News & Analysis: Tesco's Fresh & Easy Launches New Direct Mail Promo Piece Full of $5-Off Discount Coupons; Is it Taking Deep-Discounting Too Far?

Tesco's Fresh & Easy Neighborhood Market is distributing a new, price discount-focused direct-mail brochure this week, featuring three of its $5-off coupons good on any total grocery order of $20 or more, to households in the neighborhoods where is small-format combination basic grocery and fresh foods markets are located.

As pictured at top, the front of the direct-mailed promotional piece features a photograph of a canvas shopping bag filled with a 2-Liter bottle of Coke soda pop, a loaf of bread and a couple other grocery items.

Outside of the bag are images of fresh & easy store brand bottled water, milk, orange juice and a bag of apples, all which are basic or staple grocery items.

The promotional brochure's tag line is: Everyday low prices. Quality you can trust.

The combination of the pictures of everyday, staple food and grocery items combined with the price/value and quality tag line is an attempt to position the stores (using the promotional piece) as a shopper's choice for low prices and high quality (which equals value) everyday, which is a clear pitch to create primary grocery shoppers, as we've said Tesco must do in order to succeed in its strategy of designing the Fresh & Easy chain to be an everyday food and grocery shopping venue rather than a specialty foods store.

Near the canvas grocery bag filled with groceries at the top of the mailer, Fresh & Easy offers the following quotes from a couple U.S. newspapers about the stores, in an attempt to create a form of "third party endorsement" of the grocery chain:

"They're about the size of a Trader Joe's with lot's of Whole Foods-type natural foods and prices that can seem costco-esque."
USA Today, April 7, 2008

"The new Fresh & Easy markets get a big thumbs-up from customers for product selection and lower prices."
Los Angeles Times, November 9, 2007

Inside the brochure is where Fresh & Easy makes its major statement though, which is the price focus with the deep-discount coupons.

The inside of the mailer contains three $5-off coupons (pictured above) good for any total grocery purchase of $20 or more at a Fresh & Easy Neighborhood Market grocery store. This amounts to a 25% discount on a grocery purchase of $20, which just about eats up the gross margin on that $20 sale.

Tesco's Fresh & Easy has been using these $5-off on a $20 purchase coupons for some time. However, including three in one direct-mailed promotional brochure to a household is very aggressive from a price discount standpoint. It also makes us wonder if there isn't some desperation behind such a move?

Usually a grocery retailer will include one such coupon (and not usually for that deep of a discount) in a mailer as a way to generate consumer trial in its stores, then hope to gain return trips from shoppers once they shop the grocery store that first time using the coupon.

From a marketing standpoint we can't help but wonder if including three of these deep- discount coupons, along with the aggressive manner in which Tesco gives these $5-off on a $20 purchase in its Fresh & Easy stores, isn't creating price-focused coupon shoppers rather than building store loyalty among consumers to the Fresh & Easy retail brand. [Readers are telling us they are getting two or three of these $5-off coupons each time they make a purchase at the Fresh & Easy grocery stores in Southern California, Nevada and Arizona.]

Of course the economy is in such bad shape in the U.S. that aggressive discounting has become the norm among nearly all grocery chains. However, Fresh & Easy has been using these $5-off coupons since its first stores opened in the fall of 2007. As such, since the retailer has been using them aggressively since day one, it runs the risk of creating a customer base that's shopping the stores primarily because of the deep discounts the $5-off on a $20 purchase coupons provide, in our analysis.

As an example, Tesco uses similar coupons in the United Kingdom, where they're referred to as vouchers. However, those coupons are worth about 50% less than those the retailer is using for Fresh & Easy. As a result, they take a much smaller bite out of gross margin.

Tesco's Fresh & Easy carries its value theme over onto the back (pictured above) of the direct mail promotional piece, where it offers the following text:

"We're a neighborhood-sized market that's quick and easy to shop."
*Fresh and wholesome foods
*Unbelievably low prices
*all your favorite brands
*a variety of prepared meals

The meat and potatoes of the promotional brochure however clearly are the three $5-off on a minimum $20 purchase coupons.

As such, in our analysis the marketing message of the new direct-mailed Fresh & Easy promotional piece really isn't value, despite the text and images suggesting so. Rather, the message is really price, demonstrated by the coupons providing a 25% discount on a $20 grocery purchase. Everyday low-price positioned food retailers in the U.S. seldom if ever use deep-discount promotional techniques like this.

We don't offer this analysis as a criticism per se. Rather, we offer it as an object lesson that value means far more than price. We think Fresh & Easy is attempting to make a value statement with the new direct-mailed piece. But because the coupons (and the deep discount they represent) are so prominent, it's our assessment the brochure's statement is loud and clear: price discount.

This is a good short term strategy for Fresh & Easy in some ways. After all, competing food retailers are fighting for shoppers' food dollars in this period of soaring food and gasoline costs in the U.S. However, since Fresh & Easy is not yet a year old and has used these deep discount coupons since day one, our analysis is that there is a significant body of the retailer's customers that only are shopping the stores because of the deep-discount coupons. This poses a potential problem for Tesco in terms of building its Fresh & Easy brand we believe.

For example, Trader Joe's and Costco, both retailers quoted in the newspaper quotes Fresh & Easy chose to put on the front of the flyer, are offering very little if any in the way of deep price discounts even in the current poor U.S. economy. And neither of these two retailers are offering anything in the way of coupons equaling a 25% discount on a $20 grocery purchase.

Rather, Costco and Trader Joe's are focused on being everyday low-price discount retailers in their respective niches, offering products at everyday low prices in-store.

Of course both retailers have the advantage of not being start ups like Teco's Fresh & Easy is. But neither of these two retailers built their respective strong food retailing brands by focusing on deep discount coupon promotions. Instead both have focused on the value proposition: low everyday in-store prices, quality, and some minimal promotion. Consumer perception of both Costco and Trader Joe's is that they offer low prices everyday. Therefore 25%-off coupons aren't needed in the main to lure shoppers to the stores.

At some point in the not too distant future, Tesco's Fresh & Easy is going to have to wean itself off of offering the deep discount coupons or at least lower the value to be more in line with what it offers (50% less value) in the United kingdom.

The retailer will have to do this because as we've reported based on information from sources in a position to have direct knowledge, Fresh & Easy's current gross margins are less than enviable and need to be improved considerably. It's difficult to do so using the deep discount coupons so aggressively. Price can be a non-therapeutic drug to a food retailer in terms of generating and keeping customer counts and sales.

When this day does occur, the numerous customers who base their shopping at the Fresh & Easy stores on using these deep discount coupons also will have to wean themselves off of the substantial savings these coupons provide them.

At that point, Tesco's Fresh and Easy Neighborhood Market will have to replace this price-centered motivation among shoppers to shop the stores with something else. That's no easy task.

It's clear Tesco's positioning of Fresh & Easy Neighborhood Market is to be a primary and secondary food and grocery shopping venue with an everyday low price focus--value. What isn't clear is how the aggressive use of coupons offering a nearly 25% promotional discount helps achieve that goal.

No doubt it brings shoppers in the door. And that is important. But it's doubtful it's lending any help in building the Fresh & Easy brand.

Another danger is that once Tesco decreases the value of the coupons as we described above, customers' market basket (dollar amount of groceries purchased per shopping trip) also will decrease.

Why? Because the $5-off coupons inflate the average ring in the stores because customers are able to purchase about 25% (in dollar value) more groceries than they would if the coupons didn't exist. And since they are being used so ubiquitously by Tesco, rather than on a limited basis, they could create a defacto price expectation in the minds of shoppers. So used to getting $5-off a $20 grocery purchase customers could come to expect that built in discount. Reduce the coupon value by half or take it away and shoppers could merely reduce their purchase amount per trip accordingly.

For now though shoppers aren't complaining. But they just might complain with their pocketbooks and their feet if the deep discount coupons they're getting as a regular course get reduced in value or stop coming in the mail or being handed out in the stores to them on each trip.

It's a tough marketing juggling act with potentially dangerous results, as all marketers who have worked at the crossroads of building brand and dealing with price deep-discounting are well aware of.

Brand loyalty seldom if ever is built on deep price discounting. And the first year or so a new food and grocery retail chain is launched often sets the stage for how consumers percieve that particular retailer.

No grocery chain wants the answer from consumers in response to the question: 'Why do you love your grocer? to be: 'I love my grocer because it always gives me 25%-off coupons every time I'm in the store and regularly mails them to my house.' Why? Because doing so isn't something any food retailer in the United States can sustain doing over time unless it raises its everyday prices by an equal amount to offset the regular deep-discount coupon use. That's a reality in the low-margin food retailing business.