Foot Traffic and Customer Counts at a Number of Las Vegas Metro Fresh & Easy Stores Low; Union Picketers and Protesters Out Front of Stores

Numerous Las Vegas Metropolitan region Fresh & Easy Buzz readers tell us--and consumers posting on the Las Vegas Review Journal comment board say--that customer store counts in many of the 11 Fresh & Easy Neighborhood Market grocery stores in the Las Vegas Metro region is regularly low. A comment we often get and read is that when these folks go into the stores, seldom are there many other shoppers in them.

We visited three of the Vegas region Fresh & Easy stores ourselves two weeks ago One store in the late morning, the other in the late afternoon, and the third at about 6pm. All three stores were near empty during the entire duration of our visits. We spent about 30 minutes in two stores and nearly an hour in another.

Union picketers and protesters in front of the Vegas stores

We also observed something in front of the Fresh & Easy stores that our Las Vegas readers and the posters on the Las Vegas Review Journal online comment board have been commenting on. That phenomenon is that outside of many of the Las Vegas stores there are picketers for the retail clerks union, as well as others protesting the stores for different reasons.

At some of the stores, there were numerous protesters or pickets out front. For example, read what Jerry Hilbert, a Las Vegas resident wrote on the Las Vegas Review Journal comment board today about the picketers in front of a Fresh & Easy store where he shops:

Jerry Hilbert wrote on April 17, 2008 04:42 PM: Maybe it is that in some ways Fresh & Easy is too sophisticated for the Las Vegas market. Most people here seem to be quite happy with filthy supermarkets, even nearly new Albertson's, Smith's etc. As for the union protesters, bring them on, I simply ignore their moronic mentality and enter the store. Since the protesters may not protest on private property, F & E customers need not worry, that is unless they too share the looser union member mentality and attitude. If that is the case, there is a really filthy Smith's at Ann Road and Decatur with looser unionized help.

At least he is shopping at the store though.

Herb from Las Vegas also weighs in on the picketing situation in front of the Fresh & Easy Vegas stores:

Herb wrote on April 17, 2008 03:15 PM: Maybe one of the reasons these stores do poor business is the intimidating looking protesters I see marching in front of their stores sometimes. I love the irony that they have a politically correct enviornmentalist theme (they even have special parking spots for hybird cars), yet liberals hate them because they aren't unionized.

Some of the Vegas Fresh & Easy stores are doing better than the others. However, we've been getting reports for some time about the lack of foot traffic in many of the stores. For example, read what Adam from Las Vegas says below:

Adam wrote on April 17, 2008 03:52 PM: I don't see this chain making it much longer. I went several times just for the $5 coupons they were giving away. However, it's not going to make my regular rotation. The only benefit they have over any other stores - including the big chains like Smiths/Albertsons, Trader Joes, and Sunflower Market - is that the place is always totally empty. That can't be a good sign. The other stores mentioned, each in their own ways, have a better balance of option, quality, and price.

In addition to our visits to the three stores last week, we visited three other Fresh & Easy grocery stores in February. We visited one store in the morning, another in late afternoon and another in the evening, so as to sample three different day parts. We spent about 45 minutes in each one. In a couple instances, there were a couple brief little rushes of business, but overall the customer traffic count was rather minimal and business was slow.

We also talked to about 15 shoppers in total on that visit outside the stores (we would have talked to more but there weren't any more than that at the times we were there). Not one of the 15 said they did their primary shopping at Fresh & Easy. Five of the 15 said it was their first visit to the store. All said they liked various aspects of the stores but were still doing their primary shopping at a larger supermarket or discount store.

We aren't suggesting our observations are scientific. However, they are snapshots of six stores, all visited at different day parts on two separate occasions almost two months apart.

Further, taken with the reports we get from readers in the region, and the numerous review boards we read like the Las Vegas Review Journal, Chowhound, Craig's List and many others, we believe it is fair to say many of the Las Vegas stores have low customer counts and can be defined as doing only moderate business.

Read what TJH, who loves Fresh & Easy (he has even given it a nickname, 'effenee') and is a regular shopper in one of the Vegas stores, says about the customer foot traffic issue below:

TJH wrote on April 17, 2008 02:44 PM: I really enjoy my local effenee. The food is always quality and they always have great discounts. But the thing I like best is that there are never any lines. Their meat and seafood are top notch, and their cheese selection is nice as well.

An occasional line means a store is doing lots of business after all.

Another regular Vegas Fresh & Easy shopper who loves the stores but none-the-less says they aren't doing well in his observation is Mark. Read Mark's opinion below:

mark wrote on April 17, 2008 02:47 PM: Too bad this isn't traded in the US markets. I'd love to short this POS. I love the stores I just know they are an albatross that lose money.

F&E Door-to-Door Marketing

We recently learned that as one way to increase foot traffic in the stores, Fresh & Easy has been having people (in some cases store employees we are told) go door-to-door in some of the Las Vegas neighborhoods where the grocery stores are located, distributing door-hanger Fresh & Easy fliers with coupons good for $5 off any store grocery order of $20 or more.

In the case of the employees doing the door-to-door marketing, we also are told they are to knock on the door and introduce themselves to the resident, let them know about the neighborhood Fresh & Easy store, invite them to shop at the store, and give them the flier and $5 coupon. [We've reported on the $5 coupons in the past. What's new is the door-to-door campaing; especially in cases where it would involve store employees.]

While this grass roots marketing technique has some merit as part of a comprehensive marketing plan, we don't believe it is near-enough to drive many customers into the stores.

Rather, based on our personal observation, conversations with readers and others in the market, and a content analysis over months of the online comment and review boards, we believe Tesco needs to launch a much more comprehensive marketing campaign--such as a combined radio and print campaign to start--as a way to drive consumers into those Las Vegas stores.

Keeping them coming back is another, more serious matter all together.

As we reported on Tuesday, Tesco CEO Terry Leahy said in a conference call and in a webcast video reporting the company's annual sales and profit numbers, that some of the best performing Fresh & Easy stores are doing over $20 per square foot in average weekly sales, which is higher than the average sales per square foot for supermarkets in the U.S.

It would have been interesting if Tesco had offered an estimate as to how many of its currently open 61 Fresh & Easy grocery stores that best performing number represents. Without that data, the statement is meaningless. Does it mean two stores, four stores, 33 stores? You get the point.

Despite this fact, its been interesting to see how many of the business sections in U.S. newspapers have just picked up that comment and wrote stories turning it into a statement that all the stores are doing above the U.S. industry average in sales per square foot. Both God and the Devil are in the details folks.

Today's announcement by Tesco's Fresh & Easy Neighborhood Market that it will build an additional ten stores in the Las Vegas Metropolitan region (there currently are 11 stores, with four more set to open soon) gives the retailer an opportunity to launch a comprehensive marketing campaign, the near-term goal of which should be to drive consumers into those stores, many of which as we've reported have low customer counts and need increased foot traffic.

With 25 stores in the region, the retailer can get much more bang for its marketing buck than it can with only 11. However, it remains that a number of the stores in the region aren't performing up to snuff presently. Time--and effort--will tell if that changes or stays the same.

Converting more Suzy's

If Fresh & Easy can convert more Suzy's, like the Suzy who posted the comment below on the Las Vegas Review Journal online comment board, to its Las Vegas stores it will be a big success. However, right now in our analysis, many of the Vegas-area stores are seriously lacking in foot traffic and customer counts--and the pickets and protestors out in front of the stores can't be helping the situation either.

Read what Suzy thinks of Fresh & Easy below:

Suzy wrote on April 17, 2008 09:58 PM: This is the best store I have ever shopped in! I used to shop Vons (I was willing to pay more to be in nicer, cleaner store), but now I do 99 percent of my weekly shopping @ F&E. Less expensive and better quality products. Love the idea of getting away from all the preservatives in other store's foods. Hope they stay in Vegas and the dirtbags stay at WalMart, Smiths, and Albertsons.

We suggest Tesco's Fresh & Easy Neighborhood Market should code name its comprehensive marketing campaign for the Las Vegas region--and although it doesn't currently have such a comprehensive campaign we think the retailer will figure out it needs one--"Operation Suzy."

Note: All full paragraphs in italics are from posts/comments taken directly from the Las Vegas Review Journal comment board.

Business Week: Tesco Defies Gravity

Europe: April 15, 2008
Business Week

Tesco Defies Gravity

Even in parlous times, the British supermarket chain is posting robust sales and profits, especially in emerging markets
by Mark Scott

All eyes are on retail sales these days as a measure of consumer sentiment in shaky economic times. On Apr. 15, British-based supermarket chain Tesco (TSCO.L), the world's third-largest general retailer after Wal-Mart Stores (WMT) and Carrefour (CARR.PA), offered investors a welcome dollop of good news, reporting pretax profits up 5.7% for the year ended Feb. 23, to $5.6 billion, on a revenue gain of 11.1%, to $101.7 billion.

The strong results, which met analyst expectations, underscore two vital points. First, Tesco did well despite weakening consumer confidence—or perhaps because of it. As an aggressive discounter, it is thriving as customers shy away from pricier fare. Second, although growth is slowing in developed economies chilled by the global credit crunch, Tesco continues to rack up huge gains in emerging markets from Hungary to Malaysia.

The proof is in the numbers. Tesco's revenues in Britain climbed 6.7% for the year, to $74.5 billion—roughly twice the growth rate of the economy as a whole—and its operating profits rose 7.1%. Sales outside of Britain surged 25.4%, to $27.2 billion, and profits jumped nearly as much, by 24.3%. International sales now constitute more than half of Tesco's revenue growth, says Chief Executive Officer Terry Leahy.

Eastern Promise

Investors embraced Tesco's results with gusto Apr. 15, pushing the company's shares up 7.3%, their biggest one-day rise since July, 2002. Analysts were especially impressed with the company's gains in emerging economies. "Central Europe and Asia are in a sweet spot in their evolution because they're becoming mature markets," says Jonathan Pritchard, food retail analyst at Oriel Securities in London. "This hasn't been the best year for the U.K., but those other countries have picked up the slack."

Indeed, Tesco's growth in Eastern European countries such as Poland and the Czech Republic has benefited from aggressive marketing and rollout of new stores, which have kept sales growth in the double digits. After taking over 11 Carrefour outlets in the Czech Republic during 2006, for instance, the British retailer says same-store sales rose 11% year over year.

Tesco's Asian operations also are on a tear, particularly in Korea, where sales at the company's online grocery division have risen 125% since last year. Credit Suisse (CS) analyst Andrew Kasoulis reckons strong economies in Asia (except for Japan) will help keep Tesco's momentum strong this year even if Western countries weaken. The company boosted its stake in China by buying 90% of local supermarket chain Hymall for $353 million in 2006, and Kasoulis believes Tesco can continue to expand there.

Yankee Doldrums

Perhaps the biggest question hanging over the company on Apr. 15 was the fate of its new U.S. push. Tesco has launched a chain of midsize stores in the U.S. called Fresh & Easy, and began opening outlets in California last November (BusinessWeek.com, 10/19/07). But after starting up 60 stores, the company revealed on Apr. 2 that it would halt its rollout for three months to tweak the formula. Brokerage Piper Jaffrey (PJC) estimates that Fresh & Easy revenues in the six months since launch may have totaled only $30 million—some 70% below its original forecast.

Analysts are plainly worried. "The new venture in the U.S. was a major driver [on Tesco's share price] for much of 2007," says Citigroup (C) analyst James Anstead in a note to investors. (The stock rose 18% last year.) "Any negative news on progress in the U.S. business could be taken badly by the market."

Nevertheless, Tesco says it's not pulling out. Startup costs to date of $123 million are running slightly below budget, and the company says it still plans to open around 150 new stores this year. "I'm very encouraged by what I see," Leahy told analysts Apr. 15, conceding that "it's still too early to make definitive judgments." The CEO says he expects losses from Fresh & Easy to hit $200 million this year before the chain turns profitable in the second half of 2009.

Solid Operating Margin at Home

Tesco ought to be able to absorb that expense easily. Despite a slowing economy, Leahy figures revenues in the retailer's home base of Britain will grow 3% to 4% this year. Tesco owns 31% of the market in Britain—more than runners-up J. Sainsbury (SBRY.L) and Wal-Mart unit

Asda combined. And according to Citigroup's Anstead, "Tesco's U.K. operating margin is at record levels." Its low prices "may mean it has more protection than most in a consumer downturn."

That's just the sort of thing investors want to hear in an era of shaky consumer confidence. With its dynamic combination of home-market advantage and international diversification, Tesco looks ready to weather economic uncertainty.

A Retail Marketing and Public Relations Memo to Tesco's Fresh & Easy Neighborhood Market Management from Natural~Specialty Foods Memo

The food and grocery industry publication Natural~Specialty Foods Memo has a 'Retail Marketing and Public Relations Memo' to Tesco's Fresh & Easy Neighborhood Market senior management in today's issue.

The "memo," titled: "Retail Marketing and Public Relations Memo: What Tesco's Fresh & Easy Neighborhood Market Should Be Doing Now," talks about the current new store opening "pause" which we reported here on Saturday.

In the piece, the publication discusses the marketing, public relations and overall implications of the announcement as part of an total retail strategy. The piece also suggests Tesco's Fresh & Easy Neighborhood Market should have prepared for the mostly negative press reports which started coming out yesterday and today in numerous U.S. newspaper business sections, such as the Los Angeles Times, San Francisco Chronicle, Associated Press news service and others.

Natural~Specialty Foods Memo offers Fresh & Easy a strategic blueprint of how it could have prepared a strategic operations and media marketing strategy before posting the "pause" announcement in its corporate blog, including suggestions for how to not only deal with but also get on top of the news cycle. The piece also says any marketing and public relations strategy must be real and integrated with overall operations.

In fact, the marketing and public relations strategies would be good for Fresh & Easy anytime. But they are especially important now, as it appears to us the retailer wasn't prepared for the mostly negative media coverage it's getting over the new store opening moratorium, along with the reports from analysts like us and others about the small-format, convenience-oriented grocery stores' sales underperformance to date, which these newspaper business section reporters and editors are including in their stories.

Lastly, the piece says "it's not too late" for Tesco to employ these strategies, if "Fresh & Easy senior management can be a fast-moving and nimble team."

Read the 'Retail Marketing and Public Relations Memo' to Tesco's Fresh & Easy Neighborhood Market from Natural~Specialty Foods Memo here.

Tesco's Corp. Finance and Strategy Director Andrew Higginson Says Reports of Fresh & Easy Store Underperformance Are 'A Load of Rubbish'

Tesco's corporate director of finance and strategy Andrew Higginson tells the United Kingdom's Daily Mail newspaper in a story in this morning's edition that reports such as ours and those by London-based investment house Piper Jaffray, which suggest the retailer's USA Fresh & Easy Neighborhood Market small-format grocery stores are under-performing in sales expectations to date, are "a load of rubbish."

Our analysis, based on multiple sources, is that the Fresh & Easy grocery markets are doing about $60,000 -to- $100,000 per-store, per-week in sales, compared to internal Tesco sales targets of about $200,000 per-store, per-week, for this point in time. We published our sales analysis before the Piper Jaffray investment firm, which is quoted in the Daily Mail article, offered their sales estimates. The first Fresh & Easy grocery stores were opened in November, 2007. There currently are 59 units open in Southern California, Arizona and Nevada.

Higgins says some of the sales estimate numbers he's read "are not figures he recognizes." "I think it's a load of rubbish. You have competitors queuing up to knock it [Fresh & Easy]. The business is doing fine and the consumer reaction is terrific," he tells a reporter for the Daily Mail in this story in today's edition.

"To be honest," Higginson adds," it's a voyage of discovery, a bit like when the dotcom boom. If customers say they love it that's the key metric really and the rest is just logistics." (Scotty, the chief engineer of the Starship Enterprise (see pic at top) on Star Trek was from the UK after all, so that helps expalin the "voyage of discovery" metaphor. But, read further.]

Really?

First, we think the gloom and doom crowd who are saying Tesco's Fresh & Easy small-format, basic grocery and fresh foods grocery market venture is destined for failure are wrong. So we agree that it's rubbish to make that specific statement at this point it time. The jury is still out on that assertion.

However, to dismiss the fact the stores are under-performing sales-wise is just mere spin, which if course as Tesco's CFO, Mr. Higginson is permitted to do so by the laws of corporate public relations.

Additionally, to dismiss all criticism, including much that has been constructive, demonstrates in our analysis one of the reasons the USA Fresh & Easy venture is having serious problems in the first place. Call it ethnocentrism, with a bit of hubris tossed in for good measure. If Tesco is to move forward in a successful manner with the stores in the U.S. it must first take an objective view of the Fresh & Easy format, operations, marketing and merchandising elements, followed by tweaking aspects in each of those key areas, as we've suggested before. It's not rubbish; it's real.

Lastly, we find this quote from Mr. Higginson to be amazing in three ways (both good and not so good mind you): "To be honest, it's a voyage of discovery, a bit when the dotcom boom. If customers say they love it that's the key metric really and the rest is just logistics."

The first thing that strikes us about the quote is positive. We like the idea that a huge (the world's third-largest) retail corporation like Tesco is willing to go on a voyage of retail discovery, especially in a rough-and-tumble grocery market like the Western USA market. Doing so speaks to one of the reasons Tesco has been so successful under the helm of CEO Sir Terry Leahy, which is that the retailer has realized a huge corporation and retailer can still be an entrepreneurial and adventurous one. In fact, that's it's essential to be in order to grow.

This spirit of adventure (and understanding that its future lies outside the UK) has guided Tesco's international expansion since the early 1990's, when Sir Terry and company decided to take the retail company on its global voyage.

The second thing about the quote is: We are surprised a CFO would reference the dotcom boom (which resulted in a bust) in the U.S. We get the aspect of it in which Mr. Higginson likens it to a "voyage" regarding Fresh & Easy. However, so many hundreds of billions of dollars of equity and value were lost in the U.S. by corporations, investment houses and individuals during the 1990's dotcom boom and bust we aren't sure it's a good idea to compare ones multi-billion dollar grocery retailing venture in the U.S. to that phenomenon. Why? Well, lets just say the dotcom boom didn't turn out too well for most from a financial perspective. Although, we did like its "spirit of adventure" in many ways personally.

Webvan and the 1990's U.S. dotcom boom and bust

Further, one of the casualties of the dotcom boom was what was to be the future of grocery retailing in the Western USA, if not the entire nation. That major casualty of the dotcom era was an online grocery delivery service called Webvan.

Webvan, which was based in Foster City in the San Francisco Bay Area in Northern California, was an online grocery retailing company which was founded in the 'go-go' 1990's by Lewis Borders, who was the co-founder of the hugely successful Borders Book store chain, which he later sold for billions.

Speaking of billions, that's about how much Lewis Borders and his team spent of investor money to create, build, operate and market Webvan. Webvan, which was touted as the next revolution in grocery retailing--and was promoted as such by most of the U.S. media--spent $1 billion to have its huge order-fulfillment, distribution center and corporate headquarters built in Oakland, California, not far from the Oakland International Airport, as well as for satellite facilities in the other U.S. markets it served.

Webvan operated in seven U.S. markets: the San Francisco Bay Area (it's first); Los Angeles; Orange County (Southern California); San Diego;; Seattle, Washington; Portland Oregon; and Chicago, Illinois. It was a Western U.S. retail strategy, which it then rolled out to Chicago. Sound strategically familiar?

Webvan spent tens of millions more on a fleet of custom-made, state-of-the-art delivery trucks (the "Van" in Webvan), a cutting-edge computer and internet-based (the "Web" in Webvan) ordering and processing system, office and warehouse equipment, marketing, sales promotion, salaries and bonuses and other "essentials."

A little over a year into its launch, Webvan had burned-through its initial billion or so of initial capital, which it raised from cream-of-the-crop U.S. venture capital and investment banking firms. However, the revolutionary grocery company still raised millions more from these same platinum investment firms via additional rounds of financing.

The problems--chief among them sales under-performance vis-a-vis targets--continued to mount. A few analysts who had always been objective about the "Webvan grocery retailing revolution" sounded the alarm that there was trouble in paradise. However, most of the U.S. and international business and popular press continued to use phrases like "The Webvan revolution," "How Webvan is putting a chill in the hearts of traditional grocers," and the "Webvan invasion," in stories about the fledgling company.

And, Webvan kept putting the lipstick on the dying pig, so to speak. It told the world things were going great, that its national U.S. expansion into the east coast and other parts of the country were right on track, and that the online grocery ordering and delivery service was gaining new customers weekly. Webvan even acquired a rival online grocery retailer, Homegrocer.com as part of its expansion strategy.

Then, in early July of 2001, Webvan announced it had ceased all operation--including the immediate firing of about 2,000 employees--and that it was filing for Chapter 11 bankruptcy protection.

The company said all that was left to do was conduct an orderly winding-down of business operations and the sale of any remaining assets after creditors had been paid. Webvan's once soaring stock wasn't worth as much as the paper the stock certificates were printed on. Most of the U.S. business and popular press outlets were "shocked" at Webvan's demise.

Conclusion

We aren't suggesting Tesco will experience anything similar to the Webvan experience with its Fresh & Easy Neighborhood market venture in the USA corporately. After all, its an international retailing corporation with over $60 billion in annual sales, as well as being the market share leader at home in the UK, with over 30% of that nation's grocery sales market all to itself.

However, we do think there are some cautionary tales in the Webvan experience for Tesco's Fresh & Easy Neighborhood Market venture.

For example: there are similar operations, marketing and merchandising mistakes being made by Fresh & Easy, the similar upfront investment sums are close, the Western U.S.--then Pacific Northwest and on to Chicago regional-to-national rollout strategies are rather similar--and, perhaps most strikingly, are the similarities (at least until marketing chief Simon Uwins announced the three-month pause in new store openings which we reported here last Saturday) in the messaging strategies of the late Webvan and present Tesco regarding Fresh & Easy: "That it's all a bunch of rubbish" and things are going just fine, thank you.

Mr. Uwins took the first (right) step in saying all is not fine in paradise when he got out in front of the story by posting in his corporate blog that the retailer needs to "kick the [Fresh & Easy store] tires" a bit and evaluate operations and other aspects to date. Had Webvan done that earlier they might still be around--although we doubt it in their case, as time essentially ran out for them.

Tesco is one of the world's most innovative and successful retailers. It's not Webvan. But even the mighty--especially when doing business in a foreign land--can learn from the experience and mistakes of a dotcom voyager like Webvan.

The Analysis of Tesco's Fresh & Easy From Piper-Jaffray's Mike Dennis in This Interview Published Today Sounds A Lot Like Ours For the Last Few Months

In an interview published today by McClatchy-Tribune News Services, Mike Dennis, an analyst with the Piper-Jaffray investment firm which has offices in the U.S. and London in the United Kingdom, sounds alot like what we've been reporting, analyzing and writing about here on Fresh & Easy Buzz for months in terms of Tesco's Fresh & Easy Neighborhood Market's sales performance to date, its format, positioning and other variables.

Additionally, Mr. Dennis--with a few differences and less comprehensively--offers some very similar reasons and explanations in the interview published below for the current sales underperformance and problems with the 59 Fresh & Easy, small-format grocery stores currently operating in Southern California, Arizona and Nevada. The interview piece is below:

Tesco struggles in U.S. debut

McClatchy-Tribune News Service: Monday, March 24, 2008

Fresh & Easy, the produce stores that British retail giant Tesco introduced to the United States last fall, has underperformed during its first months in business, according to an analyst with a U.S. investment bank.

Most of the chain's stores have failed to meet Tesco's reported goal of $200,000 a week in average sales, said Michael J. Dennis, senior research analyst with Piper Jaffray, a middle-market investment bank and securities firm based in Minneapolis.

Most of the 59 Fresh & Easy stores operating in Southern California, Arizona and Nevada as of last week average $60,000 a week in sales, Dennis said during a telephone interview from his London office.

"Once you get past the first two aisles, the fresh fruits and vegetables and the fresh bakery items, everything has been bad," Dennis said. "The rest of their sales have been a disaster. They thought they could get $200,000 a week in sales based on all of the research they did, but it hasn't happened."

Dennis -- who specializes in finding investments for retirement pensions in the food and general merchandise industries -- changed his evaluation of Tesco stock from "buy" to "neutral" in his report.

"Tesco officials must be concerned that the Fresh & Easy concept is not right for the United States market and that they need to find out quickly what their issues are," Dennis wrote in his 11-page report, which was released Feb. 20.

Much of the report's information came from suppliers and grocery industry analysts, Dennis said. "Maybe Fresh & Easy isn't as robust a concept as we first thought, especially if their reduced prices aren't attracting customers in a near recessionary U.S. environment," Dennis wrote.

A Fresh & Easy official cautioned against giving up on the chain too soon.

"We opened our first stores in November, so they haven't been operating that long," said Brendan Wonnacott, spokesman for the El Segundo-based chain. "It's too early to speculate on overall performance."

Tesco officials are "very encouraged" by Fresh & Easy's performance so far, Wonnacott said. "Every week we're getting increased sales and increased customer traffic," he said. "We haven't closed any stores, and we don't plan to close any."

But Fresh & Easy, which operates a warehouse-distribution center at March Air Reserve Base near Moreno Valley, quickly encountered problems with U.S. shoppers, including stores stocked primarily with automated check-out stands, no push-carts and too many wrapped fresh fruits and vegetables.

"In the U.S., people like to handle those kinds of foods before they buy them," Dennis said. "They also like to buy those things individually, and Fresh & Easy sells a lot of things in packs of four and six. The idea was to emphasize fresh produce, but a lot of U.S. grocery stores sell fresh produce."

Food-industry analysts were optimistic about Fresh & Easy's chances for success in the United States last summer, after they visited a test store that Tesco officials operated in a warehouse outside Los Angeles.

"They flew people in from all over to shop there," said Dennis, who attended the test opening. He felt confident about the Fresh & Easy concept. "Tesco really believed they had found a hole in the market, which was people who were looking for a place where they could stop quickly on their way home from work and shop for food."

To improve its performance, Fresh & Easy might speak with its store managers to find out what works and forge a stronger marketing presence, the Piper Jaffray analyst said. "I think they really need to do some national marketing. They should find some celebrities and piggyback on them."

Fresh & Easy stores might not be suited for the U.S. market, said Mindy McBain, associate editor of The Shelby Report, a grocery industry newsletter in Gainesville, Ga. "They have automated check-out stands, and a lot of U.S. shoppers aren't ready for that," McBain said. and Nevada.

Fresh & Easy Buzz: In the published interview, Piper-Jaffray's Dennis is quoted as saying: "Last week the (Fresh & Easy) stores were doing $60,000 a week in sales."

This is a dramatic change from when Dennis first released Piper-Jaffray's Tesco Fresh & Easy research in which he said the stores were doing about $170,000 per-store, per-week. At the time, he said the stores were falling about $30,000 per-store, per-week short of Tesco's target of $200,000 a week per-store gross sales. It sounds like Piper-Jeffray has revised its numbers downward significantly. (We agree about the $200,000 Tesco target.)

We were one of the first analysts to report--at least a week before Piper-Jaffray released it's research report and $170,000 per-store, per-week estimate--that based on information supplied by our sources , Tesco's Fresh & Easy grocery stores, which average about 10,000 square feet, we're (and still are) doing about $70,000 -to- $100,000 in sales per-store, per-week.

We further explained a number of the Fresh & Easy markets were doing even less than the lower-end $70,000 a week amount in gross sales, but that a few stores, like the unit in Los Angeles and a few others which have been doing better, accounted for bringing the average to the range we have estimated.

Piper-Jaffray's sales numbers seem now to be closer in line with ours. We stick by our $70,000 -to- $100,000 weekly store gross sales numbers however.

Dennis also makes an excellent point in the interview piece about most U.S. analysts being taken-in with the Tesco Fresh & Easy format. This is true. Accept for a handful of analysts and grocer's who looked closely at the format and didn't depend primarily on the popular press reports about it, most wrote glowingly of Fresh & Easy, even though the only information they had was given to them by Tesco.

We believe this fact actually hurt Tesco with its launch of the Fresh & Easy small-format, convenience-oriented grocery store chain. The retailer spent a little too much time perhaps basking in the glow of what the majority of the U.S. business press and industry analysts said was going to be the second coming of grocery retailing in America that they took their eyes off the ball a bit. It can happen to anyone--positive press can be a heady drug after all.

This phenomenon also has resulted in Tesco being taken a bit off guard by current analytical commentary about the Fresh & Easy stores' underperformance. Remember, not all analysts, grocers and observors were writing those "British Grocer to revolutionize American grocery retailing" articles. A few were more balanced and thoughtful.

As our readers are aware, one of the key merchandising problems we've been harping on at the Fresh & Easy grocery stores is the pre-packaged produce.

This is fine for a specialty grocer like Trader Joe's which isn't positioning its stores to be basic grocery shopping primary venues. But for Tesco's Fresh & Easy, which needs its grocery markets to be primary shopping venues, it's a prescription for failure. Were pleased to see Mike Dennis makes this same argument in the interview piece today.

American consumers love lots of variety of fresh, bulk produce. Why do you think the hundreds of farmers' markets in the U.S. are so widely popular. New farmers' markets are opening at a rate of over 25% this year over last, for example.

Additionally, talk to any successful grocery executive, and he or she will tell you--at least in nine out of ten cases--that merchandising lots of fresh, bulk produce--abundance and variety--is one of the top-three merchandising keys to that respective chain's success. Conversly, if you want to look for indicators of failure at an American supermarket that's not doing well, make sure you check out the store's produce department as one of the first three or so things you do in evaluating that supermarket's sales underperformance.

As we've said on Fresh & Easy Buzz often, we don't believe failure is the only option for Tesco's Fresh & Easy format and grocery stores. Rather, we suggest change is the needed option to survive. These changes include format adjustments, along with merchandising, marketing and positioning changes.

The key changes we've previously outlined include:

>Changing from a primary pre-packaged fresh produce operation to a primarily bulk one, with some pre-packaged specialty produce items being ok.

>Increasing the Fresh & Easy store brand and national branded basic grocery items mix in the stores from its current about 65% (store brand) and 35% (national brand) mix, to at least a 50%-50% store brand, national brand ratio.

>Analyzing the stores' merchandising mix, particularly in the basic grocery categories. Fresh & Easy grocery markets are missing some key brands and items in key categories. In many cases, these missing items are the number one or number two selling items in their respective categories. Additionally, Tesco's Fresh & Easy merchandising executives need to better understand there is a distinctive western U.S. product mix (compared to the Midwest and eastern U.S., for example) in both the basic grocery and specialty grocery segments.

Most of the tops brands in the basic grocery segment are national in scope--but there are some significant western region mixes that every supermarket chain that's successful (Safeway, Ralph's, ect.) in California and Arizona understands. The western U.S. (and even within the western states) product mix is even more significant in the specialty, natural and organic foods' categories.

>Creating more of a sense of place (or putting the "neighborhood" in Fresh & Easy Neighborhood Market) in the Fresh & Easy grocery stores. Tesco has positioned the grocery markets as primary, neighborhood grocery stores. However, the fact is customers are shopping the stores like they shop convenience stores. Rather than doing their primary--or often times even secondary--shopping at Fresh & Easy markets, customers are using the stores more like C-stores. The stores' average-ring or market basket is evidence of this, by the way.

Tesco's Fresh & Easy Neighborhood Market can't make it if the stores only serve tertiary and secondary shoppers. Tesco knows this well based on its positioning and sales targets for the grocery store chain. Rather, the grocery markets have to obtain and retain a significant percentage of primary shoppers in order to generate the sales and profits required to be a financial success.

We've suggested Tesco needs to tweak the format to create a better sense of place in the grocery stores and put the "neighborhood" in Fresh & Easy Neighborhood Market. By doing this, the markets will become more attractive to neighborhood residents and motivate them to spend more time in the stores--and return more often--thus leading to a higher percentage of needed primary shoppers.

As we've written before, we suggest their are two ways to do this. First, Tesco needs to "localize" the grocery stores more. A Fresh & Easy store in a lower-income Los Angeles neighborhood can't look identical to, and offer the exact same merchandising mix as, a Fresh & Easy store in Metro Las Vegas. Rather, the stores need to respect and reflect the given neighborhood's history, culture, practices and ethnic make up far better than they do at present if they are to succeed. Remember: chain grocery stores aren't the same retail business model as chain fast food restaurants. The criteria is different.

This "localization" needs to include some individual format adjustments to the stores based on the neighborhoods they are located in, along with "localizing" the product merchandising mix in a number of cases so it better reflects the actual people (potential customers) who live in that respective neighborhood.

Second, we suggest that overall the Fresh & Easy grocery stores are not particularly inviting. In order to get shoppers to linger longer in-store--and thus to buy more--a grocery store needs to give shoppers a sense of place and a compelling reason or two for wanting to stay in it and shop rather than run-in and run-out like is the case--and design--of the C-store format.

One concept we have would be to put what we call a "Fresh & Easy Cafe," in some or all of the stores. This would be a smaller version (respective of the stores small-footprint) of Tesco's popular "Tesco Cafes," which are located in many of the retailer's UK supermarkets.

Further, we've suggested Tesco should think about format innovations or tweaks which would make the Fresh & Easy stores more "neighborhood-centric." By this we mean adding features in the store--perhaps a "UPS Store-like mail center which includes postal and other essential neighborhood-oriented services--and similar neighborhood basics which drive local residents to the stores, as well as enhancing the grocery markets' overall sense of place to the shoppers and potential shoppers. "It's my neighborhood store in my neighborhood, for example."

There are a few more format changes, as well as merchandising, marketing and positioning fixes which we believe in our analysis would help put Tesco's Fresh & Easy Neighborhood market grocery stores on better sales performance footing. But, that's a good start for now.

Beware the 'Ides of March': Fifty Percent Item Markdowns Are A Further Sign of Low Traffic Counts and Sales Problems At Fresh & Easy Grocery Stores

As we've reported on Fresh & Easy Buzz in the past, many of Tesco's Fresh & Easy Neighborhood Market grocery stores were tossing so much fresh foods--produce, meats, bakery goods, prepared foods--in the stores' dumpsters because it had either spoiled do to slow (or in the case of the spoiled product no) sales or near-code date expiration, customers began noticing and were complaining to store managers about the wasted food.

Our correspondents in Southern California, Arizona and Nevada who shop the Fresh & Easy stores, then told us some of the grocery markets' had started marking down fresh, prepared foods items (especially the more expensive skus) fresh meats, produce and bakery items a day or two before the products were set to go out of code. And, in the case of the fresh produce and bakery goods, prior to the items' going bad.

Our correspondents tell us the fresh foods' price reductions are generally 50% off the regular retail price, which we've seen with our own eyes as well in a number of Fresh & Easy grocery stores.

These fresh foods' price markdowns have become a regular pattern at many Fresh & Easy stores; sort of like a daily version of a department store clearance sale. However, instead of the clearance sale being on white goods once a year or fall sweaters on the eve of spring like at department stores, the items at the Fresh & Easy stores being marked down each day are fresh foods' staples (and premium items) like steaks, poultry, fresh fruits and vegetables, fresh donuts and breads, and ready-to-eat prepared foods items. Many are higher-priced fresh products as well, which means significant dollar losses with each reduction, which is better (but not much) than having to toss it in the dumpster

For example, below (in italics) is a report we received this week from a correspondent named Michael, who lives in Las Vegas, Nevada and has been shopping at a Fresh & Easy grocery store (Lake Mead@ Del Webb) in the city because of the daily 50% markdowns on items like steaks:

"Hello, Just wanted to let you know that I just got back from one of the Las Vegas Fresh & Easy's, where I see they've begun addressing the criticisms regarding their food dates and potential waste of throwing out food on a daily basis. Today (the 22nd), I found plenty of goods marked down with "Today's Special" stickers. These items were usually 50% off and included produce, meat, etc. $20 Angus steak dated the 21st being sold at $10? I'll take two!

Near the checkstand was a bakery cart with more 50% off items, such as donuts and other baked goods. While I suppose these kinds of sales aren't good news for F&E (combined with their $5 off coupon you can get quite a bargain), it's got to be less of a loss than throwing the stock away entirely, and the store does seem a bit busier because of it, though I'm not sure morale is holding up (in my location, at least.)

Many American supermarket chains mark down items in their stores for a variety of reasons. Usually, each day the meat department will put a few markdown items in a small, designated area in the self-service meat case. Produce managers often do the same with a handful of items each day in the produce department, as do bakery department managers. Additionally, some supermarkets will put discontinued packaged and canned grocery products in a basket or bin with a reduced price for quick sale.

However, these practices are tiny in scale at the vast majority of U.S. supermarkets. The main reason meat and produce managers do it is that their bonuses are in part based on minimizing department shrink. As a result, every little bit helps them to meet their bonus goal. The same is true with the discontinued dry grocery items, although most stores have so little of such product they generally just give it to the local food bank.

The situation at the Fresh & Easy stores is far different however. It's a chronic problem thus far. The problem is due to slow sales. The volume in the stores (and there are numerous stores doing the daily markdowns) with the active 50% daily markdown program is so slow relatively that product turnover isn't happening at anywhere near the rate Tesco has budgeted for or predicted. The result: fresh foods go bad regularly. The solution is to either toss them in the dumpster, give them to the local food bank (which is a good idea) or discount them by 50% so hopefully you won't have to throw as many of the items in the garbage, and can at least recover a little of the dollar loss.

This problem is further evidence of the overall sales under-performance of the Fresh & Easy grocery stores to date. We've reported that based on information from sources, and our analysis of that information, it's our estimate that overall the 59 small-format Fresh & Easy grocery markets open to date are doing in the range of $70,000 -to- $100,000 per-store, per-week in gross sales. This is compared to Tesco's target of about $190,000 -to- $200,000 per-store, per-week in gross sales for this point in time. Fresh & Easy grocery markets average 10,000 -to- 13,000 square feet.

Add to the daily 50% markdowns the fact the stores regularly give out $5 coupons to shoppers, which are good for $5-off any order of $20 or more, and one can see even more clearly the lack of adequate foot traffic and sales volume to date in the stores. Five dollars off a $20 grocery order is 25% folks. That's on top of what are already low everyday prices on the Fresh & Easy store brand and national brand basic grocery items sold in the stores, and very competitive prices on the items in the fresh foods categories. (We've done price-comparisons of Fresh & Easy stores and other supermarket chains in the market areas and Fresh & Easy's prices are in the main among the lowest.)

Based on the already low everyday prices in Fresh & Easy grocery markets, coupled with the daily 50% markdowns on many items, along with the stores' aggressive price advertising program via its mass-mailed advertising circular and the $5 coupons, price obviously isn't the problem in the stores, which is something even the most junior analyst should be able to figure out.

As we've suggested on Fresh & Easy Buzz numerous times, Fresh & Easy's problems are format-driven, operations-oriented and marketing-based. To paraphrase former two-term U.S. President Bill Clinton's winning slogan or tagline, "It's the Economy... Stupid," in his first campaign for the U.S. Presidency in the early 1990's, we say: "It's Not a Pricing Issue...Stupid."

Meanwhile, Fresh & Easy shoppers like Michael from Las Vegas (and others) are loving being able to buy $20 worth of Angus Steak for half price. They also are loving the $5 coupons so they can get 25% off a $20 order. In fact, they can even buy $20 worth of 50% discounted fresh foods items (a $40 value at regular prices) and use one of the $5 coupons to knock another 25% off the 50% discount. That's pretty close to free, isn't it?

As every grocery marketer of even moderate intelligence and experience knows, price is the double-edged sword of the business. No grocer--not even the most deep-discount, no frills operators--wants too many customers who are in the main only shopping at his or her stores because of the prices. Some of that is great--it's a positioning factor for sure.

However, a grocery retailer must have more than one hook to hang its merchandising and operational hat on besides price. Why? Price-focused-only shoppers tend to be the most disloyal. They generally will leave a grocer hanging at the checkstand if they find what they believe is a better priced store in the same way a runaway bride will leave her fiance at the least minute for a host of either conscious or unconscious reasons.

Since it's March, we recall some good advice once given to Julius Ceasar prior to the beginning of the "Ides Of March," which is around March 15-20, depending on the particular year. "Ceasar," a loyal subject and soothsayer warned him, "Beware the Ides of March." Of course, we all know what happened to Julius Ceasar because he didn't listen to and head the warning.

Our unsolicited advice to Tesco's Fresh & Easy Neighborhood Market, since we've all just concluded the "Ides of March," is (another paraphrase): "Beware the low-price and discounting trap, it could come back to haunt you." While it won't render onto the Fresh & Easy Neighborhood Market executives a finality like that which was rendered onto Ceasar, the results could be equally disastrous from a business standpoint.

Is Tesco's Fresh & Easy Neighborhood Market Venture Fledgling Even Further? More Analysis and Commentary

The United Kingdom-based newspaper the Guardian is reporting today that New York-based investment firm Piper Jaffray has now revised downward its previous research estimate that Tesco's Fresh & Easy Neighborhood Market USA retail grocery chain is doing average weekly sales of about $170,000 week.

In a research note titled, "Miles Off Target," Piper Jaffray analyst Mike Dennis says research among Tesco Fresh & Easy's suppliers suggests first half sales at the retailer's U.S. small-format grocery store venture could be just $30 million, compared to the brokerage company's own estimate of $100 million.

A couple notes: first, Tesco opened its first Fresh & Easy grocery stores in early November, 2007. Therefore, when Piper Jeffray says "first half" sales they must mean four and one half months, since that's about the longest period the first Fresh & Easy stores have been open. That's a bit less than a "first half" in terms of any sales analysis we are aware of. But we get their point.

Secondly, only about 35% of the total 59 Fresh & Easy grocery markets opened to date were opened by January 1, 2008. That means over half of the stores have only been open for a little over two months. Further, about 35% of those (the 35%) stores opened just last month. So, when Piper Jaffray uses a term like "first half" sales, readers need to keep our numbers and explanation above in mind.

Further, the Guardian report doesn't say how many open and operating stores the Piper Jaffray report bases its estimate that "first half" sales should be about $100 million on. That's an important missing piece of data one needs to have when evaluating the brokerage firm's research and analysis. It's also key in analyzing average weekly per-store sales. For example, if the "first half" is defined as beginning when Tesco opened its first Fresh & Easy stores in November, 2007 (which it would have to be), that means we are looking at a "first half" universe of about 18 -to- 19 weeks.

For argument sake, lets say Piper Jaffray's numbers are correct. If they are, then that means the broker's original estimate of Fresh & Easy's below target weekly sales of about $170,000 is too high. [Last month the broker estimated Tesco's weekly sales target was $200,00 at that point in time but that the actual average weekly store sales were about $170,000 per-store, per-week. By the way, our source information pegs Tesco's internal weekly sales targets for this point in time at about $150,000 -to- $200,000 per-store per-week.]

Additionally, a week before Piper Jaffray released its estimate of the below target Fresh & Easy weekly sales of $170,000 vs. the $200,000 Tesco target, we reported that based on information provided by our sources, the stores were actually performing far worse than that. Our report was (and analysis still is) that the Fresh & Easy grocery markets are averaging weekly sales of about $70,000 -to- $100,000 per-store, per-week, with some stores doing over $100,000 and others doing even less than $70,000.

Based on Piper Jaffray's research note today that Tesco's Fresh & Easy stores likely have done only $30 million in what the firm calls the "first half," our average weekly sales figures seem to be much closer to that number than the $170,000 per-week the broker initially estimated. As we have written numerous times after our initial report, we stick with our numbers.

Average sales per-store, per-week is the most important measure of the Fresh & Easy stores right now. Why? As we said, the first stores have only been open since November, 2007, and half of the current 59 stores open to date have only been operating from one -to- two months. Cumulative sales over whatever period of time defines the "first half" is really fairly meaningless, except that is demonstrates Tesco's Fresh & Easy chain is indeed not performing up to expected levels to date.

On this issue and overall store performance, our analysis agrees with that of Piper Jaffray. We both have been saying Fresh & Easy isn't hitting Tesco's internal sales targets to date. More importantly from our perspective, we've argued part of the reason for this under-performance is because the retailer is failing in its positioning as being a primary shopping destination; the "neighborhood grocery market" in Fresh & Easy Neighborhood Market.

Rather, to date the small-format grocery stores, which sell basic groceries as well as more upscale specialty offerings, are in the main secondary food stores for consumers, and even in many cases the markets' are currently tertiary shopping venues. Tesco can't meet it goals--either the sales targets or overall strategic positioning goals--unless the Fresh & Easy stores can become primary grocery shopping venues in the neighborhoods where they do business.

New blood at Fresh & Easy headquarters

On Wednesday, we were one of the first (we believe the first in the USA) to report Tesco is bringing in American-born and raised Jeff Adams, who currently runs the retailer's business in Thailand, as the number-two man at Fresh & Easy, right below CEO Tim Mason. Adams is a former Wal-Mart executive.

We've been one of the strongest voices in suggesting our analysis shows one of the major problems with Tesco's U.S. Fresh & Easy grocery store operations is the retailer's failure to understand how important local grocery retailing is in the U.S., especially in the Western U.S. cities of California and Arizona, where the grocer currently is launching its biggest retailing efforts.

[We recently received a note from a grocery industry veteran and correspondent in the UK. Our correspondent was responding to one of our pieces in which we talked about this "localism" failure. The UK grocery industry veteran commented that "when it comes to grocery retailing, the UK is a village. We wrote back and said..."There is no more of a grocery industry retailing village than California; which we can tell you is 100% true.]

We believe the naming of USA-born and former Wal-Mart retailer Adams to the number-two position at Fresh & Easy just might be an accepting of our argument that one of the chain's key problems is a failure thus far to understand and appreciate the local customs, demographics, history and nature of the different neighborhoods where it has its Fresh & Easy grocery stores.

Among these failures in "localism" include a product mix that needs revamping to reflect what best sells in the west and more of a neighborhood marketing approach with it's stores. All veterans of grocery marketing and retailing in the Western U.S. know there are significant differences between the Orange County market in Southern California, the Metro Las Vegas, Nevada market, and the Phoenix, Arizona market. There even are significant neighborhood-level differences within these markets, especially in California.

Of course, there are numerous similarities between these markets as well. But that's the easy part really. What's more difficult--and what matters most--is understanding the differences, committing to "localism," and then devising and implementing a neighborhood marketing-style strategy to address these key differences and variables.

Piper Jaffray's research note says Adams is perhaps being brought in part to impart some of what we call "localism." Dennis says: "He (Adams) is tasked with understanding what has gone wrong with the (Fresh & Easy) concept, and how they (Tesco) are to recover, if at all, their $700 million-plus investment so far." We don't disagree with that analysis in the main.

Fresh & Easy format and positioning problems

At this point in time in our analysis, we have not reached any conclusions on the Tesco Fresh & Easy format in the U.S. We believe it's still to early for any reasonable analyst to do so. As such, the jury is still out in our analysis.

However, we are of two minds in our analysis to date. First, in many ways, we believe the Fresh & Easy format itself may not be a successful one for U.S. grocery retailing. Why? It's combination format of low-price-leader basic grocery store and semi-upscale fresh foods retailer doesn't fit the model of success in the U.S. to date.

The most successful U.S. grocery chains tend to be more solidly positioned in their format. For example--Whole Foods Market, Inc. as a supernatural, upscale, lifestyle retailer, Wegmans as an upscale supermarket, Safeway Stores as a lifestyle supermarket, Trader Joe's as a clear specialty grocer format, Save-A-Lot and Aldi as small-format, limited assortment discount retailers. There are numerous other examples.

In other words, success in U.S. grocery retailing generally goes to those retailer's whose formats are clearly positioned--discount, upscale, high-low, everyday low-price--rather than to hybrid-type formats, which Fresh & Easy is. However, as we said, the jury is still out.

This gets us to our "second mind" in terms of our analysis of Fresh & Easy. In many ways, its hybrid format has lots to offer. It's very egalitarian in its concept: a limited assortment of basic groceries at generally low-prices; mixed with specialty and organic grocery items, prepared foods, a limited-assortment of fresh produce and meats, wines and craft beers, fresh flowers, and a selection of non-foods.

The format allows a shopper to pick up her Brawny brand (Proctor & Gamble) paper towels, Tide Detergent (P&G again) and Fresh & Easy brand milk and eggs, along with a bunch of ready-to-eat and ready-to-heat prepared foods, some fresh produce, a good bottle of wine, and even a bouquet of fresh flowers for the table.

The geography of the stores also is rather egalitarian. Unlike Trader Joe's and Whole Foods--which target their stores generally to higher-income and education-level neighborhoods--Tesco is locating its Fresh & Easy grocery stores in neighborhoods that range from upper-income, to low-to-middle income and low-income. Of course, this is further evidence of how important it is for the retailer to create and keep primary customers--rather than secondary and tertiary shoppers--if it wants to succeed. A grocery chain that locates stores everywhere, rather than niche marketing like Trader Joe's and Whole Foods do, must have a significant base of primary shoppers to survive.

However, Fresh & Easy has some serious format and operations problems. First, the stores' still have serious out-of-stock problems in the fresh foods categories. This is a logistics problem, not one caused by massive sales. This problem is most serious in the late afternoons and evenings. The stores get daily deliveries each morning of fresh foods. The out-of-stocks problem has improved somewhat in the last 90 days since we began writing about it, but it still exists. (We still get emails from shoppers and vendors talking about it.)

In terms of the format problems, we mentioned a key one, which is the lack of local or neighborhood marketing and merchandising. Additionally, there's also a problem with the overall basic grocery product mix. It doesn't fit well with what sells best in the states' where the stores are located. Product selections have a real local flavor in the U.S. and Fresh & Easy doesn't reflect that fact of Western U.S. grocery merchandising.

Further, the ratio of Fresh & Easy store brand everyday grocery products to national brands is to high, in our analysis. Based on our store research, its about 65% Fresh & Easy brand -to- 35% national brand. We think an at least 50%--50% ratio is needed based on the limited assortment philosophy the retailer needs to use in its average 10,000 square foot stores.

The primary reason we suggest this, is that the stores are missing some very key--and top-selling--national brand items in key categories. Many of these items are the number one or two sellers in their respective categories. This omission gets back to the fact that Tesco has failed to understand and properly research what is called the "California product mix" and the "Arizona mix" by Western USA grocery retailing and manufacturer marketing and sales veterans.

There are a few more problems with the Fresh & Easy format and positioning, but these are the highlights--and most important. We argue that a failure by Tesco to address and fix each of these problems will likely result in a failure in the medium to long run for its USA Fresh & Easy Neighborhood Market venture. These format and positioning problems are fixable though.

The grocer needs to fix the fresh foods out-of-stocks problem yesterday. It's not even so much because it is causing lost sales, that's just the short-run problem. Far more important is that its defining the fledgling chain in the minds' of many consumers. They've gone into a Fresh & Easy market for the first or second time, seen lots of out-of-stocks in the fresh foods categories--especially prepared foods, which is the reason many consumers are trying the stores--and decided not to come back.

Not only are these shoppers unlikely to ever become primary customers, it's unlikely they will ever become secondary or tertiary ones as well. The definition of Fresh & Easy in these particular consumers' minds: "That grocery store that's always out of fresh, prepared foods." It doesn't matter that always is an exaggeration. What matters is that the problem (out-of-stocks) has defined the stores' in their minds. Further, in this era of viral marketing, where word-of-mouth means so much, a retailer needs vocal allies not vocal critics.

As we've written before, unlike a number of analysts, writers and others, we believe that despite these serious problems--and store under-performance to date--Tesco remains committed to Fresh & Easy and Western U.S. grocery retailing for the long haul. The grocer has too much money invested thus far.

Equally, if not even more important, Tesco has too much momentum built up to pull the plug, even if they decided to, which we don't believe they are even considering at this pint in time. There also is much British stiff-upper lip pride in the venture at Tesco HQ in the UK, as well as at Fresh & Easy Neighborhood Market corporate headquarters and stores in the U.S.

Further, Tesco should be very proud of its Fresh & Easy store-level employees. They are doing an excellent job, despite a rather paltry $10 per-hour wage and less than complete training do to the rapid new store opening schedule the grocer is embarked on.

Of course, the problem is, if the retailer doesn't first recognize a number of the problems we have identified above--which don't just come from our imagination but are informed from lots of observation and many sources from across the board--that long-term commitment will be meaningless. In fact, failure to fix these problems could mean prolonged agony. The addition of Jeff Adams though looks like it might be a start in the write direction. Stay tuned.

Note:
Tesco, parent company of Fresh & Easy Neighborhood Market, is having some sales problems at its stores at home in the United Kingdom. The Guardian article talks about that situation in the second half of the story.

Linkage:
Look through our February and January, 2008 archives, in addition to viewing March, and you will find numerous pieces analyzing Fresh & Easy, along with some suggested prescriptions for improvement.

Tesco Hits Back at Piper Jaffray (and Our) Analysis on Fresh & Easy Sales Performance

No sooner than 30 minutes after we published our piece earlier today about U.S. investment firm Piper Jaffray essentially confirming our weeks-long analysis that Tesco's Fresh & Easy Neighborhood Market chain in the USA is having difficulty meeting its own projected weekly sales targets, the emails from our various sources and correspondents started coming in. [Read that piece here.]

We've been responding, asking questions and following-up with additional sources most of the evening.

Tesco's Fresh & Easy has been busy as well. Earlier this evening a Tesco Fresh & Easy Neighborhood Market spokesman hit back at Piper Jaffray's Mike Dennis, who said the stores are underperforming, and that it would cost Tesco $400 million to exit the U.S. market if they decided to do so.

Dennis also said Tesco's Fresh & Easy Neighborhood Market's business concept was not as "robust as thought" and he added the grocer's low-price positioning on basic grocery items isn't low enough to lure shoppers in the U.S., who are suffering from a cocktail of economic bad news--soaring fuel and food prices, the sub-prime residential housing crisis, increasing unemployment and other maladies. Half of the professional economists in the U.S. are predicting the country is either already in or will soon slip into a recession. The Western U.S. states of California, Arizona and Nevada, where Tesco's Fresh & Easy has its current 50 stores, are three of the hardest economically hit states.

The spokesman for Fresh & Easy Neighborhood Market said this evening Mr. Dennis' claims "are a bit ridiculus, given that we only opened (our first stores) four months ago," Additionally, he pushed-back at the investment firm's claim it would cost Tesco about $400,000 million to close its Fresh & Easy operation and pull out of the U.S. "We are not even considering pulling out," the spokesman made clear in response to Mr. Dennis' claim and estimate earlier today.

As our readers are aware, we have been pointing up most of these problems for Tesco's Fresh & Easy Neighborhood Market operations for some weeks now. On February 21, we published a piece, "A Look at Fresh & Easy at 50 (Stores): An Analysis and Some suggestions for Going Forward." In that piece we pointed out Fresh & Easy's weekly sales problems, along with some other difficulties the retailer is having, including a format muddle, a lack of a sense of place in its stores, and labor issues.

One of those difficulties, the grocers's struggle in attracting and retaining employees because of its $10.00 hour starting wage, only ofering a maximum of 20 hour work weeks, and limited health insurance plans for store-level workers, hasn't even been discussed by other analysts. [Read more about what we wrote about this issue here.]

In terms of Piper Jaffray's analysis that it will cost Tesco $400 million to pull out of the U.S., based on our extensive conversations with numerous sources, our analysis is that Tesco hasn't even considered such a move (pulling the plug on Fresh & Easy) at this point in time.

Further, we believe Fresh & Easy's target of about $200,000 per-week in average sales for its stores at this point in time was way off base (too high of an estimate) for achieving in even the first year of operations in the Western U.S. states of California, Arizona and Nevada.

Southern California, Fresh & Easy's main retail beachhead, and Arizona, its second front in the grocer's small-format grocery retailing venture, are two of the most competitive food retailing markets in the U.S. Being a start-up in two such markets--and one from across the Atlantic as well--requires marketing and operations magic that Tesco has yet to introduce, in our analysis.

We have reported that based on our sources' information, we estimate Fresh & Easy's overall weekly sales at its 50 stores opened to date to be in the range of about $70,000 -to- $100,000. If Piper Jaffray is right--they estimate Fresh & Easy weekly sales at about $170,000 per-week--the chain is doing better than we have estimated its weekly target sales should be at this point in time. A full one-half of the small-format grocery markets' have only been open for about 6 weeks. The other half has been open for a blended average of about 12 weeks. The first stores (about 5 total) opened in November, 2007.

The fact is, however, even if Tesco's Fresh & Easy is doing better at $170,000 average weekly sales (if that figure is correct, which we believe is too high) the retailer is still having serious problems. And as we pointed out in our February 21 piece, these problems are fundamental. They involve store format, product mix, logistics (serious out-of-stocks), marketing and merchandising. In that piece we offered some suggestions to the retailer for going forward.

We're continuing to report on, analyze and offer insight on this story. We welcome emails @ freshneasybuzz@yahoo.com and comments here on the blog. We respect confidentiality 100%. And if we do decide to use any source information once we feel it is vetted properly, your name is protected unless you tell us we can use it for attribution.