The Arizona Market Region: Overstored? We think so. Ultra-competitive? Yes indeed. Economically battered? Yes -- without a doubt.
Beginning in early 2008 Fresh & Easy Buzz first put forth the proposition that the Arizona food and grocery retailing market -- particularly the Phoenix Metropolitan region which is one of the three market regions for Tesco' Fresh & Easy Neighborhood Market and where the grocery and fresh foods chain has been opening numerous new stores since November-December, 2007 -- was close to becoming or already was overstored (more stores selling food and groceries than the market can take.) We've continued to put forth this proposition since then in a variety of stories related to the Arizona market.
As a companion proposition, we've been suggesting for many months that the perfect (bad) storm of the housing foreclosure crisis (Arizona is one of the top five states in the U.S. in terms of per-capita foreclosures), the financial and credit crisis, and the ever-deepening economic recession (and the massive monthly job losses that have been a part of it) would soon start taking its toll on grocers in Arizona, combined with this near or already overstored phenomenon, expressing itself in three ways: the postponement of new store openings, worker layoffs, and eventually the closing by one or more grocery chains of existing stores.
Employee layoffs, new store opening postponements
The first sign, from a worker layoff perspective, that the combination of overstoring and a very bad economy in Arizona (the state has one of the highest unemployment percentages in the U.S., for example) were beginning to take a toll on the state's food and grocery retailing industry appeared in the summer of 2008 when the Arizona-based Bashas supermarket chain fired about 203 employees, 100 at their corporate headquarters and the remaining others at store-level. Bashas President Mike Proux said at the time doing so was necessary in order for the grocer to remain competitive in the highly-competitive market and economically struggling state.
Then in the fall of 2008 a number of grocery chains with operations in Arizona postponed the openings of a number of new stores they had planned to open in the state this year. These grocers include: Tesco's Fresh & Easy, Wal-Mart (although in its case just a couple units) Kroger Co. and Whole Foods Market, Inc. The reason for doing so is the combination of a bad economy and a super-competitive market -- and in our analysis the overstoring in Arizona. The ultra-high level of competition is and continues to be enhanced by the poor economy, as grocers must slash prices and increase the value of their respective promotions in order to compete for shoppers' food dollars.
Bashas employee layoffs, store closings
Now another shoe has dropped in the Arizona market, again involving Bashas, which has about 156 supermarkets in Arizona and employes 13,000 workers.
Bashas laid off another 350 workers, almost all at store-level, during the last week of January, saying it needed to do so because of the recession and the super-competitive food and grocery retailing climate in Arizona. The 350 laid off employees represent 3% of Bashas total employee payroll.
"It's no secret that we're battling on several fronts for the future viability and profitability of the company, and we're facing fierce competition and the economic recession," Kristy Nied, a spokeswoman for Bashas' said in a statement last week attributed to the company's president.
This week Bashas has taken another cost-cutting move. The Arizona-based grocery chain is closing five of its stores in the state, saying it has to do so in order to lower its costs and continue to compete as best it can in the white-hot competitive Arizona market.
Three of the five stores Bashas will close are in the Phoenix Metropolitan region, the region where Tesco's Fresh & Easy has its 30-plus stores and the market region we've been saying is the most overstored in the state.
Two of the Phoenix Metro market stores are flagship Bashas banner supermarkets. The third store being closed is one of the chain's Food City banner Latino consumer-centered format supermarkets.
Bashas also is closing another one of its Food City banner supermarkets. That store is located near the Arizona city of Yuma. The fifth store the supermarket chain is closing is its Ike's Farmers Market banner store in Tucson. That store, a one and only, is Bashas' natural and organic foods-centered format test store.
The grocer created the Ike's Farmers Market format as its entry into the natural grocery store retailing segment in its home state as a counter to the numerous natural foods chains that have entered the market with numerous stores in the last few years. These players include Whole Foods Market, Inc. Colorado-based Sunflower Farmers Market and Arizona-based Sprouts Farmers Market.
Bashas says its closing the Ike's Farmers Market test store not so much because it isn't pleased with the format but rather because the Tucson location isn't a good one for the store or the format. The grocer further says it may try the Ike's format in another part of the state in the future.
But, generally speaking, when a chain closes the only store of a new format (the test store), it usually results in the elimination of that new format completely. We don't suspect Arizona shoppers will be seeing a new Ike's Farmers Market store popping up in the state in the near future at the very least. In other words, the Ike's Farmers Market format may not be going into lifelong retirement, but if not, it's likely to be a very long period of hibernation.
Overstoring and economic recession
Thus far Bashas is the only grocery chain in Arizona we are aware of that's laid off employees and plans to close stores due primarily to the combination of the severe economic recession and the ultra-competitive nature of the food and grocery retailing market in the state. But they might not be the only grocer to do so in the near future.
What is a fact though is that many grocery chains with substantial business (and store count) in Arizona are pulling back.
For example, we know that Safeway Stores, Inc., which operates over 100 supermarkets under the Safeway banner in Arizona, currently has no plans to acquire sites for new stores in the state under the present economic and ultra-competitive climate in the market. Instead the grocery chain, which is the fifth-largest seller of food and groceries in the U.S. in terms of annual sales, is focusing its resources on making its existing stores in the state more competitive through offering lower everyday prices and stronger promotions, along with other programs.
Tesco's Fresh & Easy Neighborhood Market, which has slowed the opening of new stores in all three of the markets it's in -- Metro Phoenix, Arizona, Southern California and southern Nevada, as well as postponing its planned Northern California market region launch -- also is taking a serious look about how it should go forward in Arizona, both in terms of its existing stores and the opening of new stores, many of which are currently in the pipeline and were previously set to open throughout this year. Some are still opening. Others are being postponed.
As we've suggested since early 2008, before the recession took full bloom, the Arizona food and grocery retailing market was then near or already overstored.
Additionally, because Wal-Mart Stores, Inc. has been opening so many of its combination food and general merchandise Supercenters, Sam's Club membership warehouse stores and Wal-Mart Neighborhood Market supermarkets -- plus its first four small-format Marketside grocery and fresh foods markets last year -- in the state over the past five years, adding serious competitive heat to food retailing in Arizona, the competitive nature of the market has been given an added jolt of enhanced competition not seen prior to Wal-Mart becoming a major player in the state, which it wasn't a mere four or five years ago.
In our analysis of the Arizona food and grocery retailing market, the combination of so many stores being in the state, along with the severe economic recession, has created a ultra-competitive environment among retailers. This high-level of competition is forcing grocers to compete super-aggressively on price, which means reducing gross margins, which means reducing income. As a result, at some point something has to give. This something is what we're seeing with Bashas -- the elimination of jobs and now the closing of the five stores.
Since we believe the recession is going to last at least for the rest of 2009 -- and even if it doesn't last the rest of the year the economy won't likely show much improvement before the end of 2009 because unemployment growth and other such conditions keep occurring for months after a recession is over (lagging indicators in economists' jargon) -- we expect to see some combination of more postponements of new store openings in Arizona, additional store closings, and more job reductions in the food retailing sector, and not just from Bashas.
Wal-Mart, Safeway and Kroger, the "big three" chains in the Arizona market in terms of overall U.S. annual sales (Wal-Mart is number one, Kroger number three and Safeway number five), should be able to stay the course, particularly Wal-Mart which actually is benefiting in the market, like it is elsewhere in the U.S., from consumers switching to its stores from supermarket chains for their food and grocery shopping needs.
However, the rest of the players in the Arizona market aren't as fortunate. Most will have to at a minimum postpone most new store openings and cut costs at store-level significantly if they want to avoid layoffs and store closures. This includes Tesco's Fresh & Easy Neighborhood Market, as well as numerous others, both chains and independents.
For example, the private equity firm Cerebus, which owns the Albertson's stores in Arizona, will likely be closing 3 -to- 6 underperforming Albertsons units in Arizona in the coming months.
Cerebus owns 80% of the failing automaker Chrysler, and has been racing through billions of dollars in cash every month, despite the recent billion of dollars of government bailout money given the car maker, keeping the company alive. As a result, it has very little operating capital available for the other companies it owns, such as Albertsons LLC, which operates the Arizona Albertsons banner supermarkets, as well as those in a couple other markets. Most of the Albertsons banner stores, like the Southern California chain, are owned by Supervalu, Inc., the fourth-largest food and grocery retailer in the U.S., after number three Costco.
Super-competition good for shoppers though
Meanwhile, the ultra-competitive climate among grocers in Arizona is good for the state's food and grocery shoppers in this severe recession. Retailers are offering the hottest promotions in decades in the market, including triple and even quadruple coupon offers on manufacturers' "cents off" coupons, deep discount store coupons ranging from 10% -to- 20% off total grocery purchases, and numerous buy-one-get-one (item) free and $1 an item offers each week.
Most major Arizona grocers also have lowered everyday prices across all product categories in their stores significantly over the last six months, and are offering far more items at temporary price reductions in-store than they were just a year ago, in addition to the numerous deals featured in their advertising circulars each week, along with the coupon offers and other promotions.
More competition to come
It's our analysis that the high-level of competition in the Arizona market is only going to get stronger, particularly on a price-competitive basis, between now and the end of the year. When this form of competitive evolution (or perhaps devolution is a better term) happens for a prolonged period of time, even in the food and grocery industry which is the most recession- resistant (but not recession-proof) of all retailing sectors, the players have to adapt (cut costs) in order to survive. And just as in the evolutionary process in nature, not every player will always survive.
Tesco's Fresh & Easy and the Arizona market
The primary reason Bashas is thus far the only supermarket chain doing business in the Arizona market to fire a substantial number of employees and close existing stores is because the homegrown grocer has all of its food retailing eggs in a one state basket -- Arizona.
All but a handful of Bashas 160 supermarkets are in Arizona, which is suffering among the worse of all 50 U.S. states with housing foreclosures and unemployment, along with all of the other economic negatives that come with those dual negatives. Therefore, since nearly 100% of the grocery chain's sales come from the Arizona market, which is being battered economically, and since the supermarket chain has no significant sales in other states not being hit as severely by the recession as Arizona is, it doesn't have a buffer to protect it like Wal-Mart, Safeway and Kroger, which have stores throughout the U.S., do.
As a result, with all of its eggs in the Arizona food and grocery retailing market basket, Bashas really has no choice but to cut back by laying off workers and closing stores once it's exhausted all of the other avenues to cutting costs in a market impacted severely by the dual forces of economic recession and ultra-competitiveness.
Tesco is in a fairly similar strategic position with its Fresh & Easy chain. All of the grocer's about111 stores are located in just three markets -- Metro Phoenix, Arizona, Southern California and Metropolitan Las Vegas, Nevada. The Las Vegas region is in just as bad of shape as Arizona is in terms of housing foreclosures, rapidly-rising unemployment and other negative recessionary factors. Southern California is in better shape than Arizona and Nevada -- but only slightly better.
As a result of having all of its food retailing eggs in just three baskets, two of which, Arizona and Nevada, are among the most recession-afflicted states in the U.S., and a third region, Southern California, that's not far behind, Tesco is taking a major hit on three of its market fronts.
Unlike say Safeway, which has stores in Northern California's Bay Area and in the Seattle, Washington region -- two regions in the west certainly hurt by the recession but not nearly as much as Arizona, Nevada and Southern California are -- Tesco's Fresh & Easy has no such U.S. market region buffers to assist it. Instead Tesco happens to have chosen three states, and markets, for all of its Fresh & Easy stores that are being impacted among the most severely by the current recession. Of course Tesco couldn't have known this when they decided on these three states, all doing well at the time, when it decided where to launch its Fresh & Easy chain in late 2006/early 2007. The luck of the British, it seems. The only good news for Tesco in this regard is that it is a global retailer, which means it can buffer its U.S. business with its global sales. But not forever.
As a result of this U.S. geographical retailing determinism, Tesco's Fresh & Easy finds itself not only doing business in three of the states hardest hit by the recession, but in two of the most highly competitive market regions in the U.S. in this recession -- Southern California and Metropolitan Phoenix, Arizona -- as well. About 40% of the Fresh & Easy stores are in Southern California. The other about 60% are split near-equally between Metropolitan Phoenix, Arizona and southern Nevada.
This reality leaves an already struggling Tesco Fresh & Easy with even harder decisions than it would normally have if these market regions weren't so hard hit by the recession. That's one reason the grocer has postponed a number of new store openings in all three of the market regions.
But the big question for Tesco's Fresh & Easy is if doing that will be enough? It's going through cash in a way that is a big worry to both Tesco plc CEO Sir Terry Leahy, who is based at company headquarters in the United Kingdom, and to Tesco PLC shareholders.
By this time in its development, Tesco's sales target for the Fresh & Easy stores was to be average weekly gross sales of about $200,000 per store, per week. Based on our sources, maybe 30% -to- 40% of the Fresh & Easy markets are hitting that target at present. In addition, a number of the stores are static at about $90,000 -to- $130,000 in average weekly sales. This includes some units, such as the store in Hemet, California which was the very first Fresh & Easy market to open in late October, 2007.
This begs the question: 'Should Tesco's Fresh & Easy Neighborhood Market close those stores that have been open at least a year and are nowhere close to being able to hit the $200,000 weekly sales target in the near future'? We are referring to those stores that are doing say $90,000 -to- $130,000.
That's a question we know Tesco Fresh & Easy's senior management is asking itself, particulary as it pertains to the ultra-competitive Arizona market. We estimate there are at least five Fresh & Easy stores (the five aren't all in Arizona, but divided between all three markets) that are doing so poorly that they could be closed tomorrow and not have any appreciable effect on overall gross sales. In fact, closing those five stores would likely help a bit to stem Fresh & Easy Neighborhood Market's overall cash burn rate. (There are many more than five stores with sales in this $90,000 -to- $130,000 in weekly sales range. But we are saying we only "know" of five specific ones that could be closed right now per our reasoning above.)
As a result, it wouldn't surprise Fresh & Easy Buzz if Tesco closes in the neighborhood of five stores between now and the next few months. And if doing so would not hurt overall sales significantly, as our information suggests, and in fact would help stem some of the chain's losses -- why not do so? Closing five stores though would mean putting about 100-150 store employees out of work. So if it happens we hope they are offered jobs at other or new stores.
Of course Tesco need not close any Fresh & Easy stores at all if it doesn't want to. After all, Tesco plc is a huge, global corporation and retailer -- the third-largest in the world -- and can investment finance the Fresh & Easy chain for another couple years if it desires to, can't it, waiting for those underperforming stores to improve and hit that $200,000 a week in sales down the road, right?
That's a question United Kingdom-based Tesco plc CEO Sir Terry Leahy -- influenced by cash on hand and bottom line concerns, along with investor behavior -- will have to ultimately answer though.
Beginning in early 2008 Fresh & Easy Buzz first put forth the proposition that the Arizona food and grocery retailing market -- particularly the Phoenix Metropolitan region which is one of the three market regions for Tesco' Fresh & Easy Neighborhood Market and where the grocery and fresh foods chain has been opening numerous new stores since November-December, 2007 -- was close to becoming or already was overstored (more stores selling food and groceries than the market can take.) We've continued to put forth this proposition since then in a variety of stories related to the Arizona market.
As a companion proposition, we've been suggesting for many months that the perfect (bad) storm of the housing foreclosure crisis (Arizona is one of the top five states in the U.S. in terms of per-capita foreclosures), the financial and credit crisis, and the ever-deepening economic recession (and the massive monthly job losses that have been a part of it) would soon start taking its toll on grocers in Arizona, combined with this near or already overstored phenomenon, expressing itself in three ways: the postponement of new store openings, worker layoffs, and eventually the closing by one or more grocery chains of existing stores.
Employee layoffs, new store opening postponements
The first sign, from a worker layoff perspective, that the combination of overstoring and a very bad economy in Arizona (the state has one of the highest unemployment percentages in the U.S., for example) were beginning to take a toll on the state's food and grocery retailing industry appeared in the summer of 2008 when the Arizona-based Bashas supermarket chain fired about 203 employees, 100 at their corporate headquarters and the remaining others at store-level. Bashas President Mike Proux said at the time doing so was necessary in order for the grocer to remain competitive in the highly-competitive market and economically struggling state.
Then in the fall of 2008 a number of grocery chains with operations in Arizona postponed the openings of a number of new stores they had planned to open in the state this year. These grocers include: Tesco's Fresh & Easy, Wal-Mart (although in its case just a couple units) Kroger Co. and Whole Foods Market, Inc. The reason for doing so is the combination of a bad economy and a super-competitive market -- and in our analysis the overstoring in Arizona. The ultra-high level of competition is and continues to be enhanced by the poor economy, as grocers must slash prices and increase the value of their respective promotions in order to compete for shoppers' food dollars.
Bashas employee layoffs, store closings
Now another shoe has dropped in the Arizona market, again involving Bashas, which has about 156 supermarkets in Arizona and employes 13,000 workers.
Bashas laid off another 350 workers, almost all at store-level, during the last week of January, saying it needed to do so because of the recession and the super-competitive food and grocery retailing climate in Arizona. The 350 laid off employees represent 3% of Bashas total employee payroll.
"It's no secret that we're battling on several fronts for the future viability and profitability of the company, and we're facing fierce competition and the economic recession," Kristy Nied, a spokeswoman for Bashas' said in a statement last week attributed to the company's president.
This week Bashas has taken another cost-cutting move. The Arizona-based grocery chain is closing five of its stores in the state, saying it has to do so in order to lower its costs and continue to compete as best it can in the white-hot competitive Arizona market.
Three of the five stores Bashas will close are in the Phoenix Metropolitan region, the region where Tesco's Fresh & Easy has its 30-plus stores and the market region we've been saying is the most overstored in the state.
Two of the Phoenix Metro market stores are flagship Bashas banner supermarkets. The third store being closed is one of the chain's Food City banner Latino consumer-centered format supermarkets.
Bashas also is closing another one of its Food City banner supermarkets. That store is located near the Arizona city of Yuma. The fifth store the supermarket chain is closing is its Ike's Farmers Market banner store in Tucson. That store, a one and only, is Bashas' natural and organic foods-centered format test store.
The grocer created the Ike's Farmers Market format as its entry into the natural grocery store retailing segment in its home state as a counter to the numerous natural foods chains that have entered the market with numerous stores in the last few years. These players include Whole Foods Market, Inc. Colorado-based Sunflower Farmers Market and Arizona-based Sprouts Farmers Market.
Bashas says its closing the Ike's Farmers Market test store not so much because it isn't pleased with the format but rather because the Tucson location isn't a good one for the store or the format. The grocer further says it may try the Ike's format in another part of the state in the future.
But, generally speaking, when a chain closes the only store of a new format (the test store), it usually results in the elimination of that new format completely. We don't suspect Arizona shoppers will be seeing a new Ike's Farmers Market store popping up in the state in the near future at the very least. In other words, the Ike's Farmers Market format may not be going into lifelong retirement, but if not, it's likely to be a very long period of hibernation.
Overstoring and economic recession
Thus far Bashas is the only grocery chain in Arizona we are aware of that's laid off employees and plans to close stores due primarily to the combination of the severe economic recession and the ultra-competitive nature of the food and grocery retailing market in the state. But they might not be the only grocer to do so in the near future.
What is a fact though is that many grocery chains with substantial business (and store count) in Arizona are pulling back.
For example, we know that Safeway Stores, Inc., which operates over 100 supermarkets under the Safeway banner in Arizona, currently has no plans to acquire sites for new stores in the state under the present economic and ultra-competitive climate in the market. Instead the grocery chain, which is the fifth-largest seller of food and groceries in the U.S. in terms of annual sales, is focusing its resources on making its existing stores in the state more competitive through offering lower everyday prices and stronger promotions, along with other programs.
Tesco's Fresh & Easy Neighborhood Market, which has slowed the opening of new stores in all three of the markets it's in -- Metro Phoenix, Arizona, Southern California and southern Nevada, as well as postponing its planned Northern California market region launch -- also is taking a serious look about how it should go forward in Arizona, both in terms of its existing stores and the opening of new stores, many of which are currently in the pipeline and were previously set to open throughout this year. Some are still opening. Others are being postponed.
As we've suggested since early 2008, before the recession took full bloom, the Arizona food and grocery retailing market was then near or already overstored.
Additionally, because Wal-Mart Stores, Inc. has been opening so many of its combination food and general merchandise Supercenters, Sam's Club membership warehouse stores and Wal-Mart Neighborhood Market supermarkets -- plus its first four small-format Marketside grocery and fresh foods markets last year -- in the state over the past five years, adding serious competitive heat to food retailing in Arizona, the competitive nature of the market has been given an added jolt of enhanced competition not seen prior to Wal-Mart becoming a major player in the state, which it wasn't a mere four or five years ago.
In our analysis of the Arizona food and grocery retailing market, the combination of so many stores being in the state, along with the severe economic recession, has created a ultra-competitive environment among retailers. This high-level of competition is forcing grocers to compete super-aggressively on price, which means reducing gross margins, which means reducing income. As a result, at some point something has to give. This something is what we're seeing with Bashas -- the elimination of jobs and now the closing of the five stores.
Since we believe the recession is going to last at least for the rest of 2009 -- and even if it doesn't last the rest of the year the economy won't likely show much improvement before the end of 2009 because unemployment growth and other such conditions keep occurring for months after a recession is over (lagging indicators in economists' jargon) -- we expect to see some combination of more postponements of new store openings in Arizona, additional store closings, and more job reductions in the food retailing sector, and not just from Bashas.
Wal-Mart, Safeway and Kroger, the "big three" chains in the Arizona market in terms of overall U.S. annual sales (Wal-Mart is number one, Kroger number three and Safeway number five), should be able to stay the course, particularly Wal-Mart which actually is benefiting in the market, like it is elsewhere in the U.S., from consumers switching to its stores from supermarket chains for their food and grocery shopping needs.
However, the rest of the players in the Arizona market aren't as fortunate. Most will have to at a minimum postpone most new store openings and cut costs at store-level significantly if they want to avoid layoffs and store closures. This includes Tesco's Fresh & Easy Neighborhood Market, as well as numerous others, both chains and independents.
For example, the private equity firm Cerebus, which owns the Albertson's stores in Arizona, will likely be closing 3 -to- 6 underperforming Albertsons units in Arizona in the coming months.
Cerebus owns 80% of the failing automaker Chrysler, and has been racing through billions of dollars in cash every month, despite the recent billion of dollars of government bailout money given the car maker, keeping the company alive. As a result, it has very little operating capital available for the other companies it owns, such as Albertsons LLC, which operates the Arizona Albertsons banner supermarkets, as well as those in a couple other markets. Most of the Albertsons banner stores, like the Southern California chain, are owned by Supervalu, Inc., the fourth-largest food and grocery retailer in the U.S., after number three Costco.
Super-competition good for shoppers though
Meanwhile, the ultra-competitive climate among grocers in Arizona is good for the state's food and grocery shoppers in this severe recession. Retailers are offering the hottest promotions in decades in the market, including triple and even quadruple coupon offers on manufacturers' "cents off" coupons, deep discount store coupons ranging from 10% -to- 20% off total grocery purchases, and numerous buy-one-get-one (item) free and $1 an item offers each week.
Most major Arizona grocers also have lowered everyday prices across all product categories in their stores significantly over the last six months, and are offering far more items at temporary price reductions in-store than they were just a year ago, in addition to the numerous deals featured in their advertising circulars each week, along with the coupon offers and other promotions.
More competition to come
It's our analysis that the high-level of competition in the Arizona market is only going to get stronger, particularly on a price-competitive basis, between now and the end of the year. When this form of competitive evolution (or perhaps devolution is a better term) happens for a prolonged period of time, even in the food and grocery industry which is the most recession- resistant (but not recession-proof) of all retailing sectors, the players have to adapt (cut costs) in order to survive. And just as in the evolutionary process in nature, not every player will always survive.
Tesco's Fresh & Easy and the Arizona market
The primary reason Bashas is thus far the only supermarket chain doing business in the Arizona market to fire a substantial number of employees and close existing stores is because the homegrown grocer has all of its food retailing eggs in a one state basket -- Arizona.
All but a handful of Bashas 160 supermarkets are in Arizona, which is suffering among the worse of all 50 U.S. states with housing foreclosures and unemployment, along with all of the other economic negatives that come with those dual negatives. Therefore, since nearly 100% of the grocery chain's sales come from the Arizona market, which is being battered economically, and since the supermarket chain has no significant sales in other states not being hit as severely by the recession as Arizona is, it doesn't have a buffer to protect it like Wal-Mart, Safeway and Kroger, which have stores throughout the U.S., do.
As a result, with all of its eggs in the Arizona food and grocery retailing market basket, Bashas really has no choice but to cut back by laying off workers and closing stores once it's exhausted all of the other avenues to cutting costs in a market impacted severely by the dual forces of economic recession and ultra-competitiveness.
Tesco is in a fairly similar strategic position with its Fresh & Easy chain. All of the grocer's about111 stores are located in just three markets -- Metro Phoenix, Arizona, Southern California and Metropolitan Las Vegas, Nevada. The Las Vegas region is in just as bad of shape as Arizona is in terms of housing foreclosures, rapidly-rising unemployment and other negative recessionary factors. Southern California is in better shape than Arizona and Nevada -- but only slightly better.
As a result of having all of its food retailing eggs in just three baskets, two of which, Arizona and Nevada, are among the most recession-afflicted states in the U.S., and a third region, Southern California, that's not far behind, Tesco is taking a major hit on three of its market fronts.
Unlike say Safeway, which has stores in Northern California's Bay Area and in the Seattle, Washington region -- two regions in the west certainly hurt by the recession but not nearly as much as Arizona, Nevada and Southern California are -- Tesco's Fresh & Easy has no such U.S. market region buffers to assist it. Instead Tesco happens to have chosen three states, and markets, for all of its Fresh & Easy stores that are being impacted among the most severely by the current recession. Of course Tesco couldn't have known this when they decided on these three states, all doing well at the time, when it decided where to launch its Fresh & Easy chain in late 2006/early 2007. The luck of the British, it seems. The only good news for Tesco in this regard is that it is a global retailer, which means it can buffer its U.S. business with its global sales. But not forever.
As a result of this U.S. geographical retailing determinism, Tesco's Fresh & Easy finds itself not only doing business in three of the states hardest hit by the recession, but in two of the most highly competitive market regions in the U.S. in this recession -- Southern California and Metropolitan Phoenix, Arizona -- as well. About 40% of the Fresh & Easy stores are in Southern California. The other about 60% are split near-equally between Metropolitan Phoenix, Arizona and southern Nevada.
This reality leaves an already struggling Tesco Fresh & Easy with even harder decisions than it would normally have if these market regions weren't so hard hit by the recession. That's one reason the grocer has postponed a number of new store openings in all three of the market regions.
But the big question for Tesco's Fresh & Easy is if doing that will be enough? It's going through cash in a way that is a big worry to both Tesco plc CEO Sir Terry Leahy, who is based at company headquarters in the United Kingdom, and to Tesco PLC shareholders.
By this time in its development, Tesco's sales target for the Fresh & Easy stores was to be average weekly gross sales of about $200,000 per store, per week. Based on our sources, maybe 30% -to- 40% of the Fresh & Easy markets are hitting that target at present. In addition, a number of the stores are static at about $90,000 -to- $130,000 in average weekly sales. This includes some units, such as the store in Hemet, California which was the very first Fresh & Easy market to open in late October, 2007.
This begs the question: 'Should Tesco's Fresh & Easy Neighborhood Market close those stores that have been open at least a year and are nowhere close to being able to hit the $200,000 weekly sales target in the near future'? We are referring to those stores that are doing say $90,000 -to- $130,000.
That's a question we know Tesco Fresh & Easy's senior management is asking itself, particulary as it pertains to the ultra-competitive Arizona market. We estimate there are at least five Fresh & Easy stores (the five aren't all in Arizona, but divided between all three markets) that are doing so poorly that they could be closed tomorrow and not have any appreciable effect on overall gross sales. In fact, closing those five stores would likely help a bit to stem Fresh & Easy Neighborhood Market's overall cash burn rate. (There are many more than five stores with sales in this $90,000 -to- $130,000 in weekly sales range. But we are saying we only "know" of five specific ones that could be closed right now per our reasoning above.)
As a result, it wouldn't surprise Fresh & Easy Buzz if Tesco closes in the neighborhood of five stores between now and the next few months. And if doing so would not hurt overall sales significantly, as our information suggests, and in fact would help stem some of the chain's losses -- why not do so? Closing five stores though would mean putting about 100-150 store employees out of work. So if it happens we hope they are offered jobs at other or new stores.
Of course Tesco need not close any Fresh & Easy stores at all if it doesn't want to. After all, Tesco plc is a huge, global corporation and retailer -- the third-largest in the world -- and can investment finance the Fresh & Easy chain for another couple years if it desires to, can't it, waiting for those underperforming stores to improve and hit that $200,000 a week in sales down the road, right?
That's a question United Kingdom-based Tesco plc CEO Sir Terry Leahy -- influenced by cash on hand and bottom line concerns, along with investor behavior -- will have to ultimately answer though.
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3 comments:
I think your estimates of only 5 stores hitting 90-130k, are way underestimated. I personally know many stores aren't meeting that "magical" 100k mark. They get special t-shirts when they do ;)
F&EGal:
You are correct -- there are many more than just 5 Fresh & Easy stores not hitting the 90-130-K mark. Many more than five.
What we are saying in the piece is that "We know of five Fresh & Easy stores that the chain could close and doing so wouldn't have any appreciable effect on sales; and would actually held stem the cash burn."
In other words, we specifically know of those 5. But yes, there are many more stores not hitting that mark. We just weren't addressing those others in terms of the above comment.
Thanks for chiming in. Please do so often.
PS: We added a clarifying sentence to that paragraph in order to make our point more clear, per your comment. Thanks.
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