Saturday, November 29, 2008

Breaking News & Analysis: Tesco Set to Report its Worse Quarterly Sales Performance in 16 Years

United Kingdom-based Tesco, which owns and operates Southern California-based Fresh & Easy Neighborhood Market, which currently has 100 stores in Southern California, Nevada and Arizona USA, is set to report next week its worse sales performance since the early 1990's, according to reports today in a number of major British newspapers.

The UK Guardian and other British papers are reporting Tesco will report third quarter same store sales growth of just 1.9% next week, which would be the global retailer's worse financial performance since 1992, when Britain and the U.S. were last gripped by a serious recession.

The UK, like the U.S. and other countries, is currently battered by a global financial crisis and recession, which is taking it's toll on many retailers, although a few global discounters such as Wal-Mart Stores, Inc, (the world's number one chain), which recently reported a 10% gain in its most-recent quarterly profits on top of same store sales growth, are fairing much better.

UK analysts say Tesco is being hit not only by the macro-economic reality of the financial crisis and recession, which is resulting in consumers cutting back on all spending, including for food and groceries, but also by competitive pressures from discount food retailers in Britain like Wal-Mart-owned Asda and Aldi, Lidl and Netto, which have been in the case of Asda slashing prices and in the case of Aldi, Lidl and Netto operate on a no frills, hard disount format and everyday low-pricing structure.

Nick Mathiason, a business reporter and 'The Observor' columnist, for the UK Guardian, who has been covering Tesco and the other UK food and grocery retailers for sometime, writes in his column today that: "Analysts believe the UK's biggest retailer Tesco (which has a 31% share of the nation's food and grocery market) has been fighting the wrong war as it rebrands itself as the country's 'biggest discounter' in a battle to protect its dominant market share. It has also been hit by problems expanding abroad. In particular its forays into Thailand and America have not gone according to plan."

The foray into America the UK analysts are referring to of course is Fresh & Easy Neighborhood Market.

We've been watching Tesco closely all year, both in the UK, U.S. and elsewhere in the other 12 countries it has retail stores in. In terms of its UK franchise, we aren't sure the retailer has had much choice but to slash everyday prices in its stores and position itself as more of a discount-oriented chain. After all, Wal-Mart's Asda has been doing just that since late last year. Asda's efforts to lower thousands of prices, promote more heavily and up its value proposition dramatically have been a success and allowed it to take a bit of market share from Tesco and take even more from number three UK chain Sainsbury's.

Additionally, the UK's top three no frills, small-format discount grocery chains, Aldi, Lidl and Netto, have been gaining share since late last year. The volume of these three discount chains has been growing even faster since September when the financial crisis began to rear its head in the UK and U.S. The three hard discount chains combined only hold about 8% of the total UK food and grocery market, compared to Tesco's about 31%.

However, they are among the fastest growing chains in the country in terms of opening new stores, and the small-format, hard discount segment which they play in is the UK's fastest-growing retailing segment for food and grocery shoppers. Therefore they may be small-format and small market share players -- but they represent a mighty challenge to Tesco, as well as Asda, Sainsbury's and others.

The relative success of Asda, Aldi, Lidl and Netto, which has come as UK shoppers look for the lowest prices available, has demonstrated that discounting is where it appears to be at currently in the nation's food and grocery retailing industry. Our analysis is had Tesco not started slashing prices and positioning itself as more of a discount chain earlier this year, which was far later than Asda did for example, it might be reporting a negative sales number (loss) for the third quarter next week rather than the slim 1.9% increase being predicted by UK analysts.

As we've reported and written about extensively in the last few weeks, Tesco's Fresh & Easy Neighborhood Market CEO Tim Mason announced recently the Southern California branch of Tesco would slow down its new store growth in the Western USA, including postponing its launch into the Northern California market for an undetermined amount of time. The first Northern California stores were set to start opening in the first quarter of 2009.

Tesco, which operates nearly 4,000 stores in 14 countries and employees about 440,000 people, also recently announced sales at its South Korean retail stores were off considerably, and that it would slow new store growth there as well.

These two announcements, the U.S. and South Korean slowdown, are part and parcel of the overall drop in sales globally for Tesco, which it will demonstrate when it announces its third quarter sales next week.

Many of Tesco's stores in the UK and globally are Supercenters or Hypermarkets which sell lots of general merchandise -- clothing, consumer electronics and durables like furniture and household goods -- and therefore depend on the Christmas holiday season for a sales push in these categories. With most analysts predicting a poor Christmas sales season in the UK, like elsewhere throughout the world, Tesco likely will find its fourth quarter performance not much better than its third quarter.

But competitive pressure, and not just from Wal-Mart's Asda and the big three small-format, no frills discount grocers mentioned above is having a serious negative effect on Tesco. Something else seems to be in the works. For example, after struggling for most of the earlier part of this year, Sainsbury's, the UK's number three chain, reported a whopping 13% profit hike earlier this month. And Morrison, the UK's number four grocery chain in terms of market share, is expected to report a 7.2% gain in profits for its third quarter when it reports later this month, according to industry analysts.

In addition to these serious competitive challenges at home in the UK, along with stagnant sales in parts of the world like Asia, it's our analysis that continued loses and expenses at the U.S. Fresh & Easy Neighborhood Market chain are putting a drag on Tesco. Strong corporate sales growth can help a low tide like Fresh & Easy. However, with sales growth of only 1.9% for the third quarter, significant losses like Fresh & Easy continues to have becomes a much bigger overall concern.

Another concern is Tesco's share price. Shares in Tesco have dropped by 40% over the last year. Part of the dramatic drop in Tesco stock is due to a new law passed by the UK's competition commission which will restrict the number of new stores Tesco can open in the UK from next year on out.

Because Tesco is the nation's dominant food and grocery retailer -- it has an about 31% share compared to number two Asda's about 17% and number three Sainsbury's about 15%, for example -- the chain is the most affected by the new anti-competitive, anti-retail monopoly law. Both Asda and Sainsbury's essentially can open as many new stores as they previously have planned to since they have far fewer UK units than Tesco. To put it in perspective, Tesco has at least one store in every city and town in the UK, about 1,800 total in a country with not many more people than California has.

Selected Reports:

> Tesco posts worst figures in 16 years
>Reuters - UK: Preview-Tesco to report slowest UK growth since early 90s
>The Times - UK: Tesco hit by fears of first fall in profits for 15 years
> A Nightmare on the High Street as shops fall like dominoes
>Scotland on Sunday - UK: Mixed bag of results expected from supermarkets
>The Times - UK: Tesco can still deliver the goods
>Natural~Specialty Foods Memo: Retail Memo: Woolworths, An American Chain Imported to the UK and Embraced By the Brits as Their Own Dear 'Woolies' Puts its 815 Stores Up For Sale
>The Times - UK : Will anyone scoop up worthless woolies?

Thursday, November 27, 2008

Earl Grey Returns for the Holiday: Thanksgiving With A Slice of 'Rye'

By Earl Grey
Fresh & Easy Buzz Occasional Satire and Humour Correspondent

Since unlike most holidays, the centerpiece of Thanksgiving Day is food, and lots of it -- Fresh & Easy Buzz asked me, the Blog's now very occasional United Kingdom-based correspondent, to bring its readers some food-related news and reports about the Thanksgiving holiday -- with a focus on the lighter side. I agreed since I thought the writers and editor deserved to celebrate Thanksgiving and therefore could use a little time off. Plus, since I last wrote a piece for the publication here, this is the first time they've asked me to contribute since.

Below are a selection of news items, lifestyle-oriented reports and offbeat informational morsels for Thanksgiving Day, from yours truly Earl Grey, live from the UK.

Thanksgiving live: First up, in this world of real-time Blogging (I'm on the terrace in my boxer shorts sipping tea right now, for example), it's should be no surprise that many Bloggers are "Liveblogging" Thanksgiving. Among those are the Food Bloggers at the hallowed "Grey Lady," the New York Times.

You can check out and read the NY Times' Food Bloggers' Thanksgiving "Liveblogging" at this link: (I can't help wondering what the Times' "Livebloggers" are wearing right now?) On second thought (see my on terrace drinking tea comment above) maybe "Liveblogging" falls under the TMI (too much information) category in many ways.

Variations on the holiday bird in T-minor: Tired of preparing your Thanksgiving Day turkey the same old way? Never fear. Check out a few Unorthodox Turkey Recipes . They aren't for the traditionalist though. PS: I kind of like the Turkey Cannon.

A bird stuffed in a bird, stuffed in a bird and wrapped in bacon: Speaking of non-traditional Thanksgiving dinner center of the plate items, the Turbaconducken, pictured above, (also called a Turkenducken) might be your answer. The turkey stuffed with duck, stuffed with a chicken and then wrapped in bacon has been a popular holiday treat in places like New Orleans for decades. (I spend half my time in the U.S., so know such facts.) In recent years its started to catch on elsewhere around the United States.

I doubt most Americans will be taking their turkey multi-bird, turbo today, but it is different -- and tasty in fact. It also offers eaters a bird trifecta with each bite -- turkey, duck and chicken all together at the end of a fork. And of course the bacon wrap adds a delicious fat element to the turbo bird dish. After all, why baste the bird over and over with butter when you can wrap bacon around it, which provides not only a better taste then a butter baste in my humble opinion, but lots more fat as well. It's a holiday after all. Splurge a bit. By the way, here in the UK we wrap our birds in bacon often. I know it's very uncommon to do so in the States but you might give it a try sometime.

Come to think about it, Tesco's Fresh & Easy Neighborhood Market is offering whole turkeys wrapped in smoked bacon and sage for $2.29 pound for Thanksgiving. Therefore all last minute shoppers need do is pick-up a whole chicken at the Fresh & Easy, along with the bacon-wrapped turkey, and find a duck, and you've got at least 30% of your Turbaconducken ready to go. Just stuff the turkey with the duck stuffed with the chicken and bake. Good to go. More at:

Bacon totalitarianism: And while on the topic of bacon, sometimes people can take what is a fat-laden but tasty meat product just a little bit to far, like here. I don't approve of such humour, nor do I suspect the bacon industry trade association does either.

The silent chef: Speaking of Thanksgiving recipes and dishes, celebrity chef Rachael Ray has been doing nothing but talking about the holiday meal, along with preparing entree after entree and side-dish after side dish holiday recipes on her television shows for the last couple weeks. She's a one-woman holiday talking and cooking fest, she is.

But it appears Rachael Ray won't be doing all that cooking and TV-talking for the upcoming Christmas holiday. The "Queen of Cuisine" and "Diva of Dining" is having vocal chord surgery, which means no talking following the procedure. She's says she will even have to communicate with her husband by writing notes. I bet he is heartbroken over that.

The celebrity chef won't be returning to the airwaves until January, 2009, which means her millions of viewers will have to find an alternative idea-source for their Christmas meals. Read about Rachael Ray's vocal chord surgery here.

I think the culinary-talented and dynamic Ms. Ray (she's no Nigella Lawson though) should let a loss of voice stop her from doing at least a few pre-Christmas holiday shows though. After all, every television set today has closed-captioning text. She can write out a script and have it text-messaged across the bottom of the TV screen. Or why not hire a spokesperson to read her prepared text as she cooks? Or why not a completely silent cooking show, which would stimulate viewers imaginations if nothing else. Call it "Rachel Ray: The Silent Chef" for the month of December

Tiny kitchens rule in the new, down-sized America: Since we're on the topic of television cooking shows, which are very popular during the fall holiday season, don't you sometimes get just a bit jealous of the spacious, fancy kitchens with miles of counter space the celeb chefs like Emeril, Wolfgang Puck and other TV cooking stars get to use while preparing the recipes for viewers? After all, it's easy to make all those great creations when you've got a huge kitchen with all the latest equipment and miles of counter space, which few of us have got at home.

Well, a New York Times food section recipe tester felt the same way some of you might feel, so she launched the "Tiny Kitchen" cooking series on the Web. The tiny New York City kitchen used on the show has a grand total of two feet of kitchen counter space. Try being a star in that tight space Emeril. (Emeril is from New Orleans, by the way, and knows his way around stuffing turkeys with ducks and chickens better than most.)

You can view the "Tiny Kitchen" cooking videos here, as well as read about the series. The series makes sense in these bad economic time when everything is getting smaller -- bank accounts, houses, cars (and kitchens of course) -- and more.

Cupcake mania: Bank accounts, houses and cars and kitchens aren't the only things getting smaller -- so are cakes. For those not in the know, one of the hottest food trends in America right now is the cupcake. And not just a plain old cupcake, made with Betty Crocker cake mix and ready-to-spread frosting. Instead the gourmet cupcake, popularized by such cupcake-centered bakeries like Sprinkles in Los Angeles, are what's hot. After all, even in a bad economy, people can spend three or four bucks for a gourmet cupcake, such as Sprinkles' famous Red Velvet little sweet treats, and feel like they've indulged.

Therefore it's no surprise to me that cupcakes are popular this Thanksgiving, even though pumpkin pie usually is the dessert of choice around Thanksgiving dinner tables today. Lots of folks were even making a "pilgrimage" to the various Sprinkles cupcake bakeries in Los Angeles yesterday, stocking up on Sprinkles' Thanksgiving Pumpkin and Pecan cupcakes, for example, one of my Southern California sources told me last night.

Even that elder-stateswoman of TV cooking and entertaining shows, Martha Stewart, created a variety of Thanksgiving cupcakes this year for the original American holiday.

You can check out all the buzz about Thanksgiving cupcakes from Martha and others here.

Who let the dogs out? In closing I would be remiss if I didn't write about two things. First, one can't write about Thanksgiving dinner and the holiday in general without an item about wine, which I will do briefly. Second, as a retired professional journalist turned consultant to the tea industry (what else do you do for a second career with a name like Earl Grey?), I'm partial to what we in the trade call "Dog Bites Man" and "Man bites dog stories." It just so happens I can (sort of) combine those two things, Thanksgiving and wine, and man and dog stories, in this item below:

A wine with a bark and a bite: As much as we all would like to forget it, I'm sure most of you remember the case of former NFL football star Michael Vick and his Pit Bull breed dogs. It appears some people not only remember the sad incident, they've also decided to memorialize the case of Michael Vick and his Bad Newz Kennels. And they done so in a odd way: By creating the Vicktory Dogs Wine Collection which features 22 wines, each named for one of the Pit Bull's rescued from Michael Vick's Bad Newz Kennels. The wine is a 2003 Syrah, which those who've tasted it say is pretty good, if you can get over the whole Michael Vick/Pit Bull incident.

But the Good Newz is the money from the sale of the wines will be used to oppose dog fighting. The profits from the sale of the wines also will be used to oppose laws that target specific dog breeds -- like Pit Bulls. I take no position pro or con on that particular use of the money.

Read all about the Michael Vick-inspired new line of 22 wines, which have a portrait of each of his Pit Bull dogs (22 in total) on the labels, here.

Signing off: To borrow a line from that guy on American Idol, no not the great British export Simon Cowell, the other guy, Ryan Seacrest -- 'Earl Grey Out.' Happy Thanksgiving!

PS: Make sure to end your Thanksgiving Day meal and dessert with a spot of tea. My suggestion: Earl Grey of course.

Wednesday, November 26, 2008

Consumer Briefing: The New, Frugal and Near-Broke American Consumer is Staying Home For the Holidays

What Others Are Saying: From: Natural~Specialty Foods Memo

It looks like American consumers will be staying 'home for the holidays' in much higher numbers this Thanksgiving and Christmas than in the past. That shouldn't be a surprise really. After all, nearly all of us are broke.

Based on a number of surveys and other sources of information, it looks like many more consumers are staying home for Thanksgiving this year compared to last, and slightly more will be staying home for Christmas.

It appears many who had planned to go away to visit family for both Thanksgiving and Christmas can only afford to do so for one of the holidays. Therefore, most are opting to do so for Christmas (and those plans could change for many) and stay home and cook dinner for Thanksgiving at home. Many can't afford to leave home for either holiday -- and in fact are hoping to be able to run the furnace to keep them warm while enjoying their holiday dinner at home.

That's bad news for restaurants, the airline companies, gasoline stations, motels/hotels and other businesses that cater to holiday travelers.

However, it is good news for food and grocery retailers. The stay at home Thanksgiving 2008 trend means more people will be shopping at retail grocery stores because they are preparing dinner for family, relatives and friends at home.

Additionally, since the Thanksgiving weekend is a four-day holiday (Thursday-through-Sunday) for most, not going away means consumers will need to stock up on everyday and post-holiday provisions for the long weekend at home. After all, leftover turkey and trimmings is fine the next day. But by Saturday even the super-frugal need something else. That's more good news for grocers and those who supply stores.

The food and grocery industry Blog, Natural~Specialty Foods Memo, has a current piece about this staying 'home for the holidays' trend. You can read the story here: "Consumer Behavior Memo: 'Uber-Cocooning' -- Many American Consumers Staying 'Home For the Holidays' Out of Forced Economic Necessity."

Of course, just because millions more American consumers are staying home for Thanksgiving and Christmas this year (many are still traveling of course; just far fewer) instead of going away, and therefore will be buying more food and groceries at the grocery store, that doesn't mean they plan on splurging and spending the equivilent of say four airline tickets from home in Southern California to mom and dad's (and the grandparent's for the two kids) house in Texas, a trip they might have planned earlier this year but canceled after the financial crisis and recession hit full-blown a few months ago.

Instead, we're seeing a major trend towards frugality among American consumers, which we've been writing about in Fresh & Easy Buzz regularly. Shoppers are trading down from higher-end supermarkets to discounters, using more manufacturers' and retailer coupons (manufacturer coupon use is up 30% since February of this year), eliminating lots of their purchases of organic, specialty, premium and prepared foods, and going to the grocery store less often, buying fewer items when they do.

Natural~Specialty Foods Memo has a story highlighting and discussing this new phenomenon, the new, frugal American consumer. It's a trend every retail grocer must pay attention to, and market and merchandise to, in order to survive in this current recessionary economy. It's an economy that's going to get far worse. For example, most analysts are suggesting the current 6.5% U.S. unemployment rate should hit 8% by the first of next year, and could even go as high as 10% by mid-2009.

Read the piece from Natural~Specialty Foods Memo here: "Consumer Behavior Memo USA: 'Life, Liberty and the Pursuit of Frugality' - America's New Consumer Frugality."

Even high-income shoppers are cutting back dramatically, according to sales figures at more upscale stores as well as from survey data.

While the retail food and grocery industry in the main isn't being hurt to anywhere near the degree other format, such as department store and specialty general merchandise retailers are, there are players in the grocery retail sector that are suffering considerably. Those doing well are the discounters -- Wal-Mart, BJ's Wholesale Club, Costco, as well as supermarket chains such as Safeway Stores, Inc. and others --that are lowering prices (and costs), continuing to fine tune their value propositions, and communicating those propositions to shoppers in a variety of ways (different media and in-store) on a consistant and regular basis.

We believe the recession will last for all of 2009, getting worse and deeper before the economy begins to improve, even with the $500-$700 billion stimulus package President-elect Barack Obama is asking Congress to have passed and ready for him to sign when he takes office the last week of January, 2009.

Therefore, we have three words of advice for all food and grocery retailers -- value proposition, value proposition, value proposition.

Every retailer in the U.S. -- from Whole Foods Market, Dean & DeLuca and every upscale chain and independent, to conventional retailers and even discount format operaters -- must have a solid value proposition unique and customized to their particular retail formats and operations.

This value proposition needs to be clean, consise, clear and comprehensive.

It needs to be a major part (if not the major part) of any grocery retailer's mission from today on. It should have been since early this year. But it isn't too late. But it is getting to be too late.

In this economy, value is the key variable across all consumer classes and income levels. Just ask New York City's famous Saks Fifth Avenue high-end department store chain. Last week the upscale retailer, which has done fine during the last two U.S. recessions, discounted most of its designer clothing, shoes and other items (Gucci, Prada, ect.) by 40% -to- 60% -- and it still isn't selling, even to those high income consumers who comprise Saks' customer base.

While consumers have to by groceries and eat, but not buy Gucci or Prada, they don't have to shop at any given supermarket. They are demonstrating this fact by trading down; there's a flight to value when it comes to food and grocery stores. Those who recognize this, devise the value proposition we describe and then communicate it well, like Wal-Mart is doing on all counts right now, will not only survive the next year or more, but also will thrive.

Related stories:

>Retail Memo: What's Next For U.S. Retailers if the Economy Picks Up in 2010?

>Retail Memo: Customer-Owned Retail Food Cooperative Stores Gaining New Popularity in Recessionary America

Monday, November 24, 2008

A Single Bird in the Ad (Even Wrapped in Bacon and Sage) Does Not Make For A Good Thanksgiving Promotion For A Neighborhood Grocer For 'Everybody'

Analysis & Commentary: Tesco Fresh & Easy Neighborhood Market's Thanksgiving 2008 Advertising Circular and Promotion

Benjamin Franklin's famous letter to his daughter Sally about why he wanted the turkey to be the national bird of the United State's instead of the bald eagle. Franklin wrote the letter to Sally on January 26, 1784 from France. She was in Philadelphia -- "For my own part I wish the Bald Eagle had not been chosen the Representative of our Country. He is a Bird of bad moral Character. He does not get his Living honestly. You may have seen him perched on some dead Tree near the River, where, too lazy to fish for himself, he watches the Labour of the Fishing Hawk; and when that diligent Bird has at length taken a Fish, and is bearing it to his Nest for the Support of his Mate and young Ones, the Bald Eagle pursues him and takes it from him.

"With all this Injustice, he is never in good Case but like those among Men who live by Sharping & Robbing he is generally poor and often very lousy. Besides he is a rank Coward: The little King Bird not bigger than a Sparrow attacks him boldly and drives him out of the District. He is therefore by no means a proper Emblem for the brave and honest Cincinnati of America who have driven all the King birds from our Country . . .

"I am on this account not displeased that the Figure is not known as a Bald Eagle, but looks more like a Turkey. For the Truth the Turkey is in Comparison a much more respectable Bird, and withal a true original Native of America . . . He is besides, though a little vain & silly, a Bird of Courage, and would not hesitate to attack a Grenadier of the British Guards who should presume to invade his Farm Yard with a red Coat on."

Fresh & Easy Buzz has been writing for some time about the fact Tesco's Fresh & Easy Neighborhood Market has failed to create and communicate a solid, clear value proposition for its small-format, convenience-oriented grocery and fresh foods stores, in our analysis.

We believe the primary reason this is the case is because the retailer has yet to define what the format is (is Fresh & Easy a discount grocery or specialty foods chain? Or both? Or more?) and it's retailing mission and focus are (are the stores really for "everybody" like Tesco says they are? If so, why is such a limited consumer demographic, mostly consumers aged 19-35, shopping the stores primarily? And not enough of them at that?)

As a result, the positioning of the Fresh & Easy is a muddle, as we've been arguing since December, 2007. We said give them time then. We said give them time in June and July of this year. But it's now nearly the end of November, 2008, and has been one year since the first batch of Fresh & Easy stores opened. The failure to position the stores is still as bad as it was in December, 2007, in our analysis. Why? Because of the reasons we stated above: The retailer still hasn't figured out the chain's format and mission, therefore there is no clear, comprehensive and solid focus and positioning for Fresh & Easy.

The grocer is using a shotgun form of positioning, merchandising and marketing (fire a bunch of shot out there and see what sticks) rather than a rifle approach, which is a clear, focused position and a comprehensive marketing communications program to then create the Fresh & Easy retail brand.

In fact, based on the thrust of Tesco's overall merchandising and marketing since the first batch of Fresh & Easy stores opened in November, 2007, our analysis is that the Fresh & Easy Neighborhood Market executive team is running a specialty foods chain, Fresh & Easy, and merchandising and marketing the stores in the main in that direction. Nothing wrong with that -- except that's not what Tesco says Fresh & Easy is.

The everyday low price, discount aspect of the stores has largely been obscured in the merchandising and marketing of the Fresh & Easy chain. The value proposition, which Tesco touted for over a year before the first store opened as being its key positioning factor for Fresh & Easy, along with convenience, has been nearly non-existent -- an after-thought when it comes to positioning, merchandising and marketing.

For example, for Thanksgiving Tesco's Fresh & Easy is promoting in-store, through a press release and in its current November 12-26 online and mass-mailed advertising circular, a gourmet, ready-to-cook turkey dinner, under the theme "Thanksgiving made easy," featuring a whole ready-to-cook turkey wrapped in smoked bacon and sage, along with including prepared side dishes and trimmings for six people for about $49, or $8 per-person. Here's the dinner promotional offering:

fresh&easy Whole Turkey Wrapped in Smoked Bacon and Sage -- $2.29 Lb.

Prepared: Ready-to-heat
fresh&easy Mashed Potatoes -- $4.99/28 oz, or
fresh&easy Mashed Sweet Potatoes -- $3.99/24 oz
fresh&easy Herbed Stuffing -- $3.99/16 oz
fresh&easy Roasted Vegetables -- $4.99/19 oz
fresh&easy Turkey Gravy -- $3.49/20 fl oz
fresh&easy Cranberry & Orange Sauce -- $2.99/12 oz
fresh&easy 9" Pumpkin Pie -- $2.99 each

The $49 price for the gourmet turkey and trimmings (the turkey is gourmet while the trimmings are more mainstream) Thanksgiving dinner isn't bad at all -- it's about the same price nearly all of Fresh & Easy competitors in California, Nevada and Arizona are selling similar prepared Thanksgiving turkey/side dish/dessert dinners for. Except, the competitors' whole turkeys are already cooked in many cases, and they are your basic bird rather than being wrapped in bacon and sage or anything else. Many of these also feed 8-10 people rather than six.

We aren't saying a bacon and sage-wrapped turkey doesn't sound like it might be very tasty. The problem isn't with the dinner created by Fresh & Easy's in-house chef -- it's fine. The problem is, the Fresh & Easy Thanksgiving meal promotion is one a specialty or gourmet food store would offer, not one (at least making it its only advertised promotional offering) a neighborhood market that's positioned for everybody and claims it offers everyday food and grocery prices 15% -to- 20% lower than those of competing supermarkets would offer as its only Thanksgiving Turkey promotion. There is a disconnect from the attempted positioning of being a low-priced neighborhood market designed for all consumer segments and offering only the gourmet turkey promotion.

Such an offering would be fine as a secondary one by Fresh & Easy, say along with a value-priced Thanksgiving dinner (including just a basic, raw bird), as well as promoting basic, whole Turkeys at a hot price in the advertising circular.

But that's it. The gourmet bacon and sage-wrapped bird is the only turkey the grocer is promoting in its holiday ad. Fresh & Easy isn't promoting a value version of the dinner for say under $30 like the small-format Aldi USA discount grocery chain is doing, nor is the grocery chain offering fresh and frozen whole turkeys on sale for hot prices like Safeway Stores, Ralph's, Bashas and all of its other key competitor's are.

Aldi USA's value offering, which you can view here, is only $27.16 and includes a 14 pound Butterball brand whole turkey, which is one of the most popular brands in the U.S. The complete Thanksgiving meal fixings feed at least eight adults.

The positioning of Fresh & Easy with its Thanksgiving promotion is that of a specialty or gourmet market, plain and simple. If we may use a turkey metaphor: 'If your Thanksgiving holiday promotion looks like a gourmet turkey promotion (a bird wrapped in smoked bacon and sage), walks like a gourmet turkey promotion (higher-priced, prepared side dishes only) and is priced like an gourmet turkey promotion (higher than most consumers can afford this Thanksgiving holiday even though the price is decent for the perceived quality, and you offer no additional value-based options), it's a specialty/gourmet turkey dinner (promotion.)

For example, in addition to offering prepared turkey dinners at about $49, chains like Safeway (Vons in Southern California and southern Nevada, Safeway in Arizona, Northern California and northern Nevada) Ralphs, Albertsons, Bashas, Frys, Stater Bros, Food-4-Less and most others (all key competitors) all are offering a variety of turkey variations on sale this week. These range from promoting whole frozen birds for 38 cents -to- 49 cents per-pound if customers spend a minimum of $25 at the store, to selling frozen turkeys for 69 cents a pound (and some even less) with no minimum purchase requirements, to offering whole fresh birds for from 79 cents to about $1.39 per-pound.

These same supermarkets also are offering higher-end, premium birds, such as the popular Diesel brand free-range, all-natural turkey for as low as $2.29 per-pound, along with organic birds for a higher promotional price-point. A couple chains also are offering free turkeys (12-16 pounds) with a minimum total purchase of $100.

This Advertising and promotion is traditional. Every Thanksgiving U.S. supermarkets offer a wide range of turkey's -- usually at least three brands of frozen (a lower-end, medium range and high-end) and at least three brands of fresh turkeys (low, medium and high-end) -- for sale the week before Thanksgiving in their advertising circulars. Most also offer additional brands and versions, including premium, free-range and organic, as well as a couple value-added versions such as smoked, honeysuckle, ect. They do this because it works -- it appeals to the entire consumer spectrum, from lower income shoppers to the wealthy, or those who aren't wealthy but are willing to splurge and spend more for a premium turkey and higher-end trimmings.

It's our analysis that by promoting only one Thanksgiving offering, a ready-to-cook turkey wrapped in smoked bacon and sage, along with higher-priced ready-to-heat side dishes only, not only is Fresh & Easy missing the boat on drawing the majority of shoppers into its stores, its running a specialty food store promotion. There would be nothing wrong with this if Fresh & Easy was a specialty grocery. But it says it isn't. Rather it says it's a discount or everyday low price-format neighborhood grocery and fresh foods market designed for all consumers.

If that's the case, and positioning, then where are at a bare minimum the discount-priced and advertised fresh and frozen whole turkeys? And why not a value-version of a complete Thanksgiving dinner, along with the smoked bacon and sage-wrapped gourmet offering, like discount grocery chain Aldi USA is offering here, for example.

We say this with all humility and with zero pleasure: Tesco Fresh & Easy's November 12-16 Thanksgiving advertising circular is one of the worst Thanksgiving holiday promotions we've seen a grocer produce in nearly 30 years of working in and participating in the food and grocery industry in the U.S.

There's just no there there in the ad. No meat on the promotion's bones. No real value offered. No reason for a consumer to read it, comparing it to Safeway's, Kroger's and the other chain and independents Thanksgiving holiday promotions in California, Nevada and Arizona, and saying: 'I've got to shop Fresh & Easy for my Thanksgiving turkey and groceries.'

And in terms of promoting just the one turkey, the bird wrapped in smoked bacon and sage, most American consumers like a plain old bird for their Thanksgiving dinner. They then season it the way they choose. Feel free to ask the various U.S. poultry industry trade associations for their annual sales figures by type of bird sold if you don't believe us about the overwhelming popularity and sales of the plain old bird at Thanksgiving compared to all other variations.

A few consumers/cooks might even choose to wrap their plain old whole turkey in bacon, although we would guess that percentage would likely be about 1% of the U.S. population.

Additionally, most Americans like to buy a plain turkey because they generally serve Thanksgiving dinner to a number of family members, as well as often including friends at their holiday dinner celebrations.

Most if not nearly all U.S. consumers will shy away from buying a turkey wrapped in smoked bacon and sage because perhaps Uncle Jeff, who has high cholesterol, has been told by his doctor not to eat bacon, so he can't eat it. Or maybe because son Tom's wife is Jewish and doesn't eat pork. Then there's that crazy cousin Larry who hates bacon period. Not to mention all the kids who when they see a turkey wrapped in bacon and sage don't want any part of it. Too gross they might say, even though those of us who've enjoyed such a bird know its not gross at all. The plain turkey, seasoned by the home cook, is therefore the default bird for Thanksgiving in America.

Offering promotional variations in ads, like the bacon and sage-wrapped bird, on the plain whole fresh and frozen turkeys and turkey dinner package like Aldi's is fine. But they aren't a substitute, (rather an addition to) to offering the plain bird, unless the grocer doing so isn't concerned about sales. or drawing in holiday shoppers to its stores.

The point is, when feeding numerous family members, many from out of town or out of state even, on Thanksgiving Day, most Americans want to please all. Therefore they go for a basic, plain turkey most of the time and season it so that it appeals to most if not all of their dinner guests. Many offer a second entree as well.

The bacon and sage-wrapped turkey sounds tasty, although we prefer wrapping ours, on those rare non-Thanksgiving holiday occasions when we do so, in Pancetta. However, by making it the only offering in its Thanksgiving Day promotion and advertisement, Fresh & Easy is appealing to the smallest of consumer segments, rather then appealing to "everybody," which it could have done had it offered a plain bird, value version of the full Thanksgiving dinner, along with offering at least one frozen and one fresh whole turkey at a super hot price, like Safeway, Ralphs, Stater Bros., Food-4-Less, Bashas, Albertsons, Frys, Save Mart, Raley's and most others are doing, in its Fresh & Easy Thanksgiving holiday advertising circular.

Additionally, aren't ready-to-eat prepared meals a key aspect of Tesco's Fresh & Easy? Why no pre-cooked, ready-to-heat-only or ready-to-eat turkeys advertised for the holiday?

We suspect Fresh & Easy didn't advertise and promote this version, despite it being key to its prepared foods merchandising, because it feared it would be stuck with too many pre-cooked turkeys, having to mark them down 50% and toss many of them away after Thanksgiving. Safeway, Ralphs and most other chains are offering fully-prepared Thanksgiving meals for 8-10 for about $49 -to- $59, that include a pre-cooked turkey that just needs heating at home. Or in some cases if shoppers can get the pre-cooked birds home fast enough, keeping them hot, they just need to be carved and served.

If you view Fresh & Easy's November 12-16 advertising circular here, which is the grocer's Thanksgiving holiday promotion, we think you too will ask the same two questions we did when we first saw it: Where's the value proposition? Why no basic turkey dinner at a hot price? And where in the world are the fresh and frozen plain whole turkeys at a discount price? We had a couple other questions as well. But those were the key ones.

American consumers haven't been as financially strapped as they are this Thanksgiving since perhaps the recession of the 1970's. For many its even far worse than that. Based on its no frills, discount model, Tesco's Fresh & Easy should be offering at least one value-based Thanksgiving dinner, along with those discount-priced frozen and fresh whole turkeys we mentioned above, in its current holiday ad. By not doing so the retailer is missing the boat for what is the number one consumer spending holiday in the U.S. -- Thanksgiving. Where's the holiday value proposition? Look through the entire ad as well. Not much value. Few items even.

It's a time-tested empirical fact of American shopper behavior that U.S. consumers purchase most of their Thanksgiving holiday dinner, dessert and related food and grocery products at the store in which they decide to purchase their turkeys at, which the vast majority still serve on the holiday, although some serve ham or beef roasts. A few even serve chicken, lamb or a goose as their main course instead of turkey. But the mighty bird loved by Ben Franklin still remains far and away the number one Thanksgiving holiday dinner center of the plate item in American homes on the American-only holiday this Thursday.

In tough economic times like now many shoppers will cherry pick ads, going to two or three stores to purchase their holiday fixings. However, they still will buy lots of incremental items at the store where they purchase their turkey, ham or beef roast. That's why major U.S. chains and independents feature numerous varieties of turkeys (and hams , beef roasts, ect.) in their Thanksgiving holiday advertising circulars and promotions.

The promotional objective is to appeal to all segments of the consumer base -- from the lowest income end to the mid-range and often even the high-end. It's also to offer hot buys on the birds (often loss leaders in fact) in order to get consumers into the stores so they will buy other items. Get shoppers in with the cheap bird and hope they buy higher margin items along with other advertised products is the philosophy and practice.

Specialty markets on the other hand, especially those focused on the upscale shopper which most are, tend to focus only on the high-end Thanksgiving shopper, which this year is comprised of far fewer consumers. These are the consumers who would be more likely to buy a turkey wrapped with smoked bacon and sage to grace their holiday dinner table.

But we think most higher-end consumers wouldn't buy the bacon-sage-wrapped bird either. Rather they tend to go for a free-range, broad-breasted, organic turkey, then choose how they season it on their own. Perhaps rubbed with extra virgin olive oil and fresh garlic, then seasoned with sea salt, fresh, cracked black pepper, fresh rosemary, sage and thyme, which is a popular version for Thanksgiving.

Our analysis is Fresh & Easy has missed this empirical reality of U.S. food retailing and promotion this Thanksgiving. It's holiday promotion is pure specialty foods store, which would be fine if that's what Tesco would say Fresh & Easy is. But it isn't, according to the company. It's a neighborhood grocery and fresh foods market with low-prices positioned for all consumers, according to Tesco. But based on its Thanksgiving promotion it looks specialty foods store to us.

Saturday, November 22, 2008

Southern California Market Report: New Tesco Fresh & Easy Store Featured as Retail Co-Anchor in Proposed New Rose Ranch Center in Oxnard, California

New Store Development News

The city of Oxnard, California Planning Commission heard a request by a developer last Wednesday night (November 19) to change the Ventura County city's general plan and current zoning regulations to allow for a 77,697 square foot parcel of land at the southwest corner of Rose Avenue and Gonzales Road, which would be co-anchored by a new Fresh & Easy grocery and fresh foods market, in the city to be developed into a shopping center called The Rose Ranch Shopping Center, according to the city agenda for last week.

At present the city's current general plan and zoning restrictions for the area don't allow for a center of the size and scope of the proposed Rose Ranch to be constructed at the location.

The nearly 10 acre shopping center would have a Fresh & Easy Neighborhood Market grocery and fresh food store and a Walgreen's drug store as the retail anchor tenants.

Additionally plans call for the new center to also include a retail bank and a restaurant. Additionally, the remaining about 37,000 square feet would be marketed to a variety of smaller retail shops and related businesses, according to the proposed plans.

At the Oxnard Planning Commission hearing on Wednesday night the city planning board also got its first look at an environmental impact report the developer had prepared for the proposed Rose Ranch Shopping Center. No decision has been made yet in terms of approving the plans.

Ventura County is one region in Southern California where Tesco to date has fewer Fresh & Easy grocery markets open than in a number of other counties in the Southland. However, Tesco plans to open new Fresh & Easy markets soon in Lompoc as well as in Oxnard in Ventura County, as well as a store in nearby Santa Barbara, in Santa Barbara County.

The proposed Rose Ranch center has to first gain approval from the planning commission, which then if it gives its approval to the developer and Tesco Fresh & Easy's plans for the store, turns it over for review and ultimately a vote by the Oxnard City Council, which has final approval on any commercial developments in the city.

Oxnard is located about 60 miles northwest of Los Angeles on the Southern California coast. The Ventura County region in and around Oxnard produces some of the finest strawberries and citrus fruits such as organges, lemons and limes in the United States, along with a number of other premium crops that thrive in the region's good soil and coastal climate.


Related Stories:

>May 2, 2008: More Critical Mass in the Neighborhood: A New Fresh & Easy Grocery Store to 'Sprout' In the Southern California Central Coast City of Lompoc

>February 7, 2008: Latest Fresh & Easy Market Opens in Simi Valley, California

Friday, November 21, 2008

Breaking News: Wal-Mart Stores, Inc. Names New CEO to Replace Lee Scott; USA Chief Castro-Wright Elevated to Vice Chairman Effective Immediatly

In a move today that took nearly everybody by surprise, Wal-Mart Stores, Inc. replaced CEO Lee Scott with Mike Duke (pictured at left), the head of the mega-retailer's international operations. Duke will take over as CEO of Wal-Mart in February, 2009. Wal-Mart's investors responded to Duke's appointment by sending the stock up $2.26, or 4.5%, to $52.92 on Friday. The consensus among analysts is that Duke is a good retailer and deserved the CEO's job.

Duke, a former department store executive, only joined Wal-Mart in 1995. he was named to head the company's international division in 2005, making his three year rise from that key position to CEO a meteoric one. Prior to joining Wal-Mart, Duke's 23-year retail career included work for Federated Department Stores and May Department Stores.

When he joined Wal-Mart in 1995 Duke first led the company's logistics divisions and U.S. Wal-Mart stores before being named international chief in 2005.

Wal-Mart also today promoted the CEO of its Wal-Mart USA operations, 53-year-old Eduardo Castro-Wright, to vice chairman of the corporation, effective immediately. He's slated to take on additional responsibility in global procurement.

The announcement paved the way for what some say is his eventual ascension to the top job at Wal-Mart Stores, Inc. Many believe Castro-Wright, who is considered an extremely excellent retailer, is ready now to be CEO. However, his promotion is a pretty clear sign he's next in line for the position if he wants it whenever Mike Duke leaves. Duke held the same vice chairman position Castro-Wright was just promoted to, as did Lee Scott, before being named CEO. Duke and Scott were responsible for different aspects of Wal-Mart's business though as vice chairman

Current CEO Lee Scott, who has worked at Wal-Mart for three decades and served as CEO for the last nine years, isn't going away anytime soon though. He will continue as chairman of the executive committee of the board and as an adviser to Mike Duke through January 2011, Wal-Mart spokesman David Tovar said today.

The timing of the announcement caught most people in the retail industry and on Wall Street by surprise. Changes at the top for huge corporations like Wal-Mart generally don't come towards the end of the year or before the holiday season. Additionally, such changes are usually made at the beginning of a major corporation's fiscal year, which isn't the current case at Wal-Mart.

"Lee (CEO Scott) decided the time was right for him to retire and approached the board about doing so," Tovar said. "The board has an ongoing and rigorous succession plan process. We think the right time is now. It's a time of strength for us."

Wal-Mart didn't name a successor to Mike Duke today as part of the changes at the top for the world's largest corporation and retailer. Duke is Wal-Mart's most senior international executive, which is a key post. Some are suggesting the fact a replacement wasn't named today for Duke could mean Wal-Mart might make an outside hire to replace Duke for its most senior global executive position.

Lee Scott's nine years as the head of Wal-Mart Stores, Inc. has been overall a very successful tenure.

Under Scott's leadership, Wal-Mart has put a relentless strategic and operational focus on value that has clicked with shoppers facing myriad economic concerns. He has also put a major emphasis on revamping merchandise assortment, improved store layouts and shored up Wal-Mart's environmental and labor image, positioning the chain as a Wall Street darling after a prior streak of criticism by the media, labor and environmental groups. Wal-Mart currently is the only company on the Dow Jones listing that's up for the year, for example.

Additionally, Wal-Mart has also become the number one seller of food and grocery products in the United States in terms of overall national market share. Prior to Scott's taking the helm as CEO nine years ago Wal-Mart wasn't even close to achieving that distinction.

As CEO Lee Scott launched a massive new store opening program in the U.S. and internationally, focusing mostly on the retailer's mega-Supercenters and Sam's Club warehouse format club stores, but also on its discount stores and Wal-Mart Neighborhood Market supermarkets.

The CEO also has led an aggressive new format development program at Wal-Mart. All of the new Wal-Mart formats in the United States for example -- the small-format Marketside grocery and fresh foods stores; the "Community Market" Hispanic prototype store, the first of which opened in Texas earlier this year, the new smaller (100,000 square feet) Sam's Club prototype; the new Supercenter prototype design, and the new hybrid, smaller Supercenter located in vacant buildings (the first one, at 100,000 square feet located in a former big box supermarket building, opened in Modesto, California on November 12 -- have one basic thing in common: They all offer lots fresh foods and groceries for sale in them.

That all these new formats sell food and groceries as a primary or key feature isn't an accident. What likely could be seen historically as one of the two most important contributions Scott has made during his nine year run as CEO at Wal-Mart could very well be his decision to put the retailer on the path to becoming the dominant seller of food and grocery products in the United States -- and eventually the world. In fact it's this ficus on consumables that most analysts attribute to Wal-Mart's current success in the U.S. and globally during the severe economic recession and financial meltdown.

Scott's relentless pursuit of consumers' food and grocery dollars also led to a decision earlier this year at Wal-Mart USA to start converting scores of its Wal-Mart discount format stores throughout the U.S. in hybrid Supercenters by adding 15,000 -to- 50,000 (depending on the available space) square feet to the discount stores, all of it and then some being devoted to consumables, including fresh produce and meats.

Most of these ideas and concepts for the U.S. came from Eduardo Castro-Wright, who yesterday was the CEO of Wal-Mart USA and today is the company's new vice chairman. However Lee Scott gets CEO credit just like he gets faulted for the negatives, as it should be.

Lee Scott's other major historic contribution has been push as CEO to make Wal-Mart an even bigger global retailer than it was when he took over the head office eleven years ago.

Under Scott's leadership Wal-Mart acquired the Asda chain in the United Kingdom, making it that nation's second-largest retailer after Tesco.

The company grew business in Latin and Central America dramatically.

He did a joint venture deal bringing Wal-Mart into India, which has the world's second-fastest growing economy after China.

Scott grew Wal-Mart-China in a huge way, even saying it will someday in the not too distant future become the retailer's largest market, eventually surpassing the United States in terms of sales.

Most recently Scott inked a deal to bring Wal-Mart stores to Russia, which also has one of the world's fastest-growing economies, although that growth has slowed considerably since oil dropped from $142 per-barrel to $50 a barrel in just the last couple months. But it will rise once again -- the price of oil that is.

By naming Mike Duke, the head of its global business, as the new CEO, Wal-Mart is clearly sending a message that it plans on becoming an even bigger international retailer. The retailer's international division, which Duke heads, accounts for more than a quarter of Wal-Mart's $400 billion in annual sales. The company's future growth is globally. Although there's still room to grow sales in the U.S., it's the retailer's most mature market and pales in comparison to the opportunities internationally.

During his tenure as head of international operations, Duke had some hits, but also some big misses. For example, In 2006, Wal-Mart withdrew from Germany and Korea, two big setbacks for the company. And despite taking control of its Japanese business in 2007, Wal-Mart continues to struggle there.

Successes though include Brazil, which has experienced phenomenal growth and serves as a model for Latin America, and India, where Wal-Mart scored a coup by forming a partnership with Bharti Enterprises to expand in that country despite local opposition from mom-and-pop retailers. Add China to the list as well.

And Asda in the United Kingdom is doing extremely well despite that country's economic recession and its position as a distant number two to Tesco. Tesco has a 31% UK market share to Asda's about 17% share. But Asda has consolidated its lead over number three Sainsbury's, which was neck-to-neck with Wal-Mart-owned Asda just two years ago for number two, but now has about a 14.5% share to Asda's about 17%.

Beginning next year when he takes over Mike Duke will have a much different political agenda to contend with as CEO than Lee Scott did during the last eight years of the Republican Bush Administration. With a new Democratic President, Barack Obama, and a Democratic majority in both the U.S. house of Representatives and U.S. Senate, issues such as unionization, which Wal-Mart has been able to keep at bay, are going to become much more pressing for the company -- and for the new CEO.

If organized labor can get the Employee Free Choice Act passed, a provision of which ("quick check") allows workers to merely check a box if they want to be represented by a union rather than going through the current and sometimes elaborate secret ballot voting process, it will make it much easier for unions like the United Food & Commercial Workers (UFCW) to organize store-level Wal-Mart employees, something the union has failed to do for decades. President-Elect Obama and a majority of House and Senate Democrats support the Employee Free Choice Act. Therefore its prospects for passage in 2009 currently look strong.

New CEO Duke also will have some political fences to mend globally; fences he has yet to mend as head of Wal-Mart's international operations.

For example, in September, Mexico's Supreme Court chastised Wal-Mart for paying employees partially in vouchers that could only be used at company stores. The court compared Wal-Mart to the Mexican dictator Porfirio Diaz, who ruled the country from the late 1880s to 1911.

Wal-Mart is now Mexico's number one retailer of food and grocery products. As such it can't afford to get on the wrong side of the government.

Other global issues include its Asda chain in the United Kingdom. That nation's top three retailers -- Tesco, Wal-Mart's Asda and Sainsbury's -- have been involved in a multi-year battle with the British government involving charges of anti-competition and price fixing. Earlier this year Asda CEO Andy Bond directed executives of the chain to cooperate with British government authorities against competing chains in return for a promise that the retailer wouldn't be prosecuted or fined. The issue is still taking shape but Asda isn't completely in the clear yet either.

It will be extremely interesting to see who Wal-Mart names to replace Mike Duke in the key position of head of international operations.

Additionally, with Eduardo Castro-Wright moving from CEO of Wal-Mart USA to his new position as vice chairman of Wal-Mart, that opens up the key position of head of U.S. retailing, which remains Wal-Mart's single-largest division in terms of annual gross sales.

We will be watching this closely because since so much of Wal-Mart USA's strategy is focused on selling consumables, and developing new formats that feature food and grocery products, we would expect a person with a food and grocery retailing background perhaps to assume Castro-Wright's position.

Of course that's far from a given since Wal-Mart is fairly deep with food and grocery sector talent below the USA CEO position. However, naming a person with extensive food and grocery retailing experience, either from inside or from outside Wal-Mart Stores, Inc., would send a strong signal that Wal-Mart is even more serious than ever before about becoming the dominant force in food and grocery retailing in the U.S.

[Photo Credit: Wal-Mart Stores, Inc.]

Guest Analysis: Maggie Gilliam of Gilliam & Company On Wal-Mart's Marketside and Tesco's Fresh & Easy

Fresh & Easy Buzz Editor's Note:

As our regular readers know, Fresh & Easy Buzz has been covering the development and opening of Wal-Mart's new small-format (15,000 -to- 20,000 square feet) Marketside fresh food and grocery format and stores all year. [Click here and here to read a selection of those stories.] Wal-Mart opened its first four Marketside stores in the Phoenix, Arizona Metropolitan region cities of Chandler, Gilbert, Mesa and Tempe in early October, as we've reported on and written about extensively.

We've written often that although Wal-Mart's Marketside is in a very small way a response to Tesco's small-format, convenience-oriented Fresh & Easy Neighborhood Market fresh foods and grocery retailing venture in the Western U.S. states of California (Southern only at present), Nevada and Arizona, its much more than that -- it's a natural progression of the mega-retailer's multi-format U.S. food and grocery retailing strategy.

Wal-Mart, which recently became the number one seller of food and grocery products nationally in the U.S. in terms of total market share percentage, plans to be a 100% national food retailer in America, which means lots of stores of various formats that sell food and grocery products in every state in the nation. We call this Wal-Mart's multi-format national food retailing strategy.

The Bentonville, Arkansas-based retailer realized some years ago (and realized it even more clearly a couple years ago) that in order to achieve this goal and implement its national food retailing strategy, it would have to create various retail formats, other than putting a sole focus on just its mega-Supercenters, that sell food and grocery products. Marketside is in the main part of that strategy.

Wal-Mart did however speed-up the development of Marketside under the then leadership of former corporate director for business development David Wild based in part on the rapid number of Fresh & Easy stores Tesco was opening in the Phoenix, Arizona Metropolitan market region, which is one of Wal-Mart's key focuses for its multi-format food and grocery retailing strategy. Tesco currently has 26 Fresh & Easy markets in the Phoenix area.

Maggie Gilliam, the founder and principal of Gilliam & Co., a strategic consulting firm that specializes in the retailing and consumer products industries, recently visited three of the four Wal-Mart Marketside stores in the Phoenix Metro market, as well as paying a visit on the same trip to a Tesco Fresh & Easy store in the market. Ms. Gilliam, who in addition to operating her firm for the last 11 years, spent 30 years prior to that as a Wall Street securities analyst following and covering the retailing and related industries. She also publishes a monthly newsletter about retailing, The Gilliam Viewpoint.

Below is an analysis piece Ms. Gilliam wrote in her Blog on the Gilliam & Co. Web site on November 6, 2008. She makes a number of observations about Marketside (and Marketside vis-a-vis Fresh & Easy) in her piece that are similar to many we've made in Fresh & Easy Buzz. But she offers her own unique observations and analysis of Wal-Mart's Marketside stores, along with comparing and contrasting the Marketside fresh food and grocery markets she visited to the Tesco Fresh & Easy store she visited in that very same market.

Wal-Mart’s Marketside
By Maggie Gilliam
Gilliam & Company Business Advisors
November 6th, 2008

On November 4, 2008, we visited three of the four new Marketside experimental stores in the Phoenix area, in Gilbert, Chandler and Mesa.

The British press particularly tried to make out that these stores are Wal-Mart’s response to—or as sometimes put, in fear of—Tesco’s US expansion. In reality, Wal-Mart is always testing new ideas, both within the four walls of the existing Wal-Mart store formats and in experimental stores. Some new ideas never get very far off the ground, like an entirely vendor merchandised store and retail concepts offering: deep discount drugs, arts and crafts, closeouts, and home improvement merchandise. Others, however, like the Walmart Supercenter and Sam’s Club, evolve into major undertakings. Even they though require tweaking, and the Supercenter involved an experiment with Hypermart USA and five years of testing on the street before being rolled out.

Although the Supercenter’s success is history now, Wal-Mart’s management has long recognized that there was business to be had with smaller stores to fill the neighborhood voids not readily reached by Supercenters, hence the Neighborhood Market. Marketside fills a similar void, but it is half the size and doesn’t have a pharmacy.

We won’t hazard a guess about Marketside’s eventual role in Wal-Mart, but we liked the stores. They are not a bit like Tesco’s Fresh & Easy which wreaks efficiency and offers few amenities, with most of the fresh merchandise packaged in a central commissary. Marketside, on the other hand, is much more inviting and emphasizes fresh in almost a Whole Foods kind of way, with most of the produce loose in open bins and some even hand stacked.

The stores have sushi and a Peet’s coffee bar, along with a big variety of prepared foods. The Chandler store did not have liquor but it had applied for a license.

There is very little in the way of nonfoods, except what would normally be found in a grocery store.

The stores were not very busy, particularly the one in Chandler, which is not very visible from the street, and catty corner to a Safeway Lifestyle store, which looked beautiful, although we have been fearful from the get go that it might cause Safeway’s price image to suffer.

The Marketside stores are not identified with Wal-Mart, and virtually no advertising has been conducted. Also, the very compelling pricing was not being conveyed. Clearly, the experiment has only just begun.

Fresh & Easy must have close to 30 stores in the Phoenix area and we were only in one, in Chandler. It had a few more skus than we had seen previously, but it was out of stock on baked goods—early in the morning—and it had some produce in mesh, as opposed to plastic bags. Tesco has a problem here. Why the company ever opened a big DC before it had perfected the concept is a big mystery to us.

Thursday, November 20, 2008

Analysis & Commentary: Fresh & Easy Neighborhood Market and Tesco's Lowered Expectations

Tesco plc CEO Sir Terry Leahy outside one of the global retailer's United Kingdom stores. Sir Terry -- 'A Pence for your thoughts?'

As we reported and wrote about here on November 12 and again here on November 19, Tesco Fresh & Easy Neighborhood Market USA CEO Tim Mason announced on November 12 that the grocery chain was scaling back its heretofore rapid new store opening program, which has had the retailer opening a new small-format, convenience-oriented Fresh & Easy grocery and fresh foods market about every three days in the Southern California, Metropolitan Las Vegas, Nevada and Metro Phoenix, Arizona market regions since November, 2007.

This retrenchment includes postponing Tesco's entry into Northern California, which the grocer plans to be its fourth and newest market region.

The first stores in Northern California's San Francisco Bay Area and in the Sacramento-Vacaville Metropolitan market region were originally supposed to be open in mid-2008, according to Tesco's first announcement about the new market launch in late 2007. During the first quarter of this year Tesco revised that target, saying the first Northern California Fresh & Easy markets would start opening by the end of 2008, which would be right about now. Then once again earlier this year the grocer revised the target again, saying plans called for the Northern California stores to begin opening in early 2009.

Based on information from our sources, it's now doubtful any of Tesco's Fresh & Easy stores will open in Northern California in the first quarter of 2009. Rather, we see the first stores most likely not opening any sooner than the middle of next year.

300 stores by end of 2009: Fact or fallacy

For many months now Fresh & Easy Buzz has been saying Tesco's goal of having 300 Fresh & Easy stores open by the end of 2009, which is the number most of the mainstream press has been reporting over and over since late 2007, was unrealistic for a variety of reasons. Chief among these reasons being the fact, as we've reported, the grocery chain is way behind in building its Northern California distribution center in Stockton, California, along with the simple fact the grocer's rapid new store opening pace isn't sustainable, considering the existing Fresh & Easy stores remain below Tesco's sales targets for this time in the chain's development, along with a few other reasons.

The sustainability issue also is why Fresh & Easy took a three month new store opening pause from early April until July 2 this year. Beginning on July 2, when it opened it Manhattan Beach, California Fresh & Easy market at 1700 Rosecrans, the grocery chain started up its rapid new store opening pace again, opening a new store about every three days or so in its three Western U.S. regional markets.

Instead of towing the 300 stores by the end of 2009 party line, we've suggested having about 175-200 Fresh & Easy stores open by the end of 2009 is a more likely realistic figure.

It appears we're spot on. Tesco Fresh & Easy Neighborhood Market CEO Tim Mason is now using that same number -- about 200 stores open and operating by the end of 2009 -- publicly and to the press. For example, in a brief report on November 12 in the Financial Times, staff writer Elizabeth Rigby writes: 'Mr. Mason now hopes to hit the 200 target by November next year, some 10 months later than planned.' He also used the 200 store estimate in his November 12 interview with The Times (United Kingdom) newspaper.

Additionally, Tesco's Fresh & Easy's Neigborhood Market's corporate spokesperson is now using the about 200 stores open by the end of 2009 figure as well when speaking to the press.

We talked to a source at Tesco's Fresh & Easy Neighborhood Market who told us on the condition we wouldn't mention the source's name that the 200 store number by the end of 2009 isn't even a sure thing. Rather, that the grocery chain could easily fall short of that number. This fits with what the Financial Times' Elizabeth Rigby wrote in her brief report on November 19: 'Mr Mason now hopes to hit the 200 target by November next year, some 10 months later than planned.' Notice the word HOPES in the sentence.

Since Fresh & Easy's original strategy called for the grocer to have 200 stores open by early 2009 (like by the end of February or March of next year), and then open about a hundred more in the remaining 10 months of 2009 to get near that 300 total number of units by the end of next year's original target, having around 100 less stores than projected by the end of next year will have a major impact on Tesco's Fresh & Easy model -- and sales and profit/loss target.

Among the impact includes taking longer to break even financially with Fresh & Easy. The Fresh & Easy Neighborhood Market business plan and related financials is based on having those 300 stores, or close to that number, (and the added volume they would bring) open by the end of 2009. Therefore, with fewer stores open the grocer is going to have to obtain significantly increased sales and substantially improved profit performance out of its existing stores (and the new stores it does open between now and the end of 2009) in order to keep its losses close to plan. Same stores sales and profits must increase in order to minimize losses.

Northern California here we come, later than we started from

In terms of postponing it Northern California market launch, we've identified thus far 46 Fresh & Easy store locations in the region -- 25 in the San Francisco Bay Area and 21 in the Sacramento-Vacaville region. Fresh & Easy has confirmed 37 of these locations -- 18 in the Bay Area and 19 in the Sacramento-Vacaville market region.

Most of these 46 Bay Area locations are vacant, former retail store buildings the grocer is currently or plans on remodeling into Fresh & Easy stores. As a result, the company holds leases on the majority of these locations. Therefore, even though Tesco is postponing opening the stores it still has to pay the monthly rent on those buildings. Commercial landlords seldom give retail tenants a rent vacation because they've changed their plans on when they plan to open their stores.

For example, if Fresh & Easy postpones opening the first stores in Northern California for six months -- from early 2009 -to- mid 2009. The company still has to pay the monthly rent on all those non-open stores. And if the first batch of the stores don't start opening until six months later than originally planned that means the second and third batch of stores won't open until more than six months later than originally planned, which means paying rent on those (second and third phase opening stores) unopened stores for an even longer period of time.

This is going to have an impact on the expense side of Tesco's balance sheet since empty stores don't generate income. In fact it could add hundreds of thousands of dollars in expenses to the company's balance sheet.

It's our analysis actually that it's wise for Fresh & Easy to postpone opening its Northern California stores. But we aren't sure the grocer should even go into Northern California with the current Fresh & Easy format, so that's little comfort overall.

What isn't wise though, and indications that something is wrong, is to keep putting off the dates which the first stores will open.

In his November 12 interview with The Times CEO Tim Mason said the reason for postponing the grocer's Northern California launch is due almost completely to the current financial crisis and recession. However, in the interview he also mentioned essentially being behind in constructing the retailer's Northern California distribution center in Stockton, which is about 35 miles from Sacramento and about 50 miles from San Francisco.

Fresh & Easy Buzz has know since early this year, as have others who follow Fresh & Easy closely such as Piper Jaffray-UK senior research analyst Mike Dennis, who's been writing in his regular notes to Tesco plc investors about the construction delay of the Northern California DC and how in his analysis it would cause Tesco's Fresh & Easy to postpone its entry into Northern California and therefore will result in his view in Tesco's failing to meet its sales and profit targets for Fresh & Easy. Dennis follows Tesco plc closely. He's also been one of the closest observers and analysts of Tesco's Fresh & Easy since it set up shop in Southern California.

Therefore, since Tesco's Fresh & Easy has known since earlier this year it was behind schedule (either on purpose or not) with its Northern California distribution center, why did it wait until November, 2008 to announce it wouldn't be entering Northern California on schedule? Some might say: "It's the economy stupid!" In other words, is the recessionary economy the real reason for postponing the launch, or is it because there's no way the Northern California distribution center is or will be ready anytime soon to service Fresh & Easy stores in Northern California? You be the judge.

However, even if the economy was booming, the retailer couldn't open stores in Northern California without its distribution center being open, which is one of the two reasons CEO TIm mason has given for postponing the launch. Perhaps Fresh & Easy saw the financial meltdown and recession coming in the first quarter of this year -- something the U.S. Treasury Department , Federal Reserve and nearly every independent economist missed -- and decided to delay construction on the Stockton DC just in case?

We don't doubt the financial crisis and recession has something to do with Tesco's plans to postpone its Northern California launch. However, without a distribution center the bad economy is a moot point. Therefore there's more to the decision than just the external factor of the financial crisis and recession, obviously.

Interestingly, the interviewer for The Times didn't ask Tim Mason the simple question: 'Why is it taking so much longer than planned to construct and open the Northern California distribution center in Stockton.' Since Mr. Mason mentioned this himself, that the DC is behin schedule, it certainly would have been a logical follow-up question for the interviewer to ask. Perhaps the interviewer did ask that important journalistic question but either it wasn't answered or if asked and answered the answer didn't appear in the November 12 profile piece in The Times?

Setting the bar too high with PR hype

Having roughly 100 fewer Fresh & Easy stores opened by the end of 2009 -- the 300 store number was used by the company right up until a couple weeks ago after all -- will also have a negative perceptual effect on Tesco's U.S. small-format, convenience-oriented food and grocery retailing venture.

This effect in part is by the global retailer's own creation. Beginning at least two years before it opened its first Fresh & Easy grocery and fresh foods market Tesco started building up the public relations hype in terms of what a major food retailing venture Fresh & Easy Neighborhood Market would be. British and U.S. newspapers ran bold headlines, with the urging of the retailer's PR staff, touting the "British Food Retailing Invasion." Story after story talked about how Tesco planned to open as many as 500 stores in three years. How it would begin in the Western U.S., move to the Midwest, then on to the east coast, concurring America.'

In effect, what Tesco did through its public relations program was to set the bar for Fresh & Easy so high, even if the grocery chain exceeded all expectations in its first year of operations, which it hasn't, doing so still likely would not have been good enough based on all the pre-store opening hype the company generated in the media.

Tesco couldn't control what the mainstream media wrote, and the press loves drama, but the company intentialy created much of this hype and fed it to the press. Much of the mainsteam media loves canned stories after all, especially press releases. Tesco's PR staff did their jobs and gave it to them. It wasn't the Pr folks' fault. Rather it was the fault of the corporate executives who encouraged the hype strategy.

As most entrepreneurs and good politicians know, a company or individual must walk a fine line when playing the expectations game. It's always far easier and much more popular to go beyond expectations than it is to not meet them. Tesco set the expectations so high for Fresh & Easy that it shouldn't be any wonder to the company's executives that their performance to date has been frequently criticized. Creating excessive PR hype can be a double-edged sword. If you live up to the hype you are a hero. If not you are a goat. But nobody else is to blame -- after all it's your hype. Nobody forced the company to create and communicate it.

In Tesco's case it set the bar so high for itself with all of its publicity generation about revolutionizing American food and grocery retailing and building a empire in a scant couple years that now each time it announces a cut-back, major change or postponement, it makes the retailer look like its failing.

Perception can be reality after all. But in Fresh & Easy Neigborhood Market's case the problems go beyond mere perception -- the grocery chain has real merchandising, marketing and operations problems.

Need for major change and new strategy

As we've argued in Fresh & Easy Buzz, it's our analysis these performance problems are based largely on a single faulty premise and strategy, that the retailer has tried to use a British model of food and grocery retailing in the Western United States. That instead of bringing in key executives with extensive experience in the market the retailer has relied almost completely on executives with experience primarily in the United Kingdom. From this faulty strategy a myriad of operational, merchandising and marketing problems have then been created.

Coupled with this change, Fresh & Easy Neighborhood Market then needs to fine tune its value propostion through merchandising. Once achieved it needs to create an integrated strategic merchandising and marketing program designed to coomunicate its value proposition on a consistant and regular basis -- tout if frequnetly and hammer it home.

For example, based on its no frills model and overall low everyday prices, consumers should be flocking to Fresh & Easy stores like they are to discounters like Wal-Mart and Aldi in the current severe economic recession. That isn't happening. Why? It's our analysis the reasons are the two we outlined above -- the faulty use of a British food and grocery retailing model and a failure to properly create and communicate a strong value proposition.

What would Sir Terry do?

Tesco is a great global retailer. But in terms of approaching the Western U.S. market in a smart, regional and local way, the way all successful grocers do, it's failed miserably in that regard. Why this is so, in our analysis, we find very hard to understand.

But two other British retailer's, Sainsbury's and Marks & Spencer, both did essentially the same thing when they entered the U.S. some years ago; both acquiring existing U.S. retailers, operating for some years -- and both failing.

Tesco however still has a strong chance to be a success with Fresh & Easy in the U.S.. But it's our analysis that unless major changes are made, and its use of the British food retailing model is dumped and replaced by an American regional, sub regional and localized strategy, those chances for success are at best slim.

Tesco plc CEO Sir Terry Leahy has been largely silent for most of the year about Fresh & Easy Neighborhood Market USA. That's mainly because he made Fresh & Easy Tim Mason's (the grocery chain's CEO) baby, so to speak.

But we can't help being curious about what Sir Terry thinks about the developments over the last year at Fresh & Easy's corporate headquarters: the fact seven category managers and buyers have left corporate headquarters since February, 2008 (and another four or five left in 2007 before the first store even opened); the sudden departure of co-vice president of operations Brain Pugh and the conditions leading up to that sudden departure; the need for Fresh & Easy to spend a significant chunk of change to create a new interior design package for the Fresh & Easy stores just a few months after the first stores opened, and now the postponement of the Northern California launch; along with a few other things.

Perhaps we will hear from Sir Terry soon?