Thursday, December 30, 2010

Seven Predictions For Tesco's Fresh & Easy Neighborhood Market For 2011

The Insider - Heard on the Street

Since this is my last 'The Insider' column for 2010, I thought I would offer a few, which turned out to be seven - as in "lucky seven, perhaps - predictions for Tesco's Fresh & Easy Neighborhood Market for 2011. They follow below: 1. Store openings

Prediction: Tesco will open 40-50 new Fresh & Easy stores in 2011. All but a handful of the new stores will be in California. The handful of new stores out of the 40-50 will be in Nevada and Arizona.

2. Store closings

Prediction: Tesco will close 5-10 of its worse-performing Fresh & Easy Neighborhood Market stores in 2011, most likely towards the latter part of the year, as part of its strategy to break-even with Fresh & Easy by the end of its 2012/13 fiscal year. Tesco closed 13 poor performing Fresh & Easy stores in November of this year. [See: 13 Closing Fresh & Easy Stores List.] There are currently 155 units in California, Nevada and Arizona.

3. Sales-margin 'Catch 22'

Prediction: Same-store-sales (also called comparable-store-sales) will continue to grow for Tesco's Fresh & Easy in 2011.

However, there will be no significant or material improvement in the fresh food and grocery chain's current negative-38% margin. (comparing the same-store-sales and margin figures both together when Tesco reports its fourth quarter numbers early next year and thereafter is key in order to gauge Fresh & Easy's actual progress.)

The primary reason same-store-sales (called like-for-like sales in the United Kingdom, where Tesco is based) is because the grocer will continue its heavy discounting and the regular use of its 25% and 20%-off deep discount store coupons. The discounting is largely what's responsible for Fresh & Easy's 9.8% gain in same-store-sales for Tesco's recently-ended third quarter, in my analysis.

Tesco is at a "Catch 22" with Fresh & Easy: It needs to reduce the level and frequency of discounting in order to raise its margins; but doing so will most probably result in the loss of those comparable store sales gains. Same-store or comparable-store -sales refers to stores open for at least a year. All but about 40 of the 155 Fresh & Easy markets have been over for a year or longer.

In order to break-even, which is a huge task since Tesco lost over $200 million on Fresh & Easy in its most recently-ended fiscal year, 2010/11, the United Kingdom-based global retailer must dramatically improve that negative-38% margin. For example, most profitable food and grocery chains have a margin that's at least in the positive twenty-percentile range. Whole Foods Market, which has the best margin among all publicly-held U.S. grocery chains, reported a plus-35% margin in its most recently-ended fiscal year.

4. UFCW union 2.0

Prediction: When Tesco launches Fresh & Easy Neighborhood Market into the Northern California region in the first quarter of this year, it will be met by the most aggressive campaign yet launched by the United Food & Commercial Workers (UFCW) union, which has been attempting to unionize the chain's store-level employees since the first stores opened in November 2007.

The UFCW local that represents unionized grocery store workers in most of Northern California, including the San Francisco Bay Area where 10 of the first 12 Fresh & Easy stores are set to be opened early next year, is one of the most organized and aggressive locals within the UFCW in the U.S. The nine-county Bay Area region, home to about 7 million people, is also one of the strongest pro-union regions in America.

Expect a campaign to unionize Northern California, particularly Bay Area, Fresh & Easy store workers to start the day, or a bit before, the first Fresh & Easy stores in the region open, which will be in February or March 2011.

5. North-south logistical divide

Despite the fact it's had a building to house a distribution center in Northern California, in Stockton, for at least three years, Tesco has decided to distribute its fresh food and grocery products to the Northern California Fresh & Easy stores from its 850,000 square-foot distribution center in Riverside County, in Southern California, which on a good day (as in no heavy rain and wind or snow on the Grapevine, the mountain pass that separates Southern California from the Central Valley, on Interstate 5) is an about 10-12 hour drive by 18-wheeler to where most of the Northern California stores will be located - and much longer when there's bad weather like the state has been experiencing for the last couple weeks. Heavy snow on the Grapevine can delay trucks delivering from Southern to Northern California for days.

The primary reason for this decision is because Tesco needs to increase the volume being shipped out of the Riverside County facility in order to make it more efficient - and thus less expensive to operate. Tesco also has been warned that all of the major self-distributing supermarket chains, wholesalers and big distributors in Northern California are unionized by the Teamsters, which plans to organize workers at the Stockton facility should Tesco ever open it.

Prediction: Fresh & Easy has a sub-par logistics system. The grocer is going to experience significant out-of-stock problems at its Northern California stores almost immediately after they start opening -something it even had serious problems with in Southern California, Nevada and Arizona from November 2007 until late 2009 - and still has some problems with today - because it's not prepared systemically for the challenges that the store ordering/processing/warehouse picking/delivery cycle (and turn-around cycle) require in order to properly keep stores in the north, which are supplied from a distribution center so far away in the south part of the state, stocked.

As a result, Tesco is going to be faced with a decision - either fix the problem or get the Stockton facility up and running fast. If the grocer can smoothly distribute to the north from Riverside, it will be a net positive because of the needed new volume it will provide for the facility. For example, in October, 2010 Tesco said it needs 400 stores, which it says it will have by the end of its 2012/13 fiscal year, all being distributed out of the Riverside facility, in order to reach what it's projected to be the efficiencies needed to operate the massive distribution center without losing money.

However, if Tesco can't fix the Northern logistics problem I describe above - or muddles through with out-of-stocks and related problems at the Northern California stores - it would be advised to get the Stockton facility open as fast as possible. If not, the Northern California launch could be a nightmare for the retailer, which has already had enough of those such events with Fresh & Easy. It will have the logistics problems. That's the prediction. How it deals with the problems will determine the success of the launch, along with the first impression it makes as the new grocer in town, in Northern California.

6. Acquisitions out

In my column of June 27, 2010 - The Insider: Will Tesco Acquire Supervalu, Inc. and Change its 'Fresh & Easy' Game in America? - I wrote about the potential of an acquisition of Supervalu, Inc. by United Kingdom-based Tesco.

Prediction: Not only is an acquisition of Supervalu by Tesco not going to happen in 2011 - Tesco has no plans to make any acquisitions in the U.S. next year, unless of course one of those rare 'offers you can't refuse' drops in the retailer's lap.

Tesco's current U.S. strategic plan is to go with Fresh & Easy as a single-play, single-format operation. The retailer believes the Fresh & Easy model is its best bet, because of its low-labor and other associated costs, for making it in America. So far - three years since the first stores opened - that strategy would be fairly judged to be incorrect. But Tesco has now set its course, which of course could change, to break-even with Fresh & Easy as described by the end of its 2012/2013 fiscal year. The strategy and plan as it currently exists doesn't include one or more acquisitions.

7. Change at the top

Prediction: At some point in the year, after March 2011, there will be a couple significant changes in the senior management ranks at Tesco's Fresh & Easy Neighborhood Market, which is headquartered in the Southern California city of El Segundo.

The changes will come in part because Philip Clarke, Tesco's current head of European operations, will take over from retiring chief Terry Leahy as CEO in March of next year. But also because there's some "Fresh & Easy fatigue" that's set in among a few key executives in El Segundo, nearly all of whom came from Tesco in the UK in 2006-2007 to start up the small-format fresh food and grocery chain and have been there ever since.

The pressure is also on the senior executive staff, all of whom have VP titles, beginning next year, as they have only a little over two years to take Fresh & Easy from its current status of bleeding millions of dollars each week to break-even. Some new blood will be needed to tackle that massive project, the outcome of which will determine Tesco's fate in America come the end of its 2012/13 fiscal year.

There you have it - seven predictions for Tesco's Fresh & Easy Neighborhood Market for 2011. I'll keep tabs on my predictions throughout next year. I'll let you know in this same space at the end of 2011 how I did.

Happy New Year. See you in 2011.

- 'The Insider'

Below is a linked listing of 'The Insider's' 2010 columns

~October 27, 2010: Save Mart CEO Bob Piccinini Poised to Make it to the 'Bigs' as Member of Golden State Warriors' Ownership Group

~October 8, 2010: Incoming Tesco CEO Philip Clarke Needs to 'Imagine' When it Comes to Fresh & Easy Neighborhood Market USA

~September 13, 2010: Reading Philip Clarke's Tea Leaves: Might A Mixed Corporate/Franchise Model Be in Fresh & Easy Neighborhood Market's Future?

~September 3, 2010: How the California Grocers Association and its Members Can Snatch Victory From the Jaws of the Defeat of California's Plastic Bag Ban

~August 22, 2010: Challenges & Opportunities: Tesco's Fresh & Easy Neighborhood Market Will Supply its Northern CA Stores From its Riverside County DC in Southern CA

~July 18, 2010: When it Comes to Northern California - its Competitors are Rome Burning and Tesco's Fresh & Easy Neighborhood Market is Nero Playing the Fiddle

~July 13, 2010: A Few Words on The Life and Death of Veteran Southern California Grocer Roger K. Hughes

~June 27, 2010: The Insider: Will Tesco Acquire Supervalu, Inc. and Change its 'Fresh & Easy' Game in America?

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

~May 20, 2010: Welcome to Discountopia USA

~April 29, 2010: Heard on the Street: There's Something About Albertsons ... In Southern California


Anonymous said...

Interesting stuff. I've enjoyed your blog in 2010 from a UK perspective and as a small Tesco plc shareholder. I'll watch with interest to see how your 2011 predictions turn out.

SoCalFoodBroker said...

I agree with you in terms of profit/loss. The expense of the launch into Northern California is going to cancel out any gains Tesco might make towards breaking even with Fresh & Easy, at least for 2011. That will then leave a little over a year to do it.

Anonymous said...

Regarding unionisation: Tesco stores/head office in the UK are unionised with USDAW/SATA (respectively), although these are not as militant as UFCW. The challenge is any significant rise in labor rates will make the chain even more unprofitable and would probably result in the chain closing--in effect the union could force their own members out of a job, which may be good for long term union politics for the wider union, but not for F&E or their workers.

Regarding northern distribution: Tesco does have experience of this. The F&E systems and processes were piloted in Turkey, which has similar geographic/transport problems (although it does source more fresh products from local suppliers for the far-away stores, and the stores are bigger and can support the extra back of store labor to manage local purchasing and delivery). It will be a fine balance between out of stock and wasting stock

Clearly they would want to open the northern distribution center and kitchen as soon as the volume is there.