The Missing Link in Tesco's Purchase of Fresh & Easy Neighborhood Market Meat Supplier '2 Sisters Food Group'

Pictured above is (the artists rendering) the '2 Sisters Food Group' facility in Riverside County, California, which is located next to Tesco's Fresh & Easy Neighborhood Market distribution center. Dynamic Builders, the contractor for the 2 Sisters' building, set up a cellular-cam during construction. You can view a slide-show and a time-lapse video show of the construction of the facility here. It's worth a look.

Analysis/Commentary

Yesterday (June 20, 2010) Fresh & Easy Buzz broke the story that a National Labor Relations Board (NLRB) Administrative Law Judge, Lana H. Parke, on June 10 ruled against Fresh & Easy Neighborhood Market's fresh meat and prepared foods ingredient supplier, United Kingdom-based 2 Sisters Food Group, in an unfair labor practices case brought against it by the United Foods & Commercial Workers (UFCW) union.

[Read our story here: June 20, 2010 - NLRB Judge Rules Against Key Fresh & Easy Neighborhood Market Supplier '2 Sisters Food Group' in Labor Relations Violations Case.]

Fresh & Easy Buzz is the only publication to report on the judge's decision thus far, based on a search we just completed.

However, interestingly, today's Financial Times just happens to have a short story, "Tesco takes over Fresh & Easy suppliers," which features an interview with Tesco plc director and Fresh & Easy Neighborhood Market CEO Tim Mason, who hasn't spoken to the press in a rather long time, and who now is in the sites of The CtW Investment Group, which works with pension funds sponsored by the Change to Win coalition of U.S. labor unions, for the substantial pay package he recently received. See our June 4, 2010 story: Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009]

Last week, on June 17, CtW Investment Group sent this letter (and this press release to the media) to Tesco shareholders regarding what the group says is excessive remuneration for Mr. Mason. In the letter they urge Tesco shareholders to vote no on proxy Item #2, the Directors’ Remuneration Report, at Tesco’s upcoming July 2nd shareholder meeting in the UK.

In the story today (it's here), Tim Mason tells the Financial Times that Tesco is buying and taking over 2 Sisters Food Group and its other privately-owned in-house supplier, Wild Rocket Foods, which serves as Fresh & Easy Neighborhood Market's fresh produce procurement arm.

The story says: Tim Mason, the head of the Fresh & Easy business, told the Financial Times it was a sign of its commitment to the US business. While not large enough to require disclosure, he said the transaction involved “tens of millions of dollars” and “a real amount of money”.

If not large enough to require disclosure, Why did Mason disclose it at all. And why specifically disclose it today in the Financial Times, the day after our story on the NRLB decision against 2 Sisters Food group? There's no press release on the subject in the "newsroom" on the Fresh & Easy website, for example.

2 Sisters Food Group and Wild Rocket Foods are privately-owned companies. Tesco brought both firms to the U.S. to serve as its supply partners for Fresh & Easy. Both companies have facilities next door to Tesco's 850,000 square-foot Fresh & Easy Neighborhood Market distribution center in Riverside County, California. The impressive 2 Sisters Food Group facility is only a few years old and is about 53,000 square-feet. The facility was a substantial investment for the company.

In the story, Fresh & Easy CEO Mason also says: "The move (buying 2 Sisters Food Group and Wild Rocket Foods) would lead to 'synergies and economies by putting the management teams of the units together. . . we think will be very beneficial for the business." OK.

Mason is also attributed by the Financial Times' reporter as saying '2 Sisters Food Group and Wild Rocket Foods had not performed as well as their owners had hoped, as Fresh & Easy slowed its expansion plans.'

"Has Fresh & Easy gone more slowly than we initially planned and they initially planned? Well, yes. And that has obvious consequences," Fresh & Easy Neighborhood Market CEO Mason is quoted as saying in the story.

What isn't said in the Financial Times' story today of course is that both suppliers have been losing far more money as part of Tesco's U.S. venture that they had ever expected to. Both firms essentially wanted out of the deal - and it now appears they are.

Interestingly, the Financial Times story says nothing about the NLRB Administrative Law Judge's June 10 decision against 2 Sisters Food Group, which we reported yesterday.

The UFCW first filed an unfair labor practices complaint against 2 Sisters Food Group in 2008, as we reported here [August 27, 2008 we reported in this piece - UFCW Union Reports Tesco Fresh & Easy Neighborhood Market's Prepared Foods Supplier to Labor Board For What it Says is Unfair Firing of Six Employees] and in our story yesterday. Paying for nearly two years' of legal costs in fighting the charges, which resulted on June 10 in a victory for the UFCW union, has just added to 2 Sisters Food Group's expenses in California.

Unfortunately nothing Tim Mason says in the Financial Times story, in the couple sentences about sales, same-store-sales and the like, sheds any light on Fresh & Easy's performance. It's just a brief repetition of the generalized comments, void of any metrics, Tesco made when it reported its fiscal year 2009/10 sales and earnings in April.

We aren't surprised Tesco is buying its produce supplier Wild Rocket Foods. They signaled this in part when they transferred Tim Lee from UK corporate headquarters to Fresh & Easy USA, as its new director of fresh foods.

Tim Lee's specialty at Tesco's corporate headquarters in the UK, where he was a produce category procurement director, was fresh produce. There Lee and another Tesco produce category procurement director, Alex Dower, launched Tesco's global fresh produce sourcing buying and supply chain initiative in about mid-2009. The initiative focuses on direct procurement of fresh produce for Tesco stores in the UK and continental Europe. Lee's responsibilities included setting up satellite offices in growing and sourcing regions around the world and staffing the offices with technical specialists and produce buying teams.

Basically, what Tesco is doing with Wild Rocket Foods is buying it and folding it into its corporate procurement function, with a California Fresh & Easy twist, which Tim Lee was responsible for in the UK, and was sent to Fresh & Easy in part to do in some form.

Another signal Tesco was up to something with its produce procurement came when we learned - and reported here - June 9, 2010: Key 'Veteran' Fresh Produce Category Manager Chris Harris Leaves Fresh & Easy Neighborhood Market - that fresh produce category manager Chris Harris had left Fresh & Easy Neighborhood Market. Harris' departure now takes on a much brighter picture in light of Tesco's buying of Wild Rocket Foods, combined with the naming of Tim Lee as director of fresh foods a few months ago. (We commented in the piece linked above that Lee was making some changes to Fresh & Easy's produce procurement since coming on board. Check it out.)

In light of NLRB Administrative Law Judge Parke's June 10 ruling against 2 Sisters Food Group, we aren't surprised that Tesco is buying 2 Sisters' as well, although we didn't know it was until reading Mr. Mason's announcement today in the Financial Times, just a day after our story was published.

Buying 2 Sisters Food group and Wild Rocket Foods though is a complete 180 degree turn by Tesco. The key reason Tesco brought 2 Sisters Food Group and Wild Rocket Foods with it to America was so that it could outsource the labor intensive fresh meat and produce functions, thereby saving considerable labor costs.

As such, does it logically (and financially) follow that Tesco wants to buy the two companies, since doing so means adding hundreds (CEO Mason says 750 in the Financial Times story) of new employees to the Fresh & Easy Neighborhood Market payroll? Not on your life.

However, 2 Sisters is Tesco's primary fresh meat supplier in the UK. Additionally, Wild Rocket is owned by Tesco's leading fresh produce supplier in the UK, Langmead Farms. These relationships also help explain why Tesco would want to bailout the two companies by taking over their respective U.S. operations., even though the cost is in the "tens of millions," according to Tesco director and Fresh & Easy Neighborhood market CEO Mason.

We've been hearing from sources for some time that both 2 Sisters Food Group and Wild Rocket have been bleeding red ink, hoping for something to give, like an increase in sales volume at Fresh & Easy. It appears now both suppliers - what Tesco designed as it outsourcing hat trick fro Fresh & Easy - will bleed red ink no more in California, but rather take what they can get from Tesco and head back to the United Kingdom.

And since it's selling its U.S. operations to Tesco, 2 Sisters Food Group won't have to follow all those remedies the NRLB Administrative Law Judge laid out in her June 10 ruling. Tesco might have to though.

Related stories:

June 20, 2010: NLRB Judge Rules Against Key Fresh & Easy Neighborhood Market Supplier '2 Sisters Food Group' in Labor Relations Violations Case

June 20, 2010: NLRB Judge Rules Against Fresh & Easy Neighborhood Market in Spring Valley CA Store Labor Law Violation Case

June 12, 2010: Will Phil Clarke Shake Things up at Fresh & Easy Neighborhood Market USA When He Becomes Tesco CEO in 2011?

June 8, 2010: Tesco CEO Terry Leahy Retiring; Philip Clarke New CEO; Tim Mason Named Deputy CEO But Will Remain Fresh & Easy Neighborhood Market Chief in U.S.

June 4, 2010: Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009