Tesco's Fresh & Easy Neighborhood Market at 175 (Stores): Three New Stores Open in Northern California Today

News/Analysis

Fresh & Easy Neighborhood Market opened three stores today in Northern California, giving the small-format fresh food and grocery chain, owned by United Kingdom-based Tesco, a total of 11 units in the region. [See - April 26, 2011: Behind the Buzz: Tesco Opens Three New Fresh & Easy Neighborhood Market Stores in Northern California Tomorrow.]

The three new stores, in Hayward (Mission Boulevard and Rousseau Street), San Jose (Saratoga Avenue and Payne Avenue) and Napa (Imola Avenue and Jefferson Street), are the last batch of the 11 Fresh & Easy markets Tesco-owned El Segundo, California-based Fresh & Easy has to date announced it will open in Northern California in early 2011.

However, as we've reported, Tesco's Fresh & Easy is preparing additional stores for spring-to-summer openings.

On March 15, 2011, we reported here - San Francisco, Antioch and Fairfield Stores Next Up in Northern California For Fresh & Easy Neighborhood Market - that Fresh & Easy Neighborhood Market has four stores next in line for Northern California openings. Two of the stores are in San Francisco - at Third Avenue and Carroll Avenue and 32nd Street and Clement. The other two units are in Antioch and Farfield. (See the story linked above for details.)

As of today, Tesco's Fresh & Easy hasn't announced new store openings for May, including in Northern California.

Based on our reporting, the two San Francisco stores noted above will be the first of the group to open, possibly at the end of May, but more likely in June. (We'll have more on this development in an upcoming story.)

There are now 175 Fresh & Easy stores open and operating in California, Nevada and Arizona.

Below is a breakdown of the 175 units, by market region, as of today.

Fresh & Easy stores, by the numbers:

Southern California/San Diego
= 101 units

Northern California
 = 11 units

Central Valley, California/Bakersfield Metro
= 7 units

Central Valley, California/Fresno Metro
= 7 units

Southern Nevada/Metro Las Vegas
= 21 units

Metro Phoenix, Arizona
= 28 units

Total = 175 stores

Tesco has opened 21 Fresh & Easy grocery markets so far this year - 11 units in Northern California and 10 stores in Southern California.

In a December 30, 2010 piece - Seven Predictions For Tesco's Fresh & Easy Neighborhood Market For 2011 - we said Tesco would open 40-50 Fresh & Easy stores in calendar year 2011.

On April 19, Tesco said it would open 50 Fresh & Easy grocery markets this year, noting it is a few more than it originally planned on opening for 2011. [See - April 19, 201: Tesco's Fresh & Easy Neighborhood Market Posts Biggest One-Year Loss Yet - $307 Million Loss on Sales of $818 Million.]

April 19 was the first time Tesco or its Fresh & Easy chain mentioned how many stores it would open in 2011. It doesn't usually announce new store opening numbers at all.

Based on the 50 new stores' number, and having opened 21 units so far this year, that means Tesco plans to open an additional 29 Fresh & Easy fresh food and grocery markets this year.

Based on information from our sources, all, or nearly all, of the 29 or so new stores set to be opened in the remainder of 2011 will be in California.

No new Fresh  Easy stores have been opened so far this year in Nevada or Arizona.

No new stores in either region are planned for what's left of April.

Tesco has six less Fresh & Easy stores than it had six months ago in both Southern Nevada and metro Phoenix, Arizona, having closed six stores in each market region in November 2010. [See here for details.]

According to our sources, Fresh & Easy Neighborhood Market isn't planning on opening any new stores in Nevada or Arizona in May, either.

On April 19, Tesco reported a 2010/11 fiscal year loss of $307 million (on revenue of $818 million) for Fresh & Easy Neighborhood Market. It's fiscal year ended February 26, 2011. There were 164 Fresh & Easy stores open at the end of Tesco's fiscal year. Tesco is currently in its 2011/12 fiscal year, which ends February 2012.

On October 5, 2010, when Tesco reported its mid-year financials, the retailer said it planned to have 400 Fresh & Easy stores open and operating by the end of its 2012/13 fiscal year because it needed the sales volume from that number of units open to break-even by February 2013, when that fiscal year ends. [See - October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market.]

But last week, on April 19, Tesco CEO Philip Clarke said the retailer has revised the 400-store number down, saying it plans to break-even with Fresh & Easy Neighborhood Market by February 2013, having 300 stores open and operating, 100 less units than it said would be needed seven months ago.

The downward revision from 400 to 300 stores didn't come as a surprise to us here at Fresh & Easy Buzz, since we said in the October 5, 2010 story linked above, when the 400-store metric was announced, that it was not a realistic number of new Fresh & Easy stores for Tesco to open between then and February 2013. We were correct.

For example, from November 2007 to today, a period of three-and-a-half-years, Tesco has opened 175 Fresh & Easy stores. That would mean it would have had to open 225 stores between now and February 2012, a period of less than two years, in order to hit 400 units. That's opening 40 more stores over a 22 month period than the 175 units it's opened since November 2007 (3.5 years.)

Even hitting 300 stores by February 2013, which means opening 125 new units over the next 22 months, is a pretty tall order, from simply a logistics standpoint, although Fresh & Easy can do it, based on its history.

If it opens the 50 stores this year it will end calendar 2011 with 204 units open, which means it will need to open 94 new stores from January 2012 to February 2013. A tall order - but achievable.

But at what cost in doing so? Tesco already has more Fresh & Easy stores in poor locations than it can afford to have. The 13 stores Tesco closed in November 2010 are a perfect example of this fact.

And, having so many stores out of the current 175 in poor locations is directly related to opening too many stores too rapidly, although that's only one of a handful of major mistakes Fresh  Easy Neighborhood Market has made when it comes to choosing store locations.

For example, the grocer has a number of stores in Arizona, Nevada and Southern California that are completed but have been sitting empty for up to two years. It also has store sites it hasn't even started construction on yet, and not just in Northern California, where it opened its first two stores on March 2. These are store sites primarily in metro Las Vegas, metro Phoenix and the Bakersfield, California region that it's possible Tesco will never even open stores at but is paying for.

This brings up another decision Tesco CEO Clarke will have to make, either at the end of this year or in early 2012. That decision: How many of the current under-performing Fresh & Easy stores should he close? If Tesco used the same performance criteria it used to close the 13 poor-performing stores in November 2010, it could close another 13 units and still have change leftover in terms of additional stores not doing much better than the 13.

Getting to 300 Fresh & Easy stores by February 2013 is achievable for Tesco. But it's far from the most important metric involved in breaking-even its Fresh & Easy Neighborhood Market, which Tesco CEO Philip Clarke says will happen by then, with 300 Fresh & Easy stores open and operating.