Thinking Out Loud: We Reply to A Reader's Request About Retail Strategy; Tesco's Fresh & Easy and Wal-Mart's Marketside

We received a note via email earlier today from a regular reader who's an executive in the food and grocery industry. The reader has been following our coverage of Wal-Mart's new small-format Marketside store development, including the comparisons and contrasts we've made between the two global retailers' (number one, Wal-Mart, and number three, Tesco) small-format food and grocery retailing concepts, Tesco's Fresh & Easy Neighborhood Market and the yet but soon to open (in the Phoenix, Arizona Metropolitan region) Wal-Mart Marketplace stores.

In the note, among other comments and questions, the Fresh & Easy Buzz reader and industry executive asked us to write about a strategy we would use were we running Wal-Mart's Marketside division, with a focus on keeping Tesco's Fresh & Easy from being successful in Southern California, the Las Vegas, Nevada Metropolitan region, and the Phoenix Metro region in Arizona, where its stores (currently 78) are located.

We accepted the challenge.

Here is one strategy we would potentially use, keeping in mind our focus if we were running Marketside for Wal-Mart would not be one primarily focused on attempting to prevent Tesco's Fresh & Easy from succeeding, although defense has its place as part of a comprehensive success strategy.

The strategy: Background

Tesco's Fresh & Easy Neighborhood Market is conducting a strategy based on rapidly opening stores for three main reasons:

1. It's strategy with Fresh & Easy is based on having a critical mass of stores open close to each other (about 1.5 -to- 2 miles) in its selected market regions. This is based on the Fresh & Easy stores being "neighborhood" markets, along with making it cost effective to advertise, as well as using the stores themselves as the most important marketing medium of all. The medium (store) is the message. Its what we call the Tesco Fresh & Easy "critical mass" strategy.

2. Fresh & Easy is currently a single banner and format strategy for Tesco. Therefore it needs numerous stores as rapidly as possible to build critical mass and sales.

3. Tesco's low frills store design (low overhead), everyday low price strategy with Fresh & Easy requires sales volume. One has to have lots of stores as fast as possible to have a chance of achieving this sales volume (plus high volume for the low margins during the start up years) in order to feed what Tesco has created in terms of its model and infrastructure.

One result however of Tesco's rapid store opening program, 78 stores in a mere 10 months so far, is that in our analysis many of the store locations are poor ones. These include numerous Fresh & Easy stores that are in former Albertsons, Ralphs supermarket and Rite Aid drug store buildings that those respective retailers vacated for various reasons, among those reasons being store sales underperformance at the locations.

It's possible Tesco can succeed in many of those stores where the others didn't because of Fresh & Easy's small-format and operating model. However, its also likely down the road a bit Tesco will evaluate many of those "shotgun opened" locations for underperformance.

This is where our strategy comes in, following our readers request and guideline.

The strategy

Using its own scan-based and proprietary data, along with other available outside data and market intelligence that's available for the Southern California, Metro Las Vegas and Phoenix Metropolitan region markets, we might develop a very well detailed matrix mapping the estimated sales of each Fresh & Easy store by location in each region.

Once completed, this would be our blueprint for where we locate Marketside stores. Using the old rule that 80% of sales come from 20% of the locations (its a bit too high but is illustrative which is why its been in use for so long), we might then strategically place the Marketside stores, which are a bit larger than the Fresh & Easy Markets (10,000 -to- 13,000 for Fresh & Easy, 15,000 -to- 20,000 for Marketside), in such a way so that one Marketside store could potentially do as much in weekly sales (remember they are about 5,000 -to- 6,000 square feet bigger in size) as two or three Fresh & Easy stores (remember Tesco's strategy is to locate the stores 1.5 -to- 2 miles away from each other).

Using this strategy, 50 Marketside stores strategically placed/located against existing Fresh & Easy stores (which is an advantage Wal-Mart has since 78 Fresh & Easy's already exist) could potentially equal the sales of 100 -to- 150 Fresh & Easy Neighborhood Market grocery stores using our theory, if such a strategy worked.

The strategic placement in this way of the Marketside stores also would if successful render numerous Fresh & Easy stores (remember the critical mass strategy of locating the markets 1.5 -to- 2 miles from each other) to be sales underperformers because of the placement/locational effect of the Marketside stores. If one Marketside store could equal the sales of three Fresh & Easy stores in an area, something would have to give, such as eventually closing at least one of the three Fresh & Easy stores since it would be impossible for all three to survive under the strategic theory.

Additionally, keep in mind we are just running Marketside, and not all of Wal-Mart, only per our readers request and guidlines. Having all of Wal-Mart in our strategic sphere of influence would broaden our strategical arsenal dramatically.

In the real world, Wal-Mart, Inc. has its combination grocery and general merchandise Supercenters, its Sams' Club warehouse stores, which sell a full complement of basic groceries and fresh foods, and its 45,000 square foot Neighborhood Market supermarkets to use along with Marketside in a strategic methodology like we describe above. It's all about sales, not the size, format, store banner or number of stores you have.

For example, place a Supercenter four miles from four Fresh & Easy stores. Put a Sam's Club store in the same general area. Locate a 45,000 square foot Wal-Mart Neighborhood Market say just 1 -to- 1.5 miles from two of those three Fresh & Easy stores. Then put a Marketside unit about 1 mile away.

Because the four Wal-Mart formats are different enough, and in the case of the Supercenter and Sam's Club also have extensive general merchandise offerings, it isn't likely the various Wal-Mart formats would cannibalize each other. But they could have negative effects on sales at the four Fresh & Easy stores. Or two out of the four, which achieves the strategic objective of the plan. [By the way, this is the multi-format food and grocery retailing strategy we believe Wal-Mart plans to plug Marketside into.]

We have no inside knowledge that Wal-Mart is following such a strategic plan vis-a-vis Tesco's Fresh & Easy. What we do know, and have reported on, is that Wal-Mart's first four Marketside stores, which open in just a few weeks, will be located in four cities in the Phoenix, Arizona Metro area: Gilbert, Chandler, Mesa and Tempe.

What we do know is the Wal-Mart Marketside stores are within 1 -to- t2 miles from existing Tesco Fresh & Easy grocery markets in each of the four cities. In addition, Wal-Mart has Supercenters, Sam's Club stores and Neighborhood Market supermarkets in and around these four cities. They are strategically located vis-a-vis both the Marketside stores and the Fresh & Easy stores. Additionally, Arizona happens to be one of Wal-Mart's top three new store growth markets in the U.S. for its Supercenters, Sam's Club stores and Neigborhood Market supermarkets.

Further, as we've previously reported, Wal-Mart plans to open a Marketside store in San Diego, California (it is rather close to a Fresh & Easy store in the city) and a store in nearby Oceanside, which also is fairly close to a Fresh & Easy market.

And, as we've also reported, Wal-Mart is very carefully and selectively searching for Marketside store locations in other parts of the Phoenix Metropolitan region, in Nevada, and in Southern and Northern California. We say selectively searching because Wal-Mart does not plan to open Marketside stores at even a rate one-half that in which Tesco is opening Fresh & Easy stores in its first year.

So, based on what we've reported, as you can see, Wal-Mart looks like it may be planning a strategy similar to the one we merely cooked up to accept our loyal reader's challenge, along with hopefully providing some strategic thinking in the minds of our readers as a whole.

As we said at the start of this piece, the strategy is more of a conceptual or academic one designed to offer an idea for our reader and to our readership using the question as the premise of the strategy. However, like so often is the case, it's interesting to watch how observable facts can often seem to look very much like conceptual strategies, at least in part.

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.