Aldi USA, the Fastest-Growing Small-Format Grocer in the U.S. Promotes Everything But the Kitchen Sink (and Maybe That's Next) In its Weekly Store Ads

Despite what you may have heard, Tesco's Fresh & Easy Neighborhood Market isn't the fastest growing, and its far from the biggest, small-format, convenience-oriented discount grocery store chain in the United States.

That honor goes to Aldi USA, the U.S. division of German-based retailer Aldi International, which like Tesco PLC has food and grocery stores throughout the world.

Aldi USA, which already has over 850 small-format, no frills (about 13,000 -to- 15,000 square foot) discount grocery stores stretching from the Midwestern USA, to the Mid-Atlantic and Eastern portion of the country, is adding about 100 new grocery stores each year in the U.S. for the next five years.

If Aldi USA stays on that course, the grocer, which already is the 24th-largest in the U.S. based on annual gross sales, will have somewhere in the neighborhood of 1,400 stores in America by 2013.

Aldi in America

Aldi USA, which opened its first U.S. grocery store in 1976, operates its stores under the philosophy of less-is-more.

It's small-format, no frills discount grocery stores average no bigger than 15,000 square feet and look like a slightly modern version of America's 1970's-era neighborhood grocery store.

The grocery markets carry about 1,300 of the most frequently purchased food and grocery items in the U.S., along with a limited selection of specialty items and various non-foods products.

At least 80% of the grocery chain's food and grocery items are under its own private or store brand labels. These store brand products range from basic dry grocery, refrigerated, frozen and fresh products, to specialty and ethnic foods' items.

The small-format, no frills discount grocery chain sells high quality fresh produce and meats at cheap prices, along with its limited assortment grocery and non-foods offerings.

The stores, similar to Tesco's Fresh & Easy Neighborhood Market in design, are essentially shrunk-down versions of a typical American supermarket.

However, unlike Tesco's Fresh & Easy, Aldi USA grocery stores have a much more specifically-positioned merchandising philosophy and format: basic groceries with some specialty items tossed in at the cheapest prices possible, along with a variety of general consumer products advertised each week in-store and in the grocer's weekly advertising circular.

Aldi USA's eclectic weekly promotions

Aldi USA does lots of in-and-out promoting of everything from major national brand groceries, which they don't carry everyday, to gourmet foods on occasion like "Whole Lobster for the best price in the U.S." and numerous ethnic foods items, usually tied-in with major events like Chinese New Years for Asian foods and the like.

But even more interesting, Aldi tends to promote everything--food and grocery products, furniture, computers, consumer electronics, flowers and plants, garden supplies, clothing and more--under the sun except the kitchen sink (which we bet is on the way) in its weekly advertising circular. These non-food durable and consumer products are promoted and sold on an in-and-out basis.

To say the ads are eclectic could be the understatement of the decade.

For example, take a look here at Aldi USA's weekly ad which breaks today, Sunday, May 4.

Aldi is promoting the portable GPS navigation system pictured above in its weekly ad circular this week for $189.

Sharing space in the current advertising circular with Pillsbury brand refrigerated biscuits, Klondike ice cream bars, fresh peanuts in the shell, fruit juices and frozen pizza, is an electronic video picture frame, a portable GPS navigation system for $189, an under-the-counter AM/FM kitchen radio, numerous gardening supplies for mom for Mother's Day next weekend, cosmetic items for mom, summer dresses for toddlers, and an eclectic assortment of other food and non-food items.

We forgot to mention the USDA Choice Bacon Wrapped Filet Mignon for only $1.99. And...the Vanderwall Bombe Accent Chest furniture piece for $99.99.

Did we say Aldi USA's weekly ads are eclectic ?

They work too. Aldi USA is growing its store-count so fast because the small-format, no frills discount grocery stores are super-popular and successful in the Midwest, Mid-Atlantic and Eastern regions of the USA.

Aldi's aggressive USA growth program

As part of its 100 new stores per-year growth program, Aldi also is moving into new states and further into regions in those states it's already in. For example, the grocer is making a big push into Florida, where it sees lots of opportunity for its brand of grocery retailing.

The no frills, discount small-format grocery chain also is moving into more regions in the eastern U.S., such as New York state and Pennsylvania, as well as filling out with more stores in those places where it already operates numerous grocery markets.

Aldi USA's focus in the Midwest is similar. The grocer is adding more stores in the regions where it already operates to create stronger critical mass and retail brand recognition, while at the same time moving into new, nearby regions where its opening its first stores.

More on Aldi's weekly ads

Aldi's weekly ads are like the one for this week described above each and every week: A mix of store brand grocery products, national brand products, non-foods items, electronics, furniture, clothing, and many other surprises.

For example, take a look here at Aldi's advertising circular for next week, the week of May 11.

The non-foods theme for next week appears to be automobile care. There's a two-ton hydraulic car jack for only $17.99, a "car creeper," those things used to get under the car to change the oil, for $14.99, and a couple more interesting car-related items which you will have to look and see for yourselves.

Most of the food items in the May 11 ad circular are national brands, rather than varieties of Aldi's various store brands, this time around. There's Tyson brand chicken products, Angel brand Soft bathroom tissue, Nestle Juicy Juice fruit juices, Kellogg's and Quaker snack items and a number of other branded offerings.

Aldi USA posts these weekly advertising circulars on its website at least one week in advance of the ad breaking, and it stays on the site until it ends. There's also a function on the website where people can type in their email address so they can receive the weekly ad circulars right in their email box prior to the ad's start-date.

The Aldi ad circulars (printed copies) also are mass mailed out to residents' homes and available in the stores.

Tesco's Fresh & Easy Neighborhood Market also posts its advertising circulars on its website. However, it's ads run for a three-week period on the website rather than weekly like Aldi's do

Additionally, although we searched for it, we can't seem to find a function on the Fresh & Easy website in which a customer or potential customer can put in their email address and receive the online advertising circular in their email box like one can with Aldi. Adding this function is cheap to do, and Fresh & Easy is missing the boat by not having such a simple yet powerful tool on its website. [If there is such a feature, and we missed it, it means it's hard to find because we searched all over the site for it.]

Lastly, no place on the Fresh & Easy website's home page does it tell you where you can specifically find the advertising circular. Rather, a user has to guess.

Instead of making you guess, we will tell you where it is: the advertising circular can be found by clicking on the link titled "Fresh & Easy Ideas" in the left-hand column on the home page. It is behind that link where you will find the Fresh & Easy promotional advertising circular.

Why not a link right on the website's home page that says: "Click here for Fresh & Easy's advertising circular/specials?" We think such a simple link would not only be fresh--but EASY as well. Doing so also will result in many more sets of eyeballs reading the Fresh & Easy advertising circular on the website, which we would hope if the retailer's goal.

Learning form Aldi USA's website

Tesco's Fresh & Easy could pick up some general marketing tips, as well as communications quality and ease of use tips, from viewing Aldi USA's website.

For example, Fresh & Easy is still using the exact same website it had set up before it even opened its first store in November, 2007.

The website is really a start-up site in terms of how it's set up rather than one for a grocery chain with 61 stores and about 90 more on the way before the end of the year.

For example, take a look at how the store listing link is set up on the Fresh & Easy website. If a user wants to see where the stores are, he or she has to click on maps, and go through a cumbersome process.

Why not, like nearly every other grocery chain and independent grocer website in the U.S. has, just put a simple list of where the stores are like this one. Fresh & Easy could keep the map function if it likes it, but add a simple store list for quick viewing along with it at least.

There is a zip code box on the Fresh & Easy website, where a user can type in his or her zip code and get a list of stores nearest them. This is a good feature. However, adding a simple store list, and updating it regularly, would make good sense in our analysis.

Food retailer websites are a marketing tool; an extension of the brick and mortar storefront, as well as being a corporate communications and informational tool. As such, they need to look clean, be simple to use, and provide as much information to the user as possible with the least amount of effort.

Fresh & Easy's website has some good features. However, it's overall look, usability and lack of features most other supermarket websites have, just screams "We haven't taken the time to modify the site since we opened our first stores last November." Marketing after all is everything a retailer does--including its website.

Is Aldi USA looking westward?

Meanwhile, there's been some talk since late last year that Aldi USA might start to look west in the USA for some of its small-format, no frills discount grocery stores.

Aldi International already has a western presence in part; the same family that controls the majority of Aldi International in Germany also is the 100% owner of Southern California-based specialty grocery chain Trader Joe's, another small-format success story.

Since the Aldi USA discount format and the Trader Joe's specialty grocery format are different enough that they wouldn't cannibalize each other--many Aldi and Trader Joe's stores exist close by each other in the East, Mid-Atlantic and Midwest already--Aldi USA executives have been exploring coming west with the small-format, no frills discount grocery stores, although it isn't a top priority at present.

The kitchen sink

Meanwhile, we just know one of these weeks we're going to find an Aldi USA weekly advertising circular in our email box that has, along with its normal eclectic mix of food, grocery, nonfood and consumer products...a kitchen sink advertised in it at a bargain price.

Resources at a glance:

Aldi USA's May 4, 2008 weekly advertisement.

Aldi USA's upcoming May 11, 2008 weekly advertisement.

Fresh & Easy Neighborhood Market's current (April 23-May 13, 2008) advertising circular.

Tesco PLC Chief Sir Terry Leahy Discusses Fresh & Easy USA in Video Interview: View it Here

In a four -to- five minute webcast video interview this morning, Tesco PLC CEO Sir Terry Leahy discussed and defended the company's Fresh & Easy Neighborhood Market USA small-format, convenience-oriented basic grocery and fresh foods store venture, as part of today's reporting of its annual sales and profits.

In the webcast video, A gentleman asks Tesco CEO Leahy questions about Fresh & Easy USA, which he answers.

Among the key points Sir Terry makes in the webcast video are:

>Tesco still plans to have about 200 stores open and operating by the end of the next fiscal year, including its expansion into the Northern California regions of Sacramento and the San Francisco Bay Area.

>Sir Terry says U.S. customers "love" the Fresh & Easy stores and the stores offerings across the board.

>CEO Leahy says Fresh & Easy has received "the best" consumer feedback of any international venture the retailer has launched to date.

>He says "sales are ahead of budget" and that "store growth is progressive, week after week. I couldn't be more pleased with the reception to Fresh & Easy," he added.

>Sir Terry says Tesco is not rethinking the Fresh & Easy business model in any way and that he "couldn't be more pleased with the offering."

>Leahy adds that Tesco is "only 167 days into it" (since the first stores opened) and that the retailer "has more to do, more to learn."

>Sir Terry says Fresh & Easy's rapid new store opening activity would begin again in July after the April, May and June three month pause or hiatus, which he states was always planned.

CEO Leahy says in the webcast video he believes there are some people in the U.S. who have a vested interest in seeing Tesco's Fresh & Easy venture fail, and that's the reason for much of the negative publicity about the venture.

Further, Leahy says "any seasoned observer knows it takes time" for a new venture to succeed.

View the four -to- five minute webcast video of Tesco CEO Sir Terry Leahy being interviewed by a gentleman who asks him questions here.

Fresh & Easy Buzz Analysis: Tesco PLC on Fresh & Easy Neigborhood Market USA's Sales and Operations to Date

Fresh & Easy Buzz Editor's Note: Below is the text portion (in italics) about Fresh & Easy Neighborhood Market USA from Tesco PLC's press release issued today on its annual corporate sales and profits.

In its full press release, which you can view here, Tesco breaks out sales and profit performance for its international operations in the UK, Asia and elsewhere. However, the retailer doesn't break out the sales and profit figures for Fresh & Easy USA.

However, Tesco PLC CEO Sir Terry Leah said today the U.S. operations will lose about $200 million in its first full-year of operation. Additionally, as you can see in the very last paragraph below, Tesco says beginning in September, 2008 it will start breaking out Fresh & Easy USA sales like it does with its retail operations throughout the globe.

From today's Tesco PLC press release on Fresh & Easy USA:

United States. We are very encouraged by the start Fresh & Easy has made. The first stores opened only in November and we now have over 60 trading. Whilst it is still early days, the response of customers to our offer has surpassed our expectations – with our research regularly confirming that they like the quality and freshness of our ranges, as well as the prices and the convenient locations of the stores.

Sales are ahead of budget and sales densities are already higher than the U.S. supermarket industry average, with our best stores exceeding $20 per square foot per week. We are seeing strong growth in the early stores as we step up, as planned, our marketing programmes and as we build awareness of the brand. This is also reflected in the strong sales performance of recent openings in all of our markets in Southern California, Nevada and Arizona. Fresh foods and own brand products have sold particularly well, confirming that the core of our offer has already gained acceptance with customers.

Progress with real estate has been good and we have secured enough sites for our immediate needs – although the deteriorating property market, particularly in Arizona and Nevada, will mean that some of the third-party developments in which we had planned to open prototype stores later this year, will now be deferred. Nevertheless, we still expect to open around 150 new stores this year.

Our Riverside distribution centre (DC) and kitchen operation is gearing up well as volumes rise. As we announced last November, we have taken the necessary steps to secure the site and begin the process of obtaining the necessary permits to launch operations of our second DC in Northern California in due course. We expect a proportion of these costs will be incurred in the current year.

Last April, with our Preliminary Results, we said that costs of recruitment and training of staff for the stores, combined with the other pre-launch costs and initial trading losses, would involve estimated US start-up costs of around £65m in the financial year. We have delivered on this guidance – trading losses were £62m. We expect losses to rise this year to around £100m and then reduce thereafter as early stores begin to mature and we see increased overhead recovery from higher volumes.

US segmental reporting of sales and trading results within International will begin with our Interim Results in September.

Fresh & Easy Buzz Analysis

First, we want to repeat two things we regularly discuss here in Fresh & Easy Buzz.

Number one, is that Tesco has launched one of the most ambitious new store opening blitzes in U.S. grocery retailing history with its Fresh & Easy grocery store venture in the Western USA. The retailer has opened 61 of its small-format, basic grocery and fresh foods convenience-oriented grocery markets in the U.S. states of California (Southern California only to date), Arizona and Nevada in about 170 days.

Second, like we often say here, those who rule out Tesco in general and its Fresh & Easy grocery store venture in the USA specifically, do so at their own peril. Tesco, the third largest retailer in the world after Wal-Mart and France's Carrefour, is an innovative, determined and nimble retailer. Further, as we write frequently--and as Tesco CEO Sir Terry Leahy stated today--Fresh & Easy isn't just a test for the retailer in the USA--it's a full-fledged venture.

We now offer some brief analysis on the key points in Tesco's text from its press release regarding the retailer's Fresh & Easy Neighborhood Market operations in the USA thus far:

Fresh & Easy customer response

Tesco says in its pres release: "The response of customers to our offer has surpassed our expectations--with our research regularly confirming that they like the quality and freshness of our ranges, as well as the prices and the convenient locations of the stores."

We won't argue that point with Tesco, as its their view and opinion. However, we will offer five very key aspects about the Fresh & Easy format, operations and merchandising practices consumers in high numbers have told us they dislike. These aspects of Fresh & Easy are preventing it from gaining repeat and primary customers, based on our research and analsysis:

>The self-service checkout process in which rather than having a store clerk check a customers grocery orders they have to do it themselves, along with bagging their own groceries.

>The lack of selection of a number of key national grocery product brands popular in the Western USA in the stores. What we call a better tailored Western USA product mix.

>The overall lack of a sense of place the stores have. This is a key reason why most Fresh & Easy customers are secondary and tertiary shoppers to date rather than primary shoppers, which the grocery chain needs in order to meet its sales objectives.

>The offering of strictly pre-packaged produce. Fresh & Easy shoppers tell us they would shop the stores much more often and buy much more produce if the majority of the offering was in bulk like 99.5% of American grocery stores offer, rather than pre-packaged like Fresh & Easy merchandises it.

Pre-packaged produce is fine for a specialty grocery chain like Trader Joe's because its not looking the be the primary "neighborhood grocer" like Fresh & Easy is. Western USA consumers love a wide variety of fresh, bulk produce even more so than U.S. consumers in general, and aren't likely to ever make a grocery store which doesn't offer it their primary shopping venue.

>Not enough localization of the stores to the neighborhoods they are located in. For example, the Fresh & Easy market in low-income, primarily African American Compton, California looks identical to the store not far from the Las Vegas, Nevada gambling strip and the store in majority white, suburban, middle class Chandler, Arizona.

We aren't suggesting Tesco should have a different style and design of store for each different neighborhood. Far from it. There is a certain egalitarianism in the stores which is a good thing. What we are suggesting though is the the stores need to better reflect the history, culture, characteristics and demographics of the neighborhoods they're located in. This can easily be accomplished by merely taking the basic Fresh & Easy format and store design, and adding local touches on top of that. That's the definition of localization in retailing.

For example, adding minor elements (on top of the basic format and design) that reflect the Compton community and the neighborhood the store is in, for example. Adding some simple, Southwestern elements which reflect the Phoenix, Arizona/East Valley region where the majority of the Arizona Fresh & Easy stores are located, would be a good idea. The same for the Nevada stores, which are all located in the Las Vegas, Nevada Metropolitan region. Give them some localization--let local consumers know the stores are part of the community rather than a cookie-cutter chain.

The lack of enough local (and local to the region) food, grocery and beverage products in the stores also is a problem. Were Fresh & Easy to increase the amounts of local food and grocery items in each of the three regions in which its 61 stores are located, not only would the grocer garner tons of positive publicity, but even more importantly it would find it's stores gaining more primary shoppers, more new customers, and happier existing ones. Like Tesco knows better than nearly any retailer in the UK, local is hot. It's also hot in the USA--especially in California, where its a red hot concept.

Store sales

In its report and press release today, Tesco says: "Sales are ahead of budget and sales densities are already higher than the U.S. supermarket industry average, with our best stores exceeding $20 per square foot per week."

Lets analyze that sentence. "Sales are ahead of budget." That's meaningless to us since as any business person knows sales budget's are dynamic. For example, let just suppose Tesco's Fresh & Easy had an original sales budget of overall sales for this point in the chain's time of $200,000 per store, per week. However, like all start ups do, it frequently revises that sales budget, some times up, but mostly down with a start up.

Therefore, lets just say that instead of today's sales budget being $200,000 per store, per week, which it might have been for a long time; it gets revised downward to say $120,000 per store, per week. Hypothetically of course. As a result, if the stores are performing slightly above that amount, they are therefore "exceeding" the sales budget. We aren't making an claims in our analysis--rather just making the point that from a sales performance analysis that statement in meaningless.

Further, do you know of a retailer that, if it had 61 stores open for less than five months, and those stores were exceeding the retailer's sales targets already, they wouldn't want to hang a bright lantern on that fact and release the numbers. We don't.

We should note, we don't expect Fresh & Easy's overall sales to exceed targets at this point. If they are, it's a major achievement which should be announced in bold, banner headlines in a press release, along with the numbers, by Tesco.

Best stores exceeding $20 per square foot per week. Tesco's Fresh & Easy grocery stores average 10,000 -to- 13,000 square feet in size. That means these "best stores" are doing at least $200,000 per week in gross sales.

We have estimated here based on our sources that overall, all of the Fresh & Easy stores open to date (sales combined together) are doing about 60,000 -to- $100,000 in per-store, per-week gross sales.

We've also said in conjunction with publishing our estimates that we know some stores are doing above the $100,000 number. For example, when we first published our sales estimate a couple months ago, we mentioned based on our source information that the store in Los Angeles' Glassell Park neighborhood was doing well above $100,000 per week in gross sales.

Therefore we have no dispute with Tesco's claim that some of its best stores are doing $20 per square foot per week in gross sales. However, some could mean two, four, ten or more stores. It's just meaningless data for an analyst.

Based on our sources however, we don't believe there are many of the stores doing $200,000 or more per week in sales. It's a strong sign for Fresh & Easy though if just two or three are doing those numbers.

Additionally, we are open to the suggestion that since we first published our $60,000 -to- $100,000 overall sales estimate, that number range may has gone up a bit. Although to date our sources tell us if it hasn't overall. And if so, not by too much. But we are open.

Remember, the key is overall sales of the 61 stores. All it takes is 15 or so to bring that number down in major way. And, we know there are some Fresh & Easy stores in locations that are underperforming seriously. In those cases mere location may be the key reason. In at least three cases of such stores we are aware of, those stores are located in former supermarket or drug store buildings which the previous retailers closed.

Store brand products

Unlike some analysts, we believe Tesco's Fresh & Easy store brand offering is good in the main. We think some of the packaging needs adjusting--bolder graphics here, better lettering there--but overall the line is pretty strong.

We do agree the store brand needs marketing and promotion behind it. And it appears to us Fresh & Easy has plans to do that. The brand name, Fresh & Easy, lends itself to lots of creative brand marketing schemes. We can think of many but will leave that to Tesco to create.

We do believe however that the current store brand/national grocery brand mix in the stores is skewed too high in the Fresh & Easy brand direction. We estimate it's about a 65% -35% or 60%-40% store brand/national brand mix ratio (Fresh & Easy brand being the highest of the two). We think an at least 50%-50% store-to-national brand ratio as we've written about in the past, is needed. Remember, Fresh & Easy isn't Trader Joe's, which is a specialty grocer. Rather, Fresh & Easy's positioning is to be a grocery store "for everybody," a neighborhood market which requires lots of primary shoppers to achieve its mission and sales goals.

The $200 million loss

Lastly, a number of analysts will probably make a big deal out of Tesco taking a $200 million loss in its first year of operations of Fresh & Easy USA.

First, we are surprised at the low number, if the true loss really ends up being only $200 million.

After all, in our experience, for a grocery retailing start up, especially one headquartered in California which is America's most expensive state to do business in, losing $200 million in the first year of operations is chicken feed. Additionally, even the concept of a grocery retailing start up is rare in the U.S. Part of the reason that's the case is because the start up costs are so high.

We think this lower than anticipated (at least by us) loss (if it stays at $200 million) is in part the result of the excellent retail commercial real estate deals Tesco has cut in Southern California, Arizona and Nevada. Most of the stores built to date have gone into empty retail buildings, many of which used to house supermarkets like Albertsons and Ralphs or drug stores like Rite-Aid.

Tesco has in many cases obtained these buildings relatively cheaply and with excellent leases do to the economic downturn in the commercial real estate market in the U.S. Further, the cost of gutting the interior of these buildings and turning them into a Fresh & Easy grocery store is significantly cheaper than building a new store from the ground up. The basic building's shell, electrical, piping and other infrastructure is already there. The savings is huge.

Of course, despite the cost savings of this building reuse strategy, the jury is still out on many of these locations because in part one of the reasons the previous retail tenants closed their grocery and drug stores at the locations was store underperformance in that particular spot.

Conclusion

Tesco offered a few good specifics on its Fresh & Easy Neighborhood Market USA grocery store retailing venture today in its report on annual corporate sales and profits.

For example, we think it was smart of the retailer to announce the $200 million annual loss estimate for Fresh & Easy's first year of operations.

Why? For three reasons: it shows a willingness to be more open about the venture by Tesco, it gives investors and others a "real" number to work with, and it takes what would have been lots of speculation in the press about what the Fresh & Easy loss will be essentially off the table. Of course, there still will be some analysis about whether or not the loss will really be only $200 million. But with Tesco announcing its own number, such speculation will be minimal.

In terms of saying: "Some of our stores are doing over $20 per square foot per store in sales, exceeding the U.S. supermarket industry average," it's already getting Tesco some good PR in the popular UK and U.S. business press. Reporters and writers without much experience in the supermarket industry don't realize this is essentially meaningless data (no disrespect to Tesco, it's good general PR) because it could mean hypothetically out of 61 stores you have 10 doing 200,000 per week in sales, 40 doing less than $100,000 in weekly sales, and 11 that are doing $35,000 in weekly sales.

In other words, the retail grocery business is all about store location from a weekly sales standpoint, and from a sales data standpoint it's all about the aggregation of the weekly gross sales of all those 61 stores into the whole.

A little real life analogy: In the early late 1980's, Safeway Stores, Inc. had a store in San Francisco, California that was doing $850,000 per week in gross sales in only about 35,000 -to- 40,000 square feet. They had another store, a 20 minute drive away, that was doing about $200,000 per week in about 30,000 square feet. In other words, on store dramatically exceeded the U.S. supermarket industry average, the other was dramatically below the average.

The chain had about 12 supermarkets in San Francisco at the time. The city's population was about 700,000.

Safeway corporate didn't judge the San Francisco region district manager on the phenomenal performance of that standout store when it came to his job evaluation and bonus potential; they rated him on the performance of all 12 stores in the city.

In other words, a few exceptions to the norm don't matter--it's the aggregate. That's one reason analysts look at what's called same store sales when evaluating supermarket industry company performance.

We won't be able to see same store sales when Tesco breaks out its Fresh & Easy USA sales numbers in six months in September, 2008 as it says it will in the press release, since there were no stores open last year to compare with this year, or the November, 2007 start to September, 2008 period.

That's fine though. What we will be able to see and analyize will be sales numbers for stores open anywhere from 11 months, to some that will only have been open a week or so before the sales figures are released. Just like the Tesco international sales breakout for the UK, Asia and elsewhere, this will give investors and others a much clearer picture of Fresh & Easy than is currently available.

It also will be good for Fresh & Easy senior management, who after September won't have to deal with sales estimates likes ours and those from others.

That same mangement team also has six months to improve sales performance by making and implementing key format, operations and merchandising changes, like those we've been suggesting in Fresh & Easy Buzz for months and others, and launching what we've suggested is a much needed marketing campaign, which needs to include more than public relations-oriented marketing, but real advertising such a radio and perhaps some print and billboard advertising in support of the radio blitz.

[We hear from our sources that with the hiring of its new PR firm, which we reported here, the Fresh & Easy team plans to focus almost exclusively on "free media" rather than include advertising. We think that's a mistake.]

The good news for Fresh & Easy is that parent company Tesco PLC banged out some great annual sales and profit numbers today, sending its stock price north by a number of points and giving Tesco some well-earned props from stock analysts and the media (including us by the way) on its annual performace.

Every dollar that Tesco stock goes up by in the next few days means more capital available for Fresh & Easy USA to make and implement those changes we mentioned above--and to create and launch that marketing campaign. If done well, these changes and marketing activities could result in some strong numbers when Tesco does break out Fresh & Easy USA's sales and profit numbers this coming September.

By the way, that Safeway San Francisco region district manager mentioned in the analogy above was finally able to convince his bosses at corporate headquarters to close that San Francisco store. The chain also has opened a number of new supermarkets in the city since the early 1990's.

Southern California Supermarket Industry Produce Pros Say They're Not Seeing Any 'Fresh & Easy Effect' on Sales in Their Stores

Yesterday in this piece about Arizona-based family-owned supermarket chain Bashas', we wrote that recent conversations we've had with two of the grocery chain's executives--along with numerous other conversations we've had with various members of the Arizona Retail Association, which is the state's trade group for retail grocers--local food brokers and manufacturers representatives, all turned up the same answer: That none of these local grocery industry players and observers have yet to notice what we call a "Fresh & Easy Effect" from the 17 Fresh & Easy Neighborhood Market grocery stores Tesco currently is operating in the state's Phoenix Metropolitan region.

In other words, the Bashas' executives told us they aren't seeing any sales diminution in the chain's stores since Tesco's Fresh & Easy Neighborhood Market entered the market in December, 2007, to the present.. Further, the numerous other local industry sources we've talked to, as mentioned above, have echoed the same observation independently.

And that's not all: In this March 17 piece titled: (Scroll down a little from the top at the link), "Stater Bros. CEO Brown says the grocer isn't feeling a 'Fresh & Easy Effect'," we reported that Jack Brown, the CEO of Southern California's Inland Empire-based Stater Bros. Markets, said in a speech at a grocery industry function that his chain, which is the market share leader in the region, hasn't seen any competitive pressures or loss in sales from the numerous Tesco Fresh & Easy small-format, basic grocery and fresh foods markets which have opened in the market region in the last five months.

Yesterday, a panel comprised of four Southern California-based senior-level supermarket chain produce executives essentially repeated the same observations offered to us by the Bashas' executives, the Arizona grocery industry players sighted above, and Stater Bros. CEO Jack Brown, when they spoke at a meeting of the Southern California-based Fresh Produce and Floral Council, a long time industry group in the region.

The panel included: Mike Yuro, a produce buyer for Southern California-based supermarket chain K.V. Mart Co.; Roger Schroeder, VP of produce and floral for Stater Bros. Markets; Rob McDougal, senior director of produce and floral, Gelson's Markets, Encino, California; and Liane Mast, director of floral for Stater Bros. Ms. Mast also is the current chairwoman of the Fresh Produce and Floral Council, which is located in La Mirada, in Southern California.

All of the supermarket industry participants on the panel are senior members of the grocery retailing industry business in Southern California, with decades of experience in the industry and market region.

The veteran retail produce and floral industry panel members took questions on a wide variety of topics from members of the audience, which included fellow retailers, suppliers, brokers and others.

Among the topics brought up by audience members, and addressed by the panel members, were a number of questions asking the supermarket industry produce and floral category veterans for their analysis, observations and comments about what effect they think Tesco's coming into the market with its Fresh & Easy Neighborhood Market stores, which sell fresh produce as well as groceries and other fresh foods, is having on their respective company operations and on the grocery retailing market in general.

All four of the panel members said they haven't observed or felt in their own retail operations, nor seen in the Southern California market which they track closely--any appreciable "Fresh & Easy Effect" in terms of the small-format grocery chain either taking sales away from their respective stores or having a significant impact overall in the market thus far.

Tesco currently has a little over half of its 61 small-format, convenience-oriented basic grocery and fresh foods markets in Southern California.

Rob McDougal, the senior director of produce and floral at upscale chain Gelson's, said he was very concerned before the first Fresh & Easy stores opened in November, 2007--and remained concerned for a number of months after--that the store's focus on convenient grocery shopping might take a bite out of Gelson's business. However, he told the audience that concern appears to be unfounded, as he said he has not seen any diminution of Gelson's business from Fresh & Easy being in the market to date.

Roger Schroeder, the produce VP for Inland Empire-based Stater Bros., agreed with McDougal's analysis, adding that the opening of any new, competing grocery stores generally has an effect on business at nearby Stater Bros. stores.

However, he said he is surprised because he has not been able to detect any measurable effects of the numerous Tesco Fresh & Easy grocery markets that have opened in the Inland Empire region, which is one of Tesco's key target markets for its Fresh & Easy grocery retailing venture. Tesco has stated it hopes to have as many as 44 of the Fresh & Easy grocery markets opened and operating in Southern California's Inland Empire before the end of this year.

K.V Mart, which also is based in the Inland Empire region in the city of Carson, has seen "some ripple in sales," because of the numerous Fresh & Easy grocery stores that have opened in the region, but "nothing drastic," produce buyer Mike Yuro told an audience member is response to a question about a possible "Fresh & Easy Effect" on the retailer and in the market region.

The comments from the panel at yesterday's Fresh Produce and Floral Council meeting, along with those of Stater Bros. CEO Brown, the Bashas' executives, and the many food and grocery industry players and observers we talk to regularly in Southern California, Arizona and Nevada where Tesco has its current 61 Fresh & Easy store, are all in concert. All the same.

We have yet to hear from one grocery retailer, supplier or broker, market researcher, industry analyst or observer, that they believe (or have evidence of) Fresh & Easy is making an impact or taking away any sales from competitors in the markets it is in to date.

It's true there are only 61 Fresh & Easy grocery markets open to date. And it is fair in part to suggest that perhaps as more come on line the competitive "Fresh & Easy Effect" will be more apparent. However, since Tesco is using what we call a retail store "critical mass" strategy, locating the stores nearby each other in selected regions, we think at least a minimal "Fresh & Easy Effect" should have started to emerge by now, especially in the Phoenix, Arizona Metro region, where there are currently 17 stores within a very short distance from each other.

The same is true in Southern California's Inland Empire region, where Tesco's Fresh & Easy Neighborhood Market has its corporate headquarters--as does Stater Bros. and K.V. Mart--and has thus far located close to half of all of its Southern California stores in.

In fact, one reason Tesco has employed what we call it's "critical mass" store location strategy is so that it could have this effect--the "Fresh & Easy Effect"-- in the market as fast as possible. The entire positioning of the Fresh & Easy grocery stores is to be the majority primary and minority secondary shopping venues for people who live in the neighborhoods where the stores are located.

This isn't happening, as we've argued before. The mounting evidence from industry players and observers like those we've reported on in this piece, is leading to a fairly obvious conclusion: Thus far, Tesco's Fresh & Easy small-format basic grocery and fresh foods retail venture isn't succeeding.

It's not that we expect--or are even suggesting--that with 61 stores, Fresh & Easy should have chains like those the panel members at yesterday's meeting represent on the ropes and experiencing significant drops in sales because of a "Fresh & Easy Effect."

Rather, what we are arguing is that a consensus has emerged in Southern California, Arizona and Nevada--the respective markets where Tesco is operating--that thus far the Fresh & Easy stores aren't having a real or material effect in the market. That's not good news for any retailer; even one that's still in start up mode in many ways.

Taken with the store underperformance we've reported (doing about $60,000 - 100,000 per-store, per-week while Tesco would like them to be doing about $200,000 week, according to our source information and our analysis of it),this consensus further suggests Tesco needs to make changes and significant improvements in the following areas:

(1) Store format (tweaking it in a number of ways), (2) operations (dump the self check out scheme for example) (3) merchandising (improve the national brand representation and overall selection mix), (4) marketing (run radio ads as part of a comprehensive marketing plan and program) and (5) overall approach (localize the stores better to the neighborhood as well as on the merchandising front feature more locally-produced products). [If you look through the last couple weeks on the blog you will find more detailed suggestions for going forward for Fresh & Easy.]

Tesco is far from failure with its Fresh & Easy Neighborhood Market USA small-format grocery store retailing venture. It's historically too good of a retailer for anybody to write off at this point in time. However, at this point in time, Tesco also is far from success with Fresh & Easy as well.

USA Today Covers Tesco Fresh & Easy in Today's Edition: We Offer A Brief Analysis and A Couple Observations

The national U.S. newspaper USA Today has an article about Tesco's Fresh & Easy Neighborhood Market USA small-format grocery store retailing venture in its "Money" section in this morning's edition.

The piece is well-written although it doesn't offer much new information to those readers who follow Fresh & Easy Buzz and a few other select more industry-specific publications like ours. It shouldn't really, since USA Today is a general interest news, feature and business publication.

The USA Today story does offer some good insight from the reporter who visited Tesco Fresh & Easy facilities, and offers some good consumer comments about the stores, as well as providing a thoughtful overview of the retail venture to date.

Further, since USA Today is one of the top-three U.S. newspapers in terms of circulation and readership (it's not waiting for you outside your hotel room door every morning in nearly every state in the U.S. for nothing), many Americans who've never heard of Fresh & Easy Neighborhood Market (or Tesco for that matter) will learn about the company and its basic grocery and fresh foods' retailing venture in Southern California, Arizona and Nevada by reading the story. Good or bad; they will learn about it.

A little analysis and a couple observations:

First, the writer quotes a Piper Jaffray investment firm report in which he attributes estimates the Fresh & Easy stores are doing $170,000 per-store, per-week in average gross sales (compared to internal Tesco sales targets of $200,000) to Mike Dennis, an analyst at the firm who has been quoted in a number of press reports in which the reporters interviewed him for their stories as using this number as a sales estimate.

Recently however, as we've reported on Fresh & Easy Buzz, Piper Jaffray's Dennis said in a number of press reports that the firm has done further research since its first report referenced above and in the USA Today article. Most recently in those press reports Mr. Dennis has been quoted as saying Piper Jaffray is estimating current Fresh & Easy average per-store, per-week sales at $60,000.

This sales estimate number is similar to that of another person quoted in today's USA Today story, who the reporter quotes as saying Tesco's Fresh & Easy grocery stores could be doing less than $60,000 per-store, per-week in sales.

As our readers know, a couple months ago we first reported that based on information from a number of sources, Fresh & Easy Neighborhood Market stores were underperforming in terms of Tesco's internal sales targets. (We agree that about $200,000 per-store, per-week has been a Tesco target for this point in time for Fresh & Easy. However, it hasn't been a hard-and-fast sales target internally at Tesco.)

We offered a sales estimate, based on our source data and analysis, of average weekly per-store, per-week sales for the Fresh & Easy grocery markets of $60,000 -to- $100,000. We've stuck by that range ever since we first reported it--and continue to.

We've also suggested that sighting a single number (for example, if we said the stores are doing $60,000 or doing $100,000 per-store, per-week as an average) isn't likely valid--although people are welcome to if they feel confident in their number--because based on our sources, which have been good, a sales range like we sight is the most externally valid form of estimate in our personal view.

Lastly, in terms of comments on the article, a couple of analysts quoted in the USA Today piece speculate on the billions of dollars of sales the Tesco's Fresh & Easy Neighborhood Market could have in the next five -to- ten years. One suggests potential sales in the U.S. of $10 billion by 2015, making it one of the top ten U.S. grocery chains.

Another goes even further, suggesting possible gross sales at Fresh & Easy of $60 billion by 2020 (with 5,000 stores throughout the nation).

Assuming SuperValu, Inc. (number three in U.S. grocery sales) and number four Safeway Stores, Inc. [Kroger Co. is number two; Wal-Mart is number one in U.S. grocery sales market share] didn't grow at more than natural rates (say through acquisitions or major new store opening blitzes) that would make Tesco the third-largest grocery retailer in terms of gross sales in the U.S., just behind Wal-Mart and Kroger Co. (assuming only 12-year moderate sales growth for Kroger) in just 12 years. Wal-Mart is Wal-Mart; nobody is going to pass them in grocery sales anytime soon based on their current growth rate.

It could happen.

So could many things in the dynamic international and U.S. grocery retailing world: Wal-Mart and France's Carrefour (the world's second largest retailer; Wal-Mart is number one, Tesco number three) could merge, creating Walfour, which would be bigger than most nations.

Additionally, Kroger, Safeway, SuperValu and Tesco could merge, making number one, two, three and four fairly meaningless rankings in terms of U.S. grocery sales market share leaders... and so on. [A merger like the latter would make Wal-Mart number two in grocery sales in the U.S. Of course, if Wal-Mart and Carrefour merged; who would care?]

We aren't picking on these projections (or the analysts) because the analysts offered them. Rather, we just think such long-range prognosticating about Tesco's potential huge sales growth in the U.S. is much putting the cart before the horse at this point in time, and thus is meaningless. Right now the retailer needs to figure out how to stop the underperformance at the 61 small-format grocery stores it currently has open and operating in the Western U.S.

Tesco also needs to rethink its format, merchandising, marketing and operations approaches vis-a-vis Fresh & Easy. Further, it needs to create an identity for the stores, as well as create much more consumer awareness that the low-price positioned basic grocery and fresh/specialty foods stores exist. Thus far, Tesco's "if we build them, they will come" philosophy, along with strictly using PR or free media as a marketing and awareness strategy isn't working to drive consumers into the stores.

We don't rule Tesco out in this regard though. Not at all. And those who do are making a big mistake. Tesco is one of the world's best multi-format grocery chains. It's also a learning institution which has proven in the past it can recognize mistakes, correct them, and then do well. The United Kingdom-based international retailer also is a pioneer in small-format grocery retailing.

Therefore, the jury is still out on the success or lack thereof for Fresh & Easy in the U.S. As we've written many times, Fresh & Easy isn't a mere test for Tesco in the USA, it's a venture Tesco CEO Sir Terry Leahy is betting his and the company's success on, as well as his legacy in grocery retailing in many ways. Like the British in World War II, Tesco is one British retailer who isn't keen on giving up.

This story is far from over.

Click here for the complete USA Today article.