Tuesday, November 1, 2011
Analysis: Tesco Opens First 'Fresh & Easy Express' Store Tomorrow in Los Angeles ... So What ... ?
First in a series on 'Fresh & Easy Express'
In January of this year we broke the news that Tesco's Fresh & Easy Neighborhood Market was developing Fresh & Easy Express, a smaller, edited version - about 3,000 square-feet of selling space in 4,000 square-feet of interior space - of its Fresh & Easy fresh food and grocery markets, which average about 10,000 square-feet (selling space).
[Read our January 23, 2011 story here: Tesco's Fresh & Easy Neighborhood Market Looking For Locations For New, Smaller-Format 4,000-to-5,000 Square-Foot Stores.]
We also correctly reported in the January story that Fresh & Easy Neighborhood Market was looking for locations for the stores, and was planning on opening one, and possibly more than one, of the units this year
The Fresh & Easy Express stores will offer most everything - dry grocery, packaged baked goods, frozen foods, perishables, fresh meats, produce, ready-to-eat and ready-to-heat fresh-prepared foods - the Tesco-owned grocery chain offers in its 183 standard-version Fresh & Easy Neighborhood Market stores, but in an edited departmental fashion, with a limited product assortment.
Late this summer, about seven months after we broke the Fresh & Easy Express news, Fresh & Easy's corporate spokesperson confirmed our January report, publicly announcing the grocer's plans to open Fresh & Easy Express stores - stores with the format we reported they would have in our January story.
Not long before Tesco's Fresh & Easy announced the 'Express' store initiative this summer, we reported and published a follow up piece to our January 23 story, in which we identified what Fresh & Easy's executive management team thought at the time would be the first Fresh & Easy Express store it would open this year. That store being in the San Pedro area of Los Angeles, California.
[You can read our July 30, 2011 story here: First 4,000 Sq. Ft. Fresh & Easy Neighborhood Market 'Express' Store Set to Open in Los Angeles' San Pedro Community This Year.]
Since we published our story, Tesco's Fresh & Easy has had problems and delays in obtaining certain approvals from government officials for the San Pedro-Los Angeles 'Express' unit, which has set back the store's completion (remodeling of a vacant building) and opening date timeline. Among the problems has been an objection by a group of neighborhood residents to the grocer's application to sell alcoholic beverages at the location.
There are currently seven planned Fresh & Easy Express mini-markets, all in Southern California, set for openings beginning tomorrow through February-March 2012.
The locations of the seven stores are: Los Angeles - one unit near the University of South California campus, the San Pedro unit and the very-soon-to-be opened store at La Cienega Boulevard and 18th Street. Los Angeles County - one store each in Burbank and Hermosa Beach. Orange County - one mini-market in Seal Beach and a second unit in Laguna Niguel.
Tomorrow Tesco's Fresh & Easy is opening the La Cienega Boulevard and 18th Street store in Los Angeles as its first Fresh & Easy Express market.
We reported in this August 1, 2011 story - Six Fresh & Easy Neighborhood Market Stores in Southern California Being Readied For Openings - that Tesco's Fresh & Easy was preparing for an October or November opening for the store at La Cienega and 18th in Los Angeles.
The Los Angeles Fresh & Easy Express store opening on Wednesday, November 2 has about 3,000 square-feet of selling space inside an interior space of about 4,000 square-feet, which is the size we reported in January the 'Express' format stores would be.
Tesco has billed Fresh & Easy Express as a test.
However, Tesco CEO Philip Clarke and Fresh & Easy Neighborhood Market CEO Tim Mason, who is also Tesco's deputy CEO and chief marketing officer reporting to Clarke, have their respective fingers crossed that the 'Express' format stores - which take their inspiration from the existing Fresh & Easy grocery stores and the retailer's Tesco Express convenience stores in the United Kingdom - will not only do well but become a hit because they would like to have the micro-format option, which offers certain economies of scale on the expense side of the balance sheet, available to them as they work to grow Fresh & Easy's store-count from the current 183 units to 300 stores, a number they want to achieve by February 2013, but which based on an historical analysis model we've developed vis-a-vis Fresh & Easy we see them falling short of doing.
According to Clarke, Tesco needs to have about 300 Fresh & Easy stores open in order to break-even by the end of the United Kingdom-based retailer's 2012/12 fiscal year, which he says the El Segundo, California-based grocery chain will do. The end of the 2012/12 fiscal year is just 16 months away.
For all real and practical purposes, Tesco has until the day after Christmas 2012 to achieve break-even with Fresh & Easy. That's 13 months from today. The month of January 2013 and three weeks in February aren't going to be relevant in the bigger picture, terms of achieving break-even.
Tesco lost $113 million on Fresh & Easy in the first half of its 2011/12 fiscal year, which ended August 27, 2011. That's a 21% improvement over the same period for the previous fiscal year. Tesco lost $151 million on Fresh & Easy Neighborhood Market in its 2010/11 fiscal half-year, and about $300 million for the full fiscal year, which ended February 27, 2011.
However, there's no guarantee the 21%-reduction in loss for the half-year ended August 27, 2011 is a trend.
We will be writing more about Fresh & Easy Express later this week and into next week. So for now we aren't going to get into extensive analysis on the format and its potential.
However, we don't believe the micro-format 'Express' stores or the format itself is even close to being a killer food and grocery retailing application for Tesco and its El Segundo, California-based Fresh & Easy Neighborhood Market chain.
We also believe that if the stores do on an operational basis what Fresh & Easy's CEO,Tim Mason, and the corporate spokesperson have said they will - which is, on the labor side, to employ the same number of workers (25-30) in the 3,000 square-foot stores as they do in the 10,000 square-foot stores, working the same number of average hours - and on the merchandising side, edit the selection and reduce the SKU-count considerably (Fresh & Easy stores offer 5,000-5,500 SKUs, which isn't many) - offering about 2,500-2,800 SKUs, like a good source told us earlier this year the 'Express' stores will do, that the economics of the micro-small-box stores will be skewed in a failure direction from the outset, regardless of such key operational variables like store location, pricing and promotion.
The solution: Fewer employees and employee labor hours per 'Express' store, and far more SKUs.
A store has to have considerably more turnover if it offers say 2,500 SKUs, compared to 5,000, for example.
The standard-version Fresh & Easy grocery markets suffer from too small average market sizes. Obtaining adequate market basket sizes is even more difficult to achieve in 3,000 square-feet than it is to do in 10,000 square-feet.
We've worked on small-box stores in the Western U.S. and extensively researched small-box food and grocery retailing economics (as it pertains to the industry in the U.S.) here at Fresh & Easy Buzz. Bottom line: It's a challenge for a chain to make money with 3,000 square-foot grocery stores.
Traditional convenience stores, which average far less than 3,000 square-feet in size in the U.S., can make money because they operate on much higher gross margins (selling products for considerably higher retail prices), which shoppers in the main accept as a trade off for what they perceive as "convenience," than grocery stores and supermarkets do.
The C-stores also have far lower operational expenses than grocery stores do, including in the area of employee labor.
But Tesco can't adopt the higher margin/higher-retail price model traditional C-stores use because Fresh & Easy Express is a smaller, edited version of its Fresh & Easy grocery stores. The name is on the store - Fresh & Easy Express - and the private brand products sold inside are the same as those in the 10,000 square-foot markets.
Therefore, were Tesco to try to offer significantly higher prices at the 'Express' stores, it wouldn't fly because consumers will compare the Fresh & Easy Express stores to the standard-version Fresh & Easy stores rather than to a traditional C-store, like 7 Eleven or Circle K, for example. The result: Damage to the Fresh & Easy brand.
We think it's a good idea for Tesco to experiment with the Fresh & Easy Express format though. But we would offer many more SKUs - we could easily get all 5,000-5,500 of the SKUs that are in the Fresh & Easy grocery markets in the 3,000 'Express' stores, for example, and it would look good, were we designing and merchandising the interior of the 'Express' format from scratch.
We'll be writing more about the Fresh & Easy Express format and stores in the coming days. Stay tuned.