Monday, April 20, 2009

Tesco to Report Full-Year Financials Tomorrow; We Estimate £110-£150 Million Full-Year Loss For Fresh & Easy Neighborhood Market USA


United Kingdom-based global retailer Tesco PLC, which owns and operates El Segundo, (Southern) California-based Fresh & Easy Neighborhood Market, is set to report its full-year sales and profits tomorrow.

The word on the street in London, Britain's financial capital, is that Tesco will report record annual sales tomorrow.

In terms of its full-year profit, numerous Tesco analysts and watchers are tossing around a figure of £3 billion (British pounds) in profits for Tesco for the year. If Tesco does turn in the £3 billion profit number, or something close, that will be a rather solid performance amidst the current global recession. Tesco doesn't just sell food and groceries globally. It's also a general merchandise, hard goods and soft goods retailer. And as we're all are aware, consumers internationally have cut back significantly on purchases beyond food, grocery and other essentials in the global recession.

Not so Fresh & Easy

Not as positive for Tesco will be announcing its full-year loss for its U.S. small-format, convenience-oriented Fresh & Easy Neighborhood Market chain, which has 118 stores in California (Southern and Bakersfield), southern Nevada and Metropolitan Phoenix, Arizona.

Tesco won't go into much detail tomorrow in terms of breaking down performance figures for Fresh & Easy. But it will break down and report a full-year figure, in this case a loss, for its Fresh & Easy operation.

Fresh & Easy Buzz estimates Tesco will report a full-year operating loss for its Southern California-based Fresh & Easy operation of between £110 -to £150 million (British pounds).

Tesco had in the past hoped that its 2009-2010 operating period with Fresh & Easy -- the first stores opened in November, 2007 -- would bring it to the break-even investment point with the enterprise. But the financial powers that be at Tesco in the UK realized many months ago it wasn't going to happen.

Fresh & Easy Buzz will be reporting the Tesco numbers tomorrow, along with offering some in-depth analysis, especially on the Fresh & Easy piece, for our readers.

Below are a statements or assorted verbage we suggest you look for Tesco to say tomorrow when it reports its substantial full-year operating loss for Fresh & Easy:

>The extent of the loss will be primarily attributed to the economic recession in the U.S., with perhaps an added note about how California, Nevada and Arizona, the three states where the Fresh & Easy markets are located, have been among the hardest hot of all U.S. states in the economic downturn.

>Look for a comment about how Tesco's Fresh & Easy has, just beginning earlier this year, put an added emphasis on promotions, special pricing (or as Fresh & Easy CEO Tim Mason said, "getting down and dirty" on promotional pricing), deeper discounts and the like. As a result, Tesco just might say something like this: "having only recently taken this direction -- a direction that we are already seeing bearing fruit -- we see positive signs." Or something very close to this.

>Look for something perhaps like this: "Although we stand completely behind the pre-Fresh & Easy launch research we conducted, we could have done a better job in understanding how mature the U.S. market is. We didn't realize we would have to get as aggressive on pricing and promotions as we are now doing.

Fresh & Easy: Going forward

Fresh & Easy Buzz at present doesn't see a scenario in which Tesco will break even with Fresh & Easy by the end of 2010, unless some significant changes are made. This is despite slowing the new store growth, and hence capital investment, of the Fresh & Easy chain.

When it first launched Fresh & Easy, Tesco was touting that it planned to have at least 200 stores opened and operated by February-March of this year. In mid-2008, the grocer lowered that estimate to having about 150 open by that time instead.

But instead, there are currently 118 of the small-format, combination grocery and fresh foods stores open and operating.

Additionally, those initial plans also called for already having some Fresh & Easy stores opened and operating in Northern California's San Francisco Bay Area by now. Instead, Fresh & Easy has postponed its Northern California launch indefinitely.

Non are open yet, and the grocer has postponed its Northern California launch indefinitely.

Meanwhile, Tesco's Fresh & Easy has, based on our reporting, at least 50 sites -- vacant buildings for remodels or vacant lots for build from the ground up stores -- in various states of condition -- ranging from completed to not yet started -- in Northern California. Those locations are in the San Francisco Bay Area, the Sacramento-Vacaville region and in the Central Valley. Because many of the sites are vacant retail buildings, Tesco's Fresh & Easy has been and is making monthly lease payments on the properties.

The retailer has yet to open any of the eight Fresh & Easy store sites that we are aware it has in Fresno, California in the southern Central Valley. Thus far the grocer has opened three of the nine total sites it has announced it has in the Bakersfield, California Metropolitan region, which is located in the far southern Central Valley.

We don't believe that the rapidity of store openings -- how many and how fast a grocer opens new stores -- is a good measurement of a retailer's performance in general.

But opening numerous stores and opening them fast in multiple markets was one of the hallmarks of Tesco's public relations push in its Fresh & Easy launch, talking about having 1,000 stores operating in 4-5 years and such, for example.

As a result, the retailer should be held accountable for missing the mark so grandly. Frankly the pre-launch PR blitz sounded much like Imperial hubris, in our analysis and opinion. We would hope if it had it to do over, Tesco would be a bot more low key.

In reality, Tesco's planning with Fresh & Easy has been terribly flawed; particularly in the case of its original super-fast store opening-growth and rapid new market entry plan, which has now been scaled down to what looks like only a moderate project for the world's third-largest retailer.

And at times it appears Tesco is flying by the seat of its pants with Fresh & Easy.

For example, we've talked with former employees who worked at Tesco's Fresh & Easy Neighborhood Market corporate headquarters in the Southern California city of El Segundo. The former employees have told us that in 2008 senior management was taking time to conduct an exercise Tesco calls "talent spotting." The purpose of the exercise is to essentially identify current employees who work at headquarters who would be willing to move to a new market region when the company opens its division there.

In and of itself this is a good strategic planning process. But not we think for a grocery chain that was and is struggling significantly in its existing markets. It's difficult enough to take a successful retail food and grocery chain and transplant it to another market, just ask the numerous U.S. retailers who've done so and struggled considerably and even failed in that new market. But to take a seriously challenged format and poor performing chain to a new market is...well, a different animal all together.

But Fresh & Easy seemed determined to do just that in 2008.

The former employees say Tesco Fresh & Easy senior management was talking seriously about soon entering new markets like Chicago and even Florida as part of these "talent spotting" exercises in 2008. They also were held in 2007 before the first stores opened, as part of the chain's strategic planning process, which we think is fine. (We reported in late 2007 and early 2008 that Chicago, Florida and possibly even New York were the top markets on Tesco's new market entry list.)

But the fact that Fresh & Easy was struggling so much, and it still is, in 2008 and Tesco was still thinking seriously about Chicago...well, that's what we mean when we say it often appears things are being done at the top at Tesco's Fresh & Easy using that oxymoronic form of management theory and practice called "strategic management by the seat of the pants.'

Later in 2008 Tesco Fresh & Easy Neighborhood Market CEO Tim Mason said Chicago was no longer on the retailer's near-term (and we doubt even medium-term) new market radar screen.

He also said the retailer wouldn't open its first store in Northern California unless and until it saw some improvement in the economic recession. Mason also said the retailer needs to finish building its Northern California distribution center. (We will have more on the Northern California distribution center in an upcoming story.)

But ironically, while we understand the major reason for postponing the Northern California launch is probably to conserve cash, and keep losses from growing, from an economic recession standpoint Northern California, specifically the San Francisco Bay Area where the first Fresh & Easy stores in the region have been slated to open, is doing far better economically that the rest of California, and much better than Nevada and Arizona.

For example, San Francisco (which is both a city and county) and Marin County to its north both have unemployment rates just slightly over 7%. In contrast, California's overall unemployment rate for March was 11.2%. Other counties in the Bay Area also have jobless rates below the state average of 11.2%.

A number of the areas in Southern California where Tesco has its Fresh & Easy markets, as is the case in Bakersfield, have unemployment rates above the 11.2 state average. And much of Metropolitan Phoenix, Arizona and Metro Las Vegas, Nevada where the Arizona and Nevada Fresh & Easy stores are located, also have unemployment rates above California's 11.2%. Some regions much higher.

Therefore, if the primary cause of Tesco's struggles with Fresh & Easy is the severe recession, as CEO Tim Mason has said, would it not make sense to perhaps rapidly open some stores in Northern California's San Francisco Bay Area area, which is doing relatively well compared to most of the rest of the state, and perhaps even close a few in Metro Las Vegas and Metro Phoenix, since the recession is affecting those states so severely?

We will leave it there for now.

But stay tuned tomorrow, following Tesco plc's full-year financials report, for full analysis on Fresh & Easy Buzz.

1 comment:

Thomas said...

the vertical markets of urban area like SF, Chicago and NYC are where this format will have it's biggest impact.
they chose suburban markets mostly and a few as a test would be understandable, but it's not the future for this format.
there is no single F&E doing 200k a week in sales. that is a pipe dream.