though. The retailer does far too little online marketing and promotion compared to numerous other retailers.

For example, Aldi USA posts a weekly ad on its website and sends it to those who sign up via a weekly email alert. [See these website special purchases as well.] The retailer also has a special "value calculator" on its website in which users can find out "how much cheaper it is to shop at Aldi" than it is to shop its competitors. The small-format, deep discount grocery chain, with 950 U.S. stores, does other special marketing and promotional activities via its website as well.

Tesco's Fresh & Easy seems, based on our research, to have its strongest following among young consumers, those in about the 18 -to- 35 year-old age group, with the highest segment of that group cohort being in the 18 -to- 25 year-old age group, in our analysis.

Since consumers in this age cohort also happen to be the heaviest and most frequent and savvy users of the Internet -- not just on computers but on cell phones and other portable devices as well -- it would behoove Tesco's Fresh & Easy Neighborhood Market in our analysis to make far more frequent -- and creative -- use of the Internet and its freshandeasy.com website than it is currently doing.

Real Estate Group Selling the Four Wal-Mart Marketside Small-Format Grocery Stores Set to Open on Oct. 4; Plus Data on the Store's Exact Sizes

Santa Ana, (Southern) California retail real estate development company Red Mountain Retail Group (RMRG), which owns the four former drug store buildings in Mesa, Chandler, Gilbert and Tempe, Arizona that Wal-Mart has turned into its small-format Marketside food and grocery stores which are set to open on October 4, has sold one of those buildings and has the other three on the market. (The Mesa Marketside store is the one pictured above.)

Red Mountain, which acquired the four drug store buildings in Arizona along with three others in a seven unit purchase, has sold the Wal-Mart Marketside store building at 910 East Elliot Road in Tempe, Arizona for $6,061,604 at a 6.3% cap rate, according to a Red Mountain group executive. The deal closed on September 19. It was arranged by Kevin Boeve of the Marcus & Millichap real estate firm. The Tempe Marketside store is 16,480 square feet.

RMRG, which has offices in Phoenix, Arizona and the Central Valley, California city of Clovis near Fresno, as well as having its headquarters office in Santa Ana, also has the other three Wal-Mart Marketside store buildings -- the stores in Mesa, Chandler and Gilbert -- up for sale, according to Pete Oakley, who is handling the sale out of the firm's Santa Ana office.

Below are the locations, square footage and asking prices (in millions) of each of the remaining three Wal-Mart Marketside store buildings:

>Mesa, Arizona: 7561 E Baseline. Mesa, AZ 85209. Store Size: 16,516 square feet. Selling price: $6,516,000 at a 6.00% cap rate.

>Chandler, Arizona: 950 N McQueen Rd., Chandler, AZ 85225. Store Size: 17,075. Selling price: $6,602,000 at a 6.00% cap rate.

>Gilbert, Arizona: 838 West Elliot Road, Gilbert, AZ 85233. Store Size: 14,841 square feet. Selling price: $5,738,000 at a 6.00%.

The store sales information data provides us with the exact size of each of the Wal-Mart Marketside stores set to open on October 4., which is information no publication has previously published to date.

The Gilbert, Arizona Marketside store is the smallest of the four units, at 14,841 square feet, which is just slightly below the 15,000 -to- 20,000 square foot range we've said the stores will fall into.

The other three Marketside stores are closer to the same size. From least -to- most square feet they are: Tempe at 16,480; Mesa at 16,516; and Chandler at 17,075, which has the most square footage of the four stores.

Red Mountain Retail Group was founded in 1999. The group says it currently has a retail portfolio consisting of 75 centers in seven U.S. states. According to the company, that portfolio totals 4,860, 568 square feet of retail space worth about $1 billion.

The retail real estate firm focuses on acquiring distressed or challenged shopping centers and buildings in those centers, rehabilitating the centers, and then finding new tenants, which is what it did in working with Wal-Mart to locate its first four Marketside stores in the Phoenix Metro region in the vacant, former drug store buildings.

RMRG also buys selected portfolios of retail real estate, with an eye towards those it thinks have untapped opportunity if rehabilitated and then marketed properly, as well as participating in other facets of the commercial retail real estate industry

Michael Mugel, the founder and CEO of Red Mountain, says the deal with Wal-Mart to convert the four former drug stores into the small-format Marketside food and grocery markets was a "short notice, thrill ride."

"We are thrilled to have had the opportunity to work with Wal-Mart in the opening of their first Marketside stores in the nation," Mugel says. "We enjoy short notice, thrill ride opportunities like this where we can serve our client's needs by matching our core values (relationships first, execution second and the belief the 'Anything is Possible') with their ever expanding concept requirements."

In other words, Wal-Mart didn't spent lots of time in the location phase of the development process for Marketside in terms of wondering where its first stores would go. It knew where it wanted the first four Marketside stores -- in four cities where Tesco has existing Fresh & Easy stores, along with at locations in those cities close to existing Fresh & Easy markets -- and then found a real estate firm to find it four locations within 1 -to- 2 miles from Fresh & Easy store locations in each of those four cities, which is the geographical case of each of Wal-Mart's first four Arizona Marketside stores.

Selling the first of the four Marketside store buildings, along with putting the three others on the market, isn't being done by RMRG for any other reason other than the fact that's what the company does -- acquires centers and buildings, improves them sometimes, then finds a tenant for the buildings, as it did with Wal-Mart for its Marketside stores.

Once that cycle is completed, the firm, like most others in its business, then sells the buildings for a profit since the buildings not only now have a tenant in them but also come with the improvements done to them by that tenant. This adds value and creates a profit. The firm can then use that cash flow generated from the sales to purchase other "challenged" properties it can improve, find tenants for, and then turn over.

Leasing rather than owning the buildings also provides many cash-flow and other advantages to Wal-Mart, not the least of which includes not laying out upfront cash to own the store buildings of what is a brand new format, Marketside, for the retailer.

Don't be surprised if additional Wal-Mart Marketside stores open in Arizona -- and in California -- in centers and buildings acquired, owned and rehabilitated by the Santa Ana, California-based retail real estate development company.

Fresh & Easy Buzz Gets A Peek -- And it Was Only A Peek -- Inside One of the Four New Wal-Mart Marketside Stores Opening in Arizona On October 4

Fresh & Easy Buzz was able to get a peek inside one of the four new small-format combination grocery and fresh foods Marketside stores Wal-Mart will open in the Phoenix, Arizona Metropolitan region cities of Chandler, Mesa, Gilbert and Tempe on October 4, just nine days from today.

And it was just a peek. The store windows were mostly covered, which meant we had a limited viewing opportunity. People were working in the store. And there was lots of stuff all over inside making it difficult to get a full perspective. Despite these challenges, we did get a look inside. We're hoping to get a better look prior to October 4.

What we were able to see of the Marketside store's interior confirms much of what we've been writing since December, 2007 about the format's interior design and look.

Here's what we were able see from our tiny viewing point:

>The Marketside store interiors use muted colors, like those you can see on the outside of the store pictured above, which is the Mesa Marketside unit, along with those type colors used in its Marketside logo. The design statement trying to be made inside the store is: FRESH foods and ingredients in a warm and comforatble (but not lavish) retail environment, in our analysis.

>The floor is of polished concrete. No tiles. It looks utilitarian yet attractive. It looks similar to what Whole Foods Market, Inc. does (polished and sometimes colored concrete floors) in most of its natural foods supermarkets. It's also similar to the floors in Fresh & Easy stores.

>Stylistic fresh foods and meal solution-oriented graphics are depicted in a couple places inside the store.

This is part of Wal-Mart's visual attempt to reinforce its "What's For Dinner" meal solutions positioning of the Marketside stores in our analysis. Wal-Mart's answer to that question is the Marketside stores' offering of in-store fresh-prepared foods, along with a limited assortment of basic, natural and specialty food and grocery items, fresh meats and produce (including value-added offerings), other perishables, and items in a couple of other categories featured in the 15,000 -to- 20,000 square foot stores.

>We were able to see a tiny portion of what looked like the store's "eat-in" seating area but couldn't view it completely. This is the small area in the Marketplace stores we've written about previously in which about 9 -to -10 customers can sit and eat prepared foods at in-store. The stores also have in-store kitchens. Further, from what we could see, there's a counter-like eating area. It looks attractive but not something one would describe as "gourmet" or "lavish."

>Some of the trimming and fixtures inside the Marketside are of polished blond wood, lending a slightly upscale look to the store interior.

>The store shelving isn't "warehouse style" like it is in Tesco's Fresh & Easy stores or like in Trader Joe's markets. Rather, it's more conventional food store shelving, more similar from a small-format perspective to what Safeway is using in its first and currently only "The Market" format store, "the market by Vons," in Long Beach, California.

Unfortunately, the shelving was blocked by various items and boxes. So between that fact and our tiny window of viewing opportunity we can't report much more on the look of the shelving than what we were able to see based on those conditions.

Overall, we would describe the interior of the Marketside store as attractive; a slightly upscale but still utilitarian look. It's not the super high-end look of a Bristol Farms in Southern California or newer Whole Foods Market upscale store, for example.

But it is more upscale in design and look than a Fresh & Easy store and slightly more so than a newer Trader Joe's small-format market. However, from what were able to view, it looks to us to be a bit less upscale in design than Safeway's "the market by Vons" in Long Beach, California and SuperValu-owned Jewel-Osco's new "Urban Fresh by Jewel," small-format grocery store which just opened in Chicago.

Reader Request

If any Fresh & Easy Buzz readers have gotten a closer view of one of the four Marketside stores in Chandler, Mesa, Gilbert and Tempe, Arizona set to open on October 4, please feel free to share what you saw by using the comments box below. Of course, any and all other comments regarding Wal-Mart's Marketside (as well as Fresh & Easy) also are welcomed. Just click the comments link below -- and write.

News & Analysis: Employees At Two More Fresh & Easy Grocery Stores Could Soon Request UFCW Union Recognition From Tesco's Fresh & Easy

Employees of at least one and possibly two additional Fresh & Easy grocery stores could soon request formal recognition from the company to become union stores. Beyond that though, what might a union contract between Fresh & Easy employees, the UFCW union and Tesco's Fresh & Easy Neighborhood Market actually look like?

On September 17, we wrote and published this piece about store employees at a Tesco Fresh & Easy Neighborhood Market grocery store in Huntington Beach, (Southern) California formally requesting union representation at their store. The employees sent a letter to Fresh & Easy Neighborhood Market CEO Tim Mason requesting this formal union recognition and affiliation with the United Food & Commercial Workers (UFCW) union.

Thus far, Tesco has not replied to the employees letter. A Fresh & Easy Neighborhood Market spokesperson has said the company is evaluating the letter and request. However, there has been no public statement to date on the Huntington Beach store employees request to be recognized as a union shop from either Tesco Fresh & Easy CEO Tim Mason or Tesco PLC. CEO Terry Leahy.

Fresh & Easy Buzz has now learned employees of two more additional Fresh & Easy stores could soon be making a similar request to Tesco's Fresh & Easy Neighborhood Market to be recognized as UFCW-affiliated union stores. Both of the stores are located in Southern California.

At least in one of the two stores, the initial impetus for generating union interest among employees came from a UFCW member who has been working at that store for many months, which is similar to the tactic the UFCW used at the Huntington Beach store, as we reported in our September 17 story.

In that instance, Graham Ozenbach, a UFCW member on leave from his job at a Southern California Vons supermarket (Vons is owned by Safeway Stores, Inc. and is a unionized chain), had been working undercover at the Huntington Beach Fresh & Easy store since December, 2007.

In addition to Mr. Ozenbach, there are additional UFCW organizers working in Fresh & Easy grocery stores as part of the union's strategic plan to unionize the grocery chain's store-level employees.

Employees at one of the two additional Fresh & Easy stores could request within weeks to be a union store in the same way the Huntington Beach store workers did about two weeks ago.

The other Fresh & Easy store is not as far along in terms of there being a consensus among store employees to do so.

Should employees at a second and possibly third Fresh & Easy grocery store request formal UFCW union affiliation from Tesco's Fresh & Easy Neighborhood Market, it likely will increase the pro-unionization pressure on the retailer, since having employees at just one store (Huntington Beach) do so could allow Tesco to argue its merely an exception -- that employees at the grocery chain's other 86 stores aren't asking for it. But having employees at a second and then third store request union status begins to look more like a movement or a trend towards the unionization direction.

UFCW organizers know getting employees at a second Fresh & Easy store to request union recognition is key, which is why they are working very hard to do so.

U.S. labor laws allow Tesco to deny the request by the Huntington Beach store employees -- as well as by employees at any other Fresh & Easy market -- to be recognized as a UFCW-affiliated union store.

If Tesco does deny the request, the store employees then must, with the UFCW's assistance, submit a petition for unionization. Once that is done, the store employees can then hold an open ballot vote. If a simple majority of store-level employees vote in favor of joining the UFCW in that election, the store then will be certified as a union shop under U.S. labor regulations and laws.

Still would need a contract

However, if passed and unionization is certified, that doesn't mean the Fresh & Easy employees would automatically start getting the same pay and benefits workers at unionized Southern California supermarket chains like Vons, Ralphs, Albertsons, Stater Bros and others get.

Instead the UFCW and Tesco's Fresh & Easy Neighborhood Market would have to negotiate and agree on a labor contract between the two parties. This can be a very long and complicated -- as well as contentious -- process.

In Southern California, as in most parts of the U.S., the region's supermarket chains generally operate under the same contracts with the UFCW. When a previous contract is up, the union usually negotiates with a region's top two or three chains. Once those chain's agree on a new contract with the union, the region's other chains and unionized independents generally adopt that contract as well.

We say generally because in the last round of UFCW-supermarket chain negotiations in California, it was two regional chains -- Stater Bros. in Southern California and Save Mart in Northern California -- that were the first to sign contracts with the UFCW ahead of Safeway Stores, Inc. and Kroger Co. (which owns the Ralphs chain in California), which are the two largest unionized supermarket companies in California.

Different formats equal different job descriptions

Since there are major qualitative format and operational differences between Tesco's Fresh & Easy and all of the unionized supermarket chains in California, we expect if Tesco does ultimately allow its store-level employees to be represented by the UFCW, the Tesco-UFCW contract will have to look different than the union's current Southern California supermarket chain contracts look.

All of the unionized supermarket chains and independents in California generally have the following in common: They are standard-sized (and larger than standard) supermarkets; they offer full-service checkout and bagging for customers; carry an extensive selection of products requiring lots of hand stocking of shelves by employees; cut meat from primal cuts into case-ready cuts right in-store; and merchandise bulk produce (with some pre-packaged), which requires lots of prep work by store produce department employees.

On the other hand, Tesco's Fresh & Easy grocery markets have self-service customer checkout. Store employees are instructed to assist customers with the checkout if they ask. But cashiering isn't a major part of a Fresh & Easy store employees' job description like it is for employees who work in a unionized supermarket.

Additionally, all of the fresh & easy store brand grocery products, which represent about 60-65% of all the grocery category products merchandised in the stores, arrive at the Fresh & Easy stores from its distribution center in cases that are "shelf-ready."

Rather than having to cut open each case and stock it on the shelf as is the case at unionized supermarkets, the Fresh & Easy store employees zip open the case and stock the full case onto the store's warehouse-style shelving. There's no taking an item out of the case one at a time and stocking it on the shelf as is commonly the case at unionized supermarkets, with the exception of those unionized warehouse format stores (which are a small percentage) that use tray packing.

The Fresh & Easy store employees do have to traditionally cut open the non fresh & easy brand grocery product (about 35% of the products) cases. But they too are tray-packed on the shelves, which requires far less work and time than hand stocking does.

All fresh meat items, and about 95% of all of the fresh produce items, arrive at the Fresh & Easy grocery markets pre-packaged. All the store clerks do is open the cases and stock the meat and produce cases with the already packaged products.

As such, Fresh & Easy stores have no departmental structure like the unionized supermarkets do. These stores -- Safeway, Vons, Ralphs, Stater Bros. Albertsons and the others -- operate the meat and produce departments departmentally. Meat department workers just work in that department, same with produce, bakery, general merchandise and deli. The largest department being grocery, which includes checkout and essentially everything else except the departments mentioned above.

The meat department workers in the union supermarkets cut meat from boxed primal cuts (very few if any break down entire sides of beef anymore, although some still do) into roasts, steaks and other case-ready items, grind meat like hamburger, and do other cutting tasks, along with wrapping most of the cuts in the meat department. [There is a separate classification at lower pay for "meat wrappers." many of the meat cutters wrap as well as cut though.]

Additionally, many of the union supermarkets have full-service meat cases along with self-service, which mean customer service can be another part of the job.

Unionized produce department workers also do much prep work, unloading cases and bins of produce, trimming and preparing bulk produce before stocking it in the department, and building fresh bulk produce product displays in the stores.

The work of the majority of union meat cutters and produce clerks therefore is far different and considerably more extensive than what workers at Fresh & Easy stores do regarding the two fresh categories. This is by Tesco's design of the Fresh & Easy format, which has at its core centralizing much of the replenishment functions at its distribution center, thereby minimizing store labor.

What a potential conract might look like

As a result of these differences in format between Fresh & Easy stores and the vast majority of unionized supermarkets in the U.S. -- which results in Fresh & Easy store workers having qualitative and quantitative differences in their job descriptions and duties compared to the majority of unionized supermarket chain workers -- it's our analysis that if Tesco does eventually go union with Fresh & Easy -- as it is union-affiliated in nearly every other country in the world where it has stores -- it's probable Fresh & Easy store workers will operate under a different contract than the UFCW has with the region's unionized supermarket chains.

It's also probable such a contract would include lower wages than the Vons, Ralphs, Stater Bros. and other supermarket chain employees receive, along with less of a health benefit package than these union supermarket workers get under the contracts with these chains.

There already is precedent for this. The UFCW has different classifications (we mentioned a couple earlier) with the unionized supermarket chains mentioned above.

The main union classification is for a grocery clerk, the primary job description of which is to check out customer purchases at the front end (grocery checkers) of the store and to stock shelves (grocery stockers) and do related merchandising duties. These are the grocery clerks, along with most of the produce clerks and meat cutters, that in California make about $20 an hour after a full year or so of work experience in the union.

However, there are other store classifications, including courtesy clerks, who's job description is limited to bagging groceries, doing store cleanups, putting "go-backs" back on the store shelves and a few other limited duties. These workers make considerably less an hour (although more than the $10 an hour ($9 in NV and AZ) Fresh & Easy pays all its Southern California store employees accept for the store manager and assistant manager) than grocery clerks do under the union contract, although they get the same benefits package.

There also are "general merchandise" clerks. These store workers work strictly stocking items that fall under the general merchandise and health and beauty aid categories. They aren't permitted under the union contract do work in any other areas of the store or to stock items onto the shelves in any other categories.

Our analysis is the ultimate make-up of a UFCW-Tesco Fresh & Easy contract would be a hybrid of the existing contracts the union has with the supermarket chains and something new, which would likely include a different categorization of Fresh & Easy workers.

This categorization/job description would in our analysis probably look something like a combination of the union grocery clerk, courtesy clerk and general merchandise examples above.

We also believe it would be a combination of the three hourly wage scales for each of those union supermarket job categories. In other words, Fresh & Easy store employees would likely make less hourly than workers in the grocery clerk classification who work at Vons, Ralphs and the other union chains currently do.

As far as we can discover, Fresh & Easy Buzz is the first publication to mention and discuss this aspect of the UFCW-Tesco Fresh & Easy ongoing union issue. We do so because we think its not only news -- but is an important element of this ongoing story.

There's a perception -- and in many cases we've noticed an assumption -- among many people that if Tesco's Fresh & Easy does go union, it will be the same contract as what currently exists among the UFCW and the various supermarket companies in the region.

Our analysis is that such an assumption is incorrect, along with such a perception. Rather, it's likely if Tesco's Fresh & Easy eventually does become unionized -- which we suggest one shouldn't assume will happen anytime soon or at all -- it will end up having a different contract -- with a lower wage scale -- with the UFCW than is currently the case with the contracts the union (and union supermarket workers) has with Southern California's unionized grocery chains and independents.

Tesco PLC, Fresh & Easy and the Numbers Game; Will Tesco Release Hard Numbers For Fresh & Easy Next Week? If So, Will They Be Meaningful?

Earlier this year Tesco PLC., which owns Fresh & Easy Neighborhood Market USA, said it planned to breakout some of its sales, profit and related numbers for its American Fresh & Easy grocery store chain, which now has 87 stores in Southern California, Nevada and Arizona, when it reports its corporate financials next week.

Tesco didn't get specific, and didn't say it would provide a comprehensive sales, profit and loss statement for Fresh & Easy. But it did make clear enough that it would offer a breakout of sorts next week, including some store sales numbers and related information.

In fact, United Kingdom investment analysts are expecting some sort of breakout -- hard numbers, sales figures and the like at a minimum.

However, based on information from some of our sources, we aren't sure this is going to happen.

We've learned of three possible scenarios in this regard:

Scenario One: That Tesco PLC. has decided not to release any hard sales and related numbers for Fresh & Easy next week. Instead it plans to offer a summary of the state of the business similar to what Tesco CEO Sir Terry Leahy did when the company last reported its financials.

Scenario Two: That Tesco will release some "soft numbers." In other words some sort of average store sales range that offers very little in the way of specific data for industry watchers and financial analysts. Something like a current average store sales per week figure using a range such current weekly store sales of $125,000 -to- $200,000 (per-store, per-week).

By the way Fresh & Easy Buzz's most recently published sales estimate range for Tesco Fresh & Easy Neighborhood Market is $125,000 -to- $150,000 per-store, per -week. Based on our information, we believe current average sales of about $130,000 per-store per-week is about right for the 87 stores in operation.

Releasing a sales range figure -- say of $120,000 -to- $200,000 per-store per-week for Fresh & Easy -- would allow Tesco to report what are essentially true numbers (based on our range above) -- spin added of course -- and to demonsrate it is on track to achieve what was its initial target sales of $200,000 (average) in weekly store sales.

Scenario Three: we're aware of two people who've recently been told by Fresh & Easy Neighborhood market USA's corporate spokesperson that Tesco Fresh & Easy is planning to release a summary of sales to date and a few other hard numbers in October. If true, it would make no sense to do so if Tesco is releasing some hard numbers next week.

There are high expectations, particularly among a number of stock analysts who follow Tesco and have a keen interest in its U.S. Fresh & Easy food and grocery retailing venture, as there is among industry analysts in general and Tesco's competitors, that Tesco will release some meaningful hard numbers next week.

We will see what does and doesn't get released by Tesco next week when it reports its corporate numbers from comapny headquarters in the United Kingdom.

It's likely though those who are looking for a traditional report of sales, profit, loss and related hard numbers from Tesco regarding its Fresh & Easy chain in the U.S. are going to at best get a limited version in terms of hard numbers, and perhaps nothing more than a summary of Fresh & Easy operations similar to what Tesco presented when it last reported its corporate financials.

We'll learn for sure next week.

Thursday, September 25, 2008

Competitor News: Wal-Mart Joins Tesco, Others in Announcing A Plastic Bag Reduction Program of its Own

Wal-Mart, Inc. said today it will give out fewer plastic shopping bags in its stores, and encourage shoppers to reuse and recycle them, as the retailer aims to slash its plastic bag waste by a third worldwide by 2013.

Wal-Mart and its partner in the initiative, the Environmental Defense Fund organization, said today the plan is expected to cut the equivalent of 9 billion plastic bags from Wal-mart stores each year, and eliminate more than 135 million pounds of plastic waste globally in the next five years.

Additionally, The world's largest retailer said it's goal is to reduce plastic bag waste by 25 percent in its U.S. stores and 50 percent in other countries where it operates stores.

"If we can encourage consumers to change their behavior, just one bag at a time, we believe real progress can be made toward our goal of creating zero waste," says Matt Kistler, senior vice president for sustainability at Wal-Mart.

Kistler says Wal-Mart's U.S. stores will begin selling a new 50-cent reusable bag in October. All of its store clerks and baggers will be trained to pack bags more efficiently as well, according to the retailer's chief of sustainability.

Earlier this month, its Wal-Mart Mexico stores introduced reusable bags that cost one-third less than the previous ones.

Numerous environmental groups are giving Wal-Mart kudos for its new plastic bag reduction policy. Others are saying it's far from enough, especially from the world's largest retailer.

We applaud their efforts, but 33 percent by 2013 is not a very aggressive goal. It's doable ... by 2010 or 2009," Stephanie Barger, the executive director of Costa Mesa, California-based Earth Resource Foundation, which runs the "Campaign Against the Plastic Plague," said today in a statement.

An interesting aspect of Wal-Mart's new single-use plastic carrier bag reduction program is that the retailer has taken on the environmental group the Environmental Defense Fund as a partner in the cutback scheme.

Wal-Mart and the Environmental Defense Fund aren't new to each other however. The environmental organization began working with the mega-retailer in 2005 when Wal-mart started its corporate and retail sustainability program.

In fact, the Environmental Defense Fund has a corporate partnerships division headed by Gwen Ruta, who's title is vice president of corporate partnerships, which works with corporations like Wal-Mart and others on "green" and sustainability issues and initiatives.

"I think the way they're (Wal-Mart) going about it (the plastic bag reduction program) is the way that works for them," Ms. Ruta said regarding the comments by other environmentalists that Wal-Mart isn't going far enough to reduce the volume of plastic bags it uses in its stores. "They're (Wal-Mart) going to try lots of different things, see what works best and move forward, but against clear, very measurable goals and timeline."

Tesco United Kingdom, Fresh & Easy USA

In this August 13 story, "Tesco to Offer Shoppers Free Plastic Bags in UK Stores Only if Requested; Still Offering Plastic Bags-Only in Fresh & Easy USA Stores; No Paper Option," we wrote about the major plastic bag reduction program Tesco, which owns the Fresh & Easy fresh foods and grocery chain in the Western U.S., launched last month in the United Kingdom.

Under Tesco's new program in the UK, the retailer says it will only give shoppers free plastic bags at checkout if they ask for them. Since Tesco, like nearly all British food retailers, doesn't offer the paper bag option in its stores, which is the norm in the U.S., that means unless Tesco shoppers bring reusable shopping bags with them to the store, the only option is plastic. The use of reusable shopping bags by UK grocery shoppers is much higher than it is in the U.S. however, although Americans are beginning to catch up.

Tesco's plastic bag reduction program in the UK goes farther than Wal-Mart's in terms of actual practical application. The percentage reduction goals of both companies are about the same though.

However, Wal-Mart's new program, according to the company, is international in scope, aiming to reduce the volume of plastic bags its U.S. stores use by 25% and the amount used elsewhere in the world by 50%.

Tesco's plan is a bit more piecemeal, focusing primarily in its home country of the UK.

Tesco's Fresh & Easy USA, which offers only free plastic bags and not paper in its stores, does offer two kinds of reusable shopping bags for sale in the stores.

It sells one of the bags for only 20-cents each. That bag, called a "bag for life," is made out of synthetic, plastic-like material. Fresh & Easy says it will replace the bag "for life" when it wears out, which is an excellent offering. At 20-cents the bag also is less than half the cost of the 50-cent reusable bag Wal-Mart will begin selling in its stores next month. Fresh & Easy stores also sell more expensive canvas shopping totes.

These have been the only two initiatives Fresh & Easy has launched thus far in terms of an attempt to use fewer plastic grocery bags in its 87 stores in Southern California, Nevada and Arizona.

Since the stores don't offer free paper grocery sacks as an option to plastic like nearly every other chain and independent in the Western USA does, and since most American shoppers don't bring reusable shopping bags with them to the grocery store, single-use plastic bags are the default bag at Fresh & Easy stores, just as they are in the UK at Tesco's supermarkets and other format food stores. That is of course unless shoppers bring their own bags, which would be the best solution to this entire issue we believe.

Tesco's Fresh & Easy Hits the Retail Trifecta in Las Vegas; Opens Three New Stores Today in the City

Tesco's Fresh & Easy Neighborhood Market hit the retail trifecta today in Las Vegas, Nevada, opening three new small-format Fresh & Easy fresh food and grocery markets today in the city.

The three new Fresh & Easy markets are at the following locations in Las Vegas:
  • Desert Inn & Pecos McLeod
  • Lake Mead & Hollywood
  • Charleston & Sloan
With the three new Fresh & Easy stores opening today, Tesco Fresh & Easy Neighborhood Market now has 19 stores in the Las Vegas, Nevada Metropolitan region.

Tesco held grand openings at all three stores today. The retailer also donated $1,000 per-store to a local charitable organization, the Children's Heart Foundation, a local elementary school, the Jacob E. Manch Elementary School, and the Eldorado Cross Country Team, a local running team. Tesco's Fresh & Easy Neighborhood Market donates $1,000 to a local non-profit group each time it opens a new store.

Tesco is far from finished opening new Fresh & Easy grocery markets in the Las Vegas market though.

The retailer says it will open six new stores in the Las Vegas area (Clark County) alone in October, at the following locations on the dates listed:
  • Eastern & Fremont -- October 8
  • Las Vegas & Pecos -- October 8
  • Las Vegas & Lake Mead -- October 8
  • Vegas & Buffalo -- October 15
  • Eastern & Wigwam -- October 29
  • Vegas & Jones -- October 29
With the opening of its three new Las Vegas stores today, Tesco now has 87 Fresh & Easy Neighborhood Market grocery stores operating in Southern California, the Las Vegas Metro region, and in the Phoenix, Arizona Metropolitan market.

Critical mass in Vegas?

Now having 19 stores in the Las Vegas market -- with 25 by the end of October when the six new markets open next month -- Tesco should be able to build some critical mass in terms of starting to become a major player in the market region, which has a population of about 2 million residents.

After all, 25 stores in a region with that population, where most of the residents are concentrated in the city of Las Vegas, is enough to begin to start putting market share numbers of at least some minor significance on the board.

It will be interesting to see if more (Fresh & Easy stores) means more (new business) in the Las Vegas Metropolitan market, or if it just spreads the current volume of business the stores are doing around to the other locations.

Wednesday, September 24, 2008

Fresh & Easy Buzz Strategy Session: Professor Says Research Shows Both Price and Format Matter; Hendrick Meijer: Strategist; Prepared Foods Seminar

Strategic Marketing Lesson:

Research: Pricing and format both important variables in food retailing strategy

"Both pricing and format strategy are important when considering the retail strategy of stores," says Dinesh Gauri, assistant professor of marketing in the Whitman School of Management at Syracuse University in New York.

These recent findings by Gauri are based on research that took into consideration both the format of the store - i.e. whether it is a small convenience store, a supermarket, or a super center - and the stores' pricing strategy. Both Tesco's Fresh & Easy Neighborhood market and Wal-Mart's Marketside are mentioned in the report in terms of small-formats.

Typically, stores either adopt the 'high-low' (Hi-Lo) pricing strategy, where promotions vary week to week, or the 'every-day-low-price' (EDLP) strategy, where most items on a regular basis are consistently low priced.

Findings of the research indicate that although some combinations are more similar than others, considering only the pricing or only the format strategy in isolation fails to represent a complete picture, and the strategic implications change significantly when both format and pricing strategies are studied in combination.

Food Retailing History 103 (advanced course)

Hendrick Meijer: Food retailing innovator, format and merchandising strategist

The tale of Hendrik Meijer. Hendrik Meijer, founder of what is now Meijer Inc., was one of the pioneers of self-service grocery stores. He also introduced the concepts of the supercenter and discount store. Read about his strategic vision here: The Grand Rapids Press (Mich.)

Prepared Foods Seminar: Competitive Analysis

Market Economy: Supermarket and C-store competition
Seeking to drive less, consumers are buying more meals where they buy groceries or gasoline. Supermarkets and c-stores are working hard to accelerate that shift.

The article does a nice job of describing how both supermarkets and convenience stores are growing the fresh, prepared foods category in their respective formats. The piece also looks at the competitive threat supermarkets and convenience stores, with their growing foodservice programs, are posing to restaurants of all types.

Tesco's Fresh & Easy Neighborhood Market is featured in the article, along with Whole Foods Market, Inc., convenience store chain 7-11 and fast food chain McDonald's.

The article also offers some nice demographic and related data on the prepared foods category.

Click here to read the article from the trade publication Restaurants & Institutions.

Breaking U.S. Economic News: U.S. President George W. Bush Speaks to the Country About the Financial Crisis

From the Fresh & Easy Buzz Editor's Desk

Just a few minutes ago in a prime-time speech carried by every U.S. television network and radio station, U.S. President George W. Bush, looking less than self-assured, addressed Americans from the White House, issuing a dire warning that unless lawmakers pass a $700 billion financial rescue plan, the result likely will be closed businesses, more housing foreclosures, more lost jobs and the wiping out of retirement savings.

In other words the U.S. President warned Americans they face a potential economic crisis unlike any experienced in the nation in recent history. [The Associated Press photograph at top, left is of President Bush posing for photographers right after giving his speech tonight.]

A dire warning and crisis situation it is indeed.

Of course, the Devil is in the details of that $700 billion financial rescue package which the U.S. House of Representatives and U.S. Senate are currently conducting hearings on, saying it would be irresponsible for them to merely rubber stamp the proposal, which among other things calls for the Secretary of the Treasury to be given extraordinary powers, including not having any of his actions being subject to review by any U.S. court of law, in his role as the government's economic bailout Czar.

The Associated Press has just filed the first story about President George W. Bush's talk to the American people this evening.

Additionally, you can read a complete transcript of Bush's speech given from the White House tonight. Click here to view the transcript

In his speech this evening the U.S. President also invited Presidential candidates Barack Obama and John McCain to meet with him, cabinet officials and a selected group of others at an emergency meeting at the White House tomorrow to discuss the financial crisis gripping the financial markets and the country.

Republican candidate for President John McCain also has announced he is suspending his campaign until further notice because of the financial crisis.

His campaign also asked the Obama campaign to cancel Friday's nationally televised Presidential debate, which is to be on the topic of foreign policy. An Obama campaign spokesman told cable news network channel CNN earlier tonight that its team wants the debate to go forward, and that it hopes the financial crisis and the U.S. economy can be discussed in Friday's debate, along with foreign policy, since it is the most pressing issue facing Americans.

The potential economic damage the current financial crisis has already and can further cause is grave, not only in the U.S. but globally. A plan that protects both Wall Street and main street needs to be devised rapidly. But not in a sloppy fashion like the current one before Congress was developed.

Hopefully that plan can be fixed at the grand White House meeting tomorrow, agreed to on a bi-partisan basis in Congress, and rapidly passed and enacted.

The Devil may be in the details. But additional lost jobs and retirement savings, a global economic meltdown, business failures, and numerous other related economic negatives lie in the balance, as does the well being of the American people.

Breaking News: Wal-Mart to Open its Four Marketside Food and Grocery Markets in the Phoeniz, AZ Metropolitan Region on October 4

As we've been reporting on Fresh & Easy Buzz for months, Wal-Mart, Inc. has planned an early Fall, 2008 opening of its small-format, combination grocery and in-store fresh, prepared foods Marketside stores in the Phoenix, Arizona Metropolitan region.

Wal-Mart has now announced and confirmed on its http://www.marketside.com/ website the specific date the four Marketside grocery markets will open in the Phoenix Metropolitan region cities of Gilbert, Mesa, Chandler and Tempe.

All four Marketside stores are set to Open on Saturday, October 4, just 11 days from today, according to the announcement on the Marketside website. [Click here to see the announcement (look in the right corner) on the website. Click here for maps showing the location of each store in the four Arizona cities.

Wal-Mart is planning to hold grand opening day celebrations at each of the four Marketside stores -- which as we've previously reported don't use the Wal-Mart name on them just as Tesco does not use its corporate name on its small-format Fresh & Easy stores -- according to a spokesperson at Marketside's corporate office in Tempe, Arizona, where one of the four stores is located.

Earlier this year Wal-Mart set up a separate office in Tempe, Arizona where it will run operations and related functions for Marketside. The retailer has been using the office in Tempe to interview corporate and store-level employees to work for Marketside.

Workers and vendors are still busy today getting the four Marketside stores ready to open on October 4, according to a Fresh & Easy Buzz correspondent who visited two of the store sites -- in Gilbert and Mesa -- today.

Additionally, a vendor who has been doing business with Wal-Mart's Marketside said their was much activity at the Tempe location yesterday.

Also, Mike Thomas, who is the store manager of the Marketside store in Chandler, reports activity is frenetic at his store in preparation for the October 4 opening.

Thomas also confirms something we've been writing about Wal-Mart's Marketside stores since we first reported on the development when Fresh & Easy Buzz was started in December, 2007. That is that the Marketside stores will offer basic groceries and its other goods at affordable and even discount prices.

There's been much talk in various publications that Marketside would be "upscale" both in look and price. based on our source information all along we've disagreed with that assessment.

Instead, we've suggested Wal-Mart plans to not only offer up-market products like in-store, fresh, prepared foods and specialty items in the Marketside stores -- along with a limited assortment of basic grocery items -- but plans to do so at affordable prices. This strategy has only gotten stronger at Wal-Mart since the U.S. economy has continued to worsen and food price inflation has continued to soar.

"Our pricing is going to be very competitive and accessible to everybody," Chandler Marketside store manager Mike Thomas says.

Thomas adds that Wal-Mart's message with Marketside, which we've reported before in Fresh & Easy Buzz, is an answer to the question "What's For Dinner." His answer to that question: "We're providing a meal solution for people on the go, people who want something that's convenient, fresh and affordable," adding he believes shoppers will like how "What's For Dinner" is priced at the Marketside stores. We will find out if that's the case in 11 days.

Wal-Mart is playing up this particular theme with signs it has on the windows of the four Marketside stores set to open on October 4. The signs announce the store openings on that date, along with having additional illustrated signage depicting a table place-setting with the text: "Marketside: Recommended by food critics and financial planners. Come shop with us," The "food critic" message on the sighns is the culinary message, the "financial planners" message being the value proposition to go along with it in terms of marketing.

As we've previously reported, all four of the Arizona Marketside stores, which average 15,000 -to- 20,000 square feet, are located in buildings which housed former drug stores. That's the model Tesco has used for many of its current 83 Fresh & Easy Neighborhood Market grocery stores.

Tesco's Fresh & Easy markets, which average 10,000 -to- 13,000 square feet, offer a limited assortment of basic grocery products (about 65% under its fresh & easy brand and the remaining 35% (give or take a few percentage point either way) being national and regional brands), fresh produce, meat and bakery goods, craft beers and specialty wines, a small assortment of non-foods, and a significant selection of fresh, prepared foods.

The Marketside stores essentially offer a similar assortment of products in a slightly bigger store -- 15,000 -to- 20,000 square feet for Marketside vs. 10,000 -to- 13,000 for Fresh & Easy.

A key merchandising element of both Tesco's Fresh & Easy and Wal-Mart's Marketside is a substantial offering of fresh, prepared foods.

The Marketside stores will differ in the category however. Fresh & Easy makes all of the ready-to-eat and ready-to-heat prepared foods items at a central kitchen at its distribution center in Riverside County, (Southern) California and then delivers the products to the stores in Southern California, Nevada (Las Vegas Metro area) and Arizona (Phoenix Metro region).

Wal-Mart's Marketside stores on the other hand will make the fresh, prepared foods right in-store. Each store has a kitchen in it, along with a small "eat-in" area that can seat about 9 -to- 10 customers at any given time. Like Fresh & Easy though, the major thrust of Marketside's prepared foods merchandising will be "to go" sales to shoppers.

Wal-Mart believes the Marketside in-store prepared foods offering -- including having a kitchen right in the store, along with the eating area -- gives the stores a significant point of differentiation vis-a-vis Tesco's Fresh & Easy, along with helping to create more of a culinary, fresh food-oriented image for the chain as part of answering that "What's For Dinner" question it's using in Marketside's positioning.

David Wild, who headed the Marketside format development team as the mega-retailer's former director of new business development, told us this while he was still with the company, saying he felt it's a key point of differentiation for Marketside. Wild left his position with Wal-Mart earlier this year to accept the job of CEO of Helfords, the United Kingdom's leading automotive parts and bicycle-making company.

Wal-Mart Marketside also has been conducted consumer "taste-test" panels of its fresh, prepared foods offerings in Arizona for a number of months now, using the data to refine its in-store prepared foods, along with using the information from the particiapants as a guide in pricing the various items.

We will be able to observe if this indeed is a point of differentiation for Marketside over Fresh & Easy beginning on October 4.

Tesco has Fresh & Easy markets in all four of the Arizona cities -- Gilbert, Mesa, Chandler and Tempe -- where Wal-Mart will open its Marketside stores on October 4.

Additionally, Wal-Mart has located each of those four Marketside stores, in each of the cities, within 1 -to- 2 miles from a Fresh & Easy small-format grocery store. Wal-Mart also has Supercenters, Sam's Club stores and Wal-Mart Neighborhood Market (40,000 -to- 45,000 square feet) supermarkets all over the region.

With the close proximity of the Marketside and Fresh & Easy stores in those four cities, the similarities in merchandising and product offerings of both formats, along with the resources of both Wal-Mart (number one global retailer) and Tesco (number three global retailer), beginning in 11 days small-format food and grocery retailing is going to get even more interesting than it already is in the Phoenix, Arizona Metropolitan market. Stay tuned.