Major Changes Coming to Tesco's Fresh & Easy Neighborhood Market Stores

Breaking Buzz - News/Analysis

Tesco's Fresh & Easy Neighborhood Market is preparing to make some major and significant changes inside it small-format fresh food and grocery markets, including adding bakery ovens it will use to bake its artisan breads in-store throughout the day, Fresh & Easy Buzz has learned.

Current plans at United Kingdom-based Tesco and its El Segundo, California-based Fresh & Easy Neighborhood Market chain call for rolling out the changes to as many as 100 stores by the end of this year.

Below are the key changes Tesco will soon start making to some of its 175 Fresh & Easy stores in California, Nevada and Arizona.

Fresh baked bread and bread-bakery front and center

The first and most significant change Tesco's Fresh & Easy plans to make is to install bread-baking ovens in the stores. The ovens will be used to bake Fresh & Easy's artisan breads in-store throughout the day. The grocer is also considering using the ovens to bake other selected items.

As part of its plans to install the bakery ovens and bake the artisan breads in-store, Fresh & Easy Neighborhood Market plans to relocate the bread and bakery sections and shelves from their current locations in the rear of the stores to the front of the store, as a way to showcase what it hopes will become a key offering, led by the fresh-baked breads and related merchandising, in the small-format fresh food and grocery markets

The addition of the ovens and the relocation of bakery to a more prominent, up-front location in the stores is part of an overall plan to attempt to create a warmer feeling and improved "sense of place" in the small-format (10,000-12,000 square-foot) Fresh & Easy stores, which feature a spartan "small box" design including cement floors, warehouse-style grocery shelving and utilitarian fresh and frozen food product display fixtures.

In April Tesco's CEO, Philip Clarke, said during his presentation of the UK-based global retailer's fiscal year 2010/11 financial results that later this year the Fresh & Easy stores would begin opening an hour earlier - at 7 a.m. - than their current 8 a.m opening time and concurrent with that change the stores will start offering fresh-brewed coffee and pastries in-store, hoping to become a morning destination stop for commuters and others.

Around five of the 175 Fresh & Easy stores currently open later than 8 a.m. - at 10 a.m. A couple of those same stores also close earlier than the regular 8 p.m. closing time. Fresh & Easy made the changes last year.

The planned addition of the in-store bread-baking ovens and relocation of the bread and bakery section to the front of the Fresh & Easy grocery markets is related in part to the earlier store opening time and new coffee and pastry offering Clarke mentioned last month, although it was in the works before then.

As part of the relocation of the bakery section, the installation of the in-store bread-baking ovens and the upcoming offering of fresh coffee and pastries, some of the Fresh & Easy stores will also get "mini-cafe" areas featuring seating of some type and/or a coffee bar where customers can drink their coffee and eat pastry, muffins, fresh-baked bread and other items in the store, according to our sources.

[You might find this February 21, 2008 story from Fresh & Easy Buzz - A Look at Fresh & Easy at @ 50 (Stores): An Analysis and Some Suggestions for Going Forward - this piece from March 24, 2008 - The Analysis of Tesco's Fresh & Easy From Piper-Jaffray's Mike Dennis in This Interview Published Today Sounds A Lot Like Ours For the Last Few Months - and these stories interesting and informative.

Yes. We first suggested serving coffee, offering "mini cafes" and much more in the Fresh & Easy stores in February and March 2008 (see the linked stories above) and have written about it and other changes designed to create an improved "sense of place" (and for other top and bottom line reasons) in the stores since then. For example, here's a story from September 2010 we suggest you take a look at: September 14, 2010: Eight Plus One: Napa Unit Added to Eight Fresh & Easy Neighborhood Market Stores Opening in Northern CA in Early 2011.]

According to our sources, how many of the stores will get such sit-down options hasn't been determined yet by Tesco and Fresh & Easy Neighborhood Market.

Essentially, the overall plan is to make the front-of-store bread and bakery section and the coffee and pastry offering the first thing customers see - and in the case of the fresh bread baking and coffee brewing, the first thing shoppers smell - when they enter the stores, something Clarke and Mason hope will help create a warmer feeling, more inviting in-store experience and better first impression from shoppers - along with selling some coffee, pastries and fresh-baked artisan bread - according to our sources.

The multiple top and bottom-line goals of the change and new additions are to help increase customer counts, gain more repeat shoppers, increase sales, and ultimately improve Fresh & Easy's margin, which is currently a rock-bottom negative-38%.

Going mobile with the 'Kitchen Table'

A second major change planned for the Fresh & Easy stores is to eliminate the in-store area called the "Kitchen Table," which is used primarily and regularly for product sampling, and replace it with a mobile unit that can be wheeled throughout the store so food products can be sampled next to where they're located in the stores -  in the condiment aisle, produce or meat department and the like - rather than being done at a fixed location, which is what the "Kitchen Table" currently is in the stores.

We've pointed out more than once in Fresh & Easy Buzz just this limitation with the fixed location "The Kitchen Table" food sampling station.

It's going away, to be replaced by a mobile version that can be used anywhere in the store, allowing food demos to be done right where the product being sampled is shelved or displayed.

The Fresh & Easy stores will also gain valuable product display space by removing "The Kitchen Table" and taking it mobile.

The square-footage currently taken up by the food sampling kiosk is "dead space" from a sales-per-square-foot perspective.

An example: If "The Kitchen Table" currently takes up 100 square-feet, that's 100 square-feet in the 10,000-12,000 square-foot Fresh & Easy stores that's not producing sales. Conversely, if product was displayed in the 100 square-feet space, which will soon be the case, whatever dollar amount of sales that space generates contributes to the total average sales per-square-foot of the store, resulting in a net-plus for the grocery chain.

Small-format stores like those operated by Tesco's Fresh & Easy can't afford to waste precious and valuable sales square-footage with permanent installations like the soon to be mobile "Kitchen Table," as we've pointed out previously in the blog.

Current plans call for turning the space where the "Kitchen Table" is now located in the stores into an end-cap to be used for product display purposes, our sources tell us.

Fresh flowers front and center

Another significant planned change for the Fresh & Easy markets is the moving of the fresh flower displays from the current location in the stores to a front-of-store lobby location.

Similar to the strategy behind moving the bread and bakery items up-front, this change will put the fresh flowers in a more prominent location in the stores, perhaps providing some of that warmth and better "sense of place" (our phrase and useage and not his) Tesco CEO Clarke, who just took over in March, would like to see in the Fresh & Easy stores.

Visualize it this way: Fresh flowers (which tend to evoke warm and fuzzy feelings in people), bread and baked goods (a warm and wholesome fresh food offering) will be among the first things customers will see (visual) as they enter the store. Along with that visual, those with decent-to-good olfactory senses will smell the scent of fresh coffee being brewed and artisan bread being baked, something that shouldn't be too difficult to do because the Fresh & Easy stores are small.

Many of the Fresh & Easy stores already merchandise a selection of fresh flowers and plants at the front-end of the stores and even outside, particularly those units that have outdoor patio areas.

For example, a Fresh & Easy Buzz senior correspondent visited the store in Pacifica, California, which was opened March 9 of this year, today and saw an assortment of potted plants merchandised on the outside patio area by the left-front entrance of the store, a display of fresh cut flowers located up-front near the front doors, and a selection of orchids displayed at the front-end checkout stands.

New meat, deli-prepared foods refrigerated cases

Tesco is also planning to replace the utilitarian open shelf-style refrigeration display cases it currently uses in the Fresh & Easy stores to display fresh meats and deli-prepared foods products with new, closed-in style fixtures that not only are much more attractive than what's currently in the stores but also have much higher energy efficiency than the existing open-style cases do.

The new refrigerated display cases fit into Tesco's overall desire to create a warmer and more inviting look and feel in the Fresh & Easy stores - that needed improved "sense of place" we've been writing about in the blog regularly since February 2008 - along with offering the energy-saving benefits.

A season of change

Tesco is planning a few other changes as part of the overall makeover we're reporting on in our story today.

However, those we've detailed above are the major and most significant changes Tesco is planning to soon start implementing in some of its Fresh & Easy stores.

Neither Tesco or its Fresh & Easy Neighborhood Market chain have publicly announced the plans or any of the changes we're reporting on today. The only mention has been of the planned 7 a.m opening time and the serving of coffee and pastries in the stores, which CEO Clarke noted in April.

Additionally, based on a comprehensive search of the three major search engines - Google, Yahoo and Bing - prior to publishing this story, no other publication has to date reported on any of the plans we're reporting on exclusively today.

We also know this to be true because of how closely and comprehensively we cover Tesco and Fresh & Easy Neighborhood Market.

Therefore, if you see stories on the changes we're reporting on today published in other publications in the following days and weeks, as Fresh & Easy Buzz readers you'll know it was reported here first, and will be able to say you first read the news here.

Current plans at UK-headquartered Tesco and and at Fresh & Easy Neighborhood Market, which is based in El-Segundo, California, call for the grocery chain to start rolling out the changes we're reporting on today to selected stores soon.

Tesco and its Fresh & Easy chain hope to have the changes detailed in this story, along with a few others, implemented in up to 100 of the 175 Fresh & Easy grocery markets by the end of this year, our sources tell us.

Fresh & Easy Neighborhood Market is currently testing the various new features we're reporting on today in one of its stores.

We're very familiar with the store where the test has been and is going on. However, we've decided not to disclose the location at this time.

The test, along with a couple other variables, has led Tesco CEO Philip Clarke, to "green light" the changes to what could be up to 100 stores by the end of 2011.

Behind the major changes

As we've previously reported in Fresh & Easy Buzz, although he's only been CEO since March 2011, having officially taken over March 3 from Terry Leahy who retired, Clarke, who was formerly head of Tesco's European retail operations and corporate information technology and who's been with the company for over three decades, has already made at least two trips to the U.S. to Fresh & Easy's corporate offices in El Segundo, its distribution center facility in Riverside County and to visit selected stores in California, Nevada and Arizona.

Clarke's first visit was in February of this year, before he officially assumed the CEO position. (See the story linked at the end of this piece.)

Tesco announced Leahy's retirement and Clarke's appointment as CEO in June 2010, and Clarke worked closely with Leahy from that time until taking over in March as part of the global retailer's succession plan strategy.

His second and most recent U.S. Fresh & Easy-related visit was in early April, when, according to our sources, Clarke made the final decision

The new CEO is under significant pressure from major institutional investors to right the Fresh & Easy Neighborhood Market ship.

For example, Warren Buffet and partner Charlie Munger, who through their Berkshire-Hathaway holding company and investment arm own about 3% of Tesco plc stock, spoke out publicly about Fresh & Easy for the first time at the recent Berkshire annual meeting in Omaha, Nebraska, which was attended by our 'The Insider' columnist, suggesting to Tesco - and CEO Clarke - that the UK-based retailer should take a very close look at its U.S. operation and seriously consider if it might not be time to pull the plug on Fresh & Easy, which has racked up losses of nearly $1 billion since the first stores opened in November 2007.

Last month Tesco reported a loss of $300 million for Fresh & Easy in its 2010/11 fiscal year which ended February 26, 2011.

We've been covering and writing about Warren Buffet and Berkshire-Hathaway since 2008, as it relates to the 'Oracle of Omaha' and partner Munger being one of Tesco's major institutional investors.

Based on our extensive coverage, we can report with a fairly high degree of confidence the recent comments by Buffett and Munger are the first time either has spoken out publicly in any way that casts doubt on Tesco's decision to continue forward with Fresh & Easy or its ability to succeed with the U.S. chain.

In fact, less than a year ago Buffett bought additional Tesco plc stock, and at the time wasn't concerned about Fresh & Easy Neighborhood Market being a drag on Tesco's value. He's concerned it is now, which is the primary motivation behind the statements he and Munger recently made.

Clarke said shortly after taking over as CEO and again in April he has faith in Fresh & Easy Neighborhood Market succeeding going forward.

The current strategy signed off on by Clarke is to have 300 Fresh & Easy stores, all being distributed to out of the Riverside County facility in Southern California, open and operating by the end of Tesco's 2012/13 fiscal year, which ends in February 2013.

Philip Clarke, is on the record as saying with the 300 stores open by then, Tesco will break-even with Fresh & Easy when it reports its 2012/13 financial results in April 2013.

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

Tesco said in April it plans to open 50 new Fresh & Easy stores this year, all in the existing three states.

So far this year the retailer has opened 21 Fresh & Easy grocery markets - 11 in Northern California and 10 in Southern California.

No new Fresh & Easy stores are set to open in May. That means from June-to-December of this year Tesco needs to open 29 Fresh & Easy stores to hit its 50 store target.

The 21 new units were opened from January -to- April of this year, so opening 29 Fresh & Easy stores over the next seven months is achievable for the retailer, based on what's its done to date so far in 2011 and its past new store opening track record.

But it's going to be more difficult for Tesco to get to the 300 store number by the end of its 2012/13 fiscal year.

For example, if it opens the 50 new Fresh & Easy units this year, it will have 225 stores open and operating as it goes into 2012, leaving the retailer with 75 new stores to open from December 2012 -to- mid-February 2013.

The goal is achievable but not easy - particularly making sure the 75 stores are in prime locations, which is something Tesco has not done with Fresh & Easy in the three and a half years its been opening stores.

The reality is, far too many of the current Fresh & Easy stores are in poor or mediocre locations, which is something Tesco began to remedy when it closed 13 poor-performing stores - six units each in Nevada and Arizona and one grocery market in Southern California - on November 2010. There are stores currently doing as poorly from a sales perspective as those 13 were when the decision was made to close them last year.

But for the analyst at the London, UK investment firm and any others who are currently suggesting to the media and others they have the inside track on knowing Philip Clarke plans to pull the plug soon on Fresh & Easy, the major changes we're reporting on today serve as a counterfactual, not to mention empirical, refutation of those assertions, which in at least the one case are being made as part of a publicity campaign.

They're statements and not arguments because the assertions are backed by very little knowledge (and the hard work required to obtain that knowledge) about what's actually going on at Tesco's Fresh & Easy, accept for what they read in Fresh & Easy Buzz and perhaps elsewhere.

The informaton and work product from an objective publication like Fresh & Easy Buzz is then appropriated wthout permission and intentionally used to support an a priori determined conclusion - and also because it's easier than doing the hard work themselves - without informing their primary audience and the writers and editors of the publications they're seeking publicity from where they obtained the information. [See May 4, 2011 here and May 6, 2011 here, for an example.]

[Also read this story we wrote and published over three years ago in Fresh & Easy Buzz - March 24, 2008: The Analysis of Tesco's Fresh & Easy From Piper-Jaffray's Mike Dennis in This Interview Published Today Sounds A Lot Like Ours For the Last Few Months.]

After all, would Tesco be making what will be a considerable financial investment in implementing the changes we're reporting on if

The answers are - no. No yet. And not in 2011, according to our research and reporting. That doesn't mean Clarke and Tesco's board won't pull the plug on Fresh & Easy before the end of Tesco's 2012/13 fiscal year however. Doing so remains a distinct possibility.

The major changes reported in our story, along with a few more to come, are, as noted earlier, set to start being rolled out to selected stores, beyond the current single test unit, soon.

Are the changes the right ones?

Will the major changes be enough to help Tesco right the Fresh & Easy Neighborhood Market ship?

We plan to address those propositions and a couple others in an upcoming piece.

Stay tuned.

[Editor's Note: The changes detailed aren't the only major and significant ones coming to Tesco's Fresh & Easy. Read our exclusive report from April 12, 2011 here: Fresh & Easy Neighborhood Market to Shrink Health & Body Care Sections in Stores; Add Candy and Snack Items.]

[Readers: Click on the following links - sense of place, store design, local retailing, neighborhood retailing, sense of place theory, localism, localization, localizing Fresh and Easy to neighborhoods, Fresh and Easy sales performance, store average weekly sales, store sales analysis,Warren Buffet, Philip Clarke,Sir Terry Leahy, Tim Mason - to see some related stories.]

Additonal Suggested Related Reading

May 11, 2011: CEO Philip Clarke Launches A New 'Vision and Strategy' For Tesco

April 19, 2011: Tesco's Fresh & Easy Neighborhood Market Posts Biggest One-Year Loss Yet - $307 Million Loss on Sales of $818 Million

February 23, 2011: Incoming Tesco CEO Philip Clarke Visits America - And Fresh & Easy Neighborhood Market

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?

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