Fresh & Easy Neighborhood Market Goes 'Outside the Box,' Adds Natural Gas-Fueled Trucks to Delivery Fleet

'Green' Food and Grocery Retailing

El Segundo, California-based Fresh & Easy Neighborhood Market is going outside the box - its 10,000 square-foot grocery markets and 800,000 square-foot distribution center in Riverside County, California specifically - in its latest environmental conservation and sustainability initiative.

The Tesco-owned chain has inked a deal with Ryder System, Inc., its transportation, logistics and supply chain partner, to lease 25 compressed natural gas (CNG) delivery trucks, which it will add to its fleet of diesel fuel-powered vehicles and use to deliver fresh foods and groceries to its 176 stores in California, Nevada and Arizona from its Southern California distribution center. Fresh & Easy currently leases 71 vehicles from Ryder Systems, which it uses to deliver product to its stores in the three Western States.

Fresh & Easy Neighborhood Market has taken delivery of the first 15 of the CNG delivery vehicles, according to Cindy Hass, a spokesperson for Ryder Systems. The remaining 10 delivery trucks will be delivered to the grocery chain in October, she says. The CNG vehicles are the fist of their kind for Fresh & Easy's delivery truck fleet.

Tesco's Fresh & Easy is what Ryder Service, Inc. calls one a "Dedicated Contract Carriage" customer, which means the company provides a full menu of transportation, logistics and supply chain services to the grocer.

Those services include: providing the delivery vehicles and related equipment on a lease basis, along with engineering and logistics support services; supplying the drivers and management expertise. In other words, it's a full outsourcing-type arrangement between Fresh & Easy Neighborhood Market and Ryder.

Ryder Systems is making the compressed natural gas vehicles available to Tesco's Fresh & Easy as part of an agreement to reduce emissions the transportation company has made with the San Bernardino Associated Governments (SANBAG) in Southern California. San Bernardino County neighbors Riverside County, where the grocery chain's distribution center is located.

The agreement between the transportation company and SANBAG is part of a $38.7 million public/private partnership between the U.S. Department of Energy, the California Energy Commission, the Southern California Association of Governments Clean Cities Coalition, and Ryder System, Inc.

The key elements of the project include putting 202 of the CNG-powered delivery vehicles on the road in Southern California, making upgrades to three maintenance facilities for the servicing of natural gas vehicles, and the construction of two compressed natural gas fueling stations in the region.

Compressed natural gas is about 40% cheaper than diesel fuel, base on today's price. Additionally, experts estimate the CNG-fueled delivery vehicles produce in the neighborhood of 25% less emissions than diesel fuel does.

Geologist, entrepreneur and oilman T. Boone Pickens has for the last couple of years been advocating a nationwide government/private sector partnership that would have as its focus the conversion of the nation's entire diesel fuel-powered commercial trucking fleet to compressed natural gas, arguing doing so would be cheaper, reduce carbon emissions, help lower U.S. dependence on foreign oil and create jobs. According to Geologists, the U.S. and Canada have the greatest amount of natural gas reserves in the world.

Pickens has spent over a million dollars of his own money on a pubic relations program and lobbying Congress and the President to enact legislation designed too enable the massive conversion of the U.S. trucking fleet from diesel fuel to natural gas but has yet to see his "Pickens' Plan" become public policy.

United Kingdom-based Tesco, which owns Fresh & Easy Neighborhood has a major climate change/carbon reduction initiative that was started a few year ago by former CEO Terry Leahy, who retired in March of this year, and is being continued by the board of directors and new CEO Philip Clarke, who took over for Leahy in March.

Tim Mason, the CEO of Fresh & Easy, was named to the additional position of Tesco group deputy CEO in March. In that position, which reports to Clarke, Mason has overall responsibility for Tesco's global climate change/carbon reduction initiative, along with heading up Tesco's global marketing and branding efforts, as well assisting Clarke in a number of other initiatives.

"We are committed to reducing our impact on the environment, and incorporating natural gas vehicles into our fleet is a natural step to help us reduce emissions even further," Mason says. "Ryder has been an excellent partner in this effort, supporting our efforts to save our customers money and to be a good neighbor."

The reduction in  fuel costs should also provide some needed cost savings for Fresh & Easy Neighborhood Market as long as the cost of compressed natural gas remains significantly lower than diesel fuel.

"When we can reduce our operating costs through more efficient transportation technologies like natural gas, we can pass those savings on to our customers," Mason says. "This natural gas vehicle initiative directly supports our efforts to offer fresh, wholesome food at affordable prices."

The addition of the 25 CNG delivery vehicles to its fleet should provide a significant contribution by Tesco's U.S. Fresh & Easy chain towards the global retailer's goal and strategy of reducing its carbon footprint over the coming years in the 14 countries where it has its operations, stores, distribution facilities and delivery fleets, because of the reduced emissions the natural gas-fueled delivery trucks provide.

Related Stories

December 8, 2010: Fresh & Easy Neighborhood Market to Install Solar Energy Systems Atop Nine Arizona Stores in March 2011

May 12, 2010: Brighter Looking Fresh Foods, 'Greener' Stores on Tap at Tesco's Fresh & Easy Neighborhood Market

December 31, 2008: 'Green' Retailing: Tesco Scores Second Overall, Number One Among Food and Drug Chains, in Ceres Coalition's Climate Change Corporate Scorecard

September 8, 2008: Tesco PLC CEO Terry Leahy: 'We Must Go Green'

April 4, 2008 Fresh & Easy Buzz Redux: Fresh & Easy Neighborhood Market Should Mimic Tesco UK's Penny-A-Bulb Compact Fluorescent Light Bulb Promo for Earth Day USA

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Fresh & Easy's key "green" grocer initiatives

Since it opened its first stores in November 2007, Tesco's Fresh & Easy has been making making continuous improvement towards its goal of becoming a "green" (as in more sustainable) grocer.

In fact, the retailer's sustainable initiative started before opening the stores. For example, when Tesco constructed the 800,000-plus square-foot Fresh & Easy Neighborhood Market distribution center in Riverside County it included a massive solar energy array on the building's roof. In the peak summer months, like now, the system provides up to 30% of the facilities energy.

Fresh & Easy's most recent "green" initiative at store-level is the replacement of the coffin-style reach in frozen food display cases n the stores with upright units that have glass doors, which is something we were the first publication to report in this story: The grocer is currently in the process of replacing the coffin case freezer cases with the upright units with glass doors in about a third of its 176 stores.

Key sustainability/energy conservation initiatives Tesco's Fresh & Easy currently practices in its stores:

>Uses LED lighting in its outdoor signs an in its frozen and refrigerated product display cases inside the stores;

>Uses above standard (in energy efficiency) display cases for perishable foods'

>Recycles the display packaging it ships to its stores, returning it back to the distribution center in Riverside County;

(However, unlike most grocers Fresh & Easy does pre-package most of its fresh produce, thereby creating added packaging that's sent home with customers who purchase the items. The grocer also offers free single-use plastic carrier bags only rather than a choice of paper or plastic like most if not all of its competitors do. If Fresh & Easy offered its customers a choice it would be more sustainable because single-use plastic bags are recycled at far-lower rates then paper grocery sacks are, although the grocer does a good job at encouraging the use of reusable shopping bags in its stores.)

>Has recycling bins in all its stores for single-use plastic carrier bags and other types of recyclable packaging. This is the law in California, where the grocer has 127 of its 176 stores. But is not required in Arizona, where Fresh & Easy has 27 units, or Nevada, where there are 21 stores. However, Fresh & Easy neighborhood Market has the bins in its stores in those states anyway;

>Started installing solar panel arrays on nine Fresh & Easy stores in Arizona in March of this year.

Challenges & Opportunities: Tesco's Fresh & Easy Neighborhood Market Will Supply its Northern CA Stores From its Riverside County DC in Southern CA

The Insider: Heard on the Street

Tesco's Fresh & Easy Neighborhood Market plans to supply it's Northern California stores from its 850 square-foot distribution center in Southern California's Riverside County rather than start up and operate its facility in Stockton, California, which it obtained in 2008, until it achieves a store-count and level of sales volume which makes doing so economically feasible.

Fresh & Easy Buzz has estimated it will cost Tesco $25 million -to- $30 million to make the Stockton distribution center fully operational.

Further, in order to be self-distributing out of Stockton for its Northern California division, it's my analysis Fresh & Easy needs annualized sales of at least $200 million in the region, from a economies-of-scale standpoint. That's the annual sales volume to begin the self-distribution from the facility. But not to make the distribution center operationally efficient. Tesco reported overall sales of $544 million for its fiscal year 2009/10, which ended in February 2010. My estimate is the chain is currently doing slightly under $600 million in annualized sales. [See - April 20, 2010: Strong Group Revenue & Profit For Tesco... But $253 Million Loss at Fresh & Easy]

Tesco announced on August 19 it plans to open its first eight Fresh & Easy units in Northern California in "early 2001." [See - August 19, 2010 story: Tesco Will Open its First Eight Fresh & Easy Neighborhood Market Stores in Northern California in 'Early 2011.' and our August 21, 2010 piece: April 2010 Prediction Correct: February 2011 Target to Open First Eight Fresh & Easy Neighborhood Market Stores in Northern California for details.]

That Fresh & Easy Neighborhood Market plans to supply the Northern California stores out of its Southern California distribution center comes as no surprise to Fresh & Easy Buzz or 'The Insider.' We've suggested in the blog and on our @FreshNEasyBuzz Twitter feed it's something the grocer should consider doing.

Long-distance distribution

Tesco's Fresh & Easy will have to take some special steps in order to supply the stores in the northern region of California out of its Riverside County facility, however.

For example, the U.S. Department of Transportation (DOT) requires (by law) that truck drivers can only drive for a straight eight-hour period, and then must stop and lay off for eight hours. It's about 450 miles - at least an eight hour trip and often longer, particularly in winter when it snows on the "Grapevine" over Interstate 5 - from Fresh & Easy's Riverside County distribution facility to the San Francisco Bay Area and Sacramento/Vacaville regions (a little less to Modesto and Stockton in the Northern Central Valley, but not much), where the majority of the planned Northern California Fresh & Easy stores are located. This means a single driver can't make the trip from the Riverside County facility and deliver to the stores in Northern California.

Because of this factor, Fresh & Easy will either have to use a driver team - starting with two drivers, one pilots the rig from Riverside County to say Stockton, then the other driver takes over to make the deliveries to the stores - or have a single driver start out from Southern California, bring the load to say Stockton (or elsewhere), then have a second driver waiting at the Stockton facility yard to take over to make the deliveries to the stores. Since Tesco is paying for the Stockton facility, it could use it as a transfer depot under scenario number two above.

There is precedent for grocers and distributors supplying stores in Northern California from Southern California. For example, Kroger Co.'s Ralphs supplies its Foods Co stores in Northern California out of a southern distribution facility.

And even better case study vis-a-vis Tesco's Fresh & Easy is WinCo Foods. Idaho-based WinCo Foods operates 12 huge discount food and grocery stores in Southern California. (The grocer's stores average 90,000 -to- 100,000 square-feet. One WinCo store is a big as 10 Fresh & Easy markets.) Six of the 12 Southern California WinCo markets are in Riverside and San Bernardino counties. Riverside County is where the Fresh & Easy Neighborhood Market distribution center is located.

WinCo Foods distributes to its Southern California stores from its Northern California distribution center in Modesto, which is where one of the first eight Fresh & Easy stores in the north state will open in early 2011. Modesto is 30 miles from Stockton, where the Northern California Fresh & Easy facility is located.

In addition to the two self-distributing retailers detailed above, two natural foods wholesalers, Nature's Best and Tree of Life, supply supermarkets and natural foods stores in Northern California from facilities located in Southern California, and have been doing so for many years. Tree of Life distributes fill-in (what Safeway Stores, Inc. doesn't procure direct) natural, organic, and specialty foods products to the 200-plus Safeway supermarkets in Northern California out of its Southern California distribution center near Los Angeles, as well as to some natural foods stores and independent grocers. Nature's best services numerous high-volume natural foods stores in Northern California, along with independent supermarkets, out of its Southern California headquarters and distribution facility. It's been doing so for decades.

Challenges

Supplying stores in Northern California from Southern California isn't without it challenges however, particularly for a self-distributing retailer like Fresh & Easy. Keep in mind Tree of Life (now owned by Kehe Food Distributors) and Natures Best are wholesalers. As long as they fulfill a retail customer's order and get it there when they say they will, they have done their job. Out-of-stocks thus aren't the wholesaler's problem, unless it's due to problems in its procurement and order-filling systems.

The chief difficulty for Fresh & Easy will be order lead time. For example, for a store in Northern California to get a grocery delivery from Southern California on a Monday morning, the ordering process, even with continuous replenishment which Fresh & Easy uses, has to be made and processed earlier than normal in order to allow for the at least eight hours it takes for a truck to get from Riverside County to Stockton or another nearby city in the north.

Let's say the San Francisco or Pacifica stores in the Bay Area (two of the first eight to open in early 2011) are to get Monday morning deliveries, which is key in order to replenish after the weekend. That means the truck with those store's orders must leave Fresh & Easy's Riverside County distribution center at about 9 pm on Sunday night.

Further, let's say the truck has two drivers. Driver one starts out from Riverside County. Eight hours later - at 5 am Monday - he arrives in Stockton. His eight hours are up. Driver two takes over to make the deliveries, first to the San Francisco store (arriving around 7 am), which is about two hours from Stockton in commute traffic, then goes on to Pacifica (about 30-40 minutes from the San Francisco store) and any other stores on the route. Remember, driver two has only eight hours to make the deliveries.

Since the truck must leave the Riverside County distribution center at around 9 pm on Sunday night to make the Monday morning deliveries in Northern California, the orders must be picked early on Sunday, which means they must be processed a considerable time before that.

What's even more of a challenge though in distributing from south-to-north are shorts and out-of-stocks. For example, let's say on that Monday delivery scenario above, ten percent of the items ordered are shorted by the Riverside County distribution center. Some were out-of-stock, others were picking mistakes, and a few just didn't get put on the truck. It happens all the time. Normally, with a local distribution center, stores could get many of those items the next day. However, because of the time lag distributing south-to-north, it's much more difficult to solve these types of shortages in 24 hours or less.

The south-to-north distribution will be particularly challenging for Fresh & Easy Neighborhood Market in its fresh-prepared foods category. The items have a short shelf-life, which means the added delivery time will create the potential for more shrinkage at store-level than if the products were being distributed to the Northern California stores out of Stockton. And of course, combination refrigerated-dry grocery trailors will have to be used to deliver the products from the south to Northern California, which Fresh & Easy already uses.

Tesco's Fresh & Easy does have a track record in long distance distribution in that it distributes to its 27 stores in Metro Las Vegas, Nevada and 34 stores Metro Phoenix, Arizona out of the Riverside County facility in Southern California. Its about 250 miles from Riverside County to Metro Las Vegas and about 325 miles from the Riverside distribution center to Metro Phoenix. The distance to the Northern California stores however is nearly twice that to Metro Las Vegas, and at least 100 miles farther than to Metro Phoenix. As such, it presents more of a challenge to the grocer than it's experienced to date in terms of long distance distribution.

Fresh-prepared foods category

The category that presents the greatest challenge to Fresh & Easy in supplying the Northern California stores from Southern California is fresh-prepared foods, which comprise a significant number of the about 5,000 SKUs the Fresh & Easy stores stock. The refrigerated ready-to-eat and ready-to-heat food items also are a centerpiece of the chain's offering and merchandising.

Fresh & Easy already has a significant shrink problem in its fresh-prepared foods category, which is why it marks the items down by as much as 50% each day in its stores. They have short code dates and sales have been less than the grocer anticipated.

The added time required to distribute product from the south to the north means Fresh & Easy will have to be extremely diligent in how it orders the products for the stores because it will have to estimate the quantities somewhat in order to allow for the needed lead time in order processing, order picking and loading on the trucks at the Riverside distribution center, the eight-plus hour drive from the facility to Northern California, and the added hours delivering the items to the stores. In other words, the order-to-delivery cycle becomes shorter because of the long distance distribution system. Therefore, the grocer will have to tweak its replenishment system to operate in a more anticipatory way than it does for its 98 stores in Southern California in particular, and to a lessor but significant degree than it does for southern Nevada and Arizona.
If too much is ordered, that means more 50% markdowns and more shrink, throwing away what doesn't sell. If too little is ordered, that means out-of-stocks and lost sales.

Fresh foods kitchen-only option down the road

One thing Fresh & Easy could do as it gets a few dozen stores open is to set up a fresh-prepared foods kitchen at its Stockton distribution center in Northern California but continue to distribute all other categories out of Riverside. This would allow for better distribution to the stores, including decreased shrink and potential out-of-stocks, of the highly-perishable refrigerated ready-to-eat and ready-to-heat foods, while at the same time saving the expense of setting up and running a full distribution facility in the north.

'The Insider' wouldn't even think about operating a full Northern California distribution center (all categories) until there were about 100 Northern California stores up and running, with more in the pipeline. (I would hope the 100 stores would at least equal the $200 million in sales volume I mentioned at the top of my column.) At the point if the volume isn't sufficient, then it means the stores aren't doing well enough in general. Therefore, the problem is far greater than logistics and distribution.

Economies-of-scale & 0pportunities

A south-north distribution strategy makes the best sense for Tesco's Fresh & Easy Neighborhood Market for the near-to-medium term.

The economies of scale in setting up and operating a full distribution center at the Stockton facility for a handful of stores, with unproven sales, doesn't pan out. Remember, Tesco had planned to launch Fresh & Easy into Northern California by early 2009, having about 100 stores open by now in the region. Instead, I expect it to have in the range of 25 -to- 40 stores open in Northern California by the end of 2011. The rate of store openings is still being discussed at Tesco's Fresh & Easy. The Stockton facility was acquired and planned predicated on that 2007-2008 strategy.

Using two drivers - a tag team starting at Riverside or a hand-off scenario in Stockton or elsewhere in Northern California - will be more expensive than using one driver, obviously. But it will be far less costly than fully-setting up and operating the Stockton distribution center.

Additionally, with 159 stores currently, and annual sales volume of about $600 million in my estimation, Tesco's Fresh & Easy distribution center in Riverside County is nowhere near where it needs to be for optimum operating efficiencies. Therefore, distributing the Northern California sales volume out of the facility will help toward increasing its overall volume, getting closer to those efficiency goals.

The challenges of distributing from the south to the north though will be real ones for Fresh & Easy Neighborhood Market. The grocer still has far too many out-of-stocks in many of its stores than it should, although its improved considerably from 2009, when it was very bad.

But taking all of the variables into consideration, I would do what Tesco's Fresh & Easy plans to do, distribute to the Northern California stores for the near-to-medium term out of the existing Riverside County facility. The one caveat being that I would start looking into setting up and operating a fresh-prepared foods kitchen-only at the Stockton facility for down the road.

Recent columns by 'The Insider'

~July 18, 2010: When it Comes to Northern California - its Competitors are Rome Burning and Tesco's Fresh & Easy Neighborhood Market is Nero Playing the Fiddle

~July 13, 2010: A Few Words on The Life and Death of Veteran Southern California Grocer Roger K. Hughes

~June 27, 2010: The Insider: Will Tesco Acquire Supervalu, Inc. and Change its 'Fresh & Easy' Game in America?

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

~May 20, 2010: Welcome to Discountopia USA

~April 29, 2010: Heard on the Street: There's Something About Albertsons ... In Southern California

[Fresh & Easy Buzz Editor's Note: Below are the stories thus far in our Northern California Market Special Report Series.] [Photo credit: Fresh & Easy Neighborhood Market.]

August 21, 2010: April 2010 Prediction Correct: February 2011 Target to Open First Eight Fresh & Easy Neighborhood Market Stores in Northern California

August 19, 2010: Tesco Will Open its First Eight Fresh & Easy Neighborhood Market Stores in Northern California in 'Early 2011.'

August 17, 2010: Henry's Farmers Market 'Beats' Fresh & Easy Neighborhood Market to Northern California Despite Multi-Year Head Start; Elk Grove Store Opens Tomorrow

July 29, 2010: Tesco's Fresh & Easy Neighborhood Market Putting Together List of Managers Interested in Transferring to Northern California

July 25, 2010: Safeway to Start Construction on New Pleasanton, California Flagship Store Soon; Thanksgiving 2011 Target Opening

July 22, 2010: 'The Insider' - After Four Years in the High Weeds in Northern & Central California, Kroger Co. is Emerging to Grow its Foods Co Chain

July 21, 2010: Vacant Fresh & Easy Neighborhood Market Store in Pacifica, California Has the City's Mayor in a Pickle

July 18, 2010: 'The Insider' - When it Comes to Northern California - its Competitors are Rome Burning and Tesco's Fresh & Easy Neighborhood Market is Nero Playing the Fiddle

July 14, 2010: Tony Bennett Has Nothing on Whole Foods Market When it Comes to Loving San Francisco...That City By the Bay

July 6, 2010: Walmart Looking for Store Sites in Northern California For 20,000 Sq-Ft Neighborhood Market by Walmart Prototype Store

June 28, 2010: Smart & Final to Open its New Format SmartCo Foods Stores in California and Arizona

June 26, 2010: Tesco Planning to Announce in July When First Northern California Fresh & Easy Neighborhood Market Stores to Open

June 14, 2010: Newly-Named Whole Foods Market CO-CEO Walter Robb Comes Full Circle With the Opening of the New Store in Mill Valley CA

June 5, 2010: Sprouts Farmers Market Opens First Northern California Store in Sunnyvale; Strikes Up Partnership With Local Non-Profit Farm

May 29, 2010: Going Rural: Fresh & Easy Neighborhood Market to Build First Store in Los Banos, California

May 28, 2010: First Phase of Fresh & Easy Neighborhood Market-Anchored Condo Development in San Francisco's Bayview Set For Completion in June

April 19, 2010: Tesco Debating Whether to Launch Fresh & Easy Into Northern California This Fiscal Year... or Wait

May 9, 2010: A Whopping 15 of Whole Foods Market's 41 New Stores in Development are in California - And Nine of The 15 Are In Northern CA

May 8, 2010: Sprouts, and Likely Henry's to Beat Fresh & Easy to Northern California Despite it's Big Head Start

May 6, 2010: Going Smaller & Getting 'Hybrid': Walmart's Smaller Supercenter in Vacant Retail Buildings Strategy Began in 2008

April 19, 2010: Tesco Debating Whether to Launch Fresh & Easy Into Northern California This Fiscal Year... or Wait