Wednesday, August 31, 2011

Tesco Says Sayonara to Japan, Good Morning to Sacramento

News & Analysis

United Kingdom-based Tesco, which operates 5,400-plus stores in 14 countries, announced today it plans to eliminate its operations in one of those nations - Japan - while expanding its geographic reach across the Pacific Ocean in the Western United States by launching its Fresh & Easy Neighborhood Market chain into the Sacramento, California metropolitan region next year, as we reported it would do in this story on Monday (August 29): Meaningful Move or Too Little Too Late? Fresh & Easy Neighborhood Market Planning Early 2012 Metro Sacramento Market Launch.

The announcement today in the United Kingdom by CEO Philip Clarke, who took over in March of this year from Terry Leahy who during his 14-year term as Tesco's chief executive launched the global retailer into the largest (United States) and third-largest (Japan) countries in terms of total dollar sales of food and groceries (China is second), that Tesco would put its 129 small-format stores in Japan up for sale and exit the market overshadowed the announcement made today by Tim Mason, Tesco deputy CEO and CEO of Fresh & Easy Neighborhood Market, that the 177-store Fresh & Easy chain would enter the metro Sacramento, California market next year, beginning with the opening of six stores.

Tesco's Fresh & Easy Neighborhood Market currently operates as far south in California as the San Diego region, throughout Southern California, in the Bakersfield, Fresno and Modesto metro regions in the Central Valley, in the San Francisco Bay Area and in Vacaville, which is about midway between Sacramento and the Bay Area, along with operating stores in the Las Vegas, Nevada and Phoenix, Arizona metropolitan regions. There are 128 stores in California; 28 units in Arizona; and 21 Fresh & Easy markets in Nevada. (See here, here and here for detailed information.)

Mason, who is based at Fresh & Easy Neighborhood Market's headquarters in El Segundo (Southern), California where he remains CEO of the venture as well as serving as group deputy CEO of Tesco's global operations, a position he was appointed to in March 2011, made the announcement today at a groundbreaking ceremony held on a vacant lot at the future Fresh & Easy store at 34th Street and Broadway in Sacramento's Oak Park neighborhood.

At Mason's side was former NBA basketball star and current Mayor of Sacramento, Kevin Johnson, who's development company sold the parcel of land the store will sit on to Tesco in 2008. Johnson, who is a native of Sacramento and returned home when he retired from the NBA a few years ago, was raised in Sacramento's Oak Park Neighborhood. (See the story linked at top for more information.)

"I'm excited to welcome Fresh & Easy to our neighborhood," Mayor Johnson said at the ceremony today. "Fresh & Easy is not only bringing more good jobs to Sacramento, but also high-quality, healthy food at affordable prices to neighborhoods that don’t always have access to such foods."

CEO Philip Clarke's announcement today across the pond in the UK though is the one that generated the most interest from Tesco's investors and competitors - and the most ink from the press on both sides of the pond. In fact, little if any of the coverage we've seen so far today even mentions the announcement made today by Mason about Fresh & Easy's launch into the metro Sacramento market next year, which we wrote about Monday before the plans were publicly announced by the grocer.

A number of British publications are using Tesco's exit from Japan as a logical news hook however, asking and suggesting that Philip Clarke's next move might be to pull the plug on Fresh & Easy before the year is out.

That's not going to happen, based on our reporting and information, although the exit from the country on the other side of the Pacific Ocean will draw much closer attention from investors and the media to Tesco's U.S. operations than has been the case - expect here at Fresh & Easy Buzz - at least for the next week or so.

Clark said in a statement today Tesco is exiting Japan because the retailer has determined it's unable to build a business in the country of sufficient scale to make a profit.

"We have reviewed our portfolio in Asia and the performance of our business in Japan. Having made considerable efforts in Japan, we have concluded that we cannot build a sufficiently scalable business," he said.  

"We have decided to sell our operations there and focus on our larger businesses in the region, in line with our priority of driving growth and improving returns. I want to thank our colleagues in Japan for their continued dedication to the business. With good stores in good locations across Greater Tokyo, we will be undertaking a formal sale process over the coming months and the business will continue to trade as usual in the meantime."

Tesco has been in Japan for eight years and has lost about £250 million  on the venture.

Unlike in the U.S. where Tesco started up Fresh & Easy Neighborhood Market from scratch, the retailer entered Japan in 2003 by acquiring the C2 Network, which ran stores under the Tsurakame name.

Its 129 stores in Japan are all small-format and trade under the Tsurakame, Tesco and Tesco Express banners.

Annual sales for the 129-store operation are £500 million ($812 million), making it the retailer's smallest operation out of the 14 (soon to be 13) nations it's in. Tesco reported sales of about $818 million for Fresh & Easy in its most recent fiscal year ended February 2011.

Tesco said today about half of its 129 stores in Japan are profitable.

Tesco's about $406 million loss over eight years in Japan pales in comparison to what it's lost in the three years and 10 months its 177-store Fresh & Easy Neighborhood market chain has been in operation in California (128 stores), Nevada (21 units) and Arizona (28 stores). That amount is about double the Japan lose and in less than half as many years. For example, Tesco lost $300 million on Fresh & Easy in its most recent fiscal year ended February 2011.

Meanwhile across the pond at the future store at 34th Street and Broadway in Sacramento's Oak Park neighborhood, Tim Mason announced the first six Fresh & Easy stores the grocer plans to open in the metro Sacramento region in 2012. The locations of those stores are:

>34th Street and Broadway, Sacramento
>Watt Avenue & El Camino Avenue, Sacramento
>Mack Road and Franklin Boulevard, Sacramento
>Lincoln and Sterling Road, Lincoln
>Elk Grove Florin Road and Calvine Road, Elk Grove
>East Natoma Street and Blue Ravine Road, Folsom

As we reported Monday, Fresh & Easy Neighborhood Market is currently targeting early 2012 for the opening of the first one or more of the six stores. Based on our current information, the three units in Sacramento proper are likely to be the first units opened next year. That could change of course.

Five of the six stores are among the first batch of 19 future locations Tesco's Fresh & Easy Neighborhood Market announced in February 2008 it planned to open in the Sacramento/Vacaville region. Of those 19 stores, one unit has been opened so far, the store at Elmira & Nut Tree in Vacaville, which was opened earlier this year.

The Vacaville store is one of 13 Fresh & Easy units in Northern California Tesco has opened this year. Eleven of the stores are in the San Francisco Bay Area. Besides the Vacaville store, the one other unit outside the Bay Area is the store in Modesto.

Interestingly, the unit at East Natoma and Blue Ravine in Folsom, which is a suburb of Sacramento, isn't one of the 19 stores announced in February 2008. There is a store in Folsom on that list, which you can view here, but it's at Greenback & Madison.

The East Natoma and Blue Ravine location was acquired by Tesco's Fresh & Easy post 2008, as were a number of future store sites in the Sacramento area, which we've identified here and here.

On the other side of the Pacific, Tesco said today its putting its 129 small-format stores up for sale.

Based on the division's small market share of less than one half of one percent - which is about the same market share percentage Tesco has with Fresh & Easy in California, metro Las Vegas, Nevada and metro Phoenix, Arizona - and the not so great performance level of the stores (half profitable), we expect the UK-based global retailer to take a fairly serious haircut on any sale it agrees to. Japan's post-earthquake economy, which was so great before the quake and tsunami, also makes buying the stores a less attractive proposition, in our analysis.

Across the pond in the UK today Tesco CEO Clarke took great pains in a conference call with members of the press to downplay any comparisons between the retailer's decision to bow out of Japan and the potential for doing the same with Fresh & Easy in the United States anytime in the near future. He essentially said the two operations are very different in kind and by degree.

There's truth in that statement. But also some spin.

The central reason Tesco gave today for saying sayonara to Japan - that it doesn't see being able to build a business of proper scale and thus become profitable in the country - is a key factor in evaluating Fresh & Easy Neighborhood Market because Clarke, like CEO Terry Leahy before him, along with Tim Mason, all say the key to breaking even and then making a profit with the U.S. chain is to get acheive the proper "scalability" needed to achieve that objective.

That optimum "scale" started out in 2006 under Leahy as being about 1,000 Fresh & Easy stores over five or six years. later Leahy and Tesco amended that amount to around 500 stores during the same period of time.

Earlier this year Clarke said it would take 400 Fresh & Easy stores by the end of Tesco's 2012/13 fiscal year for it to break even with the chain. A couple months later Clarke said Tesco will break even by February 2013 with 300 stores, saying that's what's needed to achieve "scalability."

There are currently 177 Fresh & Easy stores, which is 123 units away from that 300-store magic number. Tesco's fiscal 2011/12 half-year just ended. The retailer will report half-year revenue and the profit/loss at Fresh & Easy in October. It will be interesting to see what the loss is in terms of it being a benchmark to what Clarke and Mason say will be break-even in 18 months, when the 2012/13 fiscal year end in February 2013.

Tesco attempted to achieve "scalability" for eight years in Japan. It's pulling out, having given as the key reason it's inability to achieve it.

Philip Clarke and Tim Mason are on the record as saying the key strategy to breaking even and eventually making a profit with Fresh & Easy Neighborhood market is to achieve proper "scalability." They've now defined that "scale" as 300 stores in operation by February 2013, at which time the two men say Fresh & Easy will break even.

Terry Leahy, considered Britain's wizard of retailing by his peers and most analysts, was wrong about achieving proper "scalability" in Japan, and that was after eight years rather than the five it will be in February 2013 for Fresh & Easy. It was up to Clarke to pull the plug on Japan, which in the greater scheme of things for Tesco globally was the correct move to make in our analysis.

But Leahy is gone and now it's Clarke's turn. And he needs to think long and hard about whether he, like Leahy was about Japan, is wrong about what it's going to take to get Fresh & Easy Neighborhood Market to break even in 18 months, not to mention become a viable business and start making a profit. In our analysis it is, after all, more than a "scalability" issue.

Monday, August 29, 2011

Meaningful Move or Too Little Too Late? Fresh & Easy Neighborhood Market Planning Early 2012 Metro Sacramento Market Launch


Tesco's El Segundo, California-based Fresh & Easy Neighborhood Market is planning to open its first stores in the Sacramento metropolitan region in Northern California early next year, according to our sources, and has recently posted advertisements for store managers on the Internet in advance of its entering what will be a new market region for the 177-store small-format fresh food and grocery chain in 2012.

On Wednesday (August 31) Fresh & Easy Neighborhood Market will hold a ground breaking at the site of what will be one of its first Sacramento-area stores to open next year, at 34th and Broadway in Sacramento's Oak Park Neighborhood. Joining Tesco group deputy CEO Tim Mason, who's also the CEO of Fresh & Easy, and other senior executives at Wednesday's ground breaking will be Ex-NBA basketball star and Mayor of Sacramento Kevin Johnson, who once owned the site of the future Fresh & Easy store in the Oak Park neighborhood where he was raised, along with members of the City Council.

Mayor Johnson's neighborhood

It should come as no surprise to regular readers of Fresh & Easy Buzz that Tesco's Fresh & Easy will kick off it plans to enter the metro Sacramento market with a ground breaking at the Oak Park-Sacramento location Wednesday - or that Mayor Johnson will be attending the event. It's Mayor Johnson's neighborhood after all.

In 2008 Johnson's then Kynship Development Company sold the Oak Park parcel to Fresh & Easy Neighborhood Market for $1.12 million. In December 2008 that deal held up the incoming mayor's swearing-in ceremony for a couple hours, as we reported here - December 3, 2008: Swearing-In of New Sacramento, CA Mayor Kevin Johnson Delayed A Few Hours Over A $2.2 Million Tesco Fresh & Easy Agenda Item.

Johnson was sworn-in though that same day and has gone on to become a very popular mayor in Sacramento, along with drawing national attention. He's also one-half of what is a major political power couple in the making: He will soon get married to Michelle Rhee, the former chancellor of the Washington D.C. Public school system, who is considered a leader, if not the leader, in public school educational reform in America. Rhee's Student's First organization has as its ambitious mission nothing less than the transform of public education in the U.S.

The mayor also has a background in public school education reform. After retiring from the NBA he returned to his hometown of Sacramento and went into business as a developer. He also set up the non-profit St. Hope organization. Among the numerous programs the foundation started a few years ago was a charter school that replaced the then-failing Sacramento High School into what has become a much more successful school than it previously was.

Johnson has focused much of his work with the non-profit St. Hope organization on the low-income Oak Park neighborhood where he was raised. After taking office as mayor in 2008 he severed his day-to-day ties with St. Hope.

He also focused much of his for-profit real estate acquisition and development efforts in the neighborhood prior to becoming Mayor of Sacramento. For example, in March 2008 when the then 42-year old Sacramento native announced he was running for mayor, Johnson owned about 37 properties in Oak Park, as we noted in this piece on March 7, 2008: Former NBA All-Star and Sacramento Native Kevin Johnson is the Driving Force Behind a Fresh & Easy Market in Sacramento's Oak Park Neighborhood. Notice what we said in the very last sentence in the story linked above.

It was in February 2008 that United Kingdom-based Tesco announced its plans to enter the metro Sacramento market region, saying it would open 19 Fresh & Easy stores, including seven units in the city of Sacramento.

The grocer's initial plans were to open the first stores in the Sacramento area in late 2008-to-early 2009. But Tesco's financial struggles with Fresh & Easy Neighborhood Market have resulted in what will end up being an about four year delay of those original plans when the first stores open in the Sacramento market next year if all goes according to current plans.

In early March 2008 Fresh & Easy Neighborhood Market CEO Tim Mason and Sacramento's then-Mayor Heather Fargo, who Johnson defeated in the local election, held a press conference in front the the very same future Fresh & Easy store in the city's Oak Park neighborhood to announce the Tesco-owned grocer's plans to open stores in the city and region.

Tesco's Fresh & Easy finally opened its first Fresh & Easy stores in Northern California in March of this year. It has opened 13 units in the region to date.

Sacramento bound, locations waiting in the wings

The retailer has opened one of those 19 stores, the unit at Elmira & Nut Tree in Vacaville. Vacaville isn't in the Sacramento metropolitan region however. The city is located about midway between Sacramento and the San Francisco Bay Area. It's about a 45 minute drive from Sacramento on Interstate 80.

Besides the original 19 stores publicly announced by the retailer, we've identified five additional future Fresh & Easy store locations the grocer has acquired in the Sacramento metro region since 2008. Those sites are in the following cities: Carmichael (5025 Marconi Avenue); North Highlands (3525 Elkhorn Boulevard); Gold River (2210 Sunrise Boulevard); Granite Bay (8701-8705 Auburn Folsom Road); and Placerville (Missouri Flat Road & Forni Road).

We've also identified three additional future Fresh & Easy store locations in the greater Sacramento region. Those future stores are: Oroville (Butte County), at Goldtown Plaza Center; Sutter Creek (Amador County), Sutter Creek Crossroads at Hwy 104 and Hwy 49 (see here); and Clearlake (Lake County), Hwy 53 and Dam Road. (see here); along with a location in Suisun City (Sunset Center at Sunset and State Highway 12), which is in the Sacramento/Vacaville region.

Tesco's Fresh & Easy Neighborhood Market hasn't publicly announced or confirmed any of these additional locations. However, we've identified them using multiple sources, including filings by Fresh & Easy with the state of California for alcoholic beverage permits and licenses for future stores at each of the locations.

According to our sources, the Oak Park location will be one of the first two or three Fresh & Easy stores to open early next year in the Sacramento region. The Oak Park neighborhood, like San Francisco's Bayview-Hunter's Point where Fresh & Easy opened its newest store in the 5800 Third Street development last week, is underserved by grocery stores offering fresh food and groceries at affordable prices. Such areas have become commonly referred to as "food deserts."

Oak Park is also home to an extremely strong neighborhood organization. In 2008 Dustin Littrell of the Oak Park Neighborhood Association filed an appeal with the City of Sacramento against Fresh & Easy Neighborhood Market's design plan for the store in the neighborhood. Littrell, who's a designer by profession, included in the appeal a number of detailed proposed design changes for the future store at the location, including site changes he says would have improved traffic flow at and around the store.

The grocer fought the appeal for a time. But after the City of Sacramento Design Review Board agreed with most of the neighborhood group's proposed design changes for the store, Tesco's Fresh & Easy made a deal with Littrell and other neighborhood association leaders, agreeing to incorporate the majority of their proposed design changes in its plan; changes that were mandated by the city anyway. Fresh & Easy then closed escrow on the parcel, which it bought from Kevin Johnson's development company. [See - November 17, 2008: Sacramento City Design Board Agrees With Oak Park Group on Design Changes For Proposed Fresh & Easy Store; Escrow Closed on $1.1 Million Parcel.]

We covered and wrote about the Oak Park Neighborhood Association vs. Fresh & Easy Neighborhood Market store design issue extensively. You can read our stories at the following links: , , , .

Why Sacramento now?

Tesco plans to enter the Sacramento metro region with its Fresh & Easy chain early next year comes in a year in which the retailer has been focusing all of its new store growth in California.

Thus far this year it has opened 23 new Fresh & Easy stores, all in California. Of those stores 13 units are in Northern California - 11 of which are in in the San Francisco Bay Area. The other two stores are the unit in Vacaville and a store in Modesto, which is in the Northern San Joaquin Valley. Modesto is about 70 miles from Sacramento. Vacaville is about a 30 minute drive from the capital city.

Fresh & Easy Neighborhood Market also plans to continue to focus its new store growth in the Golden State for the remainder of the year. According to our sources, all the currently planned new store openings for the remainder of this year are in California.

Its been over a year since Tesco has opened any new Fresh & Easy stores in metropolitan Las Vegas, Nevada, where is has 21 units, and metro Phoenix, Arizona, where there are 28 Fresh & Easy markets. In fact, the retailer closed six stores each in the two market regions in November 2010, along with one store in Southern California, for a total of 13 units. (See here for details.)

Our sources also tell us that Tesco's focus in 2012 in terms of new store growth will be almost exclusively in California, where it has numerous future locations in both Northern California (over 50 sites in the area alone), Southern California and the Central Coast, along with a few in the Central Valley.

Entering the Sacramento market though will cost Tesco some money in terms of ongoing marketing and promotional costs, in addition to the nornal operational expenses involved in starting up. The region, where the dominant grocery chains currently are locally-based Raley's (133 stores and about $3.3 billion in annual sales), Modesto-based Save Mart (249 stores and about $5 billion in annual sales) with its Lucky banner supermarkets and Food Maxx discount warehouse stores, and Safeway Stores, Inc. (the fourth-largest food retailer in the U.S. and the overall market share leader in Northern California where it's headquartered in Pleasanton), is becoming increasingly competitive.

[See the numerous stories and analysis at this link -  - for a good primer on just how competitive Sacramento and all of Northern California is fast-becoming.

For example, Sprouts Farmers Market and Sunflower Farmers Market are both focusing on opening numerous stores in the Sacramento region next year. Sprouts currently has two stores in the region, one unit in Roseville and another in nearby El Grove. Sunflower Farmers Market opened its first store in Northern California earlier this year. That store is also in Roseville.

Additionally, discount chain Target has added its "P-Fresh" fresh food and grocery sections to a number of its discount format stores in the Sacramento region and has plans to add more next year.

And Walmart Stores, Inc., the world's largest retailer and leading seller of food and groceries in the U.S., is putting a major focus on the Sacramento metro region with its smaller-format (30,000-60,000 square-foot) Walmart Market stores, having thus far acquired a number of sites for the stores in the region, with plans for more. Walmart also has plans for more supercenters in the Sacramento area.

We expect Walmart to open its first Walmart Market unit in the Sacramento region in early 2012. That first store - or at least one of the first units - will likely be the location at Highway 65 and Second Street  in Lincoln, which is near Sacramento, where Tesco has had a future Fresh & Easy store site (at Lincoln and Sterling) since early 2008. [For more details see - January 10, 2011: Walmart 'Gets Real' With Smaller-Format Grocery Store Initiative in California; First Stores On Tap; and July 6, 2010 story - Walmart Looking for Store Sites in Northern California For 20,000 Sq-Ft Neighborhood Market by Walmart Prototype Store.

A Fresh & Easy Buzz correspondent recently saw workers inside the vacant former Rainbow Market store in Lincoln tearing out interior materials and loading them into a Walmart Stores truck trailor parked in the parking lot, signaling work has began on turning the building into a Walmart Market grocery store.

A number of other Walmart Market grocery stores - which at their smallest (about 30,000 square-feet as is the case with the Lincoln unit) have three times the selling space as Tesco's 10,000 square-foot Fresh & Easy stores, carry four-to-five times the number of SKUs as Fresh & Easy (which offers about 5,000 SKUS), and offer a full selection of produce, meats and fresh-prepared foods plus in most cases an in-store pharmacy - will be located near the current planned Fresh & Easy Neighborhood Market locations in the Sacramento region.

Sacramento: Continue to pay or start to play

Last year as part of a nearly year-long special report on food and grocery retailing in Northern California we wrote a series of stories about whether or not Tesco would launch Fresh & Easy into Northern California in 2011 (which it ultimately did, opening the first stores in March of this year), starting with this report - April 19, 2010: Tesco Debating Whether to Launch Fresh & Easy Into Northern California This Fiscal Year... or Wait.

We followed the April 2010 report up with this story - June 26, 2010: Tesco Planning to Announce in July When First Northern California Fresh & Easy Neighborhood Market Stores to Open . Three weeks later on July 18 our 'The Inside' columnist wrote this: 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.

On July 29, 2010 we reported in this story - July 29, 2010: Tesco's Fresh & Easy Neighborhood Market Putting Together List of Managers Interested in Transferring to Northern California - that the wheels were in motion at Fresh & Easy regarding a Northern California launch.

On August 19, 2010, less than three months after we started reporting and writing about the retailer and Northern California, Tesco's Fresh & Easy announced in a press release it planned to open its first eight stores in the region in March 2011, as we wrote about here: Tesco Will Open its First Eight Fresh & Easy Neighborhood Market Stores in Northern California in 'Early 2011.'

Our analysis throughout 2010 (and long before that) was that Tesco should focus first in Northern California on opening the numerous locations it has in the San Francisco Bay Area. It's done just that - as noted earlier 11 of the 13 stores opened in the region so far are in the Bay Area.

We also said (best described in the July 18 column by 'The Insider') that by waiting to launch into Northern California in 2011 rather than doing so earlier, like in mid-to-late 2009 or even 2010, Tesco was late to the party for a number of reasons, including timing its entry two years late when the region's competitive profile had increased considerably compared to 2009.

But our analysis remains that from a strategic perspective, despite being extremely late to the party it was the right move for Tesco to launch in Northern California, with a focus on the Bay Area, rather than continuing to postpone, which among other things would have meant continuing to pay monthly rents on even more vacant building, plus its mothballed distribution center in Stockton, that it currently is. At least 13 of the more than 50 locations the grocer has in Northern California are open and operating.

This brings us to the metro Sacramento market and 2012.

Basically Tesco is left with two choices: Either start opening its numerous locations in the market region next year or continue to keep them vacant and pay for the privilege. It's chosen to do the former rather than the latter, despite the fact the Sacramento and San Francisco Bay Area regions are very different and distinct markets, although they are geographically close and have some similarities.

More expenses, continued price and margin pressures

Tesco CEO Philip Clarke has said the world's third-largest retailer will break even with Fresh & Easy by the end of its 2012/13 fiscal year, which is just 18 months away. The 2012/13 fiscal year ends in February 2013.

But in our analysis it isn't going to happen for a variety of reasons. First off, on the expense side of the ledger Tesco is spending a considerable amount of money on a variety of changes it's making to its existing Fresh & Easy stores, all of which we were the first publication to report on beginning early this year. Tesco and Fresh & Easy have since publicly confirmed all of the changes we reported on.

The major changes Tesco is in the process of making to its Fresh & Easy stores include: remodeling the store bakery sections and adding small in-store bakeries with ovens; moving the floral departments to the front of the stores; and replacing the reach-in style frozen food cases with more modern and energy-efficient upright frozen food display cases with glass door fronts. (You can see photos of the in-store bakery and upright frozen food cases here.)

Other changes include: resetting the health and personal care sections in the stores; removing the fixed location Kitchen Table in-store food sampling stations and replacing them with mobile units; and adding high-quality faux wood floors to some of the units, such as the store in Manhattan Beach, California, which is the first store to get the floors. According to a source in a position to know, the wood floors cost $75,000-$100,000 per-store.

The source says Fresh & Easy plans to install the floors over the existing cement floors in up to one third of its 177 stores, which if it does will cost a few million dollars. That's a wasteful and non-sales generating expense (even if the floors are only added to 10 stores) for a chain losing so much money - $300 million in Tesco's most recent fiscal year ended in February 2011 - not only our analysis but in our experience in the industry as well.

The wood floor, which we've seen at the Manhattan Beach store and is without a doubt of a high quality, actually looks out of place with the rest of the Fresh & Easy interior package, which is spartan and includes warehouse-style shelving and other more minimal design features. When it comes to grocery store interior design, the whole is always greater than the the sum of its parts, even if those parts are high quality and expensive like the wood floors are.

The numerous changes to the existing stores will cost Tesco many millions of dollars at a time when it needs to control rather than increase its expenses on Fresh & Easy Neighborhood Market.

On top of these fresh expenses Tesco continues to pay monthly rent on at least a score of future store locations in California, Nevada and Arizona which it has yet to open, along with its mothballed Northern California distribution center, which sits empty in Stockton except for the security guard out front who keeps watch on the vacant building every day.

In terms of sales and operations, the markets Tesco has its 177 Fresh & Easy stores in are among the most competitive in the United States - and they're getting even more competitive as new grocers enter them - Winco Foods is coming to metro Phoenix, Arizona in 2012, for example - and existing players open new stores - Walmart's major focus in California with its supercenters and Walmart Market, for example - along with the continued growth of Target, Costco, Safeway Stores, Trader Joe's, Whole Foods Market, Sprouts, Sunflower Farmers Market and a couple other grocers in California - for example.

Add in the continuing poor economy - California, where 128 of the 177 Fresh & Easy stores are located has the second-highest unemployment rate (a bit over 12%) in the U.S. after Nevada, for example, and Arizona isn't much better - along with a state government that's broke.

Analysts don't see the state's economy improving much in 2012, although some areas like the San Francisco Bay Area and coastal portions of Southern California are doing better than the state as a whole is.

As a result, the continuing poor economy - particularly in California where all but 49 of the 177 Fresh & Easy stores are but also in Nevada where the grocer has 21 units and Arizona (28 stores) - combined with the heavy competition in those markets means continued pricing pressure, which in turn means Tesco isn't going to be able to raise retail prices on the products it sells in its Fresh & Easy stores significantly enough to add the much needed margin growth required to break-even with Fresh & Easy by the end of the 2012/13 fiscal year end.

Tesco reported a negative 38% margin for Fresh & Easy for its most recent fiscal year ended February 2011. In contrast, to serve as a comparitive illustration Whole Foods Market recently reported a plus-36% margin for its most recently-ended fiscal year. Whole Foods' has about the highest margin of any grocer. But few if any grocery chains can make a profit with a margin under 20%.

This intense competitive environment also makes it difficult for Tesco to reduce or eliminate the regular use of its deep-discount store coupons which offer shoppers up to 20%-25% off their total grocery purchases. Fresh & Easy has most recently tried to reduce the heavy frequency in which it issues the coupons both online and via direct mail pieces to shoppers homes. However when the grocer does so, the stores see a reduction in sales, which is why, based on our monitoring of the coupon distribution, we've recently seen an increase in the frequency in which the grocer is once again issuing the coupons.

Launching in the Sacramento region in early 2012 - a new market with all the expected an unexpected costs such a launch can bring, particularly to a chain like Fresh & Easy which needs numerous stores in a region to open based on its strategic plan - is only going to add to the cost side for Tesco in terms of its attempt to break even in the next 18 months. Therefore, the launch, coupled with the other factors we've noted above, will in our analysis prevent Tesco from breaking even with its U.S. venture by fiscal 2012/13-end.

No break-even in 18 months

In fact, we will offer a prediction. The prediction is between now and the end of fiscal 2012/13, Tesco CEO Philip Clarke will say publicly that the retailer will not meet its goal of breaking-even with Fresh & Easy by fiscal 2012/13-end, perhaps offering as the "primary reasons" Tesco's decision to make the major changes noted in this piece, along with the continuing poor economic conditions in California, Nevada and Arizona.

Such an announcement, if we are correct, could come as early as October of this year, when Tesco announces its first-half fiscal year financial results. The first half of Tesco's 2011/12 fiscal year end this month. Much more likely though - October 2011 is too early in our assessment - if such an announcement comes, it will come in mid-2012 when Tesco announces the results of the current fiscal year which ends in February of next year.

Of course we could be wrong in our analysis. Tesco could break-even with Fresh & Easy as Clarke says it will 18 months from now. If so we will be the first publication to offer our congratulations and say our prediction is wrong.

Can Tesco make a viable business out of Fresh & Easy?

Meanwhile Tesco will launch into the metro Sacramento region at about the same time next year as when Walmart Stores begins opening the first of what it plans to be numerous Walmart Market smaller-format grocery stores.

At the groundbreaking ceremony on Wednesday at the site of the future Fresh & Easy store in Sacramento's Oak Park neighborhood, Tim Mason, Tesco group deputy CEO and CEO of Fresh & Easy Neighborhood Market, will perhaps announce the locations of one or more additional of Fresh & Easy stores it plans to open first in the Sacramento area, along with the Oak Park unit. (We are working on finding out ourselves.)

Mayor Johnson will be there - the popular former NBA all star who sold that very same parcel of land that will house the Oak park Fresh & Easy store to Tesco - and he and the members of the Sacramento City Council will welcome Tesco to their city with open arms.

Members of the Oak Park Neighborhood Association will also be at the ceremony on August 31. They will celebrate the coming of a store they thought would open at least two years ago, along with celebrating the fact they first began trying to lure a grocer to the neighborhood a number of years before Tesco agreed to come with Fresh & Easy in late 2007-early 2008.

Like was the case in San Francisco's Bayview Hunters-Point, where all the local chains like Safeway Stores and others said no, so to did Raley's, Safeway, Save Mart and others say no thanks to putting a store in Oak Park. Tesco said yes. And in our analysis the location is going to be a good one for Fresh & Easy Neighborhood Market, just as we've said Bayview-Hunters Point will be an excellent location for the grocery chain.

But hanging over Wednesday's ceremony and formal announcement by Tesco's Fresh & Easy that's it's headed to California's capital city of Sacramento will be that most important question, which is can Tesco break-even with Fresh & Easy Neighborhood Market by early 2013, and even if it does can the United Kingdom-based retailer go beyond that most basic metric and eventually turn Fresh & Easy into a viable and profitable food and grocery retailing enterprise for the company in America, having invested about $1.5 billion in it so far and sustaining an operating loss since the first stores were opened in November 2007 that's approaching $1 billion?

We've offered our analysis on the first part of the question, predicting Tesco will not break-even with Fresh & Easy by the end of its 2012/13 fiscal year. The jury remains out for Tesco as to the second part of the question, whether or not it can ever make something viable and profitable out of Fresh & Easy.

But if our prediction about Tesco failing to reach break-even by the end of its 2012/13 fiscal year with Fresh & Easy is correct, Clarke will have to address the second part of the question before then. His decision and that of Tesco's board will be: If Fresh & Easy Neighborhood Market isn't at or very close to break-even by then, does it make financial sense to keep on going or will it be time to pull the plug on Fresh & Easy and stop the losses, instead investing the money back home in the UK, in Central Europe (another growth region) or in Asia, which is where Tesco is putting its most major growth focus on over the next few years?

Thursday, August 25, 2011

Tesco Opens Long-Awaited Fresh & Easy Neighborhood Market Store in San Francisco's Bayview-Hunters Point Neighborhood

Nearly four years in the making, Tesco opened its Fresh & Easy store (above) in San Francisco's Bayview-Hunters Point neighborhood yesterday. [Photo credit: Fresh & Easy Buzz.] Kevin, a Fresh & Easy Buzz reader who lives in Bayview-Hunters Point, e-mailed us this review (in the quotes below) he posted on the Yelp review site shortly after the store opened yesterday: "It's open. First new grocery store in the Bayview in decades; and it's a grand success. Organic offerings throughout the store - fresh, beautiful stuff. A true full-service grocery store, even offering a full line of wine & spirits. The Bayview in all it's multi-cultural glory is on display here - throngs of happy, smiling people mingling, laughing and honestly joyous about this long-awaited addition to the neighborhood. The staff is helpful and thoughtful - eager to help."

Tesco opened its long-awaited Fresh & Easy Neighborhood Market fresh food and grocery store in the 5800 Third Street condominium development at 3rd Street and Carroll Avenue in San Francisco's Bayview-Hunters Point neighborhood yesterday, completing a nearly four-year process that began when the retailer announced its plans in January 2008 to open a store in the low-income neighborhood underserved by grocery stores that offer a selection of fresh food and groceries at affordable prices.

The opening of the Fresh & Easy store yesterday - Tesco's second unit in San Francisco, 13th store in Northern California, 128th market in California and store number 177 in total - at 3rd Street and Carroll Avenue in San Francisco's Bayview-Hunters Point kicked off at a 10 a.m with presentations by Tim Mason, the CEO of Fresh & Easy Neighborhood Market and deputy CEO of parent company United Kingdom-based Tesco (pictured below), San Francisco Mayor Edwin Lee, David Chiu, president of the San Francisco Board of Supervisors, Malia Cohen, who represents the neighborhood on the board, and Sophia Maxwell, who formerly represented the area on the San Francisco Board of Supervisors and was instrumental in getting the grocer to locate a store in the new 5800 Third Street development, which opened early this year.

Mayor Lee, who is being challenged next year for the city's top elected office by Chiu and numerous others, presented a check for $1,000 to the Bayview-Hunters Point YMCA, which was chosen by the employees of the store to receive the donation Fresh & Easy gives to a local non-profit group each time it opens a new store, while the other San Francisco politicos, Mason and members of his senior executive team encouraged him on.

"I made a commitment to the community to improve Bayview-Hunters Point and make it a place that is safe and healthy for families," Mayor Lee said during his presentation this morning. "This project is a cornerstone in our broader efforts to revitalize the neighborhood by bringing healthy food, vibrant businesses, and new shoppers to Third Street."

Lee is San Francisco's former chief administrator, which is a non-elected position. He was appointed by the San Francisco Board of Supervisors early this year to fill the remaining term of then mayor Gavin Newsom, who was elected California's Lieutenant Governor in November 2010 and took office in January 2011.

It was during Newsom's term as mayor, in 2007, that Tesco agreed to locate a store in the 5800 Third Street development, which at the time was a vacant piece of land and the site of a former Coca-Cola bottling plant.

At the time of his appointment - and up until a few weeks ago - Lee said he would not run for mayor in 2012. However he recently announced he will run for the top office in the city and is being supported by local political heavyweights like Senator Dianne Feinstein and former San Francisco Mayor and California State Assembly Speaker Willie Brown. Both Feinstein, also a former mayor, and Brown are long time residents of and political players in San Francisco.

It was during Brown's two terms as mayor that the city's long-delayed plans to revitalize the low-income Bayview-Hunters Point District began to take shape

As mayor, San Francisco first African American to be elected to the office, Brown pushed through a plan to extend San Francisco's Muni light rail system into the historically majority-African American Bayview-Hunters Point  neighborhood, which previously had been neglected by most elected officials at City Hall, although Brown's close friend, former Mayor George Moscone, who was assassinated in the 1980's along with Supervisor Harvey Milk by another then-Supervisor, Dan White, made some efforts during his tenure to improve the neighborhood. Feinstein, who was President of the Board of Supervisors at the time, replaced Moscone as mayor, then later went on to become one of California's two U.S. Senators.
Above and below: Shoppers browse the aisles yesterday. [Photo credit: Fresh & Easy Buzz.]

The extension of Muni into Bayview-Hunters Point - there's a major stop right in front of 5800 Third Street where the Fresh & Easy store is located - paved the way for what is becoming a slow but steady revitalization of the neighborhood, which was essentially created during World War two when shipyards were built in the area to build ships for the two-front war effort in Europe and Japan, which created numerous jobs at the time.

Post-World War II  Bayview-Hunters point has seen a steady decline in income and opportunities for its 35,00-40,000 residents. Part-and-parcel of this phenomenon has been a lack of grocery stores in the neighborhood, which is considered a "food desert."

Newsom, who was supported by Brown and replaced him as mayor, continued to put a focus on Bayview-Hunters Point during his nearly two terms in office. That focus included working with former supervisor Maxwell and others to bring the 5800 Third Street development to Bayview-Hunters Point along with the Fresh & Easy store, which Tesco owns rather then leases.

Ironically, when it comes to grocery chains - there is a Foods Co discount warehouse grocery store owned by Kroger Co. located in Bayview-Hunters Point - local chains like Safeway Stores, Inc., which is headquartered just 30 miles from San Francisco in Pleasanton and is the leading food retailer in San Francisco with 14 supermarkets, weren't interested in the neighborhood. Instead, the grocer from across the pond, Tesco, ended up being the first grocery chain to open a new store in Bayview-Hunters Point in two decades. It was about 20-years ago when the Foods Co store was opened in the neighborhood.

About 200 customers, according to our count, attended the grand opening during its opening couple hours, including numerous residents of the 5800 Third Street development who told us they were extremely pleased to finally have the Fresh & Easy store open so they can do their grocery shopping on-site.

Along with the customers, about a dozen protesters attended the store opening, including those representing the United Food & Commercial Workers (UFCW) union (Fresh & Easy is non-union) and a neighborhood group, Clergy & Laity United for Economic Justice, that has asked Tesco's Fresh & Easy to remove alcoholic beverages from the store.

The group is also protesting about the fact that Fresh & Easy Neighborhood Market doesn't except WIC Vouchers in any of its stores besides a single unit in South Los Angeles, which is a story Fresh & Easy Buzz has been in the lead about since early 2008.

Fresh & Easy's CEO Mason however says the grocer has applied to except WIC Vouchers at the store in Bayview-Hunters Point (which is something we first said here in 2008 the grocer should do when it opened the store) and plans to start excepting the vouchers, which provide fresh and healthy foods to mothers for their children, soon.

The Clergy & Laity United for Economic Justice supports AB 183, which as we've reported extensively about would if passed by the California State Senate and signed by Governor Jerry Brown banned the sales of alcoholic beverages at self-service checkout lanes in retail stores in California. Tesco's Fresh & Easy uses an all self-checkout model in its 177 stores in California (128 stores), metropolitan Phoenix, Arizona (28 units) and metro Las Vegas, Nevada (21 stores).

Reverend Carol Been, a senior organizer for the group, says though that the organization is going a step beyond AB 183 and wants Fresh & Easy to stop selling alcoholic beverages entirely in the Bayview-Hunters Point store, siting among other reasons the alcohol-infused violence that broke out during last Saturday's football game at nearby Candlestick Park (about a mile away from the store) between the San Francisco 49ers and the Oakland Raiders.

Numerous stores in the neighborhood sell alcoholic beverages, as does the ball park itself. For example, according to the City of San Francisco's Economic Development Department their are about 90 liquor stores operating at present in Bayview-Hunters Point.

Therefore its unlikely Tesco's Fresh & Easy will remove the adult beverages from its shelves just because it's being singled out by the group for such action. The grocer went through the full process of obtaining an alcoholic beverage license, which was granted to it by the State of California. The City of San Francisco didn't object to the granting of the license either, which municipalities have a right to do in California.

The neighborhood group says its singling out Fresh & Easy to remove alcoholic beverages because of its self-service only checkout policy. However, if AB 183 does become law, it will likely make that a moot point because as the legislation is currently written it would require the grocer to at a minimum have one full-service checkout in each of its California stores because the bill, which we've nicknamed the "Son of Tesco Fresh & Easy Law," requires face-to-face interaction between a store clerk and customer whenever alcohol is purchases.

The group also says Fresh & Easy didn't hire locally for the Bayview-Hunters Point store. However, the grocer actually hired 40 employees for the store, which is almost double the number (20-25) it normally hires to staff one of its small-format grocery markets.

In addition, Mason said yesterday - and he told the same thing to Mayor Edwin Lee - that 52% of the 40 store employees are from the Bayview-Hunters Point Neighborhood. Additionally, earlier this year Fresh & Easy held a job fair at the neighborhood YMCA, which it donated $1,000 to yesterday, which is where many of those employees were hired from.
Above: The bakery department in the Bayview-Hunters Point store, which includes an oven where fresh breads and pastries are baked in-store. Fresh & Easy started adding the in-store bakeries to its existing 176 stores in July. All new stores will include the departments. We broke the news about the in-store bakeries in this May 18, 2011 piece. Below: Frozen foods in the 3rd Street and Carroll Fresh & Easy store are displayed in upright cases with glass doors. This is another change for the grocer, which is replacing the reach-in frozen food cases in its stores with the more modern units, which is also news we broke in the May 18 piece.

From a business perspective the hiring of 40 employees instead of the 20-25 Fresh & Easy normally hires per-store is difficult to understand. We've predicted the Bayview-Hunters Point store will be one of the grocers top stores in terms of average weekly sales. However, it doesn't need 40 employees to staff it in our analysis. All of Fresh & Easy's store workers are part-timers, working 20-35 hours week, accept for the store managers, assistant managers and team leaders, although in some cases they too work part time.

The grocer way be creating a potentially damaging situation for itself in hiring so many workers for the store in that (1) it could likely result in the workers getting fewer hours - they get health benefits if they work 20 hours or more a week - and even more serious could be that (2) Fresh & Easy will find itself to high of a labor expense number at the store down the road a bit and have to layoff some of the 40 employees, which will likely lead to damaging its reputation in the neighborhood.

Mason also made a little news at the opening, saying the grocer plans to open its third store in San Francisco - the unit at Silver Avenue & Goettingen in the Portola District which like the Bayview-Hunters Point store it acquired  in late 2007 and announced in January 2008 - in early 2012, confirming our previous reports that it would be the next Fresh & Easy store to open in the city.

As we've previously reported, Fresh & Easy also has a fourth store in the works in San Francisco. That unit will be in the former Delano's IGA Market store at 1245 South Van Ness Avenue in the city's Mission District. Based on our current information we expect that store to open in early-to-mid 2012. (See here for details.)

Tesco is also looking for additional locations in San Francisco for both its 10,000 square-foot Fresh & Easy stores as well as for its smaller footprint (3,000-4,000 square-foot) new "Fresh & Easy Express" format, as we've previously reported.

We've been reporting on and writing about Tesco's plans to open a Fresh & Easy market at the Bayview-Hunters Point location since the grocer first announced its intention to do so in January 2008. We said then and still suggest it will be one of the top performing Fresh & Easy stores in the chain.

In our analysis it should be among the top 10%-15 in average weekly sales among the current 177 stores in operation in California, Nevada and Arizona. Additionally, excepting WIC Vouchers at the store will in our analysis provide at least 5%-10% more sales than if the grocer doesn't except the vouchers, which is currently the case at the store, as it is with all but one of the Fresh & Easy markets, the unit in South Los Angeles.

If we're right, and we believe we are, that's good news for Tesco. But the United Kingdom-based global retailer will need much more than a good location in Bayview-Hunters Point in order to achieve its goal of breaking-even with Fresh & Easy Neighborhood Market, which it lost about $300 million on in its latest fiscal year ended in February 2011, by the end of its 2012/13 fiscal year, which is just 18 months away.

That's something we will continue to explore in Fresh & Easy Buzz in the coming months. Stay tuned.

Related Stories

>We've reported on and written extensively about the Fresh & Easy store at 5800 Third Street in San Francisco's Bayview-Hunters Point Neighborhood. Click on these link - , ,  - to read those stories and analysis.

>We were the first publication to point out that Tesco's Fresh & Easy doesn't except WIC Vouchers in its stores. Following our extensive reporting and analysis, which included a focus on the store in South Los Angeles, the grocery chain began excepting the vouchers in that store. We also first said in a couple stories in 2008 (and since then) that Fresh & Easy would be making a mistake and missing an opportunity if it didn't except the vouchers in the Bayview-Hunters Point store when it opens. You can read those stories at these links - , , , , , .

>AB 183 is the latest of three legislative bills in California that beginning in 2008 have been designed to ban the sale of alcoholic beverages at self-service checkouts in grocery and other retail stores in the GOlden State. We've reported on and written extensively about the legislation, including a recent piece last week. See those stories at this link - .

[Editor's Note: Photo of Tim Mason courtesy Fresh & Easy Neighborhood Market.]

Saturday, August 20, 2011

'Son of Tesco Fresh & Easy Law': Self-Service Checkout Booze Ban Bill AB 183 Passes Out of California Senate Appropriations Committee; Headed For Senate Floor

News/Analysis: Tesco's Fresh & Easy in California

The California State Senate Appropriations Committee passed Assembly Bill 183 (AB 183), which if passed by both houses of the state legislature and signed by Governor Jerry Brown will ban sales of alcoholic beverages at self-service checkout stands in retail stores in the Golden State, by a six-to-one majority last week.

Following passage by the Appropriations Committee, AB 183, which we've nicknamed the "Son of Tesco Fresh & Easy Law," had its "second reading" on the floor of the California State Senate on Wednesday, August 17. When a bill passes out of committee to which it's been assigned in the California State Legislature, it is read on the floor for a second time.

The bill's passage in the Appropriations Committee is the legislation's last formal committee stop. The next step for AB 183 is for it to get what's called a "third reading," which has been scheduled for August 22.

In the "third reading" next week, AB 183 will be read on the Senate floor, then debated by members. Following the debate, a roll call vote is set to be taken.

Based on our ongoing reporting, we expect the bill to pass in the California State Senate, as we've noted previously in our coverage.

If as we expect it to AB 183 is passed following debate next week or later, it will then be sent back to the California State Assembly where the legislation authored by Assemblywoman Fiona Ma (Democrat-San Francisco) originated. The reason for this is because the bill was amended in the Senate (on June 22). Therefore under California Legislative rules AB 183 must be returned to the Assembly for a vote of "concurrence" on the amendment made by the California State Senate because the Assembly is the legislative body of origin.

AB 183 passed the full Assembly by a wide margin, as we've previously reported.

If the Assembly votes to agree on the Senate Amendment to AB 183, the bill will then be returned to the California State Senate for an up or down vote by members.

The amendment (here) in the Senate doesn't change the thrust of AB 183, which is to require a face-to-face clerk-to-customer transaction (hence full-service checkout) whenever alcoholic beverages are purchased. Therefore, based on our reporting we expect the Assembly to agree to the amendment or work out a compromise with the Senate.

We also expect this to be done soon because the legislative session is coming to a close soon.

If the bill passes, which in our analysis it will, it then goes to Governor Jerry Brown, who will decide whether to sign it into law or use his veto pen.

We've said the odds are in favor of the supporters of AB 183, which include Mother's Against Drunk Driving (MADD), the United Food & Commercial Workers (UFCW) union, numerous law enforcement agencies and others, that the Governor will sign the bill, which is apposed by the California Grocers Association, the California Retailers Association, the California Chamber of Commerce, Hispanic Chamber of Commerce and others.

In a recent story on AB 183 we offered odds, saying in our analysis it's a 70% chance Governor Brown, who's a Democrat, will sign AB 183, compared to a 30% chance he will veto the bill if it passes in the Senate and is sent to his desk for action.

Based on reporting and research since then, we are decreasing our odds slightly - from the 70% probability Brown will sign it, to 60% that he will.

The way it looks to us today - and things could change either way in the coming days - AB 183 will pass in the California State Senate and the Governor will sign the bill into law.

We asked the Governor's office this week if Brown planned on signing AB 183. A spokesperson told us the Governor has not made that decision yet, which is what we expected to hear since among other things AB 183 has yet to pass both legislative houses.

We do know though that opponents of the self-service checkout booze sales ban bill have at least to a limited degree had the ear of the Governor on the matter, the primary focus of their message and arguments being that it's anti-business  legislation coming at a time when California, which has the second-highest unemployment rate in the nation, is suffering economically.

Additionally, those oppossed to AB 183 becoming law in the Golden State are also reminding the Governor that food and grocery retailers, particularly chains including Tesco's Fresh & Easy Neighborhood Market, are one of the few industries at present creating  new jobs in California.

Although the California Grocer's Association is lobbying against AB 183, the only retailer-member of the trade organization which stands to be affected in a major way if AB 183 becomes law in the Golden State is Fresh & Easy Neighborhood Market, which offers self-service checkout only in its 127 stores in California. There are 176 Fresh & Easy markets. In addition to the 127 units in California, Tesco has 28 Fresh & Easy stores in metro Phoenix, Arizona and 21 units in metro Las Vegas, Nevada.

In contrasts, we haven't been able to find any of the grocery trade group's other members - which include most of the major national and regional grocery chains and independents with stores in California - that offer self-service checkout only. Instead, those grocers in California that offer self-service checkout do it as an option along with their full-service checkout option.

As such, all that would happen for these grocers is that customers would no longer be able to purchase alcoholic beverages using the self-checkout lanes in the stores. Instead they would have to go to the full-service lanes for those purchases.

But Tesco's Fresh & Easy, which as we've noted offers self-service checkout only in its stores, will likely have to add at least one full-service checkout lane in each of its stores in California is AB 183 becomes law.

Self-service checkouts like those used at Fresh & Easy Neighborhood Market lock-up whenever a customer scans a package, bottle or can of alcohol. When this happens the assistance of a store clerk is required in order for the transaction to be completed. The clerk generally asks the customer for their identification card (it's the same process as at full-service checkouts in that if a person looks younger than 30-years-old or so they are asked for identification). Once the customers legal age is verified, the store worker then punches in a code on the register and the customer is cleared to complete self-checking their purchases.

Based on the language in AB 183, at least from our reading and those of the Legislative Analyst's Office, this isn't a sufficient face-to-face interaction to allow the purchase of alcohol at the self-service checkouts. Instead the bill requires all transactions involving the sale of wine, beer and spirits in retail stores to be conducted at a full-service checkout, similar to existing California law for the sales of tobacco products and certain other items like glue, spray paint and a couple types of over-the-counter medications.

As a result, unless a loophole can be found by Tesco's Fresh & Easy, or it, the California Grocers Association and other opponents file a lawsuit, if AB 183 passes it appears the grocer will have to change its self-service checkout model for the stores in California to some form of hybrid, like adding one or two full-service checkouts, full/self-service checkout in order to be in compliance, which is why we first coined the "Tesco Fresh & Easy Law" nickname for the legislation back in 2008, when the first of what is now three bills to ban the sale of alcoholic beverages at self-service checkouts was launched in Sacramento. Since AB 183 is the third try, we call it the "Son of Tesco Fresh & Easy Law."

The two previous bills, AB 523 in 2008 and AB 1060 last year, failed to become law. But AB 183 at present is on the road to passage in the California State Senate, in our analysis. From there it will be up to Governor Brown, a Democrat, to make it law or to veto the bill, like Republican Governor Arnold Schwarzenegger did in 2010.

We will know soon because if AB 183 passes and is sent to Governor Brown he will have until the end of September to make the "Son of Tesco Fresh & Easy" law a reality or veto it. It's a 60% probability today the Governor will sign it if it passes in the senate. But Brown is known to go against type and odds. Therefore, our our probability analysis that he will sign AB 183 could change between today and the end of September. Stay tuned.

Follow the story at the links below - Legislation to ban sales of alcoholic beverages at self-service checkout stands in California retail stores: 2008-to-today

July 27, 2011: 'Son of Tesco Fresh & Easy Law' Moving Through State Senate: Will California Determine Fresh & Easy Neighborhood Market's Checkout Scheme?

June 4, 2011: 'Son of Tesco Fresh Easy Law': Self-Checkout Booze Ban Bill AB 183 Sails Through California State Assembly; State Senate Next Stop

May 11, 2011: Son of Tesco Fresh & Easy Law' - California Assembly Appropriations Committee Passes Self-Checkout Ban Bill AB 183 By 12-4 Margin

May 6, 2011: 'Son of Tesco Fresh & Easy Law': California State Assembly Appropriations Committee Hearing For AB 183 Cancelled

May 4, 2011: 'Son of Tesco Fresh & Easy Law': Strong Chance California Legislation to Prohibit Alcohol Sales at Self-Service Checkouts Could Pass This Year

September 30, 2010: Fresh & Easy Neighborhood Market Hopes Governor Scharzenegger Can Find His Veto Pen Before Midnight Tonight

September 28, 2010: Fresh & Easy Neighborhood Market Hoping Governor Schwarzenegger Prefers His Veto Pen When it Comes to AB 1060

September 25, 2010: Future of Fresh & Easy Neighborhood Market's Self-Service-Only Checkout in California Up to Governor Schwarzenegger

August 24, 2010: California State Senate Sends Bill to Governor That Could End Self-Service-Only Checkout at Fresh & Easy Neighborhood Market

August 15, 2010 piece : Bill to Ban Alcoholic Beverage Sales at Self-Service Checkouts Would End 'Self-Service Only' at California Fresh & Easy Neighborhood Market Stores

July 14, 2008: Breaking News & Analysis: CA Assemblyman Introduces 'Tesco Fresh & Easy Law' to Ban Stores With Self-Checkout-Only From Selling Alcoholic Beverages.

Thursday, August 11, 2011

The British Are Coming ... to Target: Chicago CityTarget to Include Pret A Manger Fresh-Prepared Foods Shop; Los Angeles, San Francisco and Seattle Likely


Fresh-prepared foods merchandising and retailing continues to get more interesting - and increasingly competitive - in the United States.

Today discount retailing giant Target Corp. announced it has inked a deal with the London, UK-based fresh-prepared foods retailer Pret A Manger to put one of its Pret shops in what will be one of Target's first four smaller-format (60,000-100,000 square-feet,) urban CityTarget stores - the store at the Sullivan Center in Chicago's Loop, which is set to open in July 2012. The Chicago CityTarget store will be about 100,000 square-feet.

Pret A Manger, which means "ready-to-eat" and has free-standing shops in New York City, Washington D.C. and Chicago in the U.S., along with in the UK and Hong Kong, prepares a variety of ready-to-eat  fresh foods daily in-store. Its offerings include sandwiches, salads, soups, sushi, meals, snacks, desserts and more. (See the menu here.)

San Francisco's Metreon Center, shown in the rendering above, is being completely remodeled to house the CityTarget store, which will take up the entire second floor of the center. The store, which will be about 100,000 square-feet, is set to open in mid-2012. The location is an excellent one geographically and demographically for a Pret A Manger shop. [Artist's rendering: Westfield Group.]

The other three CityTarget units, all on the west coast in downtown Los Angeles, San Francisco (in the Metreon Center in the South of Market District) and Seattle, are also set to open next year as well.

As we reported last year, Target also says it plans future CityTarget stores (10 total to start including the four above) in New York City, Boston, Miami, and Baltimore. [See - September 24, 2010: Target to Have 'P-fresh' Fresh Food & Grocery Markets in 850 Stores By 2011 End; First Smaller Urban Store Set For Seattle in 2012.]

All of the CityTarget stores will feature Target's "P-Fresh" food and grocery stores inside, which include an assortment of fresh produce, meats, perishables, frozen foods and packaged groceries.

"We believe Pret A Manger will help us provide guests in downtown Chicago with the exceptional, complete shopping experience they have come to expect from Target," Annette Miller, the retailer's senior vice president-grocery, said in making the announcement today. "Our Chicago CityTarget guests can pop in for a fresh sandwich or salad during their regular visits to our store for groceries or apartment essentials."

Target's announcement today about its partnership with the privately-held British fresh-prepared foods chain, which burger giant McDonald's once owned about a third of, was exclusive to the Chicago CityTarget store.

"We have no other plans in place today for adding Pret A Manger to other CityTarget stores, but we're excited for the potential for that over time," Miller said. "Pret A Manger doesn't have a presence on the West Coast today. That is one reason the partnership is just in the Chicago store."

However, earlier this year a good source told us Pret A Manger is looking to the West Coast, specifically San Francisco, Seattle and Los Angeles, three big cities with strong demographics that fit the retailer well (think demographics similar to those of Starbucks and Whole Foods Market) for its next strategic move.

The UK-based fresh-prepared foods retailer started out in the U.S. in 2000 in New York City, followed by launching in Washington D.C. (in 2009) and most recently (last year) in Chicago. There are currently 250 shops globally. Sales last year were about $530 million, according to Pret A Manager.

Therefore, based on the information we have, we expect to see what will be the store-within-a-store shops - the Pret A Manger in the Sullivan Center-Chicago CityTarget store will be about 2,500 square-feet - in the San Francisco, Los Angeles and Seattle CityTarget stores, if not right away when the units open next year, fairly soon after.

Soups, salads, sandwiches and drinks from Pret A Manger.

In our analysis the move is a smart one for both Target and Pret A Manager. It also could open the door for Target to add the fresh-prepared foods' shops in some of its Target discount stores where it's been adding the "P-Fresh" fresh food and grocery markets in west coast regions and neighborhoods that make sense, such as in parts of the San Francisco Bay Area, Southern California and metro and suburban Seattle, Washington.

Target is also opening a second store in San Francisco next year. That store will not be a CityTarget but instead an about 120,000 square-foot discount store. It will include a "P-Fresh" market inside. The location, in a small shopping center near the private, Jesuit-run University of San Francisco, has good demographics to support a Pret A Manger shop as well. The two stores will be Target's first in San Francisco.

Target has Starbucks units inside many of its stores. So in terms of demographics, one can look at the top-performing in-store Starbucks cafes and begin to get a good idea of which Target discount store locations might do well with Pret A Manger shops inside, should the partnership between the two retailers blossom beyond CityTarget.

Pret A Manger's prepared foods offerings fit well with the profile of the Target shopper, which is majority female, higher income as compared to Walmart shoppers, for example, and more upscale-oriented while still searching for value.

Therefore in our analysis this partnership has the potential to grow significantly. It gives target a high-quality and extensive fresh-prepared foods offering in its stores to go along with its "P-Fresh" markets while giving Pret A Manger a way to expand into new markets without having to acquire its own standalone shops, which can be an expensive proposition in places like San Francisco and Seattle.

This is a development worth watching closely, particularly since Target is adding "P-Fresh" units to hundreds of its about 1,762 U.S. discount stores (located in 49 states) each year.

Already, about half the units have the grocery markets inside. Over the next three years Target says it plans to have the fresh food and grocery offerings in up to 75% of its discount stores.

Having a fresh-prepared foods offering as a companion to "P-Fresh" in many of those stores has the potential to be a powerful one-two punch for Target, along with turning up the heat when it comes to fresh-prepared foods merchandising and retailing in the respective markets where it might add the Pret A Manger shops.

As a result, based on what we've learned from our sources, combined with what we learned earlier this year about Pret A Manger and its expansion desires and future plans, it's our analysis Target and Pret A Manger, although they plan to take the new partnership at a slow but steady pace, are already thinking far beyond the single store in Chicago, starting with the three CityTarget stores opening in Los Angeles, San Francisco and Seattle next year, and if all goes well looking far beyond that.

We could be seeing the makings of a very interesting Anglo-American food retailing partnership featuring London-based Pret A Manger ready-to-eat fresh food shops located inside selected Target stores. The debut will come in July of next year when the first one opens in the new smaller-format urban CityTarget store in Chicago.

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