Today's LA Times on Fresh & Easy: We Chime-In With Some Analysis and Thoughts as Well

Today's edition of the Los Angeles Times has an article in the Business section by reporter Jerry Hirsch about Tesco's Fresh & Easy Neighborhood Market. The story reports on the grocery chain's decision to call a "pause" in new store openings for the next three months, as we reported on last Saturday, March 29 in the piece linked here.

The LA Times piece by Mr. Hirsch uses the three-month new store opening moratorium as its point of reference in writing about Fresh & Easy's sales performance to date at the 59 small-format, hybrid basic grocery/fresh foods grocery markets the grocer currently has open in Southern California, the Phoenix, Arizona Metropolitan/East Valley region, and the Las Vegas, Nevada Metro area.

[Even though Fresh & Easy has called a three month "pause" in new store openings, it's not a complete freeze, as there still remain a couple stores in the pipeline set to open soon.

Specifically, two stores are set to open in the next couple weeks, which will bring the total store count to 61 by the end of April.]

The Times' piece has some good shopper reaction quotes about the small-format Fresh & Easy grocery stores. The article also covers a number of issues we've reported on, discussed and analyzed on Fresh & Easy Buzz before.

Among those issues are Tesco's environmental impact problems at its massive 850,000 square foot distribution center in Southern California.

Additionally, the Times' story mentions what we've called Tesco's "ethnocentrism" (Hirsch uses the word arrogant) and its lack of local knowledge of (and respect for from a merchandising standpoint) the demographics, history and customs of the neighborhoods it has its stores in.

The Times' piece also touches on what we're referred to as a failure to either understand or implement (or both) various practices and merchandising elements common in Western U.S. grocery retailing. Chief among them, which we often point out, is "localism" in marketing and merchandising. [Review our archives for various format, operations, marketing and merchandising suggestions we've offered Tesco Fresh & Easy thus far.]

As our readers know, we were one of the first analysts to offer an estimate--based on interviews with our multiple sources--of Fresh & Easy store average weekly sales. Based on our analysis, we've estimated average overall sales at the Fresh & Easy grocery markets open to date is in the range of $60,000 -to- $100,00 per-store, per-week.

We offered our estimate at least a week before the Piper-Jaffray investment firm's London office released a report in which it said at the time it estimated Fresh & Easy average sales to be about $170,000 per-store-per-week, which the broker said was about $30,000 below Tesco's sales targets of $200,000 per-store, per-week for the markets. [We agree with Piper-Jaffray that the $200,000 per-store, per-week is about correct in terms of Tesco's internal sales goal.)

Another analyst, fresh foods industry consultant, publisher and writer Jim Prevor, released his weekly sales estimates at about the same time we published ours. Mr. Prevor's estimates are that the Fresh & Easy stores are doing about $50,000 -to- $60,000 per-store, per-week in average sales.

As we've wrote since we offered our weekly sales estimates, we stand by our numbers of average, overall Fresh & Easy weekly store sales in the range of $60,000 -to- $100,000. Additionally, we're rather skeptical of any sales estimates that don't use a range. Our sources are good, and unless another analyst is getting their estimate numbers directly from the CFO at Tesco Fresh & Easy Neighborhood Market, we suggest our readers be skeptical of any publishing of precise sales numbers, rather than a range.

Today's LA Times story quotes the Piper Jeffrey sales numbers in it. However, the Fresh & Easy sales estimate numbers it quotes (which in absolutely no knock on reporter Hirsch) are the second set of numbers Piper-Jaffray has released. Further, these new Piper-Jaffray numbers are very different (much lower) than its initial $170,000 per-store, per-week estimate just a little over a month ago.

Piper Jaffray's latest estimate is that the Fresh & Easy stores are doing about $60,000 (a similar number to Mr. Prevor's) per-store, per-week. This is a whopping $110,000 difference, compared to the first set of the brokerage firm's sales estimate numbers. It's closer to what we believe are the real average sales numbers though: the $60,000 -to- $100,000 per-store, per-week, which as we've said we currently stick by.

We do agree with much of what Piper-Jaffray says in its analysis however regarding the Fresh & Easy grocery stores' under-performance to date. In fact, we've been one of the first analysts and writers to point them out, as well as just about the only one to offer some remedies, including format tweaking, operations fixes, and suggested marketing and merchandising ideas and perspectives.

We suggest you read Mr. Hirsch's full article in today's LA Times Business Section. Particularly, we think the interviews with Fresh & Easy store customers provide some excellent qualitative data and information.

We point-up the differences in our sales estimate numbers, compared to the others, as we want our readers to have that information as they read the Times' piece and others. The fact is though that our sales estimate numbers, Piper Jaffray's, Mr. Prevor's and those of Willard-Bishop Consulting (quoted in the Times' article using weekly sales estimates of $60,000 -to- $70,000) are now all very close together.

Read the full LA Times article, "Fresh & Easy a tough sell for shoppers," here.

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.

Breaking News: Tesco plc. Makes Major Personnel Change to Fresh & Easy Neighborhood Market USA Senior Management Team

United Kingdon-based Tesco plc. has made its first major change to the senior management team of its Fresh & Easy Neighborhood Market grocery store venture in the U.S.

Jeff Adams, the American-born chief executive of Tesco's Tesco Lotus retail business in Thailand, is moving to Tesco's Fresh & Easy's Neighborhood Market's Southern California-based corporate headquarters as the second in command to CEO Tim Mason.

As our readers are aware, we recently reported that our sources have been telling us that average weekly sales at the 58 Fresh & Easy grocery markets opened to date in Southern California, Arizona and Nevada, are seriously below company targets for this point in time.

Based on information from multiple sources, we estimated in February overall weekly sales at Fresh & Easy stores of about $70,000 -to- $100,000, compared to the retailer's goal of $175,000 -to- $200,000 per week. About a week after our report, the Wal-Street investment firm Piper Jaffray said its research shows the stores underperforming as well. The firm suggested the stores were averaging about $170,000 a week in sales which was about $30,000 less than Tesco's weekly sales numbers of $200,000 are.

In a follow-up analysis, we suggested Piper Jaffray's weekly numbers were too high. We offered that, based on the firm's much higher estimate than ours, we would give the retailer the benefit of the doubt and use our high weekly sales number of $100,000 as the average, which still results in significant underperformance for the stores relative to the retailer's internal targets.

We also argued--and continue to argue-- that a $200,000 a week (too high) estimate at this point in time for Tesco demonstrates a fundamental lack of knowledge of the competitive nature of the Western U.S. retail grocery market. It also shows a failure to properly research the numerous start ups in the region that have failed, or taken years to break even.

However, we also said that if we are wrong--which based on our source information we doubt--and the Piper Jeffrey weekly sales number of $170,000 is correct, then Tesco should be happy and revise their expectations--and sales projections--downward, since if the retailer is really doing average weekly sales of $170,000 in its stores, then its doing far better then our analysis, our sources' analysis, and the analysis of others writing about Fresh & Easy believe.

In our February 21 piece linked here, as well as in numerous other pieces, we've suggested to Fresh & Easy senior management that the fledgling chain needs a major shot of "Localism" in its format, merchandise mix, and overall style of doing business in the Western USA.

Perhaps bringing American-born Adams on board as Fresh & Easy Neighborhood Market's number two reporting directly to Tim Mason is a step in that direction. After all, not one member of the pre-Jeff Adams Fresh & Easy senior management team is a U.S. native. Now there is one.