Critical Mass Retail Strategy: The Only Remaining Town in the United Kingdom Without A Tesco Store Likely to Get One Soon

As our readers know, we often talk about what we call the retail "critical mass" strategy Tesco is employing in Southern California (Northern California soon as well), the Phoenix, Arizona Metropolitan area and the Las Vegas, Nevada Metro region, with its small-format Fresh & Easy Neighborhood Market grocery stores.

Briefly, the "critical mass" strategy essentially means opening numerous stores fairly close together in given geographical areas or neighborhoods. For example, fast food retailer McDonalds, coffee chain Starbucks, and drug retailer Walgreens are three examples of retailers who employ this "critical mass" strategy nationally in the U.S.

For Fresh & Easy, the theory behind this "critical mass" strategy is to position the grocery chain as the "neighborhood grocer of choice" to residents in regions like those mentioned in our opening paragraph. It's all about convenience, yet offering a limited-assortment of everyday grocery items, along with fresh foods and specialty products, in the Fresh & Easy grocery stores. The goal: Be a neighborhood residents primary food and grocery shopping venue.

Least dear readers you think we have no empirical evidence to back up our "critical mass" description for Tesco's Fresh & Easy retail strategy, in addition to the fact you need only to look at the high concentration of grocery markets the chain has already opened so close together in Southern California, Metro Phoenix and the Las Vegas, Nevada Metropolitan area, we also would like to share a fact with you about Tesco in its home country, the United Kingdom.

That fact is, there's only one city or town in the United Kingdom that Tesco doesn't have either one of its hypermarkets, supermarkets, small-format Express grocery stores or other format Tesco retail store in. That's right, there's just one town in the entire UK without a Tesco store.

The last remaining area in the UK without a Tesco store in the UK is Harrogate, which is located about midway between London and Edinburgh, Scotland.

But not for long. Tesco is currently is in the process of re-drawing plans for a huge, new supermarket in Harrogate. The retailer is re-drawing the plans because the world's third-largest retail chain already had plans drawn-up for a 107,000 square foot grocery and general merchandise store in the relatively small town. However, some thought it too big for the site, so the British retail chain is revising the store's plans and blueprints, according to a story in tomorrow's (Sunday, March 29) edition of the Yorkshire Evening Post.

Up until last week, there were a number of other areas, all in the remote Scottish Isles, where Tesco also didn't have retail stores. However, with last weeks' purchase of six supermarkets from the UK's Somerfield supermarket chain, Tesco now has a presence in the Northern and Western Isles, where the six stores are located, and where it previously has been without stores.

The Somerfield chain, which is the sixth-largest food retailer in the UK, according to researcher TNS Worldpanel, has put the supermarket company up for sale at auction. It's also selling off some of its stores on a piecemeal basis. Somerfield operates about 900 supermarkets and convenience stores in the UK. Thus far, the UK's Co-op grocery chain is the only bidder for the entire Somerfield company.

The six store acquisition, which Tesco paid about ~100 million British Pounds for, was a strategic purchase on the part of the UK's leading retailer because it gave it stores in the Northern and Western Scottish Isles towns where it previously had no presence. Further, by acquiring the Somerfield stores there, Tesco didn't have to go through application and permit processes like they would if they built new stores in the regions.

Therefore, the last remaining town in the UK without a Tesco store is Harrogate.

There's organized, aggressive opposition to Tesco opening any more new stores at all in the UK. Organized community and national groups, in a manner similar to what Wal-Mart currently is experiencing in the U.S. with its Supercenters, have successfully stopped a number of Tesco stores from being build in their towns.

There's even a town, Iverness, which is called "Tesco Town" because the world's third-largest and the UK's number one retailer has three stores in what is a relatively small community. Tesco recently wanted to build and open a fourth store in Iverness. However, an organized petition drive, which obtained 1,000 signatures against the retailers application for the fourth store, convinced the town council to deny Tesco's application and reject there permit to build that store in the community.

Granted the UK is much smaller geographically and in population than the U.S. However, it's not all that much smaller geographically than the Western U.S. is. Further, it's about on-par population-wise with California, Arizona and Nevada combined.

As you can see, "critical mass" is the name of the game for Tesco in the UK. It's also been the retailer's strategy in other parts of Europe. With 59 Fresh & Easy small-format grocery stores open in just the last five months in Southern California, Arizona and Nevada, with as many as 200 more to come this year and next, we expect lots more "critical mass" to come in the U.S., as well as in elsewhere in the world for Tesco.

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

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

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

We accepted the challenge.

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

The strategy: Background

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

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

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

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

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

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

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

The strategy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fresh & Easy 'Critical Mass' Model Retailer Starbucks Opens First of its New Format Starbucks Merchandise Stores in Southern California; What's Next?

Photo Credit: Natural~Specialty Foods Memo.

We often compare the retail location strategy of Tesco's Fresh & Easy Neighborhood Market, which we call its "critical mass" store location strategy, to that pioneered in U.S. retailing by the likes of Starbucks, Rite Aid drug stores and drug chain Walgreens. That strategy is to locate stores within just a couple miles of each other in market regions so as to become the de facto neighborhood retailer in a respective format in the given market: coffee, drug and in the case of Fresh & Easy grocery retailing.

No retailer of any format type in the U.S. has been more aggressive in this strategy than Starbucks. In many major U.S. cities, there are a Starbucks cafes often just a few blocks from each other. We call that "critical mass squared."

Tesco's strategy with its Fresh & Easy Neighborhood Market small-format combination basic grocery and fresh foods grocery stores thus far in Southern California, the Phoenix, Arizona and Las Vegas, Nevada Metropolitan region markets where its current 61 stores are located is similar. Tesco's plan is to locate Fresh & Easy stores within about 1.5 -to- 2 miles of each other in its markets, thereby helping the grocer to theoretically become the de facto "neighborhood food store" in each neighborhood in these regions.

Since Starbucks is a key model in the U.S. for Tesco's Fresh & Easy--despite of course the two being different format and types of retailers--Fresh & Easy Buzz keeps a close eye on what Starbucks is up to, especially at retail.

As a result of this "close eye," we've discovered the King of coffee retailing has done a little format-bending of its own. Starbucks has created a new format retail store under its Starbucks brand, called Starbucks Merchandise outlet. The first of these stores (pictured at the top), which opened Tuesday at the Ontario Mills Mall in Ontario (Southern), California, is about 4,000 square feet and sells a wide range of Starbucks branded general merchandise, along with brand name items.

The food and grocery industry blog Natural~Specialty Foods Memo published a piece about the new Starbucks format and store yesterday. The piece offers an overview of the store, including the merchandise its selling, as well as a review of it along with lots of photographs of the store.

You can read the Natural~Specialty Foods Memo piece about Starbucks new Merchandise outlet store at the Ontario Mills Mall in Ontario, California here.

We don't think Starbucks will be carrying out a "critical mass" new store opening strategy for the general merchandise format stores. Rather, what we hear is the stores are just that, an outlet store.

It's likely Starbucks will open a few of the stores in various parts of the country in a regional manner, like other retailers do with outlet stores. The Ontario Mills Mall is primarily an upscale outlet center. For example, the Starbucks store, which by the way doesn't currently sell coffee of any type, prepared or packaged, is located next to an outlet store of the upscale Saks Fifth Avenue chain.

We see Starbucks putting the GM stores in a select few other, similar malls in the U.S.--Seattle, The San Francisco Bay Area, the east coast and the like--rather than blanketing the earth with them like it does with its Starbucks cafes. The outlet stores might have legs overseas as well, since Starbucks is an international brand and retailer.

Since taking over once again as CEO just a few months ago, Starbucks founder Howard Schultz has been busy on multiple marketing fronts.

He's putting a renewed focus on merchandising the Starbucks cafes as a "third place" where neighborhood residents can spend time rather than as merely coffee retailing stores which had been the case prior to his taking the CEO position over again, along with keeping his Chairman title. Schultz in part is doing this by opening fewer drive-through Starbucks for example, while concentrating on creating what he calls "The Starbucks Experience" of making the cafes people places as well as coffee selling stores once again.

Starbucks also is increasing its branded product development: creating more packaged coffees for sale at supermarkets and specialty stores, doing more branded joint ventures like the one its has with PepsiCo, Inc. for its Starbucks iced coffee line, rolling out new Starbucks branded items like its recent line of Starbucks premium chocolates, and now creating the Starbucks Merchandise outlet store, among other developments.

This is "critical mass" from a corporate marketing perspective to be sure. What's next (tongue planted slightly in cheek)? Perhaps a chain of Starbucks small-format, combination specialty foods, fresh foods, coffee, fresh baked goods and beverage stores with an in-store cafe that serves as the neighborhood social hub? It might have legs?

Vegas Baby!: Tesco Announces Ten More Fresh & Easy Grocery Stores For The Las Vegas Metro Region; it's All About 'Critical Mass'

As we've reported on Fresh & Easy Buzz in the past, Tesco's Fresh & Easy Neighborhood Market small-format, convenience-oriented grocery store venture in the Western USA, has been developing and planning to open far more than the current 11 Fresh & Easy grocery markets it currently has open in the Las Vegas, Nevada Metropolitan region in Nevada.


Today, Fresh & Easy announced it will open 10 new stores in the region. That's on top of the 11 existing grocery stores it currently has open in the area, and four new stores currently in the pipeline and set to open soon.

This brings the total number of confirmed Fresh & Easy grocery markets for Tesco in the Las Vegas Metro region to 25. There are more on the way as well, according to our sources.

The ten new Las Vegas Metro area stores will be located at the following locations (streets and cross streets):

(1) Charleston & Sloan, (2) Tropicana & Nellis, (3) Desert Inn & McLeod, (4) Lake Mead & Hollywood, (5) Las Vegas & Pecos, (6) Eastern & Wigwam, (7) Eastern & Fremont, (8)Vegas & Jones, (9) Vegas & Buffalo, (10) Las Vegas & Lake Mead

Readers familiar with the Las Vegas Metropolitan region (others can use Google Maps) will notice not only that some of these ten new store locations are fairly close together, but also that some of them are fairly close to existing Fresh & Easy Neighborhood Market grocery stores.

The Fresh & Easy 'critical mass' store location strategy

The reason for this fact is due to what we've termed Tesco's "critical mass" strategy of locating numerous Fresh & Easy grocery stores in selected regions--Southern California, the Metro Phoenix/Easy Valley region in Arizona, and Metropolitan Las Vegas, Nevada--fairly close together so as to eventually become what Walgreens' and Rite Aid are to drug store retailing and Starbucks is to coffee/cafe retailing--which in Fresh & Easy's case is becoming the "logical" choice for neighborhood grocery shopping. The "de facto" neighborhood grocer in other words because so many stores are located or concentrated in a given region.

In fact, we can now report that part of Tesco's longer-range Fresh & Easy grocery store "critical mass" retail location strategy is to eventually have the small-format, convenience-oriented basic grocery and fresh foods markets as close as within 1.5 miles from each other in these three respective markets, according to our sources.

The longer-range plan is to do the same in the Northern California regions of Sacramento and the San Francisco Bay Area, where Tesco will open an initial 37 grocery stores (19 in the Sacramento region, 18 in the Bay Area) beginning in early 2009.

Having a 25-store presence (and there are more new stores on the way for the region) in the Las Vegas Metropolitan region, which has a population of nearly 2 million people, could allow Tesco to start building a real grocery retailing critical mass in the area.

For example, radio advertising costs a retailer the same amount in a region if that grocer has just one store (or 11) as it does if that retailer has 25 stores. However, the cost vs. benefit of running those radio ads for a 25 store operation compared to 11 stores is significant.

It's called leverage. The potential store sales-lift from the radio ads are more than doubled overall when a chain has 25 stores in a region compared to say just 11, for example. However, the cost of the ads is the same. That's building marketing critical mass.

The same is the case with print advertising. Leverage, leverage, leverage.

Further, part of this "critical mass" retail store strategy--as Walgreens, Rite-Aide and Starbucks demonstrate--is that the sheer number of stores in a given area serves as its own best advertising. The medium (in this case the Fresh & Easy grocery store) is the message, as well as the retail venue.

Tesco knows this fact all to well since in its home market of the United Kingdom, the retailer has a store (or multiple stores) of one format or another in nearly every city and town in the nation. In fact, about the only part of the UK in which Tesco currently doesn't have any grocery stores are a handful of towns in the Scottish Islands.

The world's third largest, and the UK's number one, retailer solved that minor problem earlier this year when it bought a handful of stores from the UK's Somerfield supermarket chain, which is up for sale. Tesco bought eight stores from Somerfield, nearly all of which are located in those Scottish Isles towns where it currently doesn't have grocery stores--but soon will.

Vegas new store announcement well-timed

On the public relations front, making the new store announcement today--just two days after Tesco PLC reported its annual sales and profits, which were strong, and shortly after all the media attention (mostly negative) Fresh & Easy's three month new store opening "pause" has received, was smart and savvy of the retailer.

It should put an end to the suggestions by some that the new store opening hiatus meant Tesco was reevaluating opening any more new stores.

As we've reported on Fresh & Easy Buzz numerous times since we were the first U.S.-based publication to break the new store opening "pause" news after reading it in Fresh & Easy marketing director Simon Uwins' corporate blog, not opening more new stores was niether the reason for the three month hiatus, nor an issue debated by Tesco internally. As we keep saying: Fresh & Easy is a venture for Tesco, not a test.

None of this means Tesco still doesn't have numerous format, operations, marketing and merchandising problems with the small-format Fresh & Easy grocery stores that need addressing.

However, Fresh & Easy is becoming a bit more nimble in getting out in front of issues rather than waiting for others to define its retail brand and USA venture. There's more to do, but it's a good start.

Rolling the Vegas dice for fame and fortune

Meanwhile, with 25 stores and more to come, Tesco's Fresh & Easy Neighborhood Market--with a strong and creative marketing and advertising campaign, as well as making some key operations, format and merchandising changes like those we've suggested should be made for the last couple months here on F&E Buzz--has the opportunity to become a major food and grocery retailing player in the Las Vegas Metro region in Nevada.

And, as we all know, Vegas has been and is the home to some very major players, not just in grocery retailing by the way, but in general.

There's Frank (Sinatra), Sammy (Davis Jr.), Dino (Martin) and the rest of the Rat Pack, billionaire Howard Hughes and hotel magnate Steve Wynn, among the many others.

Many are asking the question: Will Tesco CEO Sir Terry Leahy go down in the annals of Vegas history and folklore like those mentioned above; in his case as being the region's major supermarket industry player and ultimately a Vegas legend?

Like they say...No guts, No glory. And...Vegas, Baby!...Vegas! Many come to Vegas to play big. Some win, some lose. But one thing they all have in common- and what leads them to sometimes gain that fame--is guts. Tesco is demonstrating it too has such grocery retailing guts with Fresh & Easy.

Building 'Critical Mass' in a New Neighborhood: Tesco to Open First Fresh & Easy Store in Oxnard in Ventura County

Tesco plans to open its first Fresh & Easy Neighborhood Market grocery store in the Ventura County Southern California central coast city of Oxnard, Fresh & Easy Buzz has learned.

Fresh & Easy Neighborhood Market, Inc., as Tesco does business in the USA, has applied for an off-sale beer and wine license with the California Department of Alcohol Beverage Control for a new store it plans to open on Channel Island Blvd. and Rose Avenue in Oxnard.

Oxnard is located in the central coast region of Southern California in Ventura County. Oxnard is the county's largest city with a population of about 200,000, according to the most recent data from the California Department of Finance. The Oxnard Metropolitan region has a population of about 800,000 residents.

Besides being the first Fresh & Easy store in Ventura County and in Oxnard, the significance of the location in the bigger scheme of things is that the new store in Oxnard, which likely will open next year, is Tesco's second planned for the central coast region.

As we reported here on May 2, Tesco applied for an off-sale beer and wine license for its first store in the general region, in Lompoc, California, recently. Lompoc, which is about 79 miles from Oxnard, is in the neighboring county of Santa Barbara.

Although both Lompoc (Santa Barbara County) and Oxnard (Ventura County) are in Southern California where Tesco already has about half of its 61 small-format, convenience-oriented Fresh & Easy stores open and operating, the region is a distinct food and grocery sales market from Los Angeles and Orange County, where the nearest Fresh & Easy grocery markets currently are located.

Ventura and Santa Barbara counties also have some geographic and economic distinctions vis-a-vis Los Angeles and Orange County.

For example, agriculture is still a main source of income and employment in both counties; more so in Ventura than in Santa Barbara County though.

Ventura County remains today one of the state's top strawberry-producing regions, for example, despite increasing urbanization in the region. The area in and around Oxnard is regularly the state's number one or two top strawberry crop producer, according to the California Department of Agriculture. The city holds the California Strawberry Festival each year to celebrate its famous crop.

Even though the two neighboring counties (Ventura and Santa Barbara) have experienced rapid urbanization over the last couple decades, they obviously are far more rural, due in part because of their geography and topography, than Los Angeles and Orange County, which are essentially one continuous urbanized region. The Simi Valley gateway area where Fresh & Easy stores are located isn't too far away either. It's "all in the neighborhood" in Southern California geographical terms.

Fertile Ventura county also is a major bean producer (especially Lima beans), as well as a source of various other fresh market crops.

Oxnard also is home to Port Hueneme, one of California's busiest commercial ports. The city was founded in 1903.

As we write often in Fresh & Easy Buzz, Tesco's retail store location strategy with its combination basic grocery and fresh, prepared foods-oriented Fresh & Easy grocery stores, is what we term a "critical mass" strategy. In other words, the retailer's strategy is to open the small-format grocery markets close to each other (about 2 miles apart eventually) in its target market regions, thereby creating a "critical mass," hopefully allowing the grocer to eventually become the "natural choice" for shoppers as their "neighborhood grocery store of choice.

Although Lompoc and Oxnard are nearly 80 miles apart, both cities anchor different parts of the central coast region, which makes sense as Tesco will likely fill in "the middle" with additional Fresh & Easy stores in other key cities in both counties, along with adding more stores in both cities.

The map above depicts graphically what we mean by the progression or march from other parts of Southern California to the coastal cities of Lompoc and Oxnard, and surrounding region.

The Oxnard and Lompoc stores also are significant in that they demonstrate Tesco's progression or March throughout Southern California.

The first Fresh & Easy grocery markets were opened last year (beginning in late October/early November) in the Southern California desert region. Other stores were opened on the heels of those first stores in the San Diego region, Orange County, the San Fernando Valley and Los Angeles. Tesco continues to open new stores in those regions.

Therefore, opening stores in the cities of Lompoc and Oxnard(with more to come per the "critical mass" strategy) and in other cities in Santa Barbara and Ventura counties, follows the grocer's strategy of filling out the entire geographical and market region parts of Southern California. Tesco will then focus on opening more additional stores in the region like it's doing in all of its other Southern California markets.

Ventura County has a relatively young population, with 68% of the city's residents under 45, and 38% under 24 years old, according to the California Department of Finance. About half the county's population is minority, with Hispanics or Latino's being the majority of those ethnic minorities represented: Hispanics, African Americans and Asians.

The remaining 45% of the population is classified as white, according to the California Department of Finance, with 5% classified as "other."

Oxnard's city motto: "The city that cares."

That's a warm welcome for any new food and grocery retailer.

More Critical Mass in the Neighborhood: A New Fresh & Easy Grocery Store to 'Sprout' In the Southern California Central Coast City of Lompoc

Tesco's Fresh & Easy Neighborhood Market has purchased a vacant commercial retail building at 1009 North H Street, near the corner of North Avenue, in the coastal Santa Barbara County city of Lompoc (pronounced Lahm' poke) in Southern California, according to a report in that city's local daily newspaper, The Lompoc Record.

In the news story, Tesco Fresh & Easy spokesman Brendan Wonnacott, confirmed to staff writer Glen Wallace the retailer has acquired the building. However, Wonnacott said it was too early to offer a date as to when the store would be ready to open.

The fact Tesco's Fresh & Easy plans to locate the store in Lompoc, in Santa Barbara County, is important because it's a geographic expansion of sorts for the grocery chain in Southern California.

To date, the retailer's numerous small-format, combination basic grocery and fresh/specialty foods' grocery stores in the region are located in Los Angeles, Orange and nearby counties; the Inland Empire desert region counties of San Bernardino and Riverside; and south towards and in San Diego County.

The building in the foreground above (with the three window awnings), which is located in a shopping center, will become a Fresh & Easy Neighborhood Market grocery store in Lompoc, California. (Photo Courtesy: The Lompoc Record.)

Lompoc and Santa Barbara County are more farther north coastal regions in Southern California than where the Fresh & Easy grocery stores currently have been opened. In addition to Lompoc, the major cities in the county include Santa Barbara, Ventura, Oxnard and a few others.

The area isn't that far from Los Angeles or Orange County for example, but it is a different regional geographical and demographic part of the Southern California food and grocery market, which is another reason, along with geography, it signals an extension of Fresh & Easy's "Ring the Bay" Southern California "critical mass" store location strategy as we refer to the scheme.

However, doing so is all part of what we've described as Tesco's "critical mass" strategy of locating numerous Fresh & Easy grocery stores (eventually having them just 1.5 to 2 miles apart) in key market regions, which include Southern California, the Phoenix, Arizona/East Valley Metropolitan region, Metro Las Vegas, Nevada, the San Francisco Bay Area, Metro Bakersfield in Central California, and the Sacramento region in Northern California, as well as future regions in the Western USA and elsewhere in the country.

The Santa Barbara County-Lompoc move also is key in that it signals just the beginning of new store openings in this part of Southern California. Remember the "critical mass" strategy. One store in this region means more on the way.

Lompoc is a city of about 50,000 residents. Demographically, the city's population is about 60% white, 30% Hispanic, 6% African American and 4% Asian. It's a middle-income, primarily working class city, although numerous affluent residents live in Lompoc and nearby in Santa Barbara County.

However, because of its desirable coastal location, the cost of housing in Lompoc has soared over the years, making it difficult for most of the city's residents to afford to buy new homes in the city and surrounding area.

Those residents who've owned homes in the area for 10 or more years though have seen the value of their houses skyrocket, even with the current housing bust in California and elsewhere in the U.S.

According to The Lompoc Record news story, the city of 50,000 currently has four full-sized supermarkets in it. That's fairly moderate for a city that size based on Southern California standards. We wouldn't call it under-stored, but it should have plenty of room for a small-format Fresh & Easy basic grocery and fresh foods format convenience-oriented market.

Resident and community groups in Lompoc have been trying, like numerous other cities are in the U.S., to lure a Trader Joe's specialty grocery store to their city.

In 2003, a group of residents launched a petition drive to bring a branch of the specialty grocer y chain to Lompoc, but it failed. They've continued to try though. However, after another lobbying effort last year, Trader Joe's told the Lompoc group it had no plans to open a store in their town in the foreseeable future.

This is obviously a big plus for Fresh & Easy in that many of the city's residents are primed for a Trader Joe's-like small-format grocery store, which Tesco's Fresh & Easy is in part. We often refer to the Fresh & Easy format as a Mini-Costco meets a Trader Joe's because the stores are one-part limited assortment, basic discount everyday grocery store and one part fresh, specialty and natural foods' store.

The Lompoc example, with its consumer demand for a Trader Joe's and an opportunity for Tesco's Fresh & Easy to capitalize on that demand, also points up the importance of our frequent argument that the grocer needs to localize its stores more and better.

For example, since there's such a huge demand for a Trader Joe's in Lompoc, Fresh & Easy could customize its store in the city with more specialty, gourmet, ethnic, natural and organic food and grocery products than it normally carries in the grocery markets, while still keeping its basic format. We call this localizing a store and its product mix on top of its basic format.

In other words, emphasis this particular store's Trader Joe's side a bit more than its Mini-Costco side. In other cities and neighborhoods, the Mini-Costco side might need to be emphasised more, for example, along with other localization and customization schemes.

What we do know is Fresh & Easy has already started doing some work on the Lompoc empty store building it's acquired, which is pictured at the top of this piece.

It shouldn't take the retailer too long to renovate it into a Fresh & Easy grocery store as to date its converted almost all of the 61 stores it has open from empty buildings into 10,000 -to- 13,000 square foot Fresh & Easy Neighborhood Market grocery stores in a relatively short per-store time span.

Editor's Note: The map we tailored above shows Lompoc, California in relation to other areas where Fresh & Easy stores are: Southern California, the Phoenix, Arizona Metropolitan area and the Las Vegas, Nevada Metro region, along with future Fresh & Easy locations in Bakersfield (Central Valley) the San Francisco Bay Area and Sacramento in Northern California.

The map should give you a good visual idea of what we mean when we say Tesco's retail store location strategy in the Western USA is to build a "critical mass" of Fresh & Easy grocery stores in key regions so as to be a neighborhood retail institution similar to how Rite-Aid and Walgreens are in the drug store sector and Starbucks is in the coffee retailing and cafe sector.

Fresh & Easy Neighborhood Market Northern California DC Likely to Be At Arch Road Site In Stockton

We first reported in December, 2007, and most recently earlier this week, that Tesco's Fresh & Easy Neighborhood Market plans to locate a Northern California distribution center (DC) in Stockton, California, which is located in the Northern San Joaquin Valley, about 30 miles from Sacramento, and about an hour from San Francisco.

We can now report it looks like the distribution site will be at Arch Road and Newcastle Road in southeast Stockton. The site is right off Highway 99, which is the major truck and freight transportation artery throughout the Valley and onto Freeway 580, to the San Francisco Bay Area. Numerous food and grocery industry companies operate distribution centers in the general region because the area is centrally located.

The potential distribution center site is 474 acres. We don't know how much of it Tesco will use. The land is owned by Opus West, a real estate development firm. Opus West is a division of the Opus Group, a $2.1 billion a year national real estate development company based in Minneapolis, Minnesota.

As we reported in December, 2007, the Stockton DC could serve Tesco's Fresh & Easy grocery stores as far south as Bakersfield in the Central Valley and in the Northern California region, including the Bay Area and Sacramento Metro region stores.

Tesco's Fresh & Easy has signed leases for 18 stores in the San Francisco Bay Area and 19 stores in the Sacramento region to date. The retailer is currently negotiating for more store sites in the Bay Area and in the Sacramento region. Fresh & Easy also is looking at sites in nearby Stockton--where the DC is likely to be located--and nearby Tracy, Manteca and Modesto. One of the grocer's 19 Sacramento region grocery stores is in Galt, which is only about 15 minutes from Stockton.

Tesco also plans to locate at least six stores in Bakersfield, in the heart of Central California. The retailer also is looking for sites in the Fresno Metropolitan area, which is only about 30 minutes away from Bakersfield. The Fresno stores could be serviced by either the Stockton distribution center or the 850,000 square foot Fresh & Easy Neighborhood Market DC in Riverside, in Southern California, as the distance to the region is about the same from either Stockton or Riverside.

The 37 stores in the Bay Area and Sacramento are only the beginning for Tesco in Northern California. Based on what our sources tell us, we believe the grocer wants to have at least 50 -to- 60 stores open in the region by the end of 2009. The first Fresh & Easy stores in Northern California are scheduled to start opening as early as late 2008, but most likely won't begin opening until early 2009.

As we often write, Tesco is pursuing a "critical mass" store strategy in California, the Phoenix Metropolitan region in Arizona and in the Las Vegas, Nevada Metro area. This strategy is to locate a "critical mass" of stores in a given region, similar to what the Starbucks and Walgreen's Drug chains' do for example.

As a result of doing this, not only is consumer awareness increased and marketing and advertising costs better leveraged, but from a positioning standpoint it serves the goal of attempting to become the logical or defacto neighborhood grocer in the region, in part by virtue of having so many stores in the area.

This strategy is especially key for Tesco in California, where it is opening the highest proportion of its stores in the three states. The retailer is pursuing what we call a "ring the bay" strategy in the San Francisco Bay Area, locating stores throughout the region in order to maximize the variables we discussed above. It's pursuing the same strategy (minus the bay) in the Sacramento region.

This strategy for Northern California is modeled on what Tesco has been doing in Southern California, which is choosing regions like Orange County, the Inland Empire and the San Diego region, building numerous stores there, and creating that "critical mass," so as to be seen as a logical neighborhood grocer for community residents. The philosophy is, that like Starbucks or Walgreen's, if you see us everywhere in a region, you will shop with us. It's similar to the version of the independent neighborhood grocer, accept its a chain model.

Tesco Opens Three New Stores in the Phoenix, Arizona Metro Area Today; Ten More on the Way

Tesco Fresh & Easy Neighborhood Market achieved a trifecta today in the Phoenix, Arizona Metropolitan area, when it opened three stores in the same day.

Additionally, Tesco plans to open an additional 10 stores in the Phoenix Metro region this year. This will bring to 37 the number of stores the grocer will have in the region.

The three stores that opened today in the Phoenix area are at: 32nd Street and Greenway Road in Phoenix, at Sossaman and Southern Roads in Mesa and at Higley and Ray Roads in Gilbert. Mesa and Gilbert are suburbs located right next door to the city of Phoenix.

The three new stores bring Fresh & Easy Neighborhood Market's total grocery store count to date in the Phoenix Metro area to 15.

The additional 10 small-format, convenience-oriented Fresh & Easy stores Tesco will open in the Phoenix Metro region demonstrate what we call the retailer's "critical mass" strategy, which is to follow the model of U.S. retailers like Starbucks, Walgreen's Drug and a few others, and open numerous stores in neighborhoods throughout various regions (the critical mass) so as to try to establish a presence as the defacto or default "neighborhood" retailer.

The locations of the 10 new stores Tesco will open in the Phoenix Metropolitan area are:

• 43rd Avenue and Bell Road, Phoenix
• 19th Avenue and Greenway Road, Phoenix
• Seventh Street and Thunderbird Road, Phoenix
• Gilbert Road and Chandler Blvd., Chandler
• Gilbert and Guadalupe Road, Gilbert
• Gilbert Road and Southern Avenue, Mesa
• Higley and Queen Creek Roads, Queen Creek
• Pima Road and Union Hills Drive Drive, Scottsdale
• Scottsdale Road and Shea Blvd., Scottsdale
• Baseline and Kyrene Roads, Tempe

Many of these 10 new store locations aren't far from existing Fresh & Easy grocery markets, demonstrating the grocer's use of the "critical mass" strategy. In fact, note the three new stores that opened today, and a number of the locations of the 10 new store locations to come soon.

Tesco plc. is the number-three retailer in the world in terms of gross annual sales, and the biggest retailer in the United Kingdom. The retailer's Fresh & Easy Neighborhood Market USA division opened its first stores in Southern California, Arizona and Metropolitan Las Vegas, Nevada in November, 2007. There currently are 59 Fresh & Easy grocery stores in these three states.

Fresh & Easy stores are small-format, convenience-oriented grocery markets which average 10,000 square feet -to- 13,000 square feet. The grocery stores sell a limited-assortment combination of Fresh & Easy store brand and national brand basic or everyday grocery products at discount prices, along with selections of fresh produce and meats, prepared foods, specialty, natural and organic grocery items, wines and craft beers (spirits in some stores), fresh flowers, and a limited assortment of non-foods items.

The small-format stores feature self-scanning checkout counters, where customers checkout their own groceries with the assistance of a store clerk if needed. The stores are utilitarian in design but have a semi-upscale interior. They are positioned to be everyday neighborhood markets with a slightly upscale twist in terms of design and product selection. We describe them as sort of a warehouse-style discount supermarket meets Trader Joe's.

News & Analysis: Tesco's Fresh & Easy Confirms 19 Store Locations for the Sacramento-Vacaville Region in Northern California

Tesco's Fresh & Easy Neighborhood Market confirmed today it plans to open 19 stores in the Sacramento Metropolitan region, as well as in nearby Vacaville and Galt.

Seven of the small-format grocery stores, which average 10,000 square feet -to- 13,000 square feet, will be in the city of Sacramento. Nine of the markets will be in the nearby suburbs (see the graphic above). Two of the Fresh & Easy stores will be in Vacaville, which is about 25 minutes from Sacramento, and one store will be in Galt, which is less than 15 miles from Sacramento, and is about midway between the capital city and Stockton, where Tesco plans to locate its Northern/Central California distribution center.


On Monday, January 28 we reported that Tesco had applied for liquor licenses for four Fresh & Easy grocery stores in the city of Sacramento (2 stores) and two stores in the nearby suburb of Folsom. We discovered this fact via liquor license applications, which are public data. As a result, we were one of the first publications to report that Tesco would enter the Sacramento region in Northern California, along with signing leases for 18 stores to date in the nearby San Francisco Bay Area. [Read our January 28, 2008 piece here.]

Tesco's confirmation of the 19 Sacramento/Vacaville-area grocery markets, along with the confirmation it will begin opening the first of its initial 18 Fresh & Easy stores in the San Francisco Bay Area at the end of this year or in early 2009, brings to a total of 35 the number of Fresh & Easy Neighborhood Market small-format grocery stores the retailer has thus far confirmed for Northern California.

Vacaville is located about 20 miles from Sacramento, off Interstate I-80, which is the primary route from Sacramento to the San Francisco Bay Area. Vacaville is about an hour drive from San Francisco and a little over 30 minutes to the East Bay Area cities of Berkeley and Oakland. Interstate 80 rings the Bay from the Bay Bridge east, out to Fairfield (where Fresh & Easy is locating a store), then on to Vacaville, the University city of Davis, and into Sacramento.

Locating a critical mass of stores in the Sacramento Metropolitan region, then out to Vacaville and Farfield, then into the Bay Area, is the same strategy Tesco is using in Southern California. This "critical mass" strategy emulates retailers like Starbucks and Walgreen's Drugs, small format retailers which locate a critical mass of stores in city's and neighborhoods so as to position their stores as a "neighborhood" retailer.

Additionally, we can report that Tesco is looking for additional new store locations in both the Sacramento and Bay Area regions. In fact, the British grocer already has a number of other location leases locked-up (in addition to those announced) and is in negotiations for more store sites in both the Sacramento and Bay Area regions. We hope to be able to report some of those locations soon here.

As we reported first in December and again in the January 28 piece, Tesco also plans to open a new distribution center in Stockton, California to serve its Bay Area and Sacramento region Fresh & Easy stores. Stockton is located in the Northern San Joaquin Valley, about 30 miles from Sacramento, and about 60 miles from San Francisco. The location is generally no more than one hour's drive-and in many cases less--to all of the 35 confirmed Northern and Central California store locations to date. Tesco's Fresh & Easy Neighborhood Market has not yet confirmed the Stockton distribution center. Additionally, Stockton is about a 15 minute drive from Galt, where one of the 19 Sacramento-area stores will be opened.

Sacramento's Mayor joins F&E CEO Mason for AM presser

Tesco's Fresh & Easy Neighborhood Market CEO Tim Mason made the Sacramento region new store announcement with a splash this morning. He was joined by Sacramento Mayor Heather Fargo and City Councilman Ray Tretheway in front of an empty commercial building located at Northgate Blvd. and San Juan Blvd. in the city of Sacramento. The grocer will remodel the empty building into a Fresh & Easy grocery market.

By having the city's mayor at his side, Mason signaled Fresh & Easy wasn't just another grocery retailer opening a new store in town, but rather is a grocer that's making a major commitment to the city and region by opening an initial 19 stores in the region next year, with more to come. Having Mason at her side also was good for the Mayor. Sacramento, like all of California is being battered by the sub-prime housing crisis, increasing unemployment and a host of other economic ills. Being able to announce a new business venture like Fresh & Easy moving into her city at this time will score her some major political points with voters.

The retailer also made another smart move by choosing the empty Tower Records building on Watt Avenue in Sacramento as one of its future Fresh & Easy grocery store locations. Tower Records, which later grew into a national chain, which went bankrupted in 2006, was founded in Sacramento in the 1960's--and the Watt Avenue location was its flagship store.

When the Watt Avenue Tower store closed, there literally was a period of mourning in Sacramento for the local independent record store that went on to be a huge mega-chain, then fell on hard times and was shut down. Tesco's Fresh & Easy should gain considerable goodwill from the community for leasing, remodeling and opening one of its grocery markets in the Tower building, which is what it's called. The building has been empty for over two years.

[Note to Fresh & Easy Management: It would be wise, and good business, to preserve aspects of the former Tower Records building when you remodel it into a Fresh & Easy market. Perhaps you should call it "Tower Fresh & Easy," or some version of that. Remember, everything is local in America, especially in Sacramento. And, in the case of an iconic building like the Tower Records' site, retaining some aspects of the building's history and culture (a plaque on the front of the new Fresh & Easy store with the history of the building would be a nice touch) will not only go a long way towards creating excellent community relations--but customers as well.]

The timing and style of the announcement was particulary good for Fresh & Easy since analysts like us and others have been writing about how the retailer's current 55 stores in Southern California, Arizona and Nevada are not performing up to expectations. [You can read our most recent analysis on Fresh & Easy store performance in posts made on Tuesday and yesterday on the blog.]

Of course, marketing an PR are only part of being a successful grocer. As we've suggested in our pieces this week, Tesco's Fresh & Easy has major operations challenges to solve and improve in addition to opening dozens of new stores and creating good PR events.

The retailer shouldn't be counted out though. Doing doing so is foolish. Tesco is the world's number three retailer, and it's track record at home in the UK and elsewhere in the world is impressive. Tesco also has lots of cash. That's helpful to any start up. What we believe Tesco hasn't learned yet though is: it can't do retailing in the U.S. in the same way it does retailing in the UK and Europe.

Fresh & Easy is missing a key American element: localism. This missing element can't be fixed as easily as the operational problems we've pointed out in our analysis. However, its just as important--maybe even more so. And, it's essential.

Competitive environment: Welcome to Sacramento

Nowhere does Tesco need to grasp the importance of tailoring its Fresh & Easy stores better to the local environment and neighborhoods than in Sacramento and its metropolitan and surrounding region.

Sacramento has been one of the fastest-growing cities in California throughout the last decade. The Sacramento Metropolitan region has a population of nearly 2 million people. The city of Sacramento has a current population of about 600,000. In addition to being California's capital city--which means lots of well-educated state government workers--Sacramento has a mixed economy. Agriculture and agribusiness remain huge in the region, as does light manufacturing, warehousing and transportation.

The fastest growing sector in the Sacramento region's economy is in the service sector, both in state government, associated non-profit organizations like law and lobbying firms, and in the private sector. This includes the health professions, law, finance and retail. In the last 15 years the city has been transformed from being a central city in a primarily agricultural region (with the exception of state government), to the urban city center of a booming metropolitan and somewhat cosmopolitan area.

Grocery retailing in Sacramento and the surrounding region has a decidedly local flair. The region's number one (in market share and store count) grocer is Raley's, which is based in the nearby city of West Sacramento. Raley's is a prvately-held, family-owned supermarket chain that's been in business in the Sacramento region for 73 years. The locally headquartered grocery chain has 120 stores and does about $3 billion a year in sales.

The Sacramento-based food retailer operates four store banners: Raley's, Bel-Air Markets, Nob Hill Foods and Food Source. Raley's stores are 55,000 square foot -to- 80,000 square foot superstores. The stores are fairly upscale and offer lots of prepared and other fresh foods, along with tons of grocery products (including lots of organics) and a huge selection of non-foods. Most of the new Raley's banner stores are closer to the 80,000 square foot size. The Raley's banner is the chain's original retail brand.

The Bel-Air banner is an upscale supermarket format. The stores average 40,000 square feet(older stores) -to- 60,000 square feet (newer stores). They're similar to the Raley's stores--lots of upscale fresh foods, but fewer nonfoods do to their size (but still plenty). Bel-Air was an acquisition for Raley's. The Bel-Air chain at one time was Raley's chief competitior in the region. In the 1980's, Raley's acquired the grocery chain from the Wong family, who founded and operated the chain for over 50 years.

Nob Hill Foods also is an acquisition for Raley's. Like Bel-Air, Nob Hill was a long-time family-owned chain. It was based in the South Bay Area city of Gilroy, where two generations of the Bonfonte family operated it for about 60 years. Raley's acquired Nob Hill Foods in the 1990's and consolidated its headquarters in its West Sacramento facility.

Food Source is Raley's discount warehouse-type store format. The grocer created the banner in the 1980's as a way to get into the growing no frills, discount warehouse store category in the region at the time. It's the grocer's smallest banner in terms of the number of stores, but does significant sales volume in its niche.

Citizen Raley's

Raley's also is a leading corporate citizen in the Sacramento region. Sacramento's semi-pro baseball team, the River Cats--which in a big city like Sacramento without a professional baseball team serves as a very popular popular equivalent--plays it games at Raley Field, a state of the art baseball stadium in the city built in large part by the grocer.

The grocer is the number one donor to programs that feed the hungry and homeless in the region. Last year it gave over $15 million dollars to food pantry's and other programs which provide food assistance to families and individuals in need.

In fact, Raley's has its hand in nearly every charitable venture in the region--from Boy Scouts and Girl Scouts, to educational scholarship assistance, environmental causes and literally many dozens more. Additionally, the Raley-Teel family, majority-owners of the Raley's grocery chain, also has its own charitable foundation, which gives additional millions each year to local non-profit groups and supports other charitable causes locally.

The other two major grocers in the Sacramento region--Safeway Stores, Inc. (number two market share) and Save Mart, Inc. (number three market share) are fairly local guys as well. Safeway, which has about 21% of the region's grocery sales market share, has its corporate headquarters in the East Bay Area city of Pleasanton, which is only about 70 miles from Sacramento. Save Mart, which entered the Sacramento region market for the first time last year when it bought Albertsons' Northern California Division from an investment banking firm, is headquartered just 60 miles away in the Central Valley City of Modesto.

Between the three grocery chains--Raley's, Safeway and Save Mart--they control about 85% of the total grocery sales market share in the Sacramento market region. The remaining 15% share is split between Food-4-Less, a multi-store deep-disount warehouse format grocer, numerous independents, Longs Drugs, a couple Trader Joe's stores, and the one Whole Foods Market, Inc. store in the region, which is located in Sacramento. (Note: Whole Foods' is looking to add at least one, and maybe two stores in the region in the next two years.)

Union supermarket chains vs. non-union Fresh & Easy

Raleys, Safeway Stores and Save Mart also are union supermarket chains. On average, the three chains pay their full-time store-level retail clerks about $21.00 hour. Full-time means the clerks' have one full year of full-time hourly experience as a union grocery clerk. Part-timer pay ranges from about $12.00 hour -to- the $21.00 hour amount. The $12.00 hour is an entry-level wage for some positions, and it goes up in increments about every three months per the agreed upon contract between the grocery chains and the union. Nearly all store level workers with six months' to a year's experience make between $15.00 and $21.00 hour.

The union contract also provides store workers with one of the best medical insurance plans in the U.S. It is comprehensive, has lower than average employee contributions, doctors office co-pays and prescription drug out-of-pocket costs for the workers. The plan also offers very affordable dental, vision and mental health plans for reasonable employee contributions.

The union supermarkets also provide a career path for workers who choose to make a career out of the retail grocery industry and work at store-level for 25 -to- 30 years and then retire. The joint employer-union pension plan pays out about $3,500 -to- $4,000 month to union clerks who retire after 25 -to- 30 years in the industry. This is in addition to collecting monthly Social Security pension payments.

Employers make the largest contribution to the worker pension plan. Employees contribute a small percentage out of their paychecks every two weeks as well. Additionally, all three of these union grocery chains--Safeway, Raley's and Save Mart--offer some form of additional retirement plans on their own to workers. Safeway offers a discount stock-purchase plan, while Raley's and Save Mart offer profit-sharing-type programs, since both are privately-held companies. Save Mart has 255 stores throughout Northern and Central Califronia, and annual sales of about $6.5 billion.

Tesco's Fresh & Easy Neighborhood Market currently pays store-level workers $10.00 hour. There currently is no established higher hourly wage for current workers when they achieve one year's experience like at the union supermarket chains.

The 10,000 square foot -to- 13,000 square foot grocery stores employee about 20 workers per-store, according to the company. All of the store employees, with the exception of a couple managers, work part time. Those part-timers who want to can work up to 20 hours a week, which qualifies them for a health insurance plan.

However, we've compared a Fresh & Easy store employee's health plan to the union food retail chains' plan, and the union plan wins across the board: it's more comprehensive, has less of an employee contribution, provides for lower employee co-payments, and offers a number of other benefits.

According to a Tesco Fresh & Easy spokesman, the retailer also offers bonuses of up to 10% to store-level workers if they meet certain performance criteria. The bonus is once a year. Fresh & Easy doesn't currently offer store-level employees a retirement plan. They also don't get discounts at present on Tesco plc. stock, like Safeway employees do with Safeway stock.

Trader Joe's, which has only a couple stores in the region, Whole Foods (it has one store), and Wal-Mart, which only has a handful of Supercenters in the Sacramento area, also are non-union shops like Tesco's Fresh & Easy Neighborhood Market.

Sacramento shoppers are historically 'local-loyal'

Sacramento region shoppers have long been super-loyal to Raley's. Just ask Safeway Stores, Inc. Despite the fact that its a chain based nearby, has more than 10 times the number of stores and does at least $40 billion more in annual sales than Raley's, its never been able to overtake the local grocer in market share in the region, despite trying hard to do so for at least four decades.

Tesco's Fresh & Easy Neighborhood Market would be wise to learn as much as it can about the "local nature" of grocery retailing in the Sacramento region. Over the last 40 years, Safeway left the market twice, under two different ownership structures, because of Raley's domination. It was only again in the 1980's--and particularly in the 1990's with its Lifestyle format stores--that
Safeway began to make some inroads in the market.

Fresh & Easy senior management can expect a strong response by Raley's, Safeway and Save Mart when it enters the Sacramento market next year. For example, in terms of retail pricing, all three--but especially Raley's and Save Mart--won't hesitate to lower prices if Fresh & Easy comes in with its discount pricing structure on basic grocery items like it has in Southern California, Arizona and Nevada, which it will do in Sacramento because doing so is key to its format and positioning. As the ancient Chinese saying states: 'May you live in interesting times.

Related Reading:

>Read our January 28, 2008 piece, "Fresh & Easy Applies for Liquor Licences for four Sacramento, California Stores.

>Read our February 21, 2008 analysis piece on Fresh & Easy's sales problems,and suggestions for improvement.

>Read this February 8, 2008 piece from the blog Natural~Specialty Foods Memo about one of Fresh & Easy's stores which will go in the low-income Oak Park neighborhood in Sacramento.

>Read what the Sacramento Bee, Sacramento's largest-circulation daily newspaper, wrote about Tesco's Fresh & Easy coming to town in today's addition

Note: Thanks to the Sacramento Bee for allowing us to use the store location graphic at the top of this story.

Store Location Strategy: Whole Foods Market-FTC Settlement Agreement Puts 32 stores on the Market; What Should Tesco's Fresh & Easy Do About it?

Food & Grocery Retailing in the Western USA

Whole Foods Market, Inc. reached a settlement agreement on March 6 with the U.S. Federal Trade Commission (FTC) regarding the FTC's nearly 20-month antitrust legal challenge against the Austin, Texas-based natural and organic foods chain's 2007 acquisition of then major competitor Wild Oats Markets, Inc., which was headquartered in Boulder, Colorado.

[We last wrote about the then ongoing antitrust case here.]

The settlement agreement between Whole Foods Market, Inc. and the FTC requires the natural foods and grocery chain to sell a total of 32 of its stores; 13 operating markets and 19 stores that have already been closed. Ten of those 19 stores were closed by Wild Oats Markets, Inc. before the 2007 acquisition by Whole Foods Market. Nine of the 19 stores have been closed by Whole Foods' since acquiring Wild Oats.

Of the 13 operating stores to be sold, 12 are former Wild Oats' units acquired by Whole Foods Market, Inc. in the 2007 deal. Just one of the 13 stores is a Whole Foods banner market store that existed prior to the 2007 acquisition of Wild Oats.

The FTC-Whole Foods settlement agreement also requires Whole Foods Market, Inc. to put up for sale the "Wild Oats" brand and all related intellectual property associated with it. This includes all the branding and packaging materials associated with the "Wild Oats" brand products, which then Wild Oats Markets, Inc. featured in its stores and for a couple years were sold in most Kroger Co.-owned supermarkets in the U.S., prior to Kroger creating its own natural-organic store brand just a few years ago.

Whole Foods Market has worked to eliminate the "Wild Oats" brand since the 2007 acquisition, rebranding all but about 6-10 former Wild Oats stores "Whole Foods" (and those stores are in the process of being rebranded as we write this), and closing-out and discountinuing all of the products under the brand from the former Wild Oats Market stores' shelves. Therefore it isn't a brand the natural grocery chain planned on using anyway, although it might have preferred to bury it rather than to sell it.

Whole Foods Market, Inc. currently operates 279 natural foods supermarkets in the U.S., Canada (6 stores) and the United Kingdom (5 stores). It had gross annual sales of $8 billion in 2008.

If the 13 operating stores are sold, that will bring Whole Foods' store count down to 266. The 13 stores to be sold had $31 million dollars in sales for the first quarter, 2009, which just ended. That works out to annual sales of about $124 million, which won't have a significant negative impact on the natural grocry chains annual sales.

Whole Foods Market will open about 10 new stores in 2009. Those 10 new stores will likely make-up most of that $124 million in annual sales because they are all bigger than the 13 stores to be sold, and a number of them are in its top demographic markets, such as in Northern California.

For example, Whole Foods Market will open its first store in the Northern California coastal city of Santa Cruz tomorrow. The city of about 100,000 residents has a very high natural and organic foods shopper demographic. We expect the Santa Cruz Whole Foods' store to be a high volume market for the natural grocer, possibly doing in the $600,000-plus per week sales range. The new store is 31,500 square feet. As an example, the Whole Foods store in Mill Valley, California (Marin County) does about $500,000 a week on average and is only 14,000 square feet. It is a very high volume store.

As a part of the settlement deal with the FTC regarding the 13 operating Whole Foods stores being sold, if those stores don't sell in a one year period of time, Whole Foods Market gets to keep them. The natural grocery chain also will operate and gain the income from the 13 stores until each respective store is sold.

A third-party receiver has been appointed by the FTC and Whole Foods Market, Inc. to sell the 13 operating and 19 closed stores. They are in the process of being put on the market by the receiver as we write this piece.

Below are, first, a list of the 13 operating Whole Foods stores being sold. After that is a list of the 19 closed stores being put on the market. The stores in green font are those located in markets where Tesco's Fresh & Easy Neighborhood Market operates. Fresh & Easy has stores in California (Southern CA and Bakersfield), southern Nevada and Metro Phoenix, Arizona. A number of the 13 currently operating and the 19 closed Whole Foods stores for sale are in Arizona and Nevada. None are in California.

The 13 operating stores for sale:

7133 N. Oracle Rd., Tucson, AZ
8688 E. Raintree Dr., Scottsdale, AZ
2584 Baseline Rd., Boulder, CO
1651 Broadway St., Boulder, CO
3180 New Center Pt., Colorado Springs, CO
5910 S. University Blvd., Littleton, CO
9229 N Sheridan Blvd., Westminster, CO
340 N. Main St., West Hartford, CT
4301 Main St., Kansas City, MO
1090 St. Francis Dr., Santa Fe, NM
7250 W. Lake Mead Blvd., Las Vegas, NV
19440 N.W. Cornell Rd., Hillsboro, OR
6930 S. Highland Dr., Salt Lake City, UT

The 19 closed stores for sale

5350 W. Bell Rd., Glendale, AZ
1422 N. Cooper Rd., Gilbert, AZ
874 E. Warner Rd., Gilbert, AZ
9028 W. Union Hills, Peoria, AZ
13823 N. Tatum Blvd., Phoenix, AZ
15569 W. Bell Rd., Surprise, AZ
200 W. Foothills Pkwy., Fort Collins, CO
8194 S. Kipling Pkwy., Littleton, CO
6424 Naples Blvd., Naples, FL
4600 Shelbyville Rd., St. Matthews, KY
87 Marginal Way, Portland, ME
8819-8833 Ladue Rd., St. Louis, MO
7831 Dodge St., Omaha, NE
517 N. Stephanie St., Henderson, NV
4879 S. Virginia St., Reno, NV
5695 S. Virginia St., Reno, NV
2077 N.E. Burnside St., Portland, OR
17711 Jean Way, Lake Oswego, OR
3736 W. Center Park Dr., West Jordan, UT

Out of the total 32 stores for sale, 12 are located in Arizona (8) and Nevada (4), two of the three states where Tesco's Fresh & Easy operates its stores. Fresh & Easy currently has stores only in the Las Vegas Metropolitan region in southern Nevada. However, it currently has at least two stores in development in the Reno area in northern Nevada.

Additionally, 26 out of the total 32 stores for sale are located in the Western U.S., in states other than Arizona and Nevada. That leaves only six stores outside the west.

The reason this is the case is because the FTC's main antitrust argument was that a combined Whole Foods-Wild Oats constituted a retail monopoly in 15-29 U.S. markets in what the FTC called the "natural and premium organic retailing segment." The majority of U.S. markets in which the FTC claimed in its legal challenge that the combined Whole Foods-Wild Oats was the most monopolistic in based on its regulatory agency created retailing category were in the Western U.S. Therefore the majority of stores offered for sale are in the west.

Arizona and Nevada

Since so many of the former Wild Oats Market stores being offered for sale are in Arizona, this obvioulsy provides Tesco's Fresh & Easy an opportunity to acquire additional new store locations in what is its second highest market region in terms of store count -- Arizona -- particularly the Phoenix Metro and easy-west valley regions.

Additionally, since all but one of the 32 stores for sale are former Wild Oats units, they are a perfect physical size for Tesco to convert into Fresh & Easy markets. Most of the 31 former Wild Oats locations for sale (out of the total 32) average about 14,000 -to- 20,000 square feet in size. This is the perfect size for Tesco to convert since the Fresh & Easy stores average about 10,000 -to- 13,000 square feet.

It's much cheaper to convert an existing store of the size of the former Wild Oats units into a Fresh & Easy market than it is to convert the former 35,000-plus square foot supermarkets and much larger big box stores Tesco has in many cases converted into Fresh & Easy stores. But the retailer knows that. It just opened a new Fresh & Easy store in Pasadena, California two weeks ago that is in a former Wild Oats store that was closed before the acquisition of the company by Whole Foods Market, Inc.

But the mere fact the stores in Arizona and Nevada are for sale, and in what we hear are in many instances for good prices, along with the fact the former Wild Oats Market stores are the perfect size to convert into Fresh & Easy markets for Tesco, doesn't mean Tesco's Fresh & Easy Neighborhood Market should buy any of the stores, especially in Arizona.

Why? It's our analysis that Fresh & Easy basically has enough stores in the Phoenix metro region for right now. In fact, we think that a number of the Fresh & Easy stores, which are located so close to one another as they are, are actually canabalizing sales of each other in numerous cases.

At this point in time, we suggest Tesco look only to key cities in Arizona on a very selective basis where there are currently no Fresh & Easy stores for new locations. The only duplication exception in the Phoenix Metro region being spots that are just screaming for a small-format grocery store.

In terms of the stores being put up for sale by Whole Foods in Arizona, our suggested strategy above basically narrows the list down to one store -- the former Wild Oats Market store in Peoria, Arizona. We would look at that former Wild Oats store to buy and convert into a Fresh & Easy. In all of the other cities, Tesco already has plenty of Fresh & Easy stores, in our analysis. [By the way, Wal-Mart will open one of its small-format, combination grocery and fresh foods Marketside stores in Peoria later this year, it's fifth Marketside unit in the Phoenix Metro region.]

We would also take a pass on the stores for sale in Las Vegas and Henderson, in southern Nevada. Tesco has enough stores in the market for now as well, in our analysis. Actually it has a few too many.

But we would take a close look at the two former Wild Oats' units for sale in the Reno area, in northern Nevada.

Colorado and Oregon

Beyond taking this limited look at the former Wild Oats stores for sale in Arizona and Nevada, here is what we would do: We would take a very close look at the seven former Wild Oats stores for sale Colorado.

Yes, we know Tesco's Fresh & Easy is currently only in three markets: California (Southern and Bakersfield), southern Nevada and Arizona. And we know it has postponed its launch into Northern California at least two or three times now.

But being in only the three states and markets with its current 116 stores is part of Fresh & Easy's problem: With its "critical mass" store location strategy, the grocery chain has put way too many stores in just three states, with the stores located way too close to one another.

There have been three negative primary results of this strategy, in our analysis:

>First, the "critical mass" store location, limited market focus strategy has resulted in too many Fresh & Easy stores being located too close together. This is causing stores to canabolize sales of other nearby stores.

>Second, the decision by Tesco to open so many Fresh & Easy stores in such a short period of time so close to one another in only three states-markets resulted in numerous bad store location decisions, in our analysis. That's in part of the reason why so many of the current Fresh & Easy markets are doing below $150,000 per week in sales.

>Third, Tesco's research failed to identify its only real key consumer demographic group so far, based on our research. The one group that seems to have thus far started to develop brand identity with and some brand loyalty to the Fresh & Easy retail brand (meaning they are primary shopper potential) and stores are members of the about 18-34 year old consumer. This is the only demographic segment we've identified thus far that contains some members who seem to have "gotten" the Fresh & Easy format, as Tesco's Fresh & Easy often puts it, as it is at present.

Consumers in this age segment tend to live in urban regions not suburbs where most of the Fresh & Easy markets are located. Think in and around Phoenix, Arizona but not farther out in the suburbs where many of the Fresh & Easy stores are located. Think college or university towns. Think Metro Los Angeles and the west side more so than the Inland Empire region and Orange County, where most of the Fresh & Easy stores in Southern California are located.

And think San Francisco and Silicon Valley in Northern California's Bay Area, as well as Metro Denver, Colorado and the hip city of Boulder where two of the former Wild Oats Colorado stores for sale are located.

A Western U.S. market region strategy, not limited 'critical mass'

In other words, instead of opening numerous more new stores in the Metro Phoenix, Arizona east and west valley regions and in Metropolitan Las Vegas (there is still plenty of room in Southern California for new stores), accept for the very limited new store fill-ins we described earlier, what Tesco needs to do is to spread out in other key Western U.S. states-regions (San Francisco Bay Area in Northern California and states like Colorado to start), thereby creating a bigger market basket instead of counting on more and more stores in the same markets to lead to success.

We would open select stores in select areas in the the San Francisco Bay Area right away. (More on this in an upcoming piece in Fresh & Easy Buzz.)

We would look at the seven Colorado former Wild Oats' stores for sale by Whole Foods. Then we would look to Oregon and Washington state, from Northern California. Then look to Utah, Idaho and New Mexico, from Colorado.

We don't mean a year or two from now. We mean right now.

What we are talking about to start is the opening of just a few Fresh & Easy stores in these states-market regions, not the "critical mass" strategy Tesco has employed to date.

For example, we see opening a total of about 7-10 Fresh & Easy stores in Metro Denver and key other cities in the state outside of the Metropolitan Denver market region. In a similar move, we suggest opening about 4-5 Fresh & Easy stores in the Metro Portland, Oregon market region and one or two outside the Metro region.

We would open about 7-10 stores in the Seattle Metro region and surrounding area to start, two-three in the Boise, Idaho Metro region, and perhaps two each in the Santa Fe and Albuquerque Metro market regions in New Mexico, to start.

This "Western U.S." strategy is opposed to Tesco's limited market region, many stores in just three states store location strategy. We will be elaborating on the alternative strategy in a future piece in the Blog.

One result of Tesco putting all of its stores in just three Western states is that those three states -- California, Nevada and Arizona -- just happen to not only be the three states hit worse by the housing foreclosure crisis, financial and credit crisis and unemployment in the west -- but also in the entire U.S.

In contrast, although being hit by the recession, Colorado, Utah and Washington State, for example, all are fairing much better that the three states. Utah has just a bit over 4% unemployment, for example, which is nearly half the national average, and is 6% below California's unemployment rate. Colorado and Washington state also have much less job loss than California, Nevada and Arizona.

And in California, the San Francisco Bay Area is doing much better than the rest of the state. It has much lower unemployment than Southern California and the Central Valley. For example, San Francisco's unemployment rate is under 6%, nearly half as much as the state's average of 10.4%.

The housing foreclosure percentage is much lower in the Bay Area than anywhere else in the Golden State, for example. And the diverse economy is till creating new jobs in some sectors, unlike what's happening in the rest of the state. (We would add that of the 18 confirmed Fresh & Easy locations by Tesco in the San Francisco Bay Area, and the additional approximately seven or eight we've discovered and reported on but haven't been confirmed by the retailer yet, about 60% of the store sites are in what we consider poor locations. We will elaborate on this in that future piece.)

Lastly, for those readers with a logistics and distribution bent, Tesco's Fresh & Easy can distribute to all of these Western States out of its Distribution center in Riverside County, (Southern) California. All that's needed are some tweaks to its current logistics model, along with one or two key additions. Yes, you have to wait for that upcoming piece to read what those logistical tweaks and addition are.

So, that's how we would deal with the new influx of grocery stores now for sale in the Western U.S. because of the Whole Foods Market-FTC settlement agreement, were we Tesco's Fresh & Easy Neighborhood Market. And we hear there could be some wheeling and dealing (good prices) for the stores, since the sale is the result of the settlement agreement with the FTC.

But its all about good store location strategy rather than good deals on closed stores, in our analysis and experience. That you can take to the bank, as long as it isn't Bank of America or Citi, and you are looking for a commercial loan.

We will elaborate on the "Western U.S. strategy," as opposed to what we term Tesco's current limited state, limited market, "critical mass" store location strategy, along with the Northern California piece, and the logistics piece, in an upcoming post or two in Fresh & Easy Buzz. Please stay tuned.

[Editor's Note: For detailed coverage and analysis about the FTC v. Whole Foods Market antitrust case, along with the settlement agreement, we suggest Natural~Specialty Foods Memo (NSFM), which has covered the topic, issue and legal case extensively since the acquisition happened in the summer of 2007. Here is a bibliography of its recent coverage, along with posts from its archives. Here is a recent piece about the selling of the "Wild Oats" brand and intellectual property.]

[Readers: You can follow Fresh & Easy Buzz around on Twitter at: www.twitter.com/freshneasybuzz.]