Fresh & Easy Developing Smaller Version of its 3K Square-Foot 'Fresh & Easy Express' Format Stores

Breaking Buzz & Analysis

Tesco-owned Fresh & Easy Neighborhood Market is currently developing a 2,000 square-foot version of its 3,000 square-foot 'Fresh & Easy Express' convenience-oriented food and grocery market, according to multiple sources familiar with the project.

Fresh & Easy is constructing a prototype of the 2,000 square-foot store inside a space it controls near the 10,000 square-foot Fresh & Easy Neighborhood Market unit in Los Angeles' Eagle Rock Neighborhood.

El Segundo, California-based Fresh & Easy Neighborhood Market used that very same space to build a mock-up of its 3,000 square-foot 'Express' format stores, of which their are currently about 10 units, all in Southern California.

The new 2,000 square-foot market, called an F2 in Fresh & Easy speak - the 10,000 square-foot stores for example are referred to internally at Fresh & Easy as F10's, the 3,000 square-foot stores F3's, and the handful of 7,000 square-foot markets the grocer operates are F7's - is basically a scaled-down version of the 3,000 square-foot stores, according to sources who are familiar with the project.

For example, current plans call for smaller refrigerated, frozen food and produce cases than in the 3,000 square-foot stores as a way to compensate for the reduced square footage, according to our sources. Some types of cases and shelving also could be eliminated for the same reason, our sources say.

Neither Tesco or its Fresh & Easy Neighborhood Market chain have announced the development of the 2,000 square-foot stores. This is the first time Tesco's plans for a smaller version of the 3,000 square-foot 'Fresh & Easy Express' store is being reported.

Analysis

The first question any food and grocery retailing analyst or grocer worth his or her salt should ask upon reading this report is: 'Why a 2,000 square-foot version of what already at 3,000 square feet is a very small-format grocery market.?

The answer to that question, according to our sources (and to our reporting and analysis of Tesco and its Fresh & Easy chain for five years on) - and it's what we said was the primary driving force behind the 3,000 square-foot 'Express' format in our stories about the stores last year - is that Tesco's Fresh & Easy is searching for ways to reduce its new store development and opening capital cost while still growing its store count.

Since launching its California-based small-format fresh food and grocery chain in 2007, Tesco has always said it will break even financially with Fresh & Easy - which lost about $245 million in its most recent fiscal year and has lost about $1.5 billion over its five year history - by achieving scale, which means opening numerous stores over a short period of time.

For example, from 2006 to 2010 Tesco said it still planned to have at least 500 stores in four-to-five years, on its way to 1,000 stores over an about six or seven year period, which would be 2013-end-to-2014. It said this despite the fact it's paused opening new stores for many months at least three times in Fresh & Easy's five year history. The most recent period being at present.

But in 2011, not long after he took over as CEO of Tesco in March of last year, Philip Clarke said the United Kingdom-based retailer planned to open just 400 Fresh & Easy stores, which would allow Tesco to break even with its U.S. grocery chain by the end of its 2013 fiscal year, which ends February 2013.

Not many months later Clarke and Tesco changed those plans, saying instead of the 400 Fresh & Easy units needed to break even by the end of fiscal 2013, it had figured out a way to do so with just 300 stores.

But then earlier this year Clarke and Tesco pushed back Fresh & Easy's break-even time to the end of its 2014 fiscal year, at which time the retailer says it will then break even with Fresh & Easy Neighborhood Market. Tesco kept - so far - the 300 store number as the number of Fresh & Easy units needed to break even by the end of the 2014 fiscal year.

There are 199 Fresh & Easy stores in California, Nevada and Arizona.

Tesco's 2014 fiscal year-end is about two years away. That means it will have to build and open 101 stores between now and then to reach 300 units, which Clarke and company say is needed to break even at that time.

But Tesco has essentially stopped opening Fresh & Easy stores, with the exception of one or two here or there.

Instead, the retailer has embarked on a cost-cutting campaign of limited sorts with Fresh & Easy, which begs another key question any industry analyst or grocer should ask: "How can Tesco open 101 stores in two years - which is half as many as it's opened over the last five years - when beginning a couple months ago it essentially stopped opening new Fresh & Easy stores?

In fact, even if Tesco were opening Fresh & Easy stores at its high-point-pace, it would be near physically and logistically impossible, and not very smart, to open 101 stores in two years, particularly considering the continued poor performance of the California-based grocery chain and its need to reduce costs and raise margin at it to even come close to breaking even with Fresh & Easy

The answer to the question, as it pertains to the micro small-format store prototype being developed, isn't that Tesco is going to open 101 2,000 square-foot grocery markets - the format in development. For example, it's opened just 10 or so of the 3,000 square-foot Fresh & Easy Express stores in the year or so since the first unit was opened.

There are numerous reasons why they won't do so but here's a simple reason why if they do it won't help: The best 10,000 square-foot Fresh & Easy stores do about $150,000 in average weekly sales, and there aren't many of those units. That would mean the best of the 2,000 square-foot stores would do - at best - about 40,000 in weekly sales. If scale, as in growing sales by growing store-count, matters, 101 2,000 square-foot stores, even if they all were stellar performers, which they won't be, doesn't add up to a whole lot of annual sales when one looks at the big picture.

But hopes and dreams of reduced capital costs without considering the fundamental question - can 2,000 square-foot grocery stores operated the way Fresh & Easy operates them make any money - it appears spring eternal at Fresh & Easy Neighborhood Market.

Therefore, the Tesco-owned chain is developing a smaller version of its 3,000 square-foot 'Express' store, shaving 1,000 square feet off the store size.

Perhaps Tesco hopes it can "shrink" (in terms of store size) rather than grow (recall those days of a 1,000-store chain) its way to break-even with Fresh & Easy.

But size does matter. And a 2,000 square-foot grocery market, like all small formats - including 3,000 and 10,000 square-foot grocery stores - are fraught with problems when it comes to making money. Just ask Walmart - the now folded 'marketside by Walmart' stores and its fledgling small-format Walmart Express, which despite being 15,000 square-feet is having economic struggles endemic to many small-format grocery stores, particularly those run by chains without a history of operating such stores.

Or ask Safeway CEO Steve Burd, who put an end to the California-based supermarket chain's 'The Market' format (10,000-14,000 square-foot grocery markets ) after just two test units has been opened and operated for about one-year each. Both stores, in Long Beach and San Jose, California, remain open but Burd killed further development of the format over two years ago.

According to our sources, at present there isn't a set date for when - or if - the first 2,000 square-foot Fresh & Easy store will open. However, our sources say, Fresh & Easy already has a number of locations for the stores scouted out, although much of the grocer's real estate team was fired last Wednesday, which is an important indication of the future of Fresh & Easy Neighborhood Market's new store development plans.

Those plans: Little to nothing going forward for the rest of this year in terms of acquiring new store sites - there are already dozens of Fresh & Easy sites that have been sitting fallow for as long as four-to-five years - and opening new Fresh & Easy stores.

[Editor's Note: Fresh & Easy Buzz is an independent Blog, and is not affiliated with Tesco, Tesco's Fresh & Easy Neighborhood Market, or any of its competitors. No member of the Fresh & Easy Buzz editorial team has ever or currently works for Tesco or its Fresh & Easy Neighborhood Market chain.]

Dollar General's California Dream Becoming Reality

Tennessee-based discount retailer Dollar General has been moving hard and fast in Northern California, particularly in the Central Valley, since we first revealed the discount retailer's big plans for the market region in this December 5, 2011 story: Dollar General Jump-Starts California Launch: Taking Over 5 Centro Mart Supermarkets For Early 2012 Openings.

In the mere four months since we published the report, Dollar General has hit the ground running, focusing on its Dollar General Market grocery stores and traditional dollar format stores in the region.

Below is what the mega-discount retailer, which operates 10,000 stores in 39 U.S. states, is up to:

>First store opened: Dollar General opened its first Dollar General Market grocery store in the region March 31, at 1729 West Highway 140, in Merced, California.

The grocery market was store number 10,000 for Dollar General, and it went all out for the grand opening, offering activities for shoppers including: a free make-up consultation from representatives of  L’Oreal and Maybelline; photographs for the kids with characters Sponge Bob, Bimbo Bear and the Energizer Bunny; and food sampling, offering numerous products sold at Dollar General. Additionally, the first 500 customers to arrive at the store for the 9 a.m. grand opening received a free ham and a reusable tote bag filled with product samples and coupons

>Store manager search: The retailer is currently advertising for store managers for its three Dollar General Markets in Stockton, California and the unit in the East Bay Area city of Brentwood. These are four of the five stores Dollar General is leasing from Stockton-based supermarket chain Centro Mart, as we detailed in our December 5, 2011 story. The fifth former Centro Mart unit, in Stockton, will be a Dollar General dollar format store. The four Dollar General Market grocery stores and the dollar store are set to open in the coming weeks.

>Regional director wanted: Dollar General is advertising for a regional director for its dollar stores and Dollar General Market stores for California and Nevada.

According to our sources, the retailer plans to open 150-200 units combined of both formats in California and Nevada over the next two-to-three years.

So far Dollar General has seven stores open in Nevada and six units in California. Dollar General CEO Rick Dreiling said in a March 22, 2012 conference call with financial analysts that the retailer plans to have 50 (grocery stores and dollar stores combined) units open and operating in California by the end of the year.

>More stores: In our December 5, 2011 story we reported Dollar General had plans to open numerous other Dollar General Market (which offer groceries along with perishables, fresh meat and produce) and dollar store units, which carry perishable and dry grocery consumables along with general merchandise items but not meat or produce, throughout Northern California, with a major focus on the Central Valley.

Above: The location of the Dollar General Market in the Gregory Gardens shopping center, Modesto, California.

Thus far we've discovered the following planned Dollar General Market grocery store units in the region: two units in the Fresno area, at Fruit and McKinley in Fresno and Bullard and Minnewawa in nearby Clovis (both are former Save Mart supermarkets which the Modesto-based chain had previously closed); a Dollar General Market in Modesto, in the Gregory Gardens shopping center at 2003 Tully Road, between Bowen and Briggsmore (the retailer has also signed a lease for a dollar format store at 510-560 North Main Street in Modesto); and a Dollar General Market in Winton, which is next door to Merced, where the first store in the region opened March 31.

Dollar General is currently advertising on a variety of online job sites for managers for the Modesto and Winton grocery markets, which are set to open in the coming weeks.

Distribution center

As we reported in our December 5, 2011 story, Dollar General has established a distribution center near Bakersfield, California to service its grocery and dollar format stores in California, Nevada, Arizona and New Mexico. The facility opened this month.

Major growth plans

Dollar General plans to open approximately 625 new stores this year, the majority of which will be its flagship dollar format stores, which average about 7,000 square feet, CEO Dreiling said in the March 22 conference call. Additionally, according to the CEO, the retailer plans to remodel and relocate about 550 stores in 2012.

The retailer opened 625 new stores in 2011, along with remodeling or relocating 575 units, for a net increase in square footage of 7%, Dreiling said.

Dreiling said in the March 22 conference call that Dollar General has about 40 new Dollar General Market grocery stores set to open this year, the majority of which will be in California, Nevada and Arizona.

Last year the retailer opened seven new Dollar General Market stores, seven of which were in Nevada (its first new market since 2006), and remodeled 25 existing grocery markets.

There are currently 70 Dollar General Market grocery stores in the U.S.

The grocery stores, which average 10,000-15,000 and offer a selection of grocery items, perishables, frozen foods, produce, meats and general merchandise, are a key element of Dollar General's strategy for California.

Part of that strategy is to focus on food deserts, regions and cities that are currently underserved by grocery markets offering fresh food and groceries at reasonable prices.

The Dollar General Market format is focused on everyday low prices. A number of industry surveys, for example, put the store's prices on par with Walmart for fresh food, groceries and general merchandise items. Dollar General also runs weekly ads for the grocery markets and sometimes offers store coupons, such as $5 off purchases of $25 or more.

Inside a new generation Dollar General Market. [Photo credit: Dollar General, 09/27/11.]

Good fiscal 2011

Dollar General had a good 2011 fiscal year on all metrics. Its full-year sales increased 13.6% to a record $14.8 billion. There was an extra week in the fiscal year. Excluding that 53rd week, full-year sales increased to 11.4%.

Sales-per-square-foot for fiscal 2011 increased to $209, compared to $201 a year ago. Average sales-per-store came in a bit over $1.5 million.

The 2011 fiscal year also marked the 22nd consecutive year of same-store-sales growth for Dollar General. Same-store-sales were up 6% for the year, with all regions reporting positive comps, according to CEO Dreiling. Dollar general is forecasting a same-store-sales increase of between 3%-5% for the current fiscal year.

Dollar General's adjusted operating profit grew 17% in 2011 over the previous year to a record $1.5 billion and a record 10.2% of sales.

The retailer posted a 31.7% gross margin rate for 2011, which was 31 basis points below the previous year but was 246 basis points higher than in 2008, the first full year of the "great recession."

On the bottom line, Dollar General's adjusted net income increased 26% over 2010, which is an impressive performance.

Dollar General also launched and e-commerce website in 2011, which will not only bring it added revenue but should prove to be a good source of data over time. For example, the retailer is currently in 39 states. Purchasing data from the site over time could prove valuable as Dollar General looks at which of those remaining states it wants to open stores in first.

A closer look inside the Dollar General Market. [Photo credit: Dollar General, 09/27/11.]

Dollar General's impact

It's difficult to forecast whether or not Dollar General will be a major player in the food and grocery retailing business in California in general and in the Northern California/Central Valley region specifically for a couple reasons.

First off, selling food and groceries isn't something the retailer has a solid track record of doing. In fact, a couple years ago Dollar General considered shuttering its Dollar General Market format and stores completely. However, it instead developed a new Dollar General Market prototype in Dallas, Texas, which is the model for the remodeled and new stores, and is going forward with the chain, including emphasising the grocery markets as part of its two-format strategy in California and Nevada, as previously noted.

Second, California has no shortage of seasoned grocery chains and independents, with more coming, like Walmart with its Neighborhood Market supermarkets (see the story link at bottom), for example. But Dollar General's focus on undeserved regions and cities in the Golden State, such as the locations in the Central Valley detailed earlier, could be a very smart move for the retailer with its Dollar General Market stores, which have a low everyday price focus.

For example, Tesco's Fresh & Easy Neighborhood Market, which continues to lose millions of dollars a week with its 10,000 square-foot grocery markets, isn't opening any new stores in California's Central Valley despite having numerous sites in cities like Bakersfield, Fresno, Modesto, Los Banos and Stockton, most of which its been sitting on for three to four years.

Fresh & Easy did finally open its first five stores in Sacramento (see story links at bottom), where Dollar General also plans to open a number of its grocery markets and dollar stores (the first unit we've discovered will be in the Grand Oaks shopping center at 7963 Auburn Boulevard in the Sacramento suburb of Citrus Heights), in March. Tesco now has 196 Fresh & Easy stores. There are 142 units in California, 24 stores in Arizona and 20 units in Arizona.

Dollar General's two-format - the grocery stores and dollar stores - strategy in California should be a powerful one though, allowing it to establish its brand in the Golden State (and in Nevada) much faster than if it was only going with a single-format approach. For example, the dollar format stores also offer a considerable selection of groceries and general merchandise items, along with some perishables and frozen foods (two categories Dollar General is expanding in the stores), which should allow the retailer to establish itself in the highly competitive Golden State faster than if it were doing a single-play strategy only.

We'll keep you updated like only Fresh & Easy Buzz can on Dollar General's march through California, which is just getting started.

Related Stories

December 5, 2011: Dollar General Jump-Starts California Launch: Taking Over 5 Centro Mart Supermarkets For Early 2012 Openings

April 3, 2012: Getting Real in the Golden State: First Group of 13 Walmart Neighborhood Market Stores Opening in California This Fall

March 9, 2012: Scoop Confirmed: Sprouts Announces Acquisition of Sunflower Farmers Market

February 9, 2012: Confirmed: First 2 Fresh & Easy Stores Open in Sacramento March 7; 3 in Metro-Area March 14

January 18, 2012: Fast-Growing The Fresh Market Chain On Track to Launch in California This Year

August 29, 2011: Meaningful Move or Too Little Too Late? Fresh & Easy Neighborhood Market Planning Early 2012 Metro Sacramento Market Launch

August 3, 2011: Fast-Growing Specialty Grocer The Fresh Market Targeting Mid-2012 For First California Store

August 31, 2011: Tesco Says Sayonara to Japan, Good Morning to Sacramento

Fresh & Easy Neighborhood Market Testing 'Scan As You Shop' Mobile Self-Checkout System at Burbank Store

Breaking Buzz & Analysis

El Segundo, California-based Fresh & Easy Neighborhood Market is following the lead of parent company Tesco and testing a version of the United Kingdom-based retailer's mobile self-scanning system at its store at Olive and Verdugo in Burbank, California.

The "Scan As You Shop" mobile self-scanning system being tested at the Burbank Fresh & Easy store is similar to those used by a few U.S. grocery chain's, like Stop & Shop on the east coast (in about 350 of its 375 stores) and Belgium-based Delhaize Group's Bloom chain - which it said last month it's eliminating for lack of performance; converting 42 of the existing 49 Bloom stores to the Food Lion banner and closing the remaining seven units.

In addition to Tesco, Waitrose and Morrisons are two other supermarket chains in the United Kingdom that offer mobile hand-held scanners in some of their stores.

Fresh & Easy's system, from Motorola, features a hand-held scanner device (see above and below) which customers carry with them as they shop the store. Shoppers then scan the product codes on the items they purchase as they shop.

Once a customer completes his or her shopping trip, they then go to one of the two specially designated self-service checkout stands in the Burbank Fresh & Easy store for checkout.

Once at checkout, a store employee randomly checks a few of the items (currently six SKUs) the customer has scanned into the hand-held device in order to check for accuracy.

After the random security check is made, the customer then completes the checkout process. Since the purchases are already scanned into the hand-held device, all that's required is for the shopper to tally the items on the device and make payment at the register.

The "Scan As You Shop" system allows shoppers to keep real time track of their purchases as they shop.

It's also compatible with Fresh & Easy's "Friends" loyalty/rewards card.

Tesco-UK tested "Scan As You Shop" for six months, from spring to the fall of 2010, at a store in Rumford, UK. It's expanded the system into some additional stores in the UK since then.

If the test at the Burbank Fresh & Easy store is a success as defined by Tesco, plans are to expand the "Scan As You Shop" system to additional stores, according to our sources.

Fresh & Easy Neighborhood Market has not publicly announced it's testing the hand-held mobile self-scanning system at its Burbank store. The test was just recently launched.

According to sources, the grocery chain has hopes the "Scan As You Shop" system will result in customers purchasing more items in the stores (at least at the Burbank test store to start) because shoppers are able to tally their purchases as they shop, resulting in higher average market basket sizes (shoppers buying more per-store-visit than they currently are doing) at the Fresh & Easy stores, which is something the grocery chain needs to achieve, as we've discussed in depth in the blog, but hasn't been able to achieve in a significant enough way to help it break-even financially to date.

This hope that the "Scan As You Shop" system being tested in the Burbank store could lead to higher average market basket purchases was discussed at Fresh & Easy's weekly meeting at its corporate offices in El Segundo, California last Wednesday, in fact.

There's no hard evidence out there though, based on our experience and research, that such mobile self-scanning systems result in encouraging shoppers to purchase more per shopping trip. In fact, there's actually some evidence to suggest the opposite can occur, which is that because shoppers are able to keep a real time tally of their purchases as they shop, it better enables them to hold purchases to a set amount, even putting items back that exceed that desired total spend. Therefore, impulse purchases could be reduced.

Fresh & Easy's senior management, led by CEO Tim Mason, also have as a goal with the "Scan As You Shop" system the speeding up of the checkout process in the Fresh & Easy stores, according to our sources.

This is a bit odd since Mason and Fresh & Easy's spokesperson have been saying since the first Fresh & Easy stores opened in November 2007 that one of the hallmarks of the chain's self-service checkout system is that it allows for faster customer checkout than conventional full-service checkout, which is offered by all of Fresh & Easy Neighborhood Market's competitors in California, Nevada and Arizona. Some of those competitors also offer self-service as an option, along with full-service checkout, in some of their stores.

Additionally, as a source with extensive experience working for Tesco's Fresh & Easy points out, the Fresh & Easy stores have only 10,000 square-feet of selling space (there are four 3,000 square-foot "Express" format stores and a handful of 7,000 square-foot stores) and eight grocery aisles, so: "How much time can you really save with 'Scan As You Shop,'" over the current time it takes to checkout in the stores, the source says. " They're (Fresh & Easy) not Costco, with people filling their carts to the brim," he adds.

The source points to another high-tech project, called Agora, that Fresh & Easy spent a considerable amount of effort and money on but hasn't in his analysis (and in ours) provided any tangible benefits to the fledgling Tesco-owned chain.

"I see 'Scan As You Shop' as "another wasteful project, like one called Agora, a triangulation program for users with an IPhone or Android phone, where you download an app for your phone and upload the floor plan of your store, then you can see where you are," he says. "You can also type in, for example, 'rice' and see what's the best path to get to the shelf with rice. But again, F&E only has 8 aisles, how lost can people get?"

He adds: "To do this project (Agora), you'll need 3 detection devices, an app, a specific map of the store and all the SRD (Space Range and Display) plan for the store real time for the consumers. They've piloted this project in the Manhattan Beach store. It seems like a waste of resources to me," the source says by way of comparing the 'Scan As You Shop' effort to it.

"With so much focus on all these special technology projects, I think UK and Tim [CEO Mason] have lost focus on the issue at hand," the experienced Fresh & Easy employee says. "They don't need cool tech to help people - they just need more people and sales. They don't need Agora or 'Scan As You Shop'. They just need someone to fix GO (Group Ordering - written in the UK) so that their just-in-time supply chain doesn't screw up. They need better quality assurance in the fresh dept and for the suppliers," the source says.

Mobile self-scanning systems offer potential benefits for shoppers who choose to use them however, such as having the ability to keep that running tally of what they purchase.

Some systems also include the ability to pay for purchases via smart phone. The test system at Fresh & Easy doesn't offer that feature at present.

But the benefits of the systems for grocers depends on the specific chain and where it's at from a development and financial standpoint.

In terms of time savings, a mobile self-scanning system can perhaps achieve that in a store where checkout is full service, although full-service is often actually much faster than customer self-service. But since the Fresh & Easy stores have self-service checkout only, which means customers unload, scan and bag their purchases at the checkstand anyway, it's hard to see where any meaningful time-savings will be achieved with the "Scan As You Shop" system.

Instead, what occurs is better explained as customer-labor shifting - rather than the customer scanning and bagging at the checkout, they do so while shopping.

It takes essentially the same amount of time to scan and bag while shopping as it does to do it at the checkout though. The only time-savings we can see with the system at Fresh & Easy is if all of the self-checkout lanes in the store have lines, something seldom seen in a Fresh & Easy store, at which point it might be faster using "Scan As You Shop" because the two specially-designated checkout lanes might move faster than the regular self-service lanes, assuming customers are lined up at them waiting to checkout.

Christopher Luna-Vasquez, a customer who used "Scan As You Shop" for the first time today at the Burbank Fresh & Easy store, told Fresh & Easy Buzz he likes the mobile self-scanning system for just that reason - that it allowed him to track his purchases in real time while shopping - and that it was faster for him than using Fresh & Easy's regular self-checkout system.

Whether or not there are enough fans of the "Scan As You Shop" system at the Fresh & Easy store, like Luna-Vasquez, is yet to be seen. But that's what tests are for, as long as they aren't biased tests.

In our analysis, testing the "Scan As You Shop" system at one store is fine. However, on a priority scale of 1-to-10, it doesn't even register in terms of where Fresh & Easy should be focusing it's efforts as a grocery chain, in our analysis.

That job one focus needs to be on the basics of foods and grocery retailing, which we aren't seeing being done in El Segundo, although we do see it being done by workers at store-level, despite a number of limitations placed on them by policies coming out of the home office.

[Photo credits: Christopher Luna-Vasquez and Rafael Luna-Vasquez, special for Fresh & Easy Buzz. Taken February 5, 2011 at Fresh & Easy Neighborhood Market, Olive and Verdugo, Burbank, California.]

Tesco's Fresh & Easy By the Numbers ... In Case You Want to Keep Score at Home or in the Office

Photo credit: Fresh & Easy Buzz.

Analysis/Commentary

Tesco's Fresh & Easy Neighborhood Market opened two new stores today - a 3,000 square-foot Fresh & Easy Express unit at Crown Valley Parkway and Golden in Laguna Niguel, California, and a standard 10,000 square-foot Fresh & Easy fresh food and grocery market at Silver and Goettingen, in San Francisco's Portola District.

The opening of the two stores today brings to eight the number of Fresh & Easy units Tesco has opened so far this year. (see the locations of the eight stores here.)

Fresh & Easy Neighborhood Market ended 2011 with 184 stores in California (135 units), Nevada (21 units) and Arizona (28 units).

The eight new stores opened thus far in 2012 brings the total store-count for the fresh food and grocery chain to 192 units - 143 stores in California, 21 Fresh & Easy markets in Nevada and 28 units in Arizona.

But not for long...

As regular readers of Fresh & Easy Buzz are aware, we broke the news on January 9, 2012 (see story here) that Tesco's Fresh & Easy Neighborhood Market was planning to close 12 stores. On January 10 (see here) we followed up our story with a second scoop, in which we listed the locations of the 12 stores set to be closed. Following the publication of our stories, Fresh & Easy's corporate spokesperson announced the store closures.

All 12 stores (see the locations here) are set to be closed by the end of this weekend. (The latest store closures follow the closing of 13 Fresh & Easy stores in November 2010.) Therefore, Fresh & Easy's 192 store-count is a temporary metric.

Come next week, Fresh & Easy Neighborhood Market will be a 180-store chain - 136 units in California, 20 stores in Nevada and 24 units in Arizona - and Tesco will be operating four fewer Fresh & Easy stores than it was at the end of 2011.

But not for long...

The 180-store number is also a temporary metric: Tesco plans to open a number of Fresh & Easy stores this month, and many more, including its first units in metro Sacramento, California, in March. Additional stores are set to open this year as well.

One of the next stores to open will be the Fresh & Easy Express unit, Tesco's fourth 3,000 square-foot micro-format food and grocery store so far, at Figueroa Street and Jefferson Boulevard, near the University of Southern California campus, in Los Angeles. The store opens February 15.

Tesco plans to open five more "Express" stores between now and the end of March 2012. (See the locations of the eight 'Express' stores here.)

Additionally, Fresh & Easy Neighborhood Market is planning a ninth Fresh & Easy Express store in the Southern California city of Bell. Plans for the store are currently before the Bell City Council.

On November 15, 2011 Fresh & Easy Neighborhood Market sent out a press release in which it said it plans to open 20-plus new stores from January-March of this year. The release listed just the cities the stores would been in but not the addresses.

But we had already reported on the grocery chain's early 2012 new store opening plans, including publishing a list of 28 stores Fresh & Easy was preparing for early 2012 openings. The grocer has yet to publicly announce the majority of the stores on our list. [See our story - November 15, 2011: Fresh & Easy Neighborhood Market to Open 20-Plus New Stores in Early 2012 - We Have What's Not in the Press Release. See the list of 28 stores here.

If Fresh & Easy opens 20 or more (all 28) of the stores by the end of March, that will give the Tesco-owned chain around 200-208 total stores come April Fools Day.

Tesco's fiscal year ends on February 27, 2012. We expect Fresh & Easy to closeout Tesco's 2011/12 fiscal year with no more than 190 stores open and operating.

Tesco's original plan for Fresh & Easy, which former CEO Terry Leahy continued to tout as late as fall 2010 in a meeting with some financial analysts at Fresh & Easy Neighborhood Market's campus facility in Riverside County, California - he retired at the end of February 2011 - was to have 1,000 stores open and operating over a five-to-six year period, beginning in November 2007, which is when the first Fresh & Easy stores were opened.

Four years and a couple months later, there are 180 Fresh & Easy stores.

Tesco CEO Philip Clark, who took over for Leahy in March 2011, revised that 1,000-store public relations fantasy soon after assuming the corner office at Tesco's corporate headquarters in the United Kingdom, announcing that the new plan was to have 400 Fresh & Easy stores open and operating by the end of Tesco's 2012/13 fiscal year, which ends in February 2013, at which time he says the United Kingdom-based global retailer will break-even with Fresh & Easy Neighborhood Market, which lost $112 million in the first half of this fiscal year, on sales of $470 million.

A couple months later, however, Clark announced that instead of 400 stores being needed to break-even with Fresh & Easy, the new magic number was 300 stores, which he said last year is the number of Fresh & Easy units Tesco plans to have open and operating by the end of February 2013, when the 2012/13 fiscal year ends. He said, and continues to say, Tesco will break-even with Fresh & Easy Neighborhood Market at that time, with 300 stores.

Even assuming Tesco were to have 200 Fresh & Easy units open by the end of fiscal 2011/12 (February 27, 2012), that would still mean the retailer needs to open 100 stores from March 2012 to February 2013, in order to reach the magic 300 units. It's going to be a very difficult task for the retailer to do though, considering its about double the amount of new Fresh & Easy stores Tesco will have opened by the end of this fiscal year. It's also about half the number of Fresh & Easy stores Tesco has opened since November 2007.

But, frankly, the math has been fuzzy when it comes to Tesco and its Fresh & Easy chain from day one.

We expect Tesco to report a fiscal 2011/12 loss for Fresh & Easy in the $190 million-to-$230 million range, on sales of about $1 billion. If we're correct (and even if the loss is slightly less than $190 million) that means Tesco has one year to go from that loss amount to break-even, or close to it, based on CEO Clarke's statements about breaking-even with Fresh & Easy by the end of fiscal 2012/13.

To put this in perspective, if Tesco loses $200 million on Fresh & Easy in fiscal 2011/12, which ends in a little over three weeks, it will be an improvement of just $53 million over the $253 million it lost on Fresh & Easy in its 2009/10 fiscal year. That loss was on sales of $544 million. As noted, we project sales of about $1 billion, nearly double two fiscal years' ago, for Fresh & Easy for fiscal 2011/12.

Tesco lost about $300 million, on sales of about $818 million, on Fresh & Easy in its 2010/11 fiscal year, which ended February 26, 2011. There were 164 Fresh & Easy stores open at the end of the 2010/11 fiscal year.

About $55 million of that loss can be attributed to Fresh & Easy's buyout of its produce (Wild Rocket Foods) and meat (2 Sisters Food Group) suppliers, however. If you deduct the $55 million, it still leaves a loss of $245 million for the most recently-ended fiscal year, an improvement of only $8 million over the $253 million loss in fiscal 2009/10, despite the fact sales for the 2010/11 fiscal year were about $274 million higher than the previous year.

Tesco reported a loss of $208 million, on sales of about $305 million, for Fresh & Easy in fiscal 2008/09, which was the first full-year of operations for the U.S. chain. There were 115 Fresh & Easy stores open at the fiscal 2008/09 year-end.

Fresh & Easy's loss was lower in 2008/09 ($208 million) than it was in 2009/10 ($253 million), even though revenue was $305 million in 2008/09, compared to $544 million in fiscal 2009/10. Not a good sign, as we pointed out in our analysis at the time.

On October 5, 2011, Tesco reported a half-year loss of $112 million, on sales of $470 million, for Fresh & Easy. Tesco touted the fact the half-year loss was 21-23% less than the $151 million half-year loss from the previous year. However, as we noted above, about $55 million (half being $27.5 million) of the $300 million loss for fiscal 2010/11 can be attributed to the buyouts of the two suppliers, which is also something Tesco noted in its financial reporting, saying that it explains in part why the loss was so much higher than the previous fiscal year loss.

But Tesco can't have it both ways - touting as positive a 21-23% decrease in the fiscal 2011/12 half-year loss at Fresh & Easy, over the half-year-ago same period, while at the same time using the fact it made the buyouts as an explanation for why the 2010/11 fiscal year loss ($300 million) was so much higher than the $253 million it lost in the previous fiscal year. The supplier buyouts were made in the 2010/11 fiscal year.

Instead, we suggest the fiscal year 2011/12 loss Tesco reports in a couple months for Fresh & Easy should be compared to the $253 million loss it reported for the U.S. chain for fiscal 2009/10, rather than the $300 million last fiscal year, because it's a more realistic and informative comparison.

For example, if the 2011/12 fiscal year loss for Fresh & Easy is $200 million, we will be evaluating it as a $53 million decrease (based on the 2009/10 loss) rather than a $100 million improvement over last fiscal year, because of the one-time buyout of the two suppliers, which Tesco itself said inflated the 2010/11 loss amount. We suggest you do the same if you want to get a better picture of Tesco's progress towards break-even with Fresh & Easy.

You should also compare the fiscal 2011/12 loss and revenue numbers with the annual revenue and loss metrics for the previous fiscal years detailed above.

For example, if Tesco reports sales of $1 billion, with a loss in the $190 million-$230 million range, compare that to its loss of $208 million in fiscal 2008/09, when the sales for the year were just $305 million, along with the 2009/10 metrics. Do the same regardless of the loss amount Tesco reports for Fresh & Easy in a couple months.

The point being that the annual revenue-to-annual loss spread should be decreasing much more than has been the case. As an example, If Tesco doesn't report a loss for fiscal 2011/12 that's at least half (which would be $104 million) of what it reported three fiscal years ago (the $208 million loss in fiscal 2008/09), can it really expect to go from a loss of $200 million or so this year to break-even 12 months from now?

Bottom line: It's going to be a struggle for Tesco to have 300 stores open by the end of February 2013. And it's not going to break-even with Fresh & Easy by then. If we are wrong, we will be the first to say so.

We suspect if Tesco reports a loss in 2013 of  around $130 million or less for fiscal 2012/13 (ends February 2013), it will call that a success. But even getting there is going to be a struggle, in our experience - which includes four-plus years of observing, reporting on and analyzing Tesco's Fresh & Easy closely - and analysis. It's also not break-even, or even close to it.

Related Stories

January 11, 2012: Tesco Reports 19.3% Comparable Sales Growth at Fresh & Easy Neighborhood Market For 6 Week Holiday Period

December 26, 2011: Solid Performance Gives Tesco 'Fresh & Easy' Wiggle Room - But CEO Clarke Shouldn't Sleep Soundly Every Night

December 8, 2011: Tesco Reports 11.9% Q3 Comp Store Sales Gain for Fresh & Easy ... But On Heavy Discounting

November 18, 2011: Fresh & Easy Neighborhood Market Combining Big Seasonal Foods Assortment With Promos and Discounts to Lure Holiday Shoppers

November 10, 2011: Chief Marketing Officer Uwins Out in Top-Level Reshuffling at Tesco's Fresh & Easy Neighborhood Market

October 8, 2010: 'The Insider' - Incoming Tesco CEO Philip Clarke Needs to 'Imagine' When it Comes to Fresh & Easy Neighborhood Market USA

October 10, 2011: Gov. Signs AB 183: End of Self-Service Checkout Only in California For Fresh & Easy Neighborhood Market if Stores to Still Sell Alcohol

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

October 4, 2010: Tuesday's Tesco Interim Report Offers A Road Map of Sorts For the Future of Fresh & Easy Neighborhood Market

April 19, 2011: Tesco's Fresh & Easy Neighborhood Market Posts Biggest One-Year Loss Yet - $307 Million Loss on Sales of $818 Million

March 21, 2011: Fresh & Easy Neighborhood Market Flooding its Northern California Store Neighborhoods With Margin-Busting Store Coupons

February 28, 2011: Changing of the Guard: Clarke Takes Over the Reins as Tesco CEO Wednesday

February 23, 2011: 'The Insider' - Incoming Tesco CEO Philip Clarke Visits America - And Fresh & Easy Neighborhood Market

December 7, 2010: Tesco Reports Solid Third Quarter Same-Store-Sales Growth For Fresh & Easy Neighborhood Market

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

October 4, 2010: Tuesday's Tesco Interim Report Offers A Road Map of Sorts For the Future of Fresh & Easy Neighborhood Market

April 20, 2010: Strong Group Revenue & Profit For Tesco... But $253 Million Loss at Fresh & Easy

April 19, 2010: Tesco Reports Fiscal 2009 Results on Tuesday, April 20; Estimated $250-$259 Million Loss For Fresh & Easy

April 21, 2009: Tesco PLC Reports Record Sales and Profits; But Takes £142 Million ($208.05 Million U.S.) Loss For Fresh & Easy Neighborhood Market USA

April 20, 2009: Tesco to Report Full-Year Financials Tomorrow; We Estimate £110-£150 Million Full-Year Loss For Fresh & Easy Neighborhood Market

September 30, 2008: News & Analysis: Tesco Reports Half-Year Financials; Reports Loss For Fresh & Easy USA and Sales Per Square Foot Averages

September 29, 2008: Tesco PLC to Report Interim Financials Tomorrow; Including Guidance on Fresh & Easy Neighborhood Market USA

September 26, 2008: Tesco PLC, Fresh & Easy and the Numbers Game; Will Tesco Release Hard Numbers For Fresh & Easy Next Week? If So, Will They Be Meaningful?

Exclusive: Tesco's Fresh & Easy Closing 12 Stores; We Have the Locations

Breaking Buzz

Yesterday we broke the news that Tesco will close up to 12 of its 184 Fresh & Easy Neighborhood Market grocery stores in California, Nevada and Arizona. [Read the story here - January 8, 2012: Tesco to Close Up to 12 Fresh & Easy Stores.]

Today we can report that Tesco's Fresh & Easy Neighborhood Market plans to close 12 underperforming stores - seven units in California, four grocery markets in metro Phoenix, Arizona and one store in metro Las Vegas, Nevada.

Below are the addresses of the 12 Fresh & Easy stores to be closed:

California

>Fresno: Cedar and Shields
>Bakersfield: H and Planz
>Hemet: Florida and Lyon
>Anaheim: Lincoln and Western
>Baldwin Park: Francisquito and Puente
>Fountain Valley: Harbor and Edinger
>Ontario: Riverside and Archibald

All the stores, except for the Fresno and Bakersfield locations, which are in the Central Valley, are in Southern California

Arizona

>Phoenix: 7th Street and Thunderbird
>Phoenix: 19th Avenue and Glendale
>Phoenix: Camelback Road and 83rd Avenue
>Phoenix: 32nd Street and Greenway

Nevada

>Las Vegas: Ann and Decatur

The store closures were announced to employees of Fresh & Easy Neighborhood Market by CEO Tim Mason today.

In making the announcement Mason said this: " Like any retailer, we are always evaluating our store portfolio and we have decided to temporarily close twelve underperforming stores. At this time, there is simply not enough growth in sales and customers to keep these stores open. Many have been open for several years and are trading in areas where the network of Fresh & Easy stores will be able to absorb most of the existing customer base. We have taken significant steps to minimize the impact these temporary closures will have on you, including making sure we are able to offer all impacted employees a position at another nearby store."

As you can see in the paragraph above, Mason calls the store closures "temporary." He used that word because Fresh & Easy plans to "mothball" the 12 stores like it did with the 13 units it closed in November 2010. All 13 of those stores remain closed and are vacant.

Mason also told employees in today's announcement that although the retailer is closing the 12 stores, Fresh & Easy plans to "open more than two dozen through March, including seven new Fresh & Easy Express stores in Los Angeles and Orange counties and our first five stores in the Sacramento market."

The first batch of those two dozen-plus new stores are set to open on Wednesday.

Neither Tesco or its Fresh & Easy Neighborhood Market chain has publicly announced the closure of the 12 stores listed above.

Tesco has now closed 25 Fresh & Easy stores since it launched its El Segundo, California-based small-format fresh food and grocery chain in November 2007, when the first batch of stores were opened.

Six of the 13 Fresh & Easy stores Tesco closed in November 2010 were in metro Phoenix, Arizona and metro Las Vegas, Nevada respectively. One store was in Southern California.

With the closing of the four Fresh & Easy units in Phoenix, Tesco will have just 24 stores in Arizona, down from a high of 34 units in October 2010, before the six stores were closed in November of that year.

There are currently 135 Fresh 7 Easy stores in California. Closing the seven stores will reduce the grocer's store count in the state to 128 units, but only until Wednesday when Fresh & Easy Neighborhood Market will begin opening the first batch of what will be a couple dozen new stores in California over the next few months. See our exclusive list of those stores here.

The closing of the single store in Las Vegas, at Ann and Decatur, will give Fresh & Easy Neighborhood Market 20 units in Nevada, down from the current 21 stores. The retailer plans to open a couple new stores in the metro Las Vegas region this year, so that store count number will rise once those units open.

Fresh & Easy Neighborhood Market didn't open any new stores in Arizona or Nevada in calendar year 2011, although it has a number of locations in both states it's been sitting on in both states for a considerable amount of time. Instead, all 29 of the new stores it opened in 2011 are in California, which is where all but a handful of the new stores set to be opened in 2012 will be located.

We'll be offering some analysis on the latest round of Fresh & Easy store closings in an upcoming piece. Stay tuned.

Related Stories

January 8, 2012: Tesco to Close Up to 12 Fresh & Easy Stores

December 26, 2011: Solid Performance Gives Tesco 'Fresh & Easy' Wiggle Room - But CEO Clarke Shouldn't Sleep Soundly Every Night

December 8, 2011: Tesco Reports 11.9% Q3 Comp Store Sales Gain for Fresh & Easy ... But On Heavy Discounting

November 10, 2011: Chief Marketing Officer Uwins Out in Top-Level Reshuffling at Tesco's Fresh & Easy Neighborhood Market

October 10, 2011: Gov. Signs AB 183: End of Self-Service Checkout Only in California For Fresh & Easy Neighborhood Market if Stores to Still Sell Alcohol

November 2, 2010: Closure of 13 Stores Brings Fresh & Easy Neighborhood Market's Store-Count to 155 Units

October 24, 2010: Tesco's Fresh & Easy Neighborhood Market On Track to Close 13 Stores By November 2, 2010

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

Tesco to Close Up to 12 Fresh & Easy Stores

Tesco closed 13 Fresh & Easy Neighborhood Market stores in November 2010, including the unit at 858 South Greenfield Road in Gilbert, Arizona pictured above. The 13 stores remain closed and vacant. Tesco's Fresh & Easy retains the financial responsibility for the store leases. [Photo credit: Fresh & Easy Buzz.]

Breaking Buzz


Tesco plans to close up to 12 underperforming Fresh & Easy stores as part of its strategy to break even financially with its fledgling Southern California-based fresh food and grocery chain by the end of its 2012/13 fiscal year, which begins in late February and runs through February 2013, Fresh & Easy Buzz has learned.

El Segundo, California-based Fresh & Easy Neighborhood Market could announce the latest round of store closures as early as Wednesday, January 11, according to our sources.

The store closure announcement could come as early as Wednesday because Tesco is opening a number of new Fresh & Easy stores, its first for the new year, on January 11. Timing the store closure announcement on the same day a number of new stores are being opened could serve to blunt some of the justifiably negative press that will come from the announcement, according to the thinking of some at Fresh & Easy Neighborhood Market, our sources tell us.

From a public relations perspective such spin could go something like this: 'Yes we are closing some stores but we also opened numerous new stores today,' followed by a comment or two on the continuing poor economy in the places where the stores are being closed, or something similar.

Fresh & Easy Buzz is the first publication to report this development. Neither Tesco or its Fresh & Easy chain have announced any plans to close any stores.

There are currently 184 Fresh & Easy stores in California (135 units), Nevada (21 units) and Arizona (28 units).


Tesco closed 13 Fresh & Easy stores in November 2010 but didn't get around to "mothballing" some of the units until much later. Pictured above is the closed grocery market at 3232 East Guadalupe Road in Gilbert, Arizona. A Fresh & Easy Buzz correspondent took the photograph above on March 23, 2011, which is when the crew took down the signs and "mothballed" the store, which was closed five months earlier. [Photo credit: Fresh & Easy Buzz.]

Tesco closed 13 underperforming Fresh & Easy grocery markets in November 2010 - six units each in Nevada and Arizona and one store in Southern California. Fresh & Easy's CEO, Tim Mason, said at the time the stores would be "mothballed," and possibly re-opened in the future. The grocer still holds the leases on the 13 closed stores. See here and here for details.


Inside a "mothballed Fresh & Easy store: The unit at 858 South Greenfield Road in Gilbert, Arizona, which was closed along with 12 other stores in November 2010. [Photo credit: Fresh & Easy Buzz.]

If Tesco closes all 12 underperforming Fresh & Easy units currently under consideration, which our sources tell us is probable, that will make for 23 Fresh & Easy stores it's closed since launching the Southern California-based chain in November 2007.

Additionally, Tesco has held back from opening numerous Fresh & Easy locations, some of which has been sitting in various states of completion since 2008-2009. These includes store sites in Arizona, Nevada and California.

That Tesco will close more Fresh & Easy stores comes as no surprise to Fresh & Easy Buzz, since we said in the blog in 2011 that it is one of the things the United Kingdom-based retailer will have to do if it hopes to come close to breaking even with Fresh & Easy over the next 14 months.

This year is a crucial one for Tesco with Fresh & Easy because for all practical purposes it has until the end of December to get to break-even with Fresh & Easy Neighborhood Market because the month of January and partial month of February 2013, when the 2012/13 fiscal year ends, is insignificant. If it doesn't happen by Christmas 2012, it isn't going to happen at all because the month of January 2013 and a few weeks in February aren't enough to make a difference, in our analysis.

Because 2012 is a "make or break" year for Tesco with Fresh & Easy, expect to see other significant changes being made, in addition to the latest round of store closures.

On October 5, 2011 Tesco reported a fiscal half-year loss for Fresh & Easy of $112 million on sales of $470 million. The second-half fiscal year began at the end of August 2011 and runs until the end of February 2012. Tesco will report how much it lost on Fresh & Easy for its full fiscal 2011/12 year in April.

The half-year loss amount is 23% less than Tesco lost on Fresh & Easy in the same period the year before. However, there's no guarantee this trend will continue into the second half of the fiscal year.

Tesco plans to open numerous new Fresh & Easy stores this year. Opening new stores requires start up expenses and adds to labor costs. Sales from new stores lag behind paying for those start up and new labor costs, which makes breaking even with Fresh & Easy while opening numerous new stores an even more difficult task for Tesco.

Related Stories

December 26, 2011: Solid Performance Gives Tesco 'Fresh & Easy' Wiggle Room - But CEO Clarke Shouldn't Sleep Soundly Every Night

December 8, 2011: Tesco Reports 11.9% Q3 Comp Store Sales Gain for Fresh & Easy ... But On Heavy Discounting

November 10, 2011: Chief Marketing Officer Uwins Out in Top-Level Reshuffling at Tesco's Fresh & Easy Neighborhood Market

October 10, 2011: Gov. Signs AB 183: End of Self-Service Checkout Only in California For Fresh & Easy Neighborhood Market if Stores to Still Sell Alcohol

November 2, 2010: Closure of 13 Stores Brings Fresh & Easy Neighborhood Market's Store-Count to 155 Units

October 24, 2010: Tesco's Fresh & Easy Neighborhood Market On Track to Close 13 Stores By November 2, 2010

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

Solid Performance Gives Tesco 'Fresh & Easy' Wiggle Room - But CEO Clarke Shouldn't Sleep Soundly Every Night

The Insider - Heard on the Street

United Kingdom-based global retailer Tesco has lost nearly $1 billion since it launched its El Segundo, California-headquartered Fresh & Easy Neighborhood Market grocery chain in November 2007.

That's a whole lot of money to lose on a food retailing venture, even for the world's third-largest retailer. Walmart is the largest by annual revenue. France's Carrefour is number two globally, followed by Tesco.

But despite its big loss with Fresh & Easy from 2008-2011, Tesco has performed superbly over the last four years.

For example, over its fiscal 2008-2011 period Tesco, which holds an about 30% market share in the United Kingdom and has operations in 14 countries, has grown its group revenue by a very healthy 31%.

In contrast, Walmart Stores, Inc. grew its revenue during the same time period by about 11%, which is far from bad for the mega-retailer from Bentonville, Arkansas, considering it has five times' the annual revenue as Tesco does.

Even more impressive, Tesco has grown its profits by 35% over the last four years, despite racking up hundreds of millions of dollars of annual losses from 2008-2011 with Fresh & Easy.

Additionally, despite continuing to have a negative overall profit margin at Fresh & Easy of around -35%, Tesco has averaged a very impressive profit margin of around 4% over the last four years.

That's more than double the profit margin Kroger Co., the leading supermarket chain in the U.S. and the number two retailer of food and groceries in America after Walmart has turned in over the last four years, for example. Kroger's annual revenue, all of which is generated in the U.S., is fairly close to, although less than, Tesco's.

On top of the impressive metrics detailed above, Tesco has averaged a very healthy return on equity of about 15% over the last decade, which has satisfied all but the most aggressive of its major investors.

It's this impressive performance that, in my analysis and opinion, is why Wall Street and The City (the UK's Wall Street) have been so patient with Tesco and its continuing struggles with and substantial financial losses at Fresh & Easy Neighborhood Market.

It's also why these big institutional investors, like Warren Buffett in the U.S. who owns about 4% of Tesco, will make some noise if Tesco doesn't break-even with Fresh & Easy Neighborhood Market by the end of its 2012/13 fiscal year, which begins February 2012 and ends in February 2013, as CEO Philip Clarke has said will happen, but will give the retailer more time to achieve the goal as long as Clarke and company continue to reduce the loss percentage, as was the case in Tesco's 2011/12 fiscal-half year, when it reported a loss of 23% less ($112 million) for Fresh & Easy than it did for the same period the year before.

Tesco reports the financial results for its 2011/12 fiscal year, which ends in February 2012, in April 2012.

If come April 2012 Tesco posts a 2012/13 fiscal-year reduction in losses at Fresh & Easy similar to what it reported in October 2011 for the half-year, it will get near-unanimous praise from the financial community for its efforts, thus giving Clarke plenty of wiggle room over the next year, in my analysis.

Tesco won't break-even with Fresh & Easy by the end of its 2012/2013 fiscal year though, in my analysis and opinion. But I'm not ready to put any specific numbers to my prediction this far out.

By the way, a loss of say $50-$100 million isn't break-even, as it's been publicly defined by CEO Philip Clarke. It's breaking even. Therefore, I do hope the goal posts aren't changed at Tesco, with a spokesperson next year perhaps suggesting something like, "Well, we didn't mean 'literally' breaking even by the end of fiscal 2012/13."

Conversely, if Tesco posts a loss of say $10-$15 million for Fresh & Easy at the end of fiscal 2012/2013, I will consider that break-even. Perhaps the holiday season has me in the giving mood?

The upcoming year, 2012, is a crucial one for Tesco with Fresh & Easy.

California (south, central and north), metro Las Vegas, Nevada and metro Phoenix, Arizona, where Tesco's 184 Fresh & Easy grocery markets are located, are among the most competitive food retailing market regions in the U.S. The competition in all three states will only get more intense in 2012.

For example, Walmart plans to open its first Walmart Neighborhood Market stores in California next year.

Mega-dollar store chain Dollar General will open its first Dollar General Market small-format grocery stores in California, starting in the north, in 2012. Dollar General opened five of the grocery markets in metro Las Vegas this year, with more units planned for the region.

The coming year will also find Boise, Idaho-based discount grocer WinCo Foods opening its first one or two stores in metro Phoenix. Fast-growing WinCo, which operates mega-stores averaging about 90,000 square-feet, is a competitive force wherever it goes. Metro Phoenix will be no exception, in my analysis.

Tesco has said it plans to open about 50 new Fresh & Easy stores in 2012. Nearly all of those stores will be in California, according to Fresh & Easy Buzz's research and reporting.

Tesco's ace in the whole in terms of its stellar performance over the last few years is its mega-market share at home in the UK, where it has over 2,700 stores and generates about 70% of its annual revenue.

Tesco controls about 30% of the UK market, which is nearly as much as its two leading competitors - Walmart-owned Asda and Sainsbury's - combined.

Asda has an about 17% share. Sainsbury's is very close behind with about 16.3%. Morrisons, the fourth-largest food and grocery retailer in the UK, has an about 12.4% market share. These "Big Four" chains, as they're called in the UK, account for nearly 75% of all food and grocery sales in the nation, according to the data from market research firm Kantar.

I don't see Tesco losing much market share at home in the UK over the next couple years despite the heavy competition there from Asda, Sainsbury's and Morrisons, along with Waitrose at the more up-market end and the hard discounters Aldi and Lidl on the other end. Tesco is a mid-range food retailer in the UK, as are Asda and Morrisons.

Therefore, I also expect Tesco to perform at or near the same levels it has over the last four years, despite continuing losses at Fresh & Easy in America.

As long as this is the case, Tesco CEO Philip Clarke will continue to get his wiggle room for Fresh & Easy from investors until early 2013, when the retailer reports its fiscal 2012/13 results, which if Clarke is right will include breaking even with what then will be a five-year-old and some change Fresh & Easy Neighborhood Market chain in America.

What I describe though is only the midfield game for Clarke and Tesco when it comes to Fresh & Easy. In other words, getting to break-even by fiscal 012/13 end and doing so without experiencing the wrath of investors is merely job one.

The bigger picture, which is if Fresh & Easy Neighborhood Market is actually a viable food and grocery retailing model and business for Tesco in the U.S., is what Clarke must also be thinking very seriously about. I don't know about him - but it would keep me up at least one night out of each week.

I'm not going to address that mega-question today. But it is a central question I will be addressing in this space throughout 2012.

I will say this today though, although I've seen some considerably promising improvements at Fresh & Easy since Philip Clarke took over as CEO of Tesco in March of this year, the jury is still out on the central question I posed above, which is if Fresh & Easy Neighborhood Market is a viable - defined as something that can make money and be grown beyond its current three state geographical area - business for Tesco in America.

Stay tuned for that discussion in 2012. See you next year.

- The Insider

Related Stories

December 8, 2011: Tesco Reports 11.9% Q3 Comp Store Sales Gain for Fresh & Easy ... But On Heavy Discounting

November 10, 2011: Chief Marketing Officer Uwins Out in Top-Level Reshuffling at Tesco's Fresh & Easy Neighborhood Market

October 10, 2011: Gov. Signs AB 183: End of Self-Service Checkout Only in California For Fresh & Easy Neighborhood Market if Stores to Still Sell Alcohol

July 1, 2011: Tesco Shareholders Meet: Board Says Yes to Pay Plan, No to Investigation of Fresh & Easy Neighborhood Market; Pig Farmers Say it's Impossible to Bring Home the Bacon

May 11, 2011: CEO Philip Clarke Launches A New 'Vision and Strategy' For Tesco

February 28, 2011: Changing of the Guard: Clarke Takes Over the Reins as Tesco CEO Wednesday

February 23, 2011: 'The Insider' - Incoming Tesco CEO Philip Clarke Visits America - And Fresh & Easy Neighborhood Market

January 27, 2011: Incoming Tesco CEO Philip Clarke Names Expanded Corporate Executive Committee

October 8, 2010: 'The Insider' - Incoming Tesco CEO Philip Clarke Needs to 'Imagine' When it Comes to Fresh & Easy Neighborhood Market USA

October 5, 2010: Philip Clarke's Early Welcome to America: Tesco Logs $151 Million Half-Year Loss For Fresh & Easy Neighborhood Market

October 4, 2010: Tuesday's Tesco Interim Report Offers A Road Map of Sorts For the Future of Fresh & Easy Neighborhood Market

September 13, 2010: 'The Insider' - Reading Philip Clarke's Tea Leaves: Might A Mixed Corporate/Franchise Model Be in Fresh & Easy Neighborhood Market's Future?

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

June 8, 2010: Tesco CEO Terry Leahy Retiring; Philip Clarke New CEO; Tim Mason Named Deputy CEO But Will Remain Fresh & Easy Neighborhood Market Chief in U.S.

[Readers: Click here to read past columns by 'The Insider.'

Tesco Reports 11.9% Q3 Comp Store Sales Gain for Fresh & Easy ... But On Heavy Discounting

News & Analysis

United Kingdom-based Tesco said today comparable-store-sales (called like-for-like in the UK) for its El Segundo, California-based Fresh & Easy Neighborhood Market chain increased by 11.9% for its 2011/12 fiscal year third quarter, which ended November 26, 2011.

The 11.9% comparable-store-sales gain is slightly less than the 12.4% Tesco reported for Fresh & Easy for its fiscal second quarter, which ended August 27.

Comparable or same-store-sales is a key indicator for retailers because the metric only includes stores open a year or more.

In contrast, overall sales growth as a metric includes new stores opened during a given quarter. Tesco reported a 29.2% overall growth rate for the third quarter for Fresh & Easy Neighborhood Market.

When looking at Fresh & Easy Neighborhood Market, comparable store sales are what's key because the numerous new Fresh & Easy stores Tesco opens tends to make the overall sales number meaningless when it comes to gaining any real understanding of the 184-store U.S. grocery chain's sales performance.

The 11.9% comparable sales growth number is a good one for Tesco's Fresh & Easy. It also continues a solid comparable sales growth trend for the grocery chain, which has turned in double-digit comparable sales increases over the last few quarters.

However, a considerable percentage of that double-digit comparable sales growth is due to heavy discounting by the chain during the third quarter, which included distributing numerous 20% off discount store coupons, along with the discounts offered customers with the new Fresh & Easy "Friends" reward card which was launched in early October, in our analysis.

Fresh & Easy's loyalty/rewards card gives customers points for certain purchases which they can redeem for cash discounts. For example, 500 points equals five dollars off any given total purchase. Fresh & Easy gave (and is still offering as an intro) shoppers 500 free points or $5 on their cards just for signing up.

Philip Clarke, Tesco's CEO, said today U.S. like-for-like revenue rose almost 30% in the "week around Thanksgiving," which "demonstrates the business is really gaining traction with customers."

What Clark didn't mention though - and what you aren't likely to read elsewhere because we track such things closely at Fresh & Easy Buzz - is that from November 2 through the week leading up to Thanksgiving, Fresh & Easy Neighborhood Market distributed five of its 20% off - $10 off purchases of $50 or more, 6 off $30, $5 off $25 - store coupons via its "friends of fresh & easy" e-mail-based flyer. The coupons are also easily available online by simply typing "fresh & easy coupons" into Google or one of the other search engines.

Fresh & Easy distributed the 20% off store coupons online on the following dates leading up to Thanksgiving on November 24: November 2, 9, 16, 18 and 22.

Fresh & Easy Neighborhood Market also distributed the coupons in its weekly advertising circulars, which are direct mailed to consumers homes.

Employees at a number of Fresh & Easy stores we visited in the three weeks before Thanksgiving were also handing out store coupons to shoppers. Additionally, a number of our correspondents reported in the same thing.

Such discounting, which has helped Tesco achieve double-digit same-store sales with Fresh & Easy for a number of quarters now, does little to help the U.S. chain's trading margin, which Tesco must increase significantly if, as CEO Philip Clarke says will happen, it's going to break-even with Fresh & Easy Neighborhood Market by the end of its 2012/13 fiscal year, which ends in February 2013.

As noted earlier, the 11.9% comparable-store-sales metric for Fresh & Easy is a good one.

The big question though is - at what cost (as in margin)?

Tesco doesn't report metrics like margin - or even sales and profit/loss - for Fresh & Easy for its third quarter.

Therefore, we can't know what that cost might be. For example, did Tesco improve its poor trading margin (negative 35% at fiscal half year) with Fresh & Easy during the fiscal third quarter? Conversely, Did the heavy discounting make that poor trading margin even worse? Did it stay the same?

We won't know any meaningful about whether or not the retailer improving its trading margin and is decreasing its loss with Fresh & Easy until Tesco reports its fiscal 2011/12 full year financials in April 2012. The fiscal year is over at the end of February 2012.

On October 5 of this year Tesco reported a fiscal 2011/12 half-year loss of $112 million for Fresh & Easy, on sales of $470 million. The loss is 21-23% (depending on how recorded) lower than the one iy reported for Fresh & Easy for the same period in the previous fiscal year.

Meanwhile, Tesco today reported its fourth-straight quarter of sales declines at home in the UK, which accounts for nearly 70% of the global retailer's revenue. Tesco has operations in 14 countries.

Sales at Tesco's UK stores open at least a year dropped 0.9 percent, excluding fuel and value-added tax, in the fiscal third quarter ended Nov. 26, the retailer reported today.

But despite the decline in sales at home, Tesco reported an overall increase in corporate revenue of 7.2%, including fuel (7.3% at constant exchange rates). and 5.4%, excluding fuel (5.5% at constant exchange rates) for its fiscal third quarter.

[You can view Tesco's fiscal 2011/12 third quarter reporting here.]

The fiscal fourth quarter, which ends in February, is a crucial period for Tesco with its Fresh & Easy chain, which is something we'll be offering analysis on in upcoming stories.

Related Stories

November 27, 2011: More Reshuffling: Number Two Marketing Exec Follows CMO Uwins Out the Door at Tesco's Fresh & Easy Neighborhood Market

November 18, 2011: Fresh & Easy Neighborhood Market Combining Big Seasonal Foods Assortment With Promos and Discounts to Lure Holiday Shoppers

November 10, 2011; Chief Marketing Officer Uwins Out in Top-Level Reshuffling at Tesco's Fresh & Easy Neighborhood Market

October 10, 2011: Gov. Signs AB 183: End of Self-Service Checkout Only in California For Fresh & Easy Neighborhood Market if Stores to Still Sell Alcohol