Wal-Mart and Tesco Locked in Heated Cross-Atlantic Competitive Battle in the USA and UK

Arkansas, USA-based Wal-Mart, the number one corporation and retailer in the world, and United Kingdom-based Tesco, the world's third-biggest and the UK's number one retailer, have commenced a full-scale "cross-Atlantic" grocery retailing battle, after Wal-Mart announced yesterday a major expansion program in the UK for its Asda supermarket chain.

The battle also is joined in the U.S., where Tesco is challenging American food retailers including Wal Mart (which is the number one grocery market share leader in the USA) with its Fresh & Easy Neighborhood Market venture.

In less than four months, Tesco has already opened 50 of its small-format (average 13,000 square feet), combination basic grocery and fresh foods' convenience-oriented Fresh & Easy grocery stores in Southern California, Arizona and Nevada. The British retailer plans to have 200 of the grocery markets' open in California and the other two Western U.S. states by the end of this year, with many more coming in 2009.

To fight back against British invader Tesco's Fresh & Easy Neighborhood Market on its home turf in the U.S., Wal-Mart will open its own small-format grocery store version named Marketside this summer. The first three -to- four stores will open in the Phoenix, Arizona metropolitan area. The first Marketside stores will be located very close to existing Fresh & Easy grocery markets in two Phoenix suburbs.

The publication Natural~Specialty Foods Memo has an analysis piece which was published yesterday that discusses and analyzes the Wal-Mart/Tesco competitive battle and how it's heating up in both the United States--with the small format grocery stores--and in the United Kingdom, where Tesco and Wal-Mart/Asda operate numerous different format grocery, combination and general merchandise stores, including superstores and hypermarkets.

We suggest the piece to our readers as it provides not only a good background on the current battle lines being drawn between the two mega-retailers, but offers analysis on where the situation might be going, as well.

Read the full piece: "Wal-Mart Heating Up the Competition Against Tesco in the UK (As well as At Home in the USA).

A Look at Fresh & Easy at @ 50 (Stores): An Analysis and Some Suggestions for Going Forward

Fresh & Easy Not Achieving Sales Goals: Consultant

From: Supermarket News, February 21, 2008

BOCA RATON, Fla. — Fresh & Easy Neighborhood Markets have not yet come close to achieving the sales levels Tesco officials were originally hoping for, according to an industry consultant here. Speaking yesterday with investors in the U.S. and the United Kingdom in a conference call sponsored by New York-based Citigroup, Jim Prevor said the 52 Fresh & Easy stores that have opened since November are averaging weekly sales volumes of $50,000 to $60,000, or about $5 a square foot — below the goal of $200,000 a week and $14-$22 in sales per square foot the company had projected. A spokesman for Fresh & Easy declined comment when contacted by SN. Prevor said the volume estimates are based on discussions with competitors, vendors, industry observers and Fresh & Easy store managers, "who all confirm each other." Prevor also said Fresh & Easy is paying rent on stores in the Bay Area in Northern California after deciding to open them early in 2009 instead of later this year as originally planned. The Tesco spokesman told SN the company never intended to move into the Bay Area until 2009. In other comments, Prevor said Fresh & Easy is not laying off employees but is not replacing any who leave. The company spokesman declined comment on that assertion.

Our Analysis: The State of Fresh & Easy Neighborhood Market @ 50 Stores

The above report on Tesco's Fresh & Easy Neighborhood Market's store performance to date is from today's issue of the supermarket trade publication Supermarket News.

Our sources (industry analysts, commercial real estate agents, suppliers, food brokers, consumers, store-level workers, and others) have been telling us similar things--and more--regarding the Fresh & Easy store's overall sales performance to date. Our regular readers know we've written about this fact--and that we've suggested some possible solutions in past pieces based on our research and analysis.

Regarding weekly Fresh & Easy store sales, we've heard from our sources weekly figures as low as those Mr. Prevor reported at the industry conference, and as a high as around $100,000 per-week for some of the stores. In particular, we've been told by two good sources the Glassell Park neighborhood Fresh & Easy grocery market in Los Angeles is doing about $100,000 in average weekly sales. However, we don't disagree in the main with Mr. Prevor's overall sales numbers. Even if all the stores were averaging $100,000 per-week, which they aren't, that would be far from what they should be doing.

Of course, it's important to keep in mind that the longest-open Fresh & Easy store, which is store number one in Hemet, California, has only been open since late October, 2007, which is less than four months. Further, many of the stores have only been open for one month. In other words, if Tesco's estimates for the Fresh & Easy grocery stores really is $200,000 per-week in start-up mode (which sounds close to right based on our research) they were too high to begin with, which is something we mentioned months ago.

The plain fact is, however, the stores' need to do at least $200,000 per-week--and do so in a time not too far down the road--to be viable. This is even more true because Fresh & Easy's retail prices on the stores' basic grocery items are relatively low, thus meaning they earn relatively lower gross margins overall than say Whole Foods Market or even Trader Joe's.

Since the bulk of the stores' total sales will come from these private label and national brand basic grocery items, the only way the retailer can make up for the low gross margins is to sell more; something the Fresh & Easy stores aren't currently achieving. Brisk sales of higher margin prepared foods will help increase overall margins, but it isn't enough all by itself. Unfortunately for Fresh & Easy, logistics problems, which in-turn is suppressing prepared foods' sales makes it all the more difficult at present to boost those overall gross margins.

In terms of the labor issue, that "Fresh & Easy isn't laying off employees, but isn't replacing those who leave", we are hearing a bit of a different twist on why this is the case from our sources, who include current store-level employees.

We're being told that in Southern California especially, but also in Arizona and Nevada, Fresh & Easy stores are having a difficult time finding employees who will work for the starting salary of $10.00 hour the retailer is paying. Additionally, with the exception of a couple full time store-level managers, Fresh & Easy is only offering employees a maximum of 20 hours a week. [Although, in those stores where workers have left, employees who want extra hours are being given them, but they still aren't 40 hour a week jobs. And the extra hours are only temporary and not guaranteed week-to-week.]

We aren't saying Prevor is wrong that Fresh & Easy is trying to cut back on store-level labor by not hiring replacements at times when employees leave. Rather, we're just adding an additional twist we recently learned from our sources. Further, we believe it's this hourly wage/labor issue that's key, not only in the case of replacement workers, but in an overall labor case as well for the retailer. We see Tesco having to raise entry-level wages, especially when they open stores in the San Francisco Bay Area of Northern California, beginning late this year or in 2009.

Part of this labor problem is that especially in Southern California, $10.00 hour isn't a particularly decent starting wage. The state of California's minimum wage is currently $8.00 hour. It was raised beginning last year, and again this year, from a minimum wage of $6.75 just two years ago.

With the exception of Whole Foods Market, Inc., Trader Joe's, Wal-Mart Supercenter and Fresh & Easy Neighborhood Market, all of Southern California's (and Arizona's too) major supermarket chains and independents are union shops.

Entry-level retail clerks start off at a far-higher hourly wage than they can get at Fresh & Easy, and have a health benefits packaged that's more than twice as good in both quality and employee contributions as the one currently offered by Tesco. (Fresh & Easy offers all employees who work 20 hours or more a week a minimal health insurance plan. It has far higher employee contributions across the board compared to the union clerks' plan.)

These union supermarkets in Southern California include: Market share leader Ralph's (owned by Kroger Co.), Safeway Stores, Inc.'s Von's chain, Albertsons (owned by SuperValu, Inc.), Stater Bros., Bristol Farms (also owned by SuperValu, Inc.), Gelson's--and frankly nearly every other chain and independent in the region accept those listed above and some small, family-owned markets and the mom and pop stores, which aren't union. It's estimated union shop supermarkets make up about 85% of the total grocery dollar market share in Southern California, according to the California Grocers' Association, based in Sacramento.

Most of the chains and independents in Arizona and Nevada are union as well. The retail clerks in those states' union shops make slightly less per-hour than those in Southern California, but have the same health plan. Their hourly salary is still far higher than the $10.00 hour Fresh & Easy is paying however.

Additionally, the clerks in the union shop supermarkets have a clear career path if they choose. A clerk with the equivalent of one year of hourly experience (this generally takes about one year for a full-timer and two years for a part-timer to achieve) makes about $21.00 hour in Southern California, and about $19.00 hour in Arizona and Nevada. In addition, they get the excellent union health benefits plan, which is one of the best private sector plans in the U.S.

Most of the union shop supermarket chains also offer discount stock purchase programs (if public companies) or profit-sharing plans (if privately held), and the retail clerks' union has a retirement plan, which employers pay into in addition to workers. A union clerk with 25-30 years of experience upon retirement can get about $35,000 -to- $40,000 per year in union retirement benefits in addition to collecting Social Security.

It's not only union supermarkets that Fresh & Easy is competing with on the labor front. In Southern California, for example, Starbucks, major retail department stores and many other retail stores pay a starting wage of more than $10.00 hour. Even McDonald's pays $10.00 hour in Southern California. Then there are receptionist jobs, administrative assistant jobs--the types of jobs that don't generally require a post high school education--that also pay over $10.00 hour in the region. We recently saw an advertisement in the Los Angeles Times' for "character mascots" at Disneyland. The hourly pay was $12.00.

Fresh & Easy Neighborhood Market 2.0

Based on the data offered by Mr Prevor, and the information we continue to get from our sources, along with much personal participant observation in the Fresh & Easy stores, we suggest Tesco needs to do at least the following three things in terms of their Fresh & Easy grocery store retail operations to help create success:

1. Solve the frequent fresh foods' out-of-stocks problem

In the last eight weeks we've interviewed at least 100 shoppers inside and outside of Fresh & Easy grocery stores in Southern California and Arizona. In addition, we've read at least 100 reviews of the grocery markets' on online review boards like yelp and others. Using basic content analysis research methodology, we've scored the most frequently made consumer complaints by category and subject.

One of the most often repeated consumer complaints we've identified is frequent store-wide out-of-stocks of fresh, prepared foods and fresh produce in Fresh & Easy stores. This is particularly the case beginning in the late afternoons and into the evening nearly every day.

Further, we've seen this situation with our own eyes in over a dozen Fresh & Easy grocery stores. In the evenings we've observed the prepared foods' refrigerated case shelves with many out-of-stock items, and in some instances the shelves were nearly empty. Unfortunately, this fact has more to do with logistics problems than massive sales.

Not only are Fresh & Easy stores losing sales from this serious logistics problem, the grocery chain is losing customers as well. This is especially the case as it concerns first time shoppers. And, since all of the stores have only been open for a short time, new shoppers means most shoppers. These shoppers' come to the store in their neighborhood for the first time--in many cases because they've heard about the markets' extensive prepared foods offerings--see the out-of-stocks, and often don't return for a second visit. A grocer can never build a strong core of primary shoppers with these kinds of logistics problems. This is something Tesco's Fresh & Easy needs to fix right away, before it defines the retailer.

2. Spread the Fresh & Easy message: Targeted radio advertising

While it's true Tesco's Fresh & Easy Neighborhood Market has obtained lots of "free media" or publicity for its new venture and stores, the fact is most of that publicity has been either in grocery trade publications--which consumers don't read--or has been in local newspapers, which if one checks newspaper company financials' these days, will notice aren't being read by people in very large numbers. Further, most of this publicity in the local newspapers happens when a new Fresh & Easy store opens in a city. After that, there isn't much mention of the stores.

In our research interviews with consumers, we've frequently been asked, "Why doesn't Fresh & Easy advertise more, other than sending out it's mass-mailed product advertising circular?" We've been asking that same question to ourselves for some time. The fact is, despite all the newspaper articles--and some television coverage--about new store openings, consumer awareness of Fresh & Easy in Southern California, Arizona and Nevada is low.

A start-up venture on the scale of Fresh & Easy can't rely on this minimal publicity to create the awareness needed to drive shoppers to its stores. The three states where the grocer currently has stores--(Southern) California, the metropolitan Phoenix region in Arizona, and the Las Vegas, Nevada metropolitan area, are all "car culture," commuter cities. People spend hours in their cars in these places daily. They generally commute by automobile back-and-forth to work, use their cars to even run the shortest of errands, and in many cases even eat while driving since they spend so many hours of their day in the car.

The other thing these millions of commuters do is listen to the radio while spending all these hours in their automobiles. Tesco's Fresh & Easy Neighborhood Market is missing a huge opportunity to reach and communicate with all these potential new customers by not running frequent, and high-quality, 30-second radio spots in these regions.

The great thing about radio advertising is that it can be targeted. For example, in Arizona it can be focused only in the Phoenix metro and suburban areas where the retailer has its stores. The same is the case in Nevada. Radio ads can be targeted only in the Las Vegas metro area and not elsewhere in the state.

For Southern California, where the grocer has a more spread-out store base, the radio ads can still be focused, and the time bought accordingly. For example, Orange Country, Los Angeles and San Diego can all be selected as separate radio advertising markets, and time buys made on that basis.

Compared to other mass media, radio is cheap. It also can be micro-targeted. Most importantly, in the regions' where Tesco has Fresh & Easy stores, the radio spots will reach potential customers where they live--in their cars. Tesco needs to create awareness of the Fresh & Easy brand and most importantly its stores. We believe the retailer is making a big mistake by not using radio extensively as a media tool in its marketing toolbox.

3. Create A sense of place: Put the 'Neighborhood' in the 'Neighborhood Markets.'

It's our analysis that a major problem with the Fresh & Easy grocery stores is they lack a sense of place. The stores' are positioned as neighborhood grocery markets--places where local residents will do most of their shopping rather than just shopping them like they would a convenience store.

The fact is though, based on our research, consumers are doing just that: shopping the Fresh & Easy neighborhood markets more like they shop convenience stores rather than using them as their primary--or even in most cases secondary--neighborhood grocery store. If this becomes the norm, the format will fail. It's not a format (or business) based on a convenience store operating model.

We believe one of the primary reasons consumers are shopping the stores in this manner (against the format positioning) is simply because the grocery markets' lack a sense of place, or neighborhood feel. The Fresh & Easy store's need more warmth. They need to offer more reasons for shoppers to linger in them and to spend time buying more of their groceries once in the store. They are called "Fresh & Easy," rather than "Quick & Easy," after all.

We have two suggestions on how Tesco can create more of a sense of place in the grocery stores, or how it can put the "neighborhood" in its neighborhood markets:

First, add a small in-store "Fresh & Easy Cafe" to the store format. This can be a 600 or so square foot in-store cafe, serving coffee drinks, smoothies, fresh-baked goods and the like. It's nothing new. It just has to be created on the scale to fit the store's 10,000 -to- 13,000 square foot size, which is why we suggest about 600-700 square feet.

The "Fresh & Easy Cafe" needs to reflect the neighborhood. It also needs to offer a good selection of food and drinks at reasonable prices. But there's no need to low-ball on those prices.

Such an in-store feature will provide a place for neighborhood residents to come to, and to spend time in, while shopping the store. Many will even come to the cafe when not shopping. And that's part of the point. When the cafe becomes a "third place" for neighborhood residents, you can bet they'll end-up doing much more of their grocery shopping there, and more often too. It's a proven fact such in-store features create more primary customers. They also extend shoppers time in a store, which generally leads to purchasing more groceries. It's all about getting primary shoppers, along with growing that average customer ring.

[Note to Fresh & Easy Neighborhood Market executives: We suggest the following to you: First, do a Google search using the keyword Third Place. (We even linked it for you.) Read some of the many articles about third place theory as it relates to American (and British for that matter) culture, society and retailing. One key book on the subject is: "The Great Good Place," by Ray Oldenburg. It's really must reading for any company trying to create a neighborhood-oriented grocery store chain, cafe chain or other "neighborhood-oriented" retail businesses.

Starbucks has often been sited by you (Fresh & Easy executives) as a model for Fresh & Easy. Starbucks uses "third place" theory and practice extensively in its store design and operations. In fact, it's a key to the chain's success. Whole Foods Markets, Inc. has employed third place theory very well in food retailing. In fact, at home in the UK, Tesco plc. does a decent job of it in some of its stores, using among other things its popular in-store "Tesco Cafe."]

Second, in keeping with this need to create more of a sense of place in the Fresh & Easy stores--and thus increase the average customer ring and create more primary shoppers--we suggest Fresh & Easy Neighborhood Market take a cue from its parent company, Tesco. But that's too logical you say?

In the UK, most Tesco stores (it varies depending on the particular format) offer a wide variety of basic everyday-type services to customers and potential customers. You could call these basic services "neighborhood-oriented" needs in fact. Among these basic "neighborhood" sevices include: mobile phone sales and mobile phone plan sales, insurance services, internet service plans, postal-type services, and other similar everyday services one would love to have available to them right in their own neighborhood grocery store.

Taking that cue from its parent, Fresh & Easy might consider, for example, setting up small neighborhood service centers in the grocery stores. These small centers would offer postal services like sending packages via UPS or Federal Express, the use of fax machines for a nominal fee, perhaps a computer or two with free internet use for customers, and a few other services. The store centers' might even want to get into the automobile and other insurance segment businesses down the road, perhaps leveraging on the Tesco plc. model. Fresh & Easy doesn't even have to operate these centers themselves if they don't want to. Rather, they could carefully outsource them to someone like the "UPS Store," which has similar freestanding franchises all over the U.S.

The specifics of what these in-store "Neighborhood Service Centers" offer isn't what's significant at this point. Rather, it's that the concept of having such centers helps to achieve the much needed goal of creating a better sense of place in the Fresh & Easy grocery stores. And, as we've said, we believe doing so will lead to the ability to better achieve two key metrics in the retail grocery business: increasing the average customer store-purchase ring, and creating primary shoppers.

Fresh & Easy to Open Three Stores in the Las Vegas, Nevada Metropolitan Region Tomorrow and Friday

Continuing its February new store opening blitz, Tesco's Fresh & Easy Neighborhood Market will open three new stores in Nevada on Thursday and Friday. Two of the new small-format, convenience-oriented grocery stores will be in the city of Henderson, Nevada, which is only about seven miles from Las Vegas, and the third new Fresh & Easy neighborhood grocery market will be in North Las Vegas.

The stores' will be about 10,000 -to- 13,000 square feet--the standard size for the Fresh & Easy market format-- and feature the grocer's combination of Fresh & Easy brand and national branded basic, everyday grocery products, fresh produce and meats, fresh, prepared ready-to-eat and ready-to-heat foods, and a selection of specialty, natural and organic grocery items.

Each Fresh & Easy store also has a food sampling area in it, where a store clerk offers shoppers various selections of the store's prepared foods' offerings as tastings during store hours. The stores, which are neighborhood discount grocery store meets Trader Joe's in their format style and product selections, also sell fresh flowers and plants, some non-foods items, a selection of wines, including a line of Australian wines which retail for $1.99 a bottle, craft beers and (in most locations) spirits.

Tesco is making a major push into the Las Vegas, Nevada metropolitan region with its Fresh & Easy grocery stores. The city of Henderson is located about seven miles southeast of Las Vegas, making it part of the city's metropolitan region even though it is an incorporated city. Henderson is Nevada's second-largest city after Las Vegas, with a population of about 180,000 residents.

The Las Vegas metropolitan region has a population of nearly 2 million people. The region's population was the fastest-growing in the U.S. between 1990 and 2000, soaring by a whopping 83% during that 10 year time period. A third of all new arrivals to the region are from California, according to the city of Las Vegas and the U.S. Census Bureau.

With the three new stores opening before the end of this week, Fresh & Easy will have a current total of nine Nevada stores, all located in the Las Vegas metropolitan region. More new stores are planned for the area and state before the end of 2008.

Inside Tesco Fresh & Easy Neighborhood Market's Riverside County, California Distribution Center

[Photo: Courtesy T. Galvin]

As a major element of its Fresh & Easy Neighborhood Market small-format grocery store venture in the Western U.S. states of California, Arizona and Nevada, Tesco has constructed an 850,000 square foot distribution center in Riverside County, which is located in the Inland Empire region of Southern California. The distribution facility is designed to serve all of it's current and future--as many as 300 total--Fresh & Easy grocery markets in the Western United States.

In addition to hundreds of thousands of square feet of warehouse space, tens of thousands of product picking locations, and 74 truck bays, the Riverside County Fresh & Easy distribution center also includes a large commercial kitchen and related facilities, where Fresh & Easy brand fresh, prepared foods' products are produced.

T. Galvin, a Southern California-based real estate economics researcher who publishes the Inland Empire Economics blog, recently toured the Fresh & Easy Neighborhood Market distribution center in Riverside County. He was so impressed with the massive facility, he asked Ted S. Oyama, the lead senior architect for the Tesco project for an interview about the design of the distribution center. Mr. Oyama is the manager of architecture for the firm AEPC Group, LLC., whcih was the lead firm on the project.

Read T. Galvin's interview with Fresh & Easy Neighborhood Market distribution center lead architect Ted S. Oyama here. It's the first interview we're aware of with the distribution facility's lead designer. The interview offers some specific and detailed information on the massive distribution center not previously covered in press reports about the facility. It's also a first-person discussion, since Mr. Oyama was the man at the helm when it came to desiging--and then making real--the 850,000 square foot distribution center.

Tesco's Fresh & Easy Serving as an Economic Stimulus Package of Sorts for California's Troubled Commercial Retail Real Estate Industry

Tesco's Fresh & Easy Neighborhood Market venture is providing a major benefit to the troubled commercial retail real estate industry in Southern California: it's giving the region's suggish commercial-retail building economy a big boost by buying and renovating numerous long-empty retail buildings, purchasing abandoned lots to build new stores on, and in some cases signing leases in mixed-use developments which have long been searching for a retail anchor.

Of the about 30 -to- 35 Fresh & Easy grocery stores currently open in Southern California (out of 50 total stores open to date), the majority of those units have gone into previously empty retail buildings, which the company has gutted and completely remodeled to fit its 10,000 -to- 15,000 square foot Fresh & Easy grocery market format.

Many of these previously empty buildings were former Albertsons' supermarkets. Before Boise, Idaho-based Albertsons, Inc. sold the supermarket company a couple years ago to SuperValu, Inc., it closed numerous underperforming Albertsons' stores throughout Southern California. Tesco's Fresh & Easy has leased many of these empty supermarkets and remodeled them for their Fresh & Easy stores. In addition, Fresh & Easy also has leased a number of empty CVS and Rite-Aid drug stores, along with a few other empty retail buildings, for their Fresh & Easy grocery market locations in the region.

Tesco decided on this combination strategy of renovating abandoned commercial retail buildings and building some from-the-ground-up new stores for a couple of reasons.

First, with the existing stores, since the building's shell, electrical, plumbing and other infrustructure is already in place, it's much more inexpensive to simply gut the store's interior and redo the outside, and create a Fresh & Easy store, rather than having to build from the ground-up. The cost savings can be considerable.

Additionally, because most of these retail buildings had been empty for some time, Tesco was able to get rather favorable lease costs and terms on them. This combination of lower building costs and cheaper rents allowed the retailer to have lower upfront costs and overhead, which makes sense considering Fresh & Easy's low-price positioning on basic grocery items and prepared foods. Since the stores average only about 13,000 square feet, the ongoing operating costs are much less than for example the previous tenent, Albertsons, which operated 35,000 -to- 55,000 square foot stores in the same boxes.

Further, since Fresh & Easy's strategy is to open as many stores as fast as it can, especially in Southern California, the rapidity in which the grocer can renovate one of these empty retail buildings is such, compared to building a store from the ground-up, that it allows for it to meet this goal of opening a critical mass of stores in a very short period of time.

In the situations where Tesco has thus far build stores from the ground-up, such as the just-opened store in the Southern California city of Compton, the grocer was able to negotiate very good financial terms for the location because the city of Compton offered the retailer a package of financial incentives to build and open a store in that community which is underserved by grocery stores. Before the Fresh & Easy store opened in Compton last week, the city of 100,000 had only one decent-sized grocery store.

Commercial real estate agents in Southern California have told us Fresh & Easy is grabbing locations nearly wherever it can--the empty retail stores, locations in shopping centers that are looking for a retail food store anchor, and in lower-rent districts which are avoided by most other grocers.

For example, one commercial real estate agent told us about a Fresh & Easy store set to open late this year in the city of Murrieta. The store is located in a shopping center that won't even be completed when the Fresh & Easy store opens. The neighborhood is a relatively new one in the city. Most of the houses and condominiums in the area were just completed in 2004, the agent told us. Further, there are numerous vacant lots where houses have yet to be built.

The Fresh & Easy store is nearly right next to the residences, the commercial real estate agent said. The neighborhood isn't expected to actually have enough residents to support a store until at least two years from now. However, he told us Fresh & Easy wanted to grab the location and get the store up and running long before that happens, or if it happens.

City officials and commercial landlords in Southern California communities ranging from Anahiem and Orange in Orange Country, to Riverside and Upland in the Inland Empire, to Fallbrook and Vista near San Diego, are all happy that Tesco has been renovating so many of these abandoned retail buildings at such a fast clip. The chain has become a corporate commercial real estate stimulus package in and of itself for the region's depressed market.

We do wonder though, with such rapid new store development, if the grocer won't have to take a hard look in a year or so at many of its locations and seriously evaluate the store performance in those neighborhoods. Keep in mind that Albertsons and the drug chains abandoned those locations--and the buildings--primarily because the stores were underperforming. While its true because of their smaller size and start-up nature that Tesco will likely define performance much differently than Albertsons did for example, many of these locations still are suspect in the medium -to-long run.

Right now though Tesco isn't concerned about that. In fact it's employing a similar strategy in its plans to move into Northern California, opening its first stores in the San Francisco Bay Area in late 2008 or early 2009. The grocer has already inked deals for 18 locations throughout the Bay Area. Many of these 18 locations are leases on empty commercial retail store buildings--and a number of those buildings are, you guessed it, former Albertsons stores, which were closed as part of that acquisition a couple years ago and have remained vacant.

Additionally, Tesco has worked two deals in the city of San Francisco similar to the Compton deal. The retailer is locating two stores in the low-income Bayview-Hunters Point neighborhood in the city, and will receive incentive packages for doing so. Both of these stores will be built from the ground-up, like the Compton store. Bayview Hunters Point is an underserved (by grocery stores) neighborhood in San Francisco which has been actively trying to lure a grocer which sells lots of fresh foods to locate in the neighborhood for over two decades.

Tesco's Fresh & Easy Neighborhood Market venture in California comes at a much needed time for retail commercial real estate in the state. Unemployment is rising rapidly in the Golden State, the state government is facing a multi-billion dollar deficiet, three of the state's counties are numbers one, two and three on the top ten list of U.S. counties with the most foreclosed homes, and California's commercial and residential building industry is at a standstill. Many economists in the state believe California is already in a recession.

In the commercial real estate sector layoffs are growing. Many agents are leaving the field before being layed off. Retail building landlords are seeing numerous tenants go out of business. Empty buildings in the main are staying empty. For many of those in the commercial retail real estate industry Tesco's British invasion of California is welcomed with wide-open arms. Right now, it's the hottest deal working in the industry.

Tesco's Fresh & Easy Neighborhood Market's new store building and opening program is serving as a healthy economic stimulus to the state's depressed commercial retail industry. This should continue for the rest of 2008 and through 2009.

The jury is still out on whether many of these stores have medium to long-term viabiltiy in certain locations. We believe a major evaluation by Tesco of many of these stores will come in about two years, towards the end of 2009. We also believe that when that evaluation comes, many of the locations will be deemed underperforming.

However, Tesco doesn't seem the least bit concerned with that issue at present. And, local governments, retail commercial real estate agents, and retail building and shopping center landlords in California aren't complaining. Right now, many of them are competing for the Fresh & Easy account, trying to be the one who can find the British grocer the best locations and empty retail buildings the fastest, and for the best deal.

A New Fresh & Easy Store Opening About Every Two Days In February

Despite the fact February is the shortest month this year, with only 29 days, Tesco's Fresh & Easy Neighborhood Market is opening a new store about every other day, in a frenetic February, 2008 new-store opening blitz in Southern California, Arizona and Nevada.

In a January 27 post in the Fresh & Easy corporate blog, company marketing chief Simon Uwins said the grocer will open 16 stores in the four weeks from January 28 -to- February 29. That's on average an opening of about one new store every two days, if the retailer is able to get all 16 new grocery markets opened by the end of this month as planned.

Nearly all of these 16 stores are being opened in Southern California, Fresh & Easy's number- one target market region, and Arizona, the grocer's number two region of focus.

Tesco will open store number 50 tomorrow morning at 10:am in the Southern California desert region city of Palm Desert. The store is located at 72885 Hwy. 111. Palm Desert is in Southern California's Inland Empire region, an area where Tesco plans to open as many as 48 stores before the end of this year.

The British grocer will open two more of its 10,000 -to- 13,000 square foot grocery stores in the nearby city's of Riverside and Upland one week from tomorrow, on February 27. The Riverside store will be the first Fresh & Easy grocery market in that city. The Upland store will be the grocer's second in that community. The Riverside store is at 8765 Trautwein Road. The new Upland grocery market is at 829 West Foothill Blvd.

The Riverside location is an interesting--and will be a competitive--one. SuperValu, Inc.-owned Albertsons is opening a remodeled supermarket tomorrow right across the street from where the Riverside Fresh & Easy, opening next week, is located.

The Albertsons' store has been remodeled under SuperValu's "Premium Fresh & Healthy Format." That format is an upscale one, featuring lots of fresh, prepared foods, expanded fresh produce departments which feature lots of organic produce, large combined self-service and old fashion butcher- block type meat departments, as well as more natural, organic and fresh foods offerings across all departments.

Riverside, and the Inland Empire region also is home to Stater Bros. markets, a local supermarket chain which is the market share leader in the region. Stater Bros. is an Inland Empire institution. In addition to being the region's number one grocery retailer, it's also the area's number one corporate citizen, giving millions of dollars a year in donations to local educational institutions, community groups, charities and other not for profit organizations.

Stater Bros. has fought-off any and all attempts by other supermarket chains to challenge its market share dominance in its home region. Tesco's Fresh & Easy can expect the supermarket chain to do everything in its power to make sure it doesn't lose any significant grocery dollar share to the British-based retailer.

Tesco's Fresh & Easy Venture in the USA, and the Ironic Challenge to its Food Retailing Dominance at Home in the UK

Tesco, parent company of Fresh & Easy Neighborhood Market in the U.S., is not only the third-largest retailer in the world in terms of sales volume, it's also far and away the number one retailer at home in the United Kingdom, with an impressive 30% share of all the food and grocery products sold in the country.

Number-two Asda (owned by Wal-Mart, Inc.), number-three Sainsbury's, Morrison's, the UK's fourth-largest food retailer, the Co-op, Waitrose, Aldi, Lidl (both German-owned chains) and a few others split up the remaining 70% of the market share. That's a lot of retailers to fight over that 70% pie. In other words, Tesco stands alone in its dominance of the UK food retailing market. Currently it does.

We use the word "currently" in the above sentence, because despite Tesco's present status as the dominant food retailing market share leader in the UK, a serious challenge is being waged against the retailer's market share ownership.

The grocery chains primarily waging that battle are Wal-Mart-owned Asda, Morrisons, and the two German grocers, Aldi and Lidl, which operate small-format, no frills, limited assortment discount stores throughout Europe. (Aldi operates its small-format discount stores in the U.S. as well. It also owns Trader Joe's in the U.S.) It's the two small-format discount grocery chains, Aldi and Lidl, we focus on in our piece today.

The Aldi and Lidl grocery stores in the UK average about 15,000 square feet. The stores design is basic and no frills, but attractive. The product mix is similar for both Aldi and Lidl: a mix of private label (about 60% -to- 65% of what they sell) and national brand grocery products (about 35 to- 40% of what the stores' sell.)

Both German-based chains put a major focus on price, and offer a limited assortment of basic grocery items. The stores also offer a small selection of higher-end specialty foods and grocery products at hot, discount prices. In the UK, the stores are called "downmarket" supermarkets in the industry.

Aldi's and Lidl's stores' in the UK may sound a bit familar to you. In a number of ways--store size, the limited assortment basic grocery products' offering with a focus on low price, specialty items offered at disount prices, for example--Tesco's Fresh & Easy small-format grocery stores in the U.S. are similar to the German "downmarket" stores in the UK.

There are differences however. Unlike Aldi and Lidl, Fresh & Easy in the USA has a second focus in its stores--which is an extensive selection of fresh, prepared foods. All three--Aldi, Lidl and Fresh & Easy sell fresh produce and meats. The Fresh & Easy stores also are somewhat more upscale in design, but not much.

Tesco also has a small-format grocery store in the UK called Tesco Express. It's similar to Fresh & Easy in the USA in many ways. However, unlike Aldi and Lidl in the UK--which focus on selling groceries for as cheap as they can, Tesco Express in the UK offers more mid-range prices, and is more upscale in its positioning and store design.

The Tesco irony: While Tesco if trying to get its fledgling small-format Fresh & Easy Neighborhood Market venture off the ground in the U.S.--and is garnering lots of attention for launching a small store competitive challenge in California, Arizona and Nevada to large-format supermarkets like Safeway, Ralphs' Wal-Mart Supercenters, Albertsons and others--its large supermarkets and even larger hypermarkets (along with its smaller Express stores) are about to get the biggest challenge they've seen to date. That challenge is coming from Aldi and Lidl--the German invaders--both of which have embarked on massive growth plans in the UK, designed to take market share from Tesco.

Aldi plans to open at least 50 new no frills, small-format discount grocery stores a year in the UK for the next few years. By the end of 2008, Aldi should have a t least 400 of the discount grocery markets in the UK. The German grocer says it plans to build at least 1,500 total stores under this fast-growth plan.

Tony Blain, Aldi's UK managing director in charge of buying, recently said the German grocer could very well have a store in every town in the UK in the next 15 -to-20 years. Blain also said Tesco is the most vulnerable UK chain in terms of Aldi's growth plan. "If you've got someone with 30% of the market [Tesco], you can assume most of our growth is going to come from that," he says.

Aldi also has launched a massive growth initiative in the U.S. The grocer recently announced that beginning this year, it will build about 100 new stores a year in the USA over the next five years. The grocer already has almost 900 Aldi small-format, discount grocery markets in the U.S. The stores are located in the Midwest and eastern portions of the country.

Lidl also has been building and opening its no frills, small-format discount grocery markets in the UK at a fast pace, and plans to not only continue but to excelerate that new store opening pace. the grocer currently has more than 450 stores in the UK and has said it plans to double that amount in the next few years.

Tesco is very worried about these two German invaders and their no frills, little discount grocery stores. So concerned is giant Tesco that it's set up its own version of a mock German small-foramt grocery store in an old warehouse facility in the UK which is owned by Tesco's founder.

Tesco is using this mock Aldi or Lidl to test merchandising strategies and related concepts. It's also highly believed in UK grocery industry circles that Tesco is using this mock store--like they did in the U.S. in developing the Fresh & Easy format--to create its own version of a small-format, no frills discount grocery store on the order of Aldi and Lidl.

The key to Aldi and Lidl's success in the UK and elsewhere throughout the world is that the grocers use a super low-cost model across the board. The retailers first try to find the cheapest sites to build their stores, and often buy empty retail buildings at a discount and then remodel the buildings to fit their store formats.

Since the store-format is small (average 15,000 square feet), it also costs less to build (or remodel an existing building) than the typical supermarket, which can range from 35,000 -to- 70,000 square feet, or a hypermarket, which is anywhere from 100,000 -to 200,000-plus square feet.

The small-format stores' require less shelving, refrigeration cases, checkout stands and the like. Additionally, because the stores' are no frills in design, the design costs also are lower than those of an even semi-upscale supermarket. Further, the small-format stores are low-overhead: less montly fixed costs for energy and water use for example, lower property taxes and more.

Aldi and Lidl also are able to extend their respective low-cost models to the all important area of labor. The no frills, discount grocery stores often have no more than 4 or 5 employees working in them at any given time.

Store employees multi-task, stocking shelves when not running the cash register, doing clean-up work when needed, and working in mutiple departments, unlike larger-format supermarkets, which have seperate produce department and meat department clerks, for example. Aldi and Lidl store managers also are working managers. They stock shelves, work at the checkstands and do other day-to-day tasks, along with managing store operations and employees.

Lastly, the two German discount grocers employ this super low-cost model in product buying. Private label grocery product development plays a major part in operations and merchandising. And both grocers are very good at it. The retailers' obtain the lowest cost of goods possible from suppliers, have extremely cost-effective packaging operations, and cut-costs aggressively throughout the entire supply chain.

Aldi and Lidl also buy lots of national brand grocery products and non-foods items on an "in-and-out" basis at steep disounts. (Aldi even makes key buys on items like small appliances, gas energy generators and other hard goods, and sells them a super-low prices.) The grocers' agree to buy scores of truckloads of an item from a supplier in return for getting a very low cost. The retailers' then create massive displays of these items in their stores and sell the goods for low prices, making only a small gross margin, but selling a huge volume of product.

Both grocers--especially Aldi--have recently increased the amount and variety of specialty, gourmet, natural and organic grocery items they sell in their UK stores as well, as a way to reach more upper-end shoppers.

The stores' offer these items a deep disounts. For example, Aldi recently offerred fresh, whole Canadian Lobsters for sale at about 40% less than the UK's leading supermarkets. There was a stampede of shoppers to Aldi stores to buy the Lobsters, which the grocer sold out of in a couple days. Aldi recently was said to offer the best quality food items among all grocery retailers in a UK consumer survey.

So, as British food retailing invader Tesco struggles to achieve success with its new, small-format Fresh & Easy grocery store venture in the highly competitive Western U.S. market, two German invaders--Aldi and Lidl--are posing a major challenge to the British-based, global retailer's dominance at home in the UK.

The irony of that fact is, Aldi and Lidl are launching their respective challenges against Tesco with small-format grocery stores, which are similar in a number of ways to the Fresh & Easy grocery markets Tesco is using to launch its competitive challenge against U.S. home-grown, larger-format supermarkets with.