Tesco Reports Holiday Period Sales; Little to Say About Fresh & Easy; We Offer Some Analysis and Attempt to Fill in A Few Blanks

United Kingdom-based Tesco, the third-largest global retailer after number one U.S.-based Wal-Mart Stores, Inc. and number two Carrefour of France, and the owner and operator of Fresh & Easy Neighborhood Market USA, released its Christmas and New Year 2008-09 holiday period sales figures today. The holiday trading period covers the seven weeks up to January 10, 2009.

The holiday sales numbers are a bit of a mixed bag for Tesco.

The overall good news for the global retailer is that sales for the seven week period ended January 10, 2009 increased by 11.6% over the same trading period last fiscal year. That's strong in total, particularly considering the current global recession.

The bad news for Tesco is that in its home United Kingdom market, which contributes by far greatest percentage of the retailer's annual sales, the retailer of food, groceries, soft goods, hard goods and other consumer products had its worse holiday trading period since the early 1990's. Tesco's UK sales for the seven week period increased by 2.5% over the same period last year. [You can read coverage about Tesco's UK performance at the following links: Financial Times: Tesco 's does better abroad; Daily Mail-UK: Tesco's down, but not out; Scotsman-UK: Tesco's Christmas slowdown sign of troubled times on the high street; The Herald-UK: Yuletide sales growth at Tesco weakest since 1990s; The Independent-UK: Tesco prepared to press the price button.]

The key reason this is bad news for Tesco -- in addition to the fact that the UK is Tesco's home market and its largest one -- is because the 2.5% sales increase is in contrast to a number of other UK food and grocery retailers that had much higher sales increases in the holiday trading period. These include top rivals Asda, which is owned by Wal-Mart Stores, Inc. and is the number two chain in the UK after Tesco, number three Sainsbury's, number four Morrisons, and fast growing Germany-based hard disounter Aldi-UK.

These four chains have been slashing prices hyper-aggressively in the midst of the severe economic recession in the UK. Tesco recently started doing the same, lowering prices on a couple thousand food and grocery items -- and recently said it's planning additional price cuts -- but it was behind the curve in doing so compared to these and a few other competitors. Most UK analysts attribute Tesco's coming late to the price cutting party as the primary reason for its less than stellar holiday trading period sales increase of 2.5% over the previous year.

Below (in italics) is how Tesco summed up its seven week holiday sales period in its financial release today:

Tesco PLC
13 January 2009

TESCO PLC
CHRISTMAS & NEW YEAR TRADING STATEMENT
TESCO DELIVERS IN THE DOWNTURN

The Tesco Group has delivered a strong performance and record sales over the Christmas and New Year period. Group sales increased by 11.6% during the seven weeks to 10 January 2009, driven by continued rapid international expansion and steady growth in the UK. This growth is against the background of challenging trading conditions in all of our markets caused by the global economic slowdown.

Good International Progress

Our overseas businesses generally saw good growth over the Christmas and New Year period, delivering a total International sales increase of 32.7%, helped by favourable exchange rate movements in Europe, and a particularly strong performance in Asia.

In Europe, sales grew by 24%, with growth at constant exchange rates slowing compared with our third quarter, reflecting the economic conditions in parts of Central Europe and in Ireland. We have grown share in all of our markets.

Sales in Asia increased by 43%, with strong growth in Korea, China and Malaysia. The integration of the acquired Homever stores in Korea is going well, with the introduction of the Homeplus Tesco ranges and lower prices proving very popular with customers. Sales at converted stores have increased by more than 50%.

In the United States, Fresh & Easy has been coping well with a severe downturn in the West Coast markets in which it trades. Like-for-like growth is strongly double-digit for the 28 stores which have now been open more than a year.

Steady UK Performance

In the UK, like-for-like sales excluding petrol increased by 2.5% in the period. We report like-for-like sales inclusive of VAT - and adjusting for the reduction in VAT rates, which came into effect in early December, growth on a comparable basis was 3.5%. The stronger growth in volumes and customer numbers we saw in our third quarter has continued.

The Tesco team delivered an even better shopping trip for customers than last year and another profitable seasonal period for the business - by providing very good standards of service and availability.

Non-food sales performance strengthened a little compared to our third quarter; with positive like-for-like sales growth, driven by good market share gains across most categories, including electrical, clothing and entertainment.

Our services businesses have also performed well. On-line sales were very strong in the run-up to Christmas and tesco.com and Tesco Direct combined saw total sales up by over 18% to £273 million in the seven weeks. Sales of digital products, including televisions and laptops, were particularly pleasing.

Tesco Personal Finance (TPF) is now a wholly-owned subsidiary, with the completion of the acquisition in December of the 50% shareholding owned by Royal Bank of Scotland Group PLC. Customer response to our new Tesco savings products has been very encouraging - with over a thousand new accounts being opened per day recently. The resulting increase in balances means that TPF is now self-funding, putting it in a strong position to pursue the strategy we laid out for the business when we announced the acquisition last July.

Asia and Europe Lift Tesco's UK boat

Based on the substantial sales increase percentages for Europe (24%) and Asia (43%), you can see that international sales in those two regions are what lifted Tesco's overall holiday sales numbers to that 11.6% figure. Tesco's total international sales increased by 32.7% for the period, as stated above. It's important to note that the sales numbers aren't like-for-like or same store sales (stores open moer than a year). Therefore, a significant contributor to the huge sales percentage increases comes from new stores opened since the previous year.

Fresh & Easy Neighborhood Market USA

Notice that there are no sales percentages provided in the Tesco release for Fresh & Easy Neighborhood Market USA, like is the case for Europe and Asia. This is all Tesco says in the release reprinted above regarding Fresh & Easy: " In the United States, Fresh & Easy has been coping well with a severe downturn in the West Coast markets in which it trades. Like-for-like growth is strongly double-digit for the 28 stores which have now been open more than a year."

That's a rather dearth of information compared with what's offered for Europe and Asia. Any analyst worth his or her salt must ask this question: Since there are 28 Fresh & Easy stores that have been open for more than a year, which includes the seven week holiday trading period, why not any sales data, like for Europe and Asia, on how those 28 stores did year-over-year? We will let the reader be the judge. However, if sales were higher in the period this year compared with last year, wouldn't it be likley for Tesco to tout such a fact like it is with Europe and Asia?

The statement: "Like-for-like growth is strongly double-digit for the 28 (Fresh & Easy) stores which have now been open more than a year" is really meaningless. Those with experience in the field of financial public relations might see it as filler; as a way to say "nothing" but still say "something."

Based on our sources, research and analysis, we believe the reason there's no mention of sales numbers or percentages for the 28 Fresh & Easy stores is because such numbers are very poor. In other words, they would pale in comparison to the Europe and Asia sales percentages -- and perhaps pale even when compared to the 2.5% UK sales increase.

As we've been reporting, Tesco is struggling with Fresh & Easy Neighborhood Market USA -- and was doing so long before the U.S. financial crisis and economic recession became full-blown.

Tesco will release its preliminary 2008-09 financial results on April 21. These should include a breakout for Fresh & Easy USA similar to the one Tesco provided for the first time in its 2008 reporting in mid-year.

Meanwhile, Tesco plans to continue opening new Fresh & Easy Neighborhood Market combination fresh foods and grocery stores in its existing Western USA markets of Southern California, Metropolitan Las Vegas, Nevada and in the Phoenix, Arizona Metro market region.

That new store opening pace has been dramatically slowed down however. For example, today Tesco's Fresh & Easy distributed this press release in which it said the Southern California based grocery chain plans to create 200 new jobs through new store openings in the next two months.

In the press release, as in all of its releases, Tesco's Fresh & Easy Neighborhood Market says each of its stores employes between 20-30 workers. Using the grocer's own published figure, this works out to the following:

>20 employes per store = 10 new stores in the next two months.
>25 employees per store = 8 new stores in the next two months.
>30 employees per store = 6 -to- 7 new stores in the next two months.

From November, 2007 until recently, Tesco has been opening a new Fresh & Easy market about every two -to- three days. Using the figure of a new store opening every two -to- three days, that amounts to about 10 new stores opening a month, or 20 new stores over a two month period.

In contrast, based on the new jobs numbers (the 200) over the next two months published by Fresh & Easy in its press release, and using the mid-point number of 25 employees per-store, that means the retailer plans to open only about four new stores a month for the next two months, for a total of about eight stores in the next two months, give or take a store or two.

In other words, Fresh & Easy is going from opening an average of at least 10 new stores per month to date, to opening on average just four new stores a month for the next two months, based on the 200 jobs creation figure it has in its press release. That's an over 50% reduction in new store openings.

This dramatic reduction comes on top of the fact that Tesco's original plan and public statements were that it would have at least 200 Fresh & Easy stores open by the end of 2008. The Fresh & Easy Neighborhood Market USA division then later reduced that number to having at least 150 stores open by the end of 2008. However, the reality of the situation is that Tesco had about 106 Fresh & Easy grocery and fresh foods markets opened and operating by the end of 2008. That's dramatically fewer than 200, and significantly less than 150.

In addition, Tesco's Fresh & Easy has postponed its entry into the Northern California market where Fresh & Easy Buzz has identified about 48 store location sites the retailer has in various states of preparation, ranging from stores that could be opened right away, to sites only recently leased. Fresh & Easy has confirmed 37 store locations for Northern California, 19 in the Sacramento/Vacaville Metropolitan region market and 18 in the San Francisco Bay Area.

Tesco's business plan for Fresh & Easy USA called for having about 300 stores opened by the end of this year. That number included being in the Northern California market by mid-2008, with a significant number of stores, at the least the confirmed 37, by the end of 2009.

That's obviously not going to happen. In fact, based on our analysis, we don't think Tesco will have many more than about 150 of its small-format Fresh & Easy grocery and fresh foods markets opened and operating by the end of this year. That's about half of what the retailer touted for well over a year before its first stores even opened in November, 2007. It's also about the same number of stores Fresh & Easy revised downward and said it would have open by the end of 2008.

We don't judge the performance of a food and grocery retailer by the number of stores it's opened over a year or two. But we do evaluate that retailer on its planning. And to open only half of the number of stores in its business plan will be a major fiasco in planning for Tesco. It demonstrates what was in our analysis a fundamental lack of real research of and in the Western USA market.

This is ironic because Tesco has touted the "extensive research" it conducted prior to entering the market. The problem is that research was mostly focus-group research rather than a combination of such consumer-based research combined with strong market-oriented and competitor research. Focus groups and similar consumer-focused research can tell a company much about a market's consumers. But it tells them nothing about the competitive aspects of markets in terms of how food retailing is done and who the competitors that do it -- and what they do -- are.

This is where Tesco made a major mistake. It convinced itself it was filling a major food and grocery retailing void in the three Western U.S. markets with the Fresh & Easy format, when in fact had it done proper research it would have discovered just how multi-formatted food retailing is in these markets, thereby better preparing itself for the highly competitive climate it now finds itself in. Tesco Fresh & Easy CEO Tim Mason essentially admitted this to be the case, that it thought it was filling a major food retailing void, in an interview with the London Times newspaper in the fall of 2008.

We've argued that those who rule Tesco out with Fresh & Easy, or with any of its other global food and grocery retailing ventures, do so at their own peril because the company is a world class retailer. But we've also argued that in the case of Fresh & Easy, Tesco has failed thus far to create a clear format, then position it well, including merchandising, and then properly communicate the retailing offering via a solid, coherent and consistent marketing program.

Instead, Tesco's Fresh & Easy is all over the place, as we've argued in the Blog often. Initially, for months Fresh & Easy was positioned primarily as a "revolutionary" fresh, prepared foods retailer with groceries as a significant sideline. Then the retailer went off on a tangent, promoting specialty and gourmet foods far and above basic groceries. Then it started to put more of a focus on basic groceries at low everyday prices. Then it focused most of its efforts on being a "green" (as in environmentally-friendly) food retailer over and above creating an identity as a value grocer or prepared foods retailer. Now it appears to be moving closer to positioning itself as a value grocer but is not doing so in any comprehensive way.

Fresh & Easy can be a grocer that is "green," sells specialty and natural foods, offers an extensive selection of prepared foods, and is in the basic grocery business with a value proposition. But it can't position itself as all of these things. Rather, it needs to create a core identity like small-format grocery chains Aldi USA (position: hard-discount basic grocer that also sells and offers many other things but only as part of that core positioning) and Trader Joe's (position: a discount natural and specialty foods retailer) have, for example.

Once created, that core positioning then becomes the basis for all it does, everything else is just a part of that whole. That position is the wheel and all the other things -- "green," specialty and natural, ect. -- are mere spokes on that wheel.

Once this retail identity is established, then all of Fresh & Easy's marketing needs to be centered on communicating that core positioning to the consumer, just like Aldi USA and Trader Joe's do so well.

We've asked numerous consumers to tell us what "Aldi" is and what "Trader Joe's" is in terms of its format. Most who are familiar with the respective chains/stores can do so easily -- and most offer a similar version of the same definition. In contrast, when we ask shoppers to tell us what a "Fresh & Easy" market is, they find it hard to answer. And in terms of the responses, they're generally all over the map. It's like the old psychology 101 story about ten people, each grabbing a different part of an elephant, and all then describing an animal other than an elephant. We're talking retail identity here.

Every good marketer and retailer knows when this (lack of retail identity) is the case it's because there's been a failure to communicate the position of the retail format, in this specific case Fresh & Easy Neighborhood Market, in the mind of the consumer. That's Tesco's challenge with Fresh & Easy -- create or decide on what Fresh & Easy is -- clearly define it internally -- then focus everything it does around that core position, then communicate that core position in a solid, comprehensive and consistent way to consumers. The whole has to be greater than the sum of its parts.

We aren't seeing signs yet of that happening at Fresh & Easy Neighborhood Market USA. Changes have been made but nothing is consistent. More parts keep getting added but they just make it more difficult to find the whole it seems.

In our analysis, Tesco's Fresh & Easy Neighborhood Market has yet to decide (maybe it doesn't know?) what Fresh & Easy is, and then develop and implement a strong, clear and consise merchandising, operations and marketing program and communicate it in a consistant way to consumers, both in-store and externally.