Deconstructing Tesco Fresh & Easy's 35% Total Sales Increase For the Just-Ended Holiday Trading Period 2009

United Kingdom-based Tesco plc reported today in what it calls its Christmas and New Year Trading Statement that 2009 Christmas and New Year holiday period total sales for its Fresh & Easy Neighborhood Market stores in California, Nevada and Arizona were 35% higher than for the same period in 2008.

The holiday trading or sales period reported today by Tesco for Fresh & Easy is the six weeks up to January 6, 2010 - basically the last week of November 2009, all of December 2009, and the first week of January 2010.

From today's trading statement: "In the United States, Fresh & Easy had a stronger Christmas and New Year period than last year, with total sales growth of 35% at constant exchange rates (24% at actual rates) and strongly positive like-for-like sales growth."

That sounds great. Or does it?

Total sales vs. same-store-sales

The 35% sales increase for the 2009 holiday sales period compared to 2008 for Fresh & Easy reported today by Tesco is merely a total sales increase number rather than what's referred to in the U.S. retail industry as same-store-sales (called like-for-like sales in the United Kingdom). As you can see in the above quote (in italics) from the trading statement, all that is said about like-for-like (same-store stores) sales is they were "strongly positive."

Same-stores-sales is a key indicator because it measure sales of stores open at least a year. Same-store-sales (like-for-like) excludes new stores a retailer may have opened during the period of say January 7, 2009 and third week of November 2009. Here's a full definition of same-store-sales.

Same-stores-sales is what financial analysts and others who look closely at retailers of all types and formats use a the critical gauge of how those retailers really are doing sales-wise. It's also what retailers themselves look at closely, along with competitors.

Tesco, for example, reported the holiday period like-for-like sales for its operations in the United Kingdom but didn't break them out for its international operations, including Fresh & Easy USA. The retailer has a policy of doing it that way, as do some other retailers.

Tesco's holiday trading period sales performance in the United Kingdom, including same-store-sales, was very good. From today's trading statement: "In the UK, total sales outperformed the industry as a whole, increasing by 8.3% compared with the same period last year (8.0% excluding petrol). Like-for-like sales excluding petrol and including VAT increased by 5.1% in the period (4.9% VAT-adjusted), all of which was volume growth. This was the strongest Christmas performance for three years." Read the full trading statement release here.

Behind the numbers

Tesco had about 102 Fresh & Easy stores opened in California, Nevada and Arizona at the beginning of the six week (the six weeks prior to January 6, 2009) 2008 holiday sales period. The 100th Fresh & Easy store opened on November 12, 2008, as documented in this Fresh & Easy press release.

At the start of the six week 2009 holiday trading period there were about 129 Fresh & Easy markets open in California, Nevada and Arizona.

That means Tesco opened about 27 new Fresh & Easy neighborhood market stores from the end of the six week holiday trading period to the beginning of the six week 2009 holiday sales period.

The about 27 new or additional stores (the number of stores opened between the 2008 and 2009 holiday sales period) works out to about 25% -30% more stores on a percentage basis than the existing 102 store base during the holiday period of 2008. Simply put: there were about 102 stores in the 2008 holiday trading period and about 129 stores for 2009 holiday trading period.

What this means is the 35% increase in gross sales for the holiday sales period 2009, compared to the same period in 2008, includes the fact that there were about 27 additional Fresh & Easy stores opened in the 2009 sales period compared to 2008.

You open about 27 new stores, total sales go up commensurately.

Looking at this fact - the existence of the additional about 27 Fresh & Easy stores opened for the 2009 period - the reported 35% sales increase suddenly appears to be what it really is: Just about what one would expect the 2009 holiday period sales to be, compared to the same period in 2008.

Open about 27 new stores between 2008 and 2009 and total sales increases about 35% - or slightly more or slightly less.

The key indicator, which unfortunately Tesco didn't release, is what is the increase or decrease in same-store-sales (like-for-like) for the holiday 2009 sales period, compared to the same period in 2008. Such a measure would give us a real indicator of true sales growth on stores open more than a year.

But, as we mentioned at top, all Tesco said about same-store sales growth in today's report is they are strongly positive.

That statement offers no empirical evidence. In other words it has to be taken as being the case on pure faith and trust.

It's of course Tesco's choice not to break out same-store-sales for Fresh & Easy. They aren't required to do so.

But it's also true the retailer is touting the 35% increase, which many mainstream and respected business publications reported today with headlines like this: "Holiday sales surge at Fresh & Easy."

In summary

In summary then, what Fresh & Easy Neighborhood Market's 35% sales increase for the holiday sales period 2009, compared to the same period in 2008, means is that overall sales grew by 35% - and that 35% sales growth included having about 27 more stores open and operating for the 2009 period, compared to 2008.

We aren't putting down the overall sales increase of 35% Tesco reported today for Fresh & Easy. Rather, our task is to attempt to explain it. And for serious consumers of such information, going behind the numbers always makes good sense.

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Fresh & Easy Buzz Analysis: Tesco PLC on Fresh & Easy Neigborhood Market USA's Sales and Operations to Date

Fresh & Easy Buzz Editor's Note: Below is the text portion (in italics) about Fresh & Easy Neighborhood Market USA from Tesco PLC's press release issued today on its annual corporate sales and profits.

In its full press release, which you can view here, Tesco breaks out sales and profit performance for its international operations in the UK, Asia and elsewhere. However, the retailer doesn't break out the sales and profit figures for Fresh & Easy USA.

However, Tesco PLC CEO Sir Terry Leah said today the U.S. operations will lose about $200 million in its first full-year of operation. Additionally, as you can see in the very last paragraph below, Tesco says beginning in September, 2008 it will start breaking out Fresh & Easy USA sales like it does with its retail operations throughout the globe.

From today's Tesco PLC press release on Fresh & Easy USA:

United States. We are very encouraged by the start Fresh & Easy has made. The first stores opened only in November and we now have over 60 trading. Whilst it is still early days, the response of customers to our offer has surpassed our expectations – with our research regularly confirming that they like the quality and freshness of our ranges, as well as the prices and the convenient locations of the stores.

Sales are ahead of budget and sales densities are already higher than the U.S. supermarket industry average, with our best stores exceeding $20 per square foot per week. We are seeing strong growth in the early stores as we step up, as planned, our marketing programmes and as we build awareness of the brand. This is also reflected in the strong sales performance of recent openings in all of our markets in Southern California, Nevada and Arizona. Fresh foods and own brand products have sold particularly well, confirming that the core of our offer has already gained acceptance with customers.

Progress with real estate has been good and we have secured enough sites for our immediate needs – although the deteriorating property market, particularly in Arizona and Nevada, will mean that some of the third-party developments in which we had planned to open prototype stores later this year, will now be deferred. Nevertheless, we still expect to open around 150 new stores this year.

Our Riverside distribution centre (DC) and kitchen operation is gearing up well as volumes rise. As we announced last November, we have taken the necessary steps to secure the site and begin the process of obtaining the necessary permits to launch operations of our second DC in Northern California in due course. We expect a proportion of these costs will be incurred in the current year.

Last April, with our Preliminary Results, we said that costs of recruitment and training of staff for the stores, combined with the other pre-launch costs and initial trading losses, would involve estimated US start-up costs of around £65m in the financial year. We have delivered on this guidance – trading losses were £62m. We expect losses to rise this year to around £100m and then reduce thereafter as early stores begin to mature and we see increased overhead recovery from higher volumes.

US segmental reporting of sales and trading results within International will begin with our Interim Results in September.

Fresh & Easy Buzz Analysis

First, we want to repeat two things we regularly discuss here in Fresh & Easy Buzz.

Number one, is that Tesco has launched one of the most ambitious new store opening blitzes in U.S. grocery retailing history with its Fresh & Easy grocery store venture in the Western USA. The retailer has opened 61 of its small-format, basic grocery and fresh foods convenience-oriented grocery markets in the U.S. states of California (Southern California only to date), Arizona and Nevada in about 170 days.

Second, like we often say here, those who rule out Tesco in general and its Fresh & Easy grocery store venture in the USA specifically, do so at their own peril. Tesco, the third largest retailer in the world after Wal-Mart and France's Carrefour, is an innovative, determined and nimble retailer. Further, as we write frequently--and as Tesco CEO Sir Terry Leahy stated today--Fresh & Easy isn't just a test for the retailer in the USA--it's a full-fledged venture.

We now offer some brief analysis on the key points in Tesco's text from its press release regarding the retailer's Fresh & Easy Neighborhood Market operations in the USA thus far:

Fresh & Easy customer response

Tesco says in its pres release: "The response of customers to our offer has surpassed our expectations--with our research regularly confirming that they like the quality and freshness of our ranges, as well as the prices and the convenient locations of the stores."

We won't argue that point with Tesco, as its their view and opinion. However, we will offer five very key aspects about the Fresh & Easy format, operations and merchandising practices consumers in high numbers have told us they dislike. These aspects of Fresh & Easy are preventing it from gaining repeat and primary customers, based on our research and analsysis:

>The self-service checkout process in which rather than having a store clerk check a customers grocery orders they have to do it themselves, along with bagging their own groceries.

>The lack of selection of a number of key national grocery product brands popular in the Western USA in the stores. What we call a better tailored Western USA product mix.

>The overall lack of a sense of place the stores have. This is a key reason why most Fresh & Easy customers are secondary and tertiary shoppers to date rather than primary shoppers, which the grocery chain needs in order to meet its sales objectives.

>The offering of strictly pre-packaged produce. Fresh & Easy shoppers tell us they would shop the stores much more often and buy much more produce if the majority of the offering was in bulk like 99.5% of American grocery stores offer, rather than pre-packaged like Fresh & Easy merchandises it.

Pre-packaged produce is fine for a specialty grocery chain like Trader Joe's because its not looking the be the primary "neighborhood grocer" like Fresh & Easy is. Western USA consumers love a wide variety of fresh, bulk produce even more so than U.S. consumers in general, and aren't likely to ever make a grocery store which doesn't offer it their primary shopping venue.

>Not enough localization of the stores to the neighborhoods they are located in. For example, the Fresh & Easy market in low-income, primarily African American Compton, California looks identical to the store not far from the Las Vegas, Nevada gambling strip and the store in majority white, suburban, middle class Chandler, Arizona.

We aren't suggesting Tesco should have a different style and design of store for each different neighborhood. Far from it. There is a certain egalitarianism in the stores which is a good thing. What we are suggesting though is the the stores need to better reflect the history, culture, characteristics and demographics of the neighborhoods they're located in. This can easily be accomplished by merely taking the basic Fresh & Easy format and store design, and adding local touches on top of that. That's the definition of localization in retailing.

For example, adding minor elements (on top of the basic format and design) that reflect the Compton community and the neighborhood the store is in, for example. Adding some simple, Southwestern elements which reflect the Phoenix, Arizona/East Valley region where the majority of the Arizona Fresh & Easy stores are located, would be a good idea. The same for the Nevada stores, which are all located in the Las Vegas, Nevada Metropolitan region. Give them some localization--let local consumers know the stores are part of the community rather than a cookie-cutter chain.

The lack of enough local (and local to the region) food, grocery and beverage products in the stores also is a problem. Were Fresh & Easy to increase the amounts of local food and grocery items in each of the three regions in which its 61 stores are located, not only would the grocer garner tons of positive publicity, but even more importantly it would find it's stores gaining more primary shoppers, more new customers, and happier existing ones. Like Tesco knows better than nearly any retailer in the UK, local is hot. It's also hot in the USA--especially in California, where its a red hot concept.

Store sales

In its report and press release today, Tesco says: "Sales are ahead of budget and sales densities are already higher than the U.S. supermarket industry average, with our best stores exceeding $20 per square foot per week."

Lets analyze that sentence. "Sales are ahead of budget." That's meaningless to us since as any business person knows sales budget's are dynamic. For example, let just suppose Tesco's Fresh & Easy had an original sales budget of overall sales for this point in the chain's time of $200,000 per store, per week. However, like all start ups do, it frequently revises that sales budget, some times up, but mostly down with a start up.

Therefore, lets just say that instead of today's sales budget being $200,000 per store, per week, which it might have been for a long time; it gets revised downward to say $120,000 per store, per week. Hypothetically of course. As a result, if the stores are performing slightly above that amount, they are therefore "exceeding" the sales budget. We aren't making an claims in our analysis--rather just making the point that from a sales performance analysis that statement in meaningless.

Further, do you know of a retailer that, if it had 61 stores open for less than five months, and those stores were exceeding the retailer's sales targets already, they wouldn't want to hang a bright lantern on that fact and release the numbers. We don't.

We should note, we don't expect Fresh & Easy's overall sales to exceed targets at this point. If they are, it's a major achievement which should be announced in bold, banner headlines in a press release, along with the numbers, by Tesco.

Best stores exceeding $20 per square foot per week. Tesco's Fresh & Easy grocery stores average 10,000 -to- 13,000 square feet in size. That means these "best stores" are doing at least $200,000 per week in gross sales.

We have estimated here based on our sources that overall, all of the Fresh & Easy stores open to date (sales combined together) are doing about 60,000 -to- $100,000 in per-store, per-week gross sales.

We've also said in conjunction with publishing our estimates that we know some stores are doing above the $100,000 number. For example, when we first published our sales estimate a couple months ago, we mentioned based on our source information that the store in Los Angeles' Glassell Park neighborhood was doing well above $100,000 per week in gross sales.

Therefore we have no dispute with Tesco's claim that some of its best stores are doing $20 per square foot per week in gross sales. However, some could mean two, four, ten or more stores. It's just meaningless data for an analyst.

Based on our sources however, we don't believe there are many of the stores doing $200,000 or more per week in sales. It's a strong sign for Fresh & Easy though if just two or three are doing those numbers.

Additionally, we are open to the suggestion that since we first published our $60,000 -to- $100,000 overall sales estimate, that number range may has gone up a bit. Although to date our sources tell us if it hasn't overall. And if so, not by too much. But we are open.

Remember, the key is overall sales of the 61 stores. All it takes is 15 or so to bring that number down in major way. And, we know there are some Fresh & Easy stores in locations that are underperforming seriously. In those cases mere location may be the key reason. In at least three cases of such stores we are aware of, those stores are located in former supermarket or drug store buildings which the previous retailers closed.

Store brand products

Unlike some analysts, we believe Tesco's Fresh & Easy store brand offering is good in the main. We think some of the packaging needs adjusting--bolder graphics here, better lettering there--but overall the line is pretty strong.

We do agree the store brand needs marketing and promotion behind it. And it appears to us Fresh & Easy has plans to do that. The brand name, Fresh & Easy, lends itself to lots of creative brand marketing schemes. We can think of many but will leave that to Tesco to create.

We do believe however that the current store brand/national grocery brand mix in the stores is skewed too high in the Fresh & Easy brand direction. We estimate it's about a 65% -35% or 60%-40% store brand/national brand mix ratio (Fresh & Easy brand being the highest of the two). We think an at least 50%-50% store-to-national brand ratio as we've written about in the past, is needed. Remember, Fresh & Easy isn't Trader Joe's, which is a specialty grocer. Rather, Fresh & Easy's positioning is to be a grocery store "for everybody," a neighborhood market which requires lots of primary shoppers to achieve its mission and sales goals.

The $200 million loss

Lastly, a number of analysts will probably make a big deal out of Tesco taking a $200 million loss in its first year of operations of Fresh & Easy USA.

First, we are surprised at the low number, if the true loss really ends up being only $200 million.

After all, in our experience, for a grocery retailing start up, especially one headquartered in California which is America's most expensive state to do business in, losing $200 million in the first year of operations is chicken feed. Additionally, even the concept of a grocery retailing start up is rare in the U.S. Part of the reason that's the case is because the start up costs are so high.

We think this lower than anticipated (at least by us) loss (if it stays at $200 million) is in part the result of the excellent retail commercial real estate deals Tesco has cut in Southern California, Arizona and Nevada. Most of the stores built to date have gone into empty retail buildings, many of which used to house supermarkets like Albertsons and Ralphs or drug stores like Rite-Aid.

Tesco has in many cases obtained these buildings relatively cheaply and with excellent leases do to the economic downturn in the commercial real estate market in the U.S. Further, the cost of gutting the interior of these buildings and turning them into a Fresh & Easy grocery store is significantly cheaper than building a new store from the ground up. The basic building's shell, electrical, piping and other infrastructure is already there. The savings is huge.

Of course, despite the cost savings of this building reuse strategy, the jury is still out on many of these locations because in part one of the reasons the previous retail tenants closed their grocery and drug stores at the locations was store underperformance in that particular spot.

Conclusion

Tesco offered a few good specifics on its Fresh & Easy Neighborhood Market USA grocery store retailing venture today in its report on annual corporate sales and profits.

For example, we think it was smart of the retailer to announce the $200 million annual loss estimate for Fresh & Easy's first year of operations.

Why? For three reasons: it shows a willingness to be more open about the venture by Tesco, it gives investors and others a "real" number to work with, and it takes what would have been lots of speculation in the press about what the Fresh & Easy loss will be essentially off the table. Of course, there still will be some analysis about whether or not the loss will really be only $200 million. But with Tesco announcing its own number, such speculation will be minimal.

In terms of saying: "Some of our stores are doing over $20 per square foot per store in sales, exceeding the U.S. supermarket industry average," it's already getting Tesco some good PR in the popular UK and U.S. business press. Reporters and writers without much experience in the supermarket industry don't realize this is essentially meaningless data (no disrespect to Tesco, it's good general PR) because it could mean hypothetically out of 61 stores you have 10 doing 200,000 per week in sales, 40 doing less than $100,000 in weekly sales, and 11 that are doing $35,000 in weekly sales.

In other words, the retail grocery business is all about store location from a weekly sales standpoint, and from a sales data standpoint it's all about the aggregation of the weekly gross sales of all those 61 stores into the whole.

A little real life analogy: In the early late 1980's, Safeway Stores, Inc. had a store in San Francisco, California that was doing $850,000 per week in gross sales in only about 35,000 -to- 40,000 square feet. They had another store, a 20 minute drive away, that was doing about $200,000 per week in about 30,000 square feet. In other words, on store dramatically exceeded the U.S. supermarket industry average, the other was dramatically below the average.

The chain had about 12 supermarkets in San Francisco at the time. The city's population was about 700,000.

Safeway corporate didn't judge the San Francisco region district manager on the phenomenal performance of that standout store when it came to his job evaluation and bonus potential; they rated him on the performance of all 12 stores in the city.

In other words, a few exceptions to the norm don't matter--it's the aggregate. That's one reason analysts look at what's called same store sales when evaluating supermarket industry company performance.

We won't be able to see same store sales when Tesco breaks out its Fresh & Easy USA sales numbers in six months in September, 2008 as it says it will in the press release, since there were no stores open last year to compare with this year, or the November, 2007 start to September, 2008 period.

That's fine though. What we will be able to see and analyize will be sales numbers for stores open anywhere from 11 months, to some that will only have been open a week or so before the sales figures are released. Just like the Tesco international sales breakout for the UK, Asia and elsewhere, this will give investors and others a much clearer picture of Fresh & Easy than is currently available.

It also will be good for Fresh & Easy senior management, who after September won't have to deal with sales estimates likes ours and those from others.

That same mangement team also has six months to improve sales performance by making and implementing key format, operations and merchandising changes, like those we've been suggesting in Fresh & Easy Buzz for months and others, and launching what we've suggested is a much needed marketing campaign, which needs to include more than public relations-oriented marketing, but real advertising such a radio and perhaps some print and billboard advertising in support of the radio blitz.

[We hear from our sources that with the hiring of its new PR firm, which we reported here, the Fresh & Easy team plans to focus almost exclusively on "free media" rather than include advertising. We think that's a mistake.]

The good news for Fresh & Easy is that parent company Tesco PLC banged out some great annual sales and profit numbers today, sending its stock price north by a number of points and giving Tesco some well-earned props from stock analysts and the media (including us by the way) on its annual performace.

Every dollar that Tesco stock goes up by in the next few days means more capital available for Fresh & Easy USA to make and implement those changes we mentioned above--and to create and launch that marketing campaign. If done well, these changes and marketing activities could result in some strong numbers when Tesco does break out Fresh & Easy USA's sales and profit numbers this coming September.

By the way, that Safeway San Francisco region district manager mentioned in the analogy above was finally able to convince his bosses at corporate headquarters to close that San Francisco store. The chain also has opened a number of new supermarkets in the city since the early 1990's.

Tesco Reports Holiday Period Sales; Little to Say About Fresh & Easy; We Offer Some Analysis and Attempt to Fill in A Few Blanks

United Kingdom-based Tesco, the third-largest global retailer after number one U.S.-based Wal-Mart Stores, Inc. and number two Carrefour of France, and the owner and operator of Fresh & Easy Neighborhood Market USA, released its Christmas and New Year 2008-09 holiday period sales figures today. The holiday trading period covers the seven weeks up to January 10, 2009.

The holiday sales numbers are a bit of a mixed bag for Tesco.

The overall good news for the global retailer is that sales for the seven week period ended January 10, 2009 increased by 11.6% over the same trading period last fiscal year. That's strong in total, particularly considering the current global recession.

The bad news for Tesco is that in its home United Kingdom market, which contributes by far greatest percentage of the retailer's annual sales, the retailer of food, groceries, soft goods, hard goods and other consumer products had its worse holiday trading period since the early 1990's. Tesco's UK sales for the seven week period increased by 2.5% over the same period last year. [You can read coverage about Tesco's UK performance at the following links: Financial Times: Tesco 's does better abroad; Daily Mail-UK: Tesco's down, but not out; Scotsman-UK: Tesco's Christmas slowdown sign of troubled times on the high street; The Herald-UK: Yuletide sales growth at Tesco weakest since 1990s; The Independent-UK: Tesco prepared to press the price button.]

The key reason this is bad news for Tesco -- in addition to the fact that the UK is Tesco's home market and its largest one -- is because the 2.5% sales increase is in contrast to a number of other UK food and grocery retailers that had much higher sales increases in the holiday trading period. These include top rivals Asda, which is owned by Wal-Mart Stores, Inc. and is the number two chain in the UK after Tesco, number three Sainsbury's, number four Morrisons, and fast growing Germany-based hard disounter Aldi-UK.

These four chains have been slashing prices hyper-aggressively in the midst of the severe economic recession in the UK. Tesco recently started doing the same, lowering prices on a couple thousand food and grocery items -- and recently said it's planning additional price cuts -- but it was behind the curve in doing so compared to these and a few other competitors. Most UK analysts attribute Tesco's coming late to the price cutting party as the primary reason for its less than stellar holiday trading period sales increase of 2.5% over the previous year.

Below (in italics) is how Tesco summed up its seven week holiday sales period in its financial release today:

Tesco PLC
13 January 2009

TESCO PLC
CHRISTMAS & NEW YEAR TRADING STATEMENT
TESCO DELIVERS IN THE DOWNTURN

The Tesco Group has delivered a strong performance and record sales over the Christmas and New Year period. Group sales increased by 11.6% during the seven weeks to 10 January 2009, driven by continued rapid international expansion and steady growth in the UK. This growth is against the background of challenging trading conditions in all of our markets caused by the global economic slowdown.

Good International Progress

Our overseas businesses generally saw good growth over the Christmas and New Year period, delivering a total International sales increase of 32.7%, helped by favourable exchange rate movements in Europe, and a particularly strong performance in Asia.

In Europe, sales grew by 24%, with growth at constant exchange rates slowing compared with our third quarter, reflecting the economic conditions in parts of Central Europe and in Ireland. We have grown share in all of our markets.

Sales in Asia increased by 43%, with strong growth in Korea, China and Malaysia. The integration of the acquired Homever stores in Korea is going well, with the introduction of the Homeplus Tesco ranges and lower prices proving very popular with customers. Sales at converted stores have increased by more than 50%.

In the United States, Fresh & Easy has been coping well with a severe downturn in the West Coast markets in which it trades. Like-for-like growth is strongly double-digit for the 28 stores which have now been open more than a year.

Steady UK Performance

In the UK, like-for-like sales excluding petrol increased by 2.5% in the period. We report like-for-like sales inclusive of VAT - and adjusting for the reduction in VAT rates, which came into effect in early December, growth on a comparable basis was 3.5%. The stronger growth in volumes and customer numbers we saw in our third quarter has continued.

The Tesco team delivered an even better shopping trip for customers than last year and another profitable seasonal period for the business - by providing very good standards of service and availability.

Non-food sales performance strengthened a little compared to our third quarter; with positive like-for-like sales growth, driven by good market share gains across most categories, including electrical, clothing and entertainment.

Our services businesses have also performed well. On-line sales were very strong in the run-up to Christmas and tesco.com and Tesco Direct combined saw total sales up by over 18% to £273 million in the seven weeks. Sales of digital products, including televisions and laptops, were particularly pleasing.

Tesco Personal Finance (TPF) is now a wholly-owned subsidiary, with the completion of the acquisition in December of the 50% shareholding owned by Royal Bank of Scotland Group PLC. Customer response to our new Tesco savings products has been very encouraging - with over a thousand new accounts being opened per day recently. The resulting increase in balances means that TPF is now self-funding, putting it in a strong position to pursue the strategy we laid out for the business when we announced the acquisition last July.

Asia and Europe Lift Tesco's UK boat

Based on the substantial sales increase percentages for Europe (24%) and Asia (43%), you can see that international sales in those two regions are what lifted Tesco's overall holiday sales numbers to that 11.6% figure. Tesco's total international sales increased by 32.7% for the period, as stated above. It's important to note that the sales numbers aren't like-for-like or same store sales (stores open moer than a year). Therefore, a significant contributor to the huge sales percentage increases comes from new stores opened since the previous year.

Fresh & Easy Neighborhood Market USA

Notice that there are no sales percentages provided in the Tesco release for Fresh & Easy Neighborhood Market USA, like is the case for Europe and Asia. This is all Tesco says in the release reprinted above regarding Fresh & Easy: " In the United States, Fresh & Easy has been coping well with a severe downturn in the West Coast markets in which it trades. Like-for-like growth is strongly double-digit for the 28 stores which have now been open more than a year."

That's a rather dearth of information compared with what's offered for Europe and Asia. Any analyst worth his or her salt must ask this question: Since there are 28 Fresh & Easy stores that have been open for more than a year, which includes the seven week holiday trading period, why not any sales data, like for Europe and Asia, on how those 28 stores did year-over-year? We will let the reader be the judge. However, if sales were higher in the period this year compared with last year, wouldn't it be likley for Tesco to tout such a fact like it is with Europe and Asia?

The statement: "Like-for-like growth is strongly double-digit for the 28 (Fresh & Easy) stores which have now been open more than a year" is really meaningless. Those with experience in the field of financial public relations might see it as filler; as a way to say "nothing" but still say "something."

Based on our sources, research and analysis, we believe the reason there's no mention of sales numbers or percentages for the 28 Fresh & Easy stores is because such numbers are very poor. In other words, they would pale in comparison to the Europe and Asia sales percentages -- and perhaps pale even when compared to the 2.5% UK sales increase.

As we've been reporting, Tesco is struggling with Fresh & Easy Neighborhood Market USA -- and was doing so long before the U.S. financial crisis and economic recession became full-blown.

Tesco will release its preliminary 2008-09 financial results on April 21. These should include a breakout for Fresh & Easy USA similar to the one Tesco provided for the first time in its 2008 reporting in mid-year.

Meanwhile, Tesco plans to continue opening new Fresh & Easy Neighborhood Market combination fresh foods and grocery stores in its existing Western USA markets of Southern California, Metropolitan Las Vegas, Nevada and in the Phoenix, Arizona Metro market region.

That new store opening pace has been dramatically slowed down however. For example, today Tesco's Fresh & Easy distributed this press release in which it said the Southern California based grocery chain plans to create 200 new jobs through new store openings in the next two months.

In the press release, as in all of its releases, Tesco's Fresh & Easy Neighborhood Market says each of its stores employes between 20-30 workers. Using the grocer's own published figure, this works out to the following:

>20 employes per store = 10 new stores in the next two months.
>25 employees per store = 8 new stores in the next two months.
>30 employees per store = 6 -to- 7 new stores in the next two months.

From November, 2007 until recently, Tesco has been opening a new Fresh & Easy market about every two -to- three days. Using the figure of a new store opening every two -to- three days, that amounts to about 10 new stores opening a month, or 20 new stores over a two month period.

In contrast, based on the new jobs numbers (the 200) over the next two months published by Fresh & Easy in its press release, and using the mid-point number of 25 employees per-store, that means the retailer plans to open only about four new stores a month for the next two months, for a total of about eight stores in the next two months, give or take a store or two.

In other words, Fresh & Easy is going from opening an average of at least 10 new stores per month to date, to opening on average just four new stores a month for the next two months, based on the 200 jobs creation figure it has in its press release. That's an over 50% reduction in new store openings.

This dramatic reduction comes on top of the fact that Tesco's original plan and public statements were that it would have at least 200 Fresh & Easy stores open by the end of 2008. The Fresh & Easy Neighborhood Market USA division then later reduced that number to having at least 150 stores open by the end of 2008. However, the reality of the situation is that Tesco had about 106 Fresh & Easy grocery and fresh foods markets opened and operating by the end of 2008. That's dramatically fewer than 200, and significantly less than 150.

In addition, Tesco's Fresh & Easy has postponed its entry into the Northern California market where Fresh & Easy Buzz has identified about 48 store location sites the retailer has in various states of preparation, ranging from stores that could be opened right away, to sites only recently leased. Fresh & Easy has confirmed 37 store locations for Northern California, 19 in the Sacramento/Vacaville Metropolitan region market and 18 in the San Francisco Bay Area.

Tesco's business plan for Fresh & Easy USA called for having about 300 stores opened by the end of this year. That number included being in the Northern California market by mid-2008, with a significant number of stores, at the least the confirmed 37, by the end of 2009.

That's obviously not going to happen. In fact, based on our analysis, we don't think Tesco will have many more than about 150 of its small-format Fresh & Easy grocery and fresh foods markets opened and operating by the end of this year. That's about half of what the retailer touted for well over a year before its first stores even opened in November, 2007. It's also about the same number of stores Fresh & Easy revised downward and said it would have open by the end of 2008.

We don't judge the performance of a food and grocery retailer by the number of stores it's opened over a year or two. But we do evaluate that retailer on its planning. And to open only half of the number of stores in its business plan will be a major fiasco in planning for Tesco. It demonstrates what was in our analysis a fundamental lack of real research of and in the Western USA market.

This is ironic because Tesco has touted the "extensive research" it conducted prior to entering the market. The problem is that research was mostly focus-group research rather than a combination of such consumer-based research combined with strong market-oriented and competitor research. Focus groups and similar consumer-focused research can tell a company much about a market's consumers. But it tells them nothing about the competitive aspects of markets in terms of how food retailing is done and who the competitors that do it -- and what they do -- are.

This is where Tesco made a major mistake. It convinced itself it was filling a major food and grocery retailing void in the three Western U.S. markets with the Fresh & Easy format, when in fact had it done proper research it would have discovered just how multi-formatted food retailing is in these markets, thereby better preparing itself for the highly competitive climate it now finds itself in. Tesco Fresh & Easy CEO Tim Mason essentially admitted this to be the case, that it thought it was filling a major food retailing void, in an interview with the London Times newspaper in the fall of 2008.

We've argued that those who rule Tesco out with Fresh & Easy, or with any of its other global food and grocery retailing ventures, do so at their own peril because the company is a world class retailer. But we've also argued that in the case of Fresh & Easy, Tesco has failed thus far to create a clear format, then position it well, including merchandising, and then properly communicate the retailing offering via a solid, coherent and consistent marketing program.

Instead, Tesco's Fresh & Easy is all over the place, as we've argued in the Blog often. Initially, for months Fresh & Easy was positioned primarily as a "revolutionary" fresh, prepared foods retailer with groceries as a significant sideline. Then the retailer went off on a tangent, promoting specialty and gourmet foods far and above basic groceries. Then it started to put more of a focus on basic groceries at low everyday prices. Then it focused most of its efforts on being a "green" (as in environmentally-friendly) food retailer over and above creating an identity as a value grocer or prepared foods retailer. Now it appears to be moving closer to positioning itself as a value grocer but is not doing so in any comprehensive way.

Fresh & Easy can be a grocer that is "green," sells specialty and natural foods, offers an extensive selection of prepared foods, and is in the basic grocery business with a value proposition. But it can't position itself as all of these things. Rather, it needs to create a core identity like small-format grocery chains Aldi USA (position: hard-discount basic grocer that also sells and offers many other things but only as part of that core positioning) and Trader Joe's (position: a discount natural and specialty foods retailer) have, for example.

Once created, that core positioning then becomes the basis for all it does, everything else is just a part of that whole. That position is the wheel and all the other things -- "green," specialty and natural, ect. -- are mere spokes on that wheel.

Once this retail identity is established, then all of Fresh & Easy's marketing needs to be centered on communicating that core positioning to the consumer, just like Aldi USA and Trader Joe's do so well.

We've asked numerous consumers to tell us what "Aldi" is and what "Trader Joe's" is in terms of its format. Most who are familiar with the respective chains/stores can do so easily -- and most offer a similar version of the same definition. In contrast, when we ask shoppers to tell us what a "Fresh & Easy" market is, they find it hard to answer. And in terms of the responses, they're generally all over the map. It's like the old psychology 101 story about ten people, each grabbing a different part of an elephant, and all then describing an animal other than an elephant. We're talking retail identity here.

Every good marketer and retailer knows when this (lack of retail identity) is the case it's because there's been a failure to communicate the position of the retail format, in this specific case Fresh & Easy Neighborhood Market, in the mind of the consumer. That's Tesco's challenge with Fresh & Easy -- create or decide on what Fresh & Easy is -- clearly define it internally -- then focus everything it does around that core position, then communicate that core position in a solid, comprehensive and consistent way to consumers. The whole has to be greater than the sum of its parts.

We aren't seeing signs yet of that happening at Fresh & Easy Neighborhood Market USA. Changes have been made but nothing is consistent. More parts keep getting added but they just make it more difficult to find the whole it seems.

In our analysis, Tesco's Fresh & Easy Neighborhood Market has yet to decide (maybe it doesn't know?) what Fresh & Easy is, and then develop and implement a strong, clear and consise merchandising, operations and marketing program and communicate it in a consistant way to consumers, both in-store and externally.

Tesco PLC News: Tesco Shares Down Slightly On Q1 Trading Update; Lower Than Expected But Still Healthy First Quarter Growth

LONDON -(Dow Jones)- Shares in retail giant Tesco PLC (TSCO.LN) dropped 2% Tuesday after it reported a slowdown in U.K. sales growth for the first quarter and warned that U.K. consumers were becoming more cautious.

Tesco, Europe's third-largest retailer by sales, said in a trading update that total sales in the 13 weeks to May 24 rose 13.7%, although this was largely driven by growth outside of the U.K.

"Our international operations, helped in part by favorable exchange rate movements, have delivered an excellent start to the year... and the core U.K. business has once again delivered good growth in a market characterized by recovering competitors," the company said in a statement.

The group described its U.K. performance as "solid" with total sales up 9.4% in the period. Excluding sales of petrol and new store openings, however, sales were up just 3.5% - marking a slowdown since the start of the period.

The company said in April that same-store U.K. sales were up over 4% in the first five weeks of year. It is targeting a full-year underlying sales growth figure of between 3% and 4%."

Although food category performance has been good, our rate of growth in non- food has eased as consumers have become more cautious with their spending during recent months," the company said.

The market focused its attention on the downbeat U.K. comments and by 0724 GMT, Tesco shares were down 9 pence, or 2.2%, at 393 pence in a lower London market. Other retailers also lost ground.

Shore Capital analyst Clive Black said the more cautious comments on the U.K. may resonate around the market.

Finance Director Andrew Higginson said on a conference call with reporters that non-food sales in the U.K. were growing at a slower rate than food sales "for first time in a long while." Sales of "big ticket" items such as furniture were "slower than we might have liked," he said, "but overall we're pretty pleased."

Higginson added that Tesco's apparent underperformance compared with some U.K. competitors was not a cause for concern. "I wouldn't worry too much about that," he said.

"Asda and the discounters are having a moment in the sun at the moment," he added, " but we're taking share from most parts of the market."

Tesco accounts for nearly one-third of the U.K. grocery market, nearly double that of its two biggest rivals, Asda Group Ltd., a unit of Wal-Mart Stores Inc. (WMT), and J Sainsbury PLC (SBR.LN).

Higginson said that the 3.5% U.K. growth was partly driven by food cost inflation as well as volumes. He declined to provide figures but added that Tesco's inflation was "a good bit below" the sales growth figure.

The group operates around 3,320 stores, of which 1,990 are in the U.K. The remainder are in Ireland, the Czech Republic, Hungary, Poland, Slovakia, Turkey, China, Japan, Malaysia, South Korea, Thailand and the U.S. (Fresh & Easy Neighborhood Market).

International sales rose 27% during the first quarter benefitting from favorable currency movements. Stripping out this benefit, sales were 13.9% higher.

Higginson pointed out that this growth did not include any acceleration in space expansion - which will be weighted toward the second half of the year. The company is adding 9.8 million square feet of new selling space in its international division this year.

Just two new hypermarkets opened in Europe during the first quarter, out of a total of over 50 planned for the year as a whole.

Press reports recently have suggested Tesco is about to buy out Royal Bank Of Scotland Group PLC's (RBS) 50% stake in Tesco Personal Finance for GBP1 billion. Higginson declined to comment on the speculation.

Additional Reporting:

>Guardian.co.uk: "Sales growth slowes at Tesco as customers tighten belts"

>Associated Press: "Tesco PLC says 1Q sales up 13.7 pc but UK sales growth rate slows"

>Thomson Financial News: "Tesco's Higginson relaxed on UK market share"

>Times UK: "Tesco feels UK sales slowdown"

>Times UK: "Tesco non-food sales hit by consumer downturn"

>Motely Fool Financial UK: "Tesco Powers Ahead"

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tesco Reports Respectable Q-3 International Sales Growth; Weakest UK Sales in 15 Years; Fresh & Easy USA Not One of the International Bright Spots

Analysis - With a special look at Fresh & Easy USA

United Kingdom-based global retailer Tesco, which owns and operates Fresh & Easy Neighborhood Market in the Western United States, reported its weakest same store quarterly sales growth for the UK, the retailer's top market, in 15 years. UK same store sales, excluding gasoline sales, rose by only 2% for the third quarter, Tesco's worse performance at home in 15 years.

Total UK sales grew by 5.9% in the quarter, with like-for-like (same store) sales up by 3.2%, including petrol. Excluding petrol, like-for-like sales rose by 2.0%. The last number, the 2.0%, is what analysts and investors focus on.

However, Tesco's overall or total global sales were up a respectable 11.7% for the third quarter.
Tesco doesn't break out its quarterly sales reporting by specific international region.

Tesco currently operates 3,956 stores internationally in 14 countries, including its Fresh & Easy Neighborhood Market small-format, convenience-oriented grocery and fresh foods markets in the Western U.S. states of California, Nevada and Arizona. Nearly half of its 3,956 stores are in the United Kingdom.

Overall "International sales were up 28.1% at actual exchange rates and by 14.6% at constant rates. This included a particularly strong performance in Asia, where sales grew by 29.4%, helped by the Homever acquisition and in spite of the depreciation of the Korean Won against Sterling," Tesco said in a statement today.

"We have seen strong growth in all our European markets, although favourable exchange rate movements have contributed significantly to this - and growth at constant rates slowed to 6%. Despite the economic slowdown in some of our markets, our businesses have done well, particularly in food and grocery categories, and we have seen good market share gains." Tesco said about its overall international operations.

Fresh & Easy Neighborhood Market USA isn't one of Tesco's global retailing bright spots however. About Tesco's Fresh & Easy USA, Tesco CEO Leahy said today:

"The U.S. is in recession," he said on the Tesco Web site in a company produced, public relations-style question and answer session on the company’s third quarter interim results. "The Western United States, where we’re opening, is in severe recession at the moment, so it makes sense to maintain our rate of opening rather than the planned acceleration in the rate of opening because you can’t just buck a downtown of that magnitude. [Fresh & Easy] is very popular. It is well received by customers. The U.S. will bounce back, the Western United States will bounce back. We’ll be able to step up our rate of growth when that happens.

"Our prudent decision to maintain, rather than accelerate our current rate of new store expansion in the United States, given the severity of the economic slowdown in some geographic markets there, will mean that we will open 0.5 million (500,000 square feet or about 45-50 Fresh & Easy stores, which average about 10,000 -to- 13,000 square feet each) square feet for Fresh & Easy during the second half. Our early US stores have now moved strongly into like-for-like growth and the performance of Fresh & Easy overall continues to be pleasing."

CEO Leahy is referring to Tesco's decision, which we've reported on, to slow its new store opening pace with Fresh & Easy, including postponing the grocery chain's opening of its first stores in the Northern California market region, where thus far Fresh & Easy Buzz has identified about 46 locations in the San Francisco Bay Area, the Sacramento/Vacaville Metro region, the Northern San Joaquin Valley and the Monterey coast region where Tesco has locked-in leases for its Fresh & Easy markets.

Initially, as we've reported, the Northern California stores were set to begin opening early this year. Tesco then changed that to the end of 2008, then again to early 2009. It is unsure when the first stores in Northern California will start opening now. But based on our sources it's not likely the first Fresh & Easy store in Northern California will open until the middle of 2009, at the earliest.

Further, based on CEO Leahy's quote above, that Tesco will open 0.5 million square feet (or 500,000 total square feet) worth of new stores in the second half, that means opening only 45-50 new Fresh & Easy markets, which average 10,000 -to- 13,000 square feet in size, during this period.

Since we've already identified 46 Fresh & Easy Northern California locations, and since we know additional Fresh & Easy markets are planned to open in Southern California, Nevada and Arizona (the three existing markets) in the second half (plus up to 13 stores in Bakersfield and Fresno), just doing the math suggests that its rather possible Tesco may not open any Fresh & Easy stores at all in Northern California (Bay Area, Sacramento/Vacaville region, Northern San Joaquin Valley) in 2009. And if it does open any Fresh & Easy stores in Northern California, the number of stores opened would be nowhere near even the 46 locations we've already identified, since opening all 46 would take up nearly all of that total 0.5 million of new square footage Sir Terry Leahy says the retailer will open in the U.S. in 2009.

Tesco plans to open five stores in the Bakersfield region in the far-southern Central Valley of California and eight stores in the Fresno Metropolitan region in the mid-Central Valley.

The first two stores in Bakersfield open tomorrow, December 3. They will be the first Fresh & Easy markets to open in California outside of the Southern California region. These regions are in Central rather than Northern California.

We expect the retailer to go forward with opening these stores. Do note though that they take up at least 130,000 of that 500,000 new store square footage. Therefore putting even more doubt in a 2009 Northern California launch.

Tesco currently operates 102 Fresh & Easy markets in Southern California, the Las Vegas, Nevada Metropolitan region and in the Phoenix Metro area in Arizona.

What Sir Terry Leahy didn't mention today in his Q&A (notice his emphasis on external factors only regarding Fresh & Easy -- the recession, ect.) is that Fresh & Easy's problems existed long before the Western U.S. economy turned demonstrably sour. In fact, up until just a month ago Fresh & Easy Neighborhood Market CEO Tim Mason said the chain was doing remarkable. And, ironically, we learned yesterday from the official board that calls recessions in the U.S., that the country is in a recession, and has been since December, 2007. The first batch of Fresh & Easy stores opened in November-December of 2007.

The fact is the format and stores haven't yet caught on in any significant way in either Southern California, Metro Las Vegas, Nevada and in Arizona. They have a niche customer base more similar to what a conventional convenience store chain or a specialty foods format chain would have. That's not what Tesco has planned for Fresh & Easy. The stores are supposed to be neighborhood grocery stores that shoppers use as primary and to a limited degree secondary shopping venues. Fresh & Easy is nowhere close to achieving that objective, neither in sales or in consumer behavior and shopping patterns.

Notice the part of the quote (in italics) above we have in bold from Sir Terry Leahy, where he says: "Our early US stores have now moved strongly into like-for-like growth and the performance of Fresh & Easy overall continues to be pleasing."

That's what's called a nuanced statement. It is true some of the early (opened in late 2007 and early 2008) Fresh & Easy stores are doing well in like-for-like (called same store sales in the U.S.) sales. But it is equally true an equal number of those early stores are doing poorly in like-for-like sales. For example, two months ago we were told by a source in a very good position to know, that the very first Fresh & Easy store opened, which was opened the last week in October, 2007, in Hemet, California, is not yet even averaging $100,000 in weekly sales; averaging instead about $90,000 -to- $100,00o per week at best.

So, even though Tesco is attributing any and all struggles for Fresh & Easy to strictly external variables like the severe economic recession, that's far from true. In fact, since Fresh & Easy is positioned as a no frills, discount grocery and fresh foods market with prices claimed by Tesco to be 15-20% lower everyday than its competition, one has to ask, as we have in previous pieces, why Fresh & Easy Neighborhood Market isn't doing well in a recession based on that model? After all, there is a mass flight by U.S. grocery shoppers to discount supermarkets and other stores like Wal-Mart and the small-format Aldi hard discount markets in the U.S.

The reason is far more internal than it is external -- a failure by Tesco to properly define the Fresh & Easy format, create a strategy to communicate that positioning, and then execute the marketing and merchandising in a comprehensive, clear and quality manner. For example, in the midst of what is a severe economic recession, and even a worse recession in California, Nevada and Arizona, Tesco's Fresh & Easy is promoting the chain and stores more like its an upscale specialty foods format rather than a discount format perfect for today's difficult economic times.

Fresh & Easy Neighborhood Market USA's primary problem isn't external -- the recession -- nor is it a public relations problem, which is an activity the grocery chain spends way to much time on. Rather it is a basic one -- Tesco's Fresh & Easy has yet to become a good merchant, plain and simple.

Tesco's stock shares jumped by 6.6% today following the release of its third quarter sales figures, a sign of confidence in the retailer from investors. However, Tesco's stock value is down about 40% from this time last year, so that confidence has a way to go in terms of gaining back that value.

"We are pleased with our progress (today's third quarter overall sales), but we are also realistic," Tesco CEO Sir Terry Leahy said today in a statement, citing the current economic climate.

In September, Tesco launched its new "Discounter" range of mid-range branded products like pasta and tea bags, for which it had knocked prices lower. That segment now makes up 5.0% of the company's food and drink sales. The retailer is hoping this product range, along with other discounting measures it is taking, will help improve its UK sales, which account for a significant portion of overall sales as Tesco's top trading region.

At home in the UK Tesco is losing business to deep discounters like small-format, no frills grocers Aldi and Lidl. Additionally, Wal-Mart-owned Asda has been engaged in an aggressive discounting program since the first of this year, which has garnered the retailer some new business in the UK at Tesco's expense.

Tesco still has about 31% of the UK food and grocery sales market share however, which is about as much as the country's number two, Asda, and number three, Sainsbury's, have in combined market share percentage. It's estimated that one of every seven pounds spent at retail in the UK is spent at a Tesco-owned store.

Like the U.S., the UK's economy is racked by recession and its own financial and credit crisis. It's important to note that Tesco, especially at home in the UK, is a general merchandise as well as food and grocery retailer. Many of its stores sell everything from clothing and consumer electronics to gifts and household goods, along with food and grocery items. It is these non-essential, durable goods type items that consumers can't afford to purchase in the UK, just as is the case in the U.S. and most other places throughout the world.

Obviously lack of sales across the board in these durable goods categories is an important factor in Tesco having its weakest sales growth (the 2%) in the UK in 15 years. In other words, its important to realize the same store sales aren't based exclusively on sales in the consumables categories, although food and groceries do make up the largest percentage of overall sales for Tesco.

[You can read and view an interview (the company produced public relations-style Q&A) with Tesco CEO Sir Terry Leahy about Tesco's third at www.tesco.com/investorcentre.]

Piper Jaffray Confirming Our Recent Analysis: Tesco's Fresh & Easy Sales Significantly Below Targets

Fresh & Easy CEO Tim Mason (right) recently sold ~1.3 million worth of Tesco stock.

Wall Street's Piper Jaffray is the first U.S. or international investment firm to report what we have been writing about here for a number of weeks: That Tesco's Fresh & Easy Neighborhood Market small-format, convenience-oriented grocery store chain in the Western U.S. is in trouble.

The United Kingdom-based business publication, thisismoney.uk.co was the first to report the Piper Jaffray research, which confirms what we have been reporting on and analyzing from our sources, in this morning's addition.

Piper Jaffray's Mike Dennis says, based on "in-depth research" the firm has conducted, that "weekly Fresh & Easy store sales are far short of target and the stores need an urgent overhaul."

"The Fresh & Easy concept is not right and they need to quickly find out what the issues are and reset the concept," Dennis says.

Dennis claims the 50 Fresh & Easy stores opened to date are averaging about $170,000 a week. Further, he believes Tesco was aiming for sales of at least $200,000 a week at this point in time, with an eventual target of $270,000 a week in gross sales.

Ironically, Piper Jaffray's $170,000 a week is far higher than what our sources have told us is the case. (These are multiple sources, and we averaged and double-checked the sales numbers each has provided to us.) As we reported last week, our sources have been telling us Fresh & Easy store sales are averaging more like $60,000 -to- $100,000 overall, with just a few doing higher weekly sales.

Jim Prevor, who publishes the Perishable Pundit online newsletter, and who has also been doing extensive writing and analysis about Tesco's Fresh & Easy Neighborhood Market operations like we have, pegs the fledgling 50-store chain's weekly sales even lower--at about $50,000 -to- $60,000 per week average.

A Tesco spokesman told thisismoney.uk.com that Piper Jaffray's Mike Dennis didn't speak to him, or to his knowledge spoke to any other Fresh & Easy USA executives, prior to releasing the report. However, this isn't an uncommon practice for Wall Street investment firms when researching a company--especially a start up. After all, the likelihood the company would confirm negative performance indicators turned up in research isn't extremely probable, especially if that company's parent firm is a multi-national public company. Such confirmations can cause dramatic overnight drops in stock-share value (and thus in corporate value), something the parent company and its major stockholders aren't going to approve of.

The investment firm's analysis--which comes on the heels of what analysts and writers like us and Prevor have been discussing--will likely spur other investment houses in the U.S and UK to begin researching Tesco's performance with its Fresh & Easy chain in the U.S. more closely.

Meanwhile, if Piper Jaffray's weekly sales averages are correct (we think they are too high), then in our analysis Tesco's prospects for success with its Fresh & Easy chain is actually higher than we previously believed it to be, based on the $70,000 -to- $100,000 a week average sales numbers our sources have provided to us.

We are continuing to work this story, and will have additional reporting and analysis coming up on Fresh & Easy's performance soon, as a follow up to this piece. In the meantime, we suggest you read thisismoney.uk.co's full story from this morning's edition here.

thisismoney.uk.co also reported in the story that Tesco Fresh & Easy Neighborhood Market CEO Time Mason recently sold ~1.3 million worth of Tesco stock shares. They may or may not have something to do with Fresh & Easy's current performance. We will be asking Mr. Mason that question in an upcoming email.

Note: Read our February 21 piece, "A Look at Fresh & Easy at 50 (Stores): An Analysis and Some suggestions for Going Forward."

Breaking News & Analysis: Tesco Set to Report its Worse Quarterly Sales Performance in 16 Years

United Kingdom-based Tesco, which owns and operates Southern California-based Fresh & Easy Neighborhood Market, which currently has 100 stores in Southern California, Nevada and Arizona USA, is set to report next week its worse sales performance since the early 1990's, according to reports today in a number of major British newspapers.

The UK Guardian and other British papers are reporting Tesco will report third quarter same store sales growth of just 1.9% next week, which would be the global retailer's worse financial performance since 1992, when Britain and the U.S. were last gripped by a serious recession.

The UK, like the U.S. and other countries, is currently battered by a global financial crisis and recession, which is taking it's toll on many retailers, although a few global discounters such as Wal-Mart Stores, Inc, (the world's number one chain), which recently reported a 10% gain in its most-recent quarterly profits on top of same store sales growth, are fairing much better.

UK analysts say Tesco is being hit not only by the macro-economic reality of the financial crisis and recession, which is resulting in consumers cutting back on all spending, including for food and groceries, but also by competitive pressures from discount food retailers in Britain like Wal-Mart-owned Asda and Aldi, Lidl and Netto, which have been in the case of Asda slashing prices and in the case of Aldi, Lidl and Netto operate on a no frills, hard disount format and everyday low-pricing structure.

Nick Mathiason, a business reporter and 'The Observor' columnist, for the UK Guardian, who has been covering Tesco and the other UK food and grocery retailers for sometime, writes in his column today that: "Analysts believe the UK's biggest retailer Tesco (which has a 31% share of the nation's food and grocery market) has been fighting the wrong war as it rebrands itself as the country's 'biggest discounter' in a battle to protect its dominant market share. It has also been hit by problems expanding abroad. In particular its forays into Thailand and America have not gone according to plan."

The foray into America the UK analysts are referring to of course is Fresh & Easy Neighborhood Market.

We've been watching Tesco closely all year, both in the UK, U.S. and elsewhere in the other 12 countries it has retail stores in. In terms of its UK franchise, we aren't sure the retailer has had much choice but to slash everyday prices in its stores and position itself as more of a discount-oriented chain. After all, Wal-Mart's Asda has been doing just that since late last year. Asda's efforts to lower thousands of prices, promote more heavily and up its value proposition dramatically have been a success and allowed it to take a bit of market share from Tesco and take even more from number three UK chain Sainsbury's.

Additionally, the UK's top three no frills, small-format discount grocery chains, Aldi, Lidl and Netto, have been gaining share since late last year. The volume of these three discount chains has been growing even faster since September when the financial crisis began to rear its head in the UK and U.S. The three hard discount chains combined only hold about 8% of the total UK food and grocery market, compared to Tesco's about 31%.

However, they are among the fastest growing chains in the country in terms of opening new stores, and the small-format, hard discount segment which they play in is the UK's fastest-growing retailing segment for food and grocery shoppers. Therefore they may be small-format and small market share players -- but they represent a mighty challenge to Tesco, as well as Asda, Sainsbury's and others.

The relative success of Asda, Aldi, Lidl and Netto, which has come as UK shoppers look for the lowest prices available, has demonstrated that discounting is where it appears to be at currently in the nation's food and grocery retailing industry. Our analysis is had Tesco not started slashing prices and positioning itself as more of a discount chain earlier this year, which was far later than Asda did for example, it might be reporting a negative sales number (loss) for the third quarter next week rather than the slim 1.9% increase being predicted by UK analysts.

As we've reported and written about extensively in the last few weeks, Tesco's Fresh & Easy Neighborhood Market CEO Tim Mason announced recently the Southern California branch of Tesco would slow down its new store growth in the Western USA, including postponing its launch into the Northern California market for an undetermined amount of time. The first Northern California stores were set to start opening in the first quarter of 2009.

Tesco, which operates nearly 4,000 stores in 14 countries and employees about 440,000 people, also recently announced sales at its South Korean retail stores were off considerably, and that it would slow new store growth there as well.

These two announcements, the U.S. and South Korean slowdown, are part and parcel of the overall drop in sales globally for Tesco, which it will demonstrate when it announces its third quarter sales next week.

Many of Tesco's stores in the UK and globally are Supercenters or Hypermarkets which sell lots of general merchandise -- clothing, consumer electronics and durables like furniture and household goods -- and therefore depend on the Christmas holiday season for a sales push in these categories. With most analysts predicting a poor Christmas sales season in the UK, like elsewhere throughout the world, Tesco likely will find its fourth quarter performance not much better than its third quarter.

But competitive pressure, and not just from Wal-Mart's Asda and the big three small-format, no frills discount grocers mentioned above is having a serious negative effect on Tesco. Something else seems to be in the works. For example, after struggling for most of the earlier part of this year, Sainsbury's, the UK's number three chain, reported a whopping 13% profit hike earlier this month. And Morrison, the UK's number four grocery chain in terms of market share, is expected to report a 7.2% gain in profits for its third quarter when it reports later this month, according to industry analysts.

In addition to these serious competitive challenges at home in the UK, along with stagnant sales in parts of the world like Asia, it's our analysis that continued loses and expenses at the U.S. Fresh & Easy Neighborhood Market chain are putting a drag on Tesco. Strong corporate sales growth can help a low tide like Fresh & Easy. However, with sales growth of only 1.9% for the third quarter, significant losses like Fresh & Easy continues to have becomes a much bigger overall concern.

Another concern is Tesco's share price. Shares in Tesco have dropped by 40% over the last year. Part of the dramatic drop in Tesco stock is due to a new law passed by the UK's competition commission which will restrict the number of new stores Tesco can open in the UK from next year on out.

Because Tesco is the nation's dominant food and grocery retailer -- it has an about 31% share compared to number two Asda's about 17% and number three Sainsbury's about 15%, for example -- the chain is the most affected by the new anti-competitive, anti-retail monopoly law. Both Asda and Sainsbury's essentially can open as many new stores as they previously have planned to since they have far fewer UK units than Tesco. To put it in perspective, Tesco has at least one store in every city and town in the UK, about 1,800 total in a country with not many more people than California has.

Selected Reports:

>Guardian.co.uk: Tesco posts worst figures in 16 years
>Reuters - UK: Preview-Tesco to report slowest UK growth since early 90s
>The Times - UK: Tesco hit by fears of first fall in profits for 15 years
>Guardian.co.uk: A Nightmare on the High Street as shops fall like dominoes
>Scotland on Sunday - UK: Mixed bag of results expected from supermarkets
>The Times - UK: Tesco can still deliver the goods
>Natural~Specialty Foods Memo: Retail Memo: Woolworths, An American Chain Imported to the UK and Embraced By the Brits as Their Own Dear 'Woolies' Puts its 815 Stores Up For Sale
>The Times - UK : Will anyone scoop up worthless woolies?

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

United Kingdom-based Tesco PLC, which owns and operates Southern California-based Fresh & Easy Neighborhood Market, today reported record corporate sales of £54.3 billion (British pounds) and record annual gross profits of £3 billion for its 52-week fiscal year ended on February 28, 2009.

Additionally, Tesco reported its net profit in the fiscal year ended February 28, 2009 rose to £2.16 billion (British pounds) ($3.15 billion U.S.) from £2.12 billion a year earlier.

The UK-based global retailer also said today it's new fiscal year, which began on March 1, is looking good thus far, reporting that sales are up 9.2% in the first six weeks. (See the links at the end of this piece for Tesco's detailed reporting.)

Below is what Tesco CEO Terry Leahy said about Tesco PLC's full-year sales and profit performance today:

"At a time when customers everywhere are feeling the economic strain, we are responding to their changing needs in all our markets by lowering prices, introducing more affordable products and offering even sharper promotions. These actions, combined with our core strengths - in selling food and everyday essentials, owning our own property and having a broad business base - are helping us to cope well with the effects of the downturn. We are also pleased with the early performance of Tesco Personal Finance under our ownership and with the converted Homever stores in Korea.

As a result, we have delivered a solid sales and profit performance, both in the UK and internationally, whilst continuing to invest in our long-term strategy for growth. We have made a good start to the new financial year and I am confident Tesco will continue to make good progress even in the current global economic environment."

Tesco reports £142 million loss for Fresh & Easy USA

But despite its excellent overall performance in the UK and globally, Tesco reported a higher than hoped for £142 million (British pounds) -- $208.05 million U.S. at actual exchange rates -- full-year loss for its El Segundo, California-headquartered Fresh & Easy Neighborhood Market small-format (10,000 -to- 13,000 square foot) grocery and fresh foods chain, which currently has 118 stores located in California (Southern and Bakersfield), southern Nevada and Metropolitan Phoenix, Arizona. There were 115 Fresh & Easy stortes open at fiscal year-end on February 28, 2009.

The £142 million ($208.05 million U.S.) loss widened from £62 million ($91 million U.S.) a year ago, according to Tesco.

In this story published yesterday [April 20, 2009: Tesco to Report Full-Year Financials Tomorrow; We Estimate £110-£150 Million Full-Year Loss For Fresh & Easy Neighborhood Market USA] Fresh & Easy Buzz estimated Tesco would report a loss today for Fresh & Easy of between £110 -to- £150 million (British pounds). The loss reported today was £142 million (British pounds) -- $208.05 million U.S. -- which is at the upper-range end of our estimate.

Below is what Tesco said today about its full-year Fresh & Easy Neighborhood Market financial performance:

"A segmental report on the United States is included in International in respect of the full year for the first time with these results. US sales and initial trading losses were previously reported within the UK segment. US sales were £208m in the year, including like-for-like growth of 30%, and trading losses were £142m (last year US trading losses were £62m). At constant exchange rates, trading losses were £123m, higher than our guidance provided last year, reflecting the more challenging trading environment in the Western states and our decision not to open stores in Northern California for the time being. Sales overall were lower than anticipated at the time of last year's Preliminary Results, as a consequence of our previously announced decision to maintain, rather than accelerate our rate of new store expansion during the second half given the severity of the economic downturn in some geographic markets in the Western US.

US trading losses reflect the fact that the US business - which has now been trading for 16 months - has been built with the necessary infrastructure in place from the beginning to support hundreds of stores. At this stage, it is therefore operating with high overhead and other costs in relation to the scale of the business, whilst also trading from immature stores."

[See our story here[Tesco to Report Full-Year Financials Tomorrow; We Estimate £110-£150 Million Full-Year Loss For Fresh & Easy Neighborhood Market USA] from yesterday in which we offered (the comments in italics in the piece) a few suggestions as to what Tesco would say publicly today in reporting the loss for Fresh & Easy.]

Fresh & Easy: full-year sales, loss

Fresh & Easy's £142 million (British pounds) -- $208.05 million U.S. -- full-year loss was on reported annual sales of £208 million ($305.04 million U.S.). In other words, Tesco Fresh & Easy's full-year sales of $305.4 million (U.S.) only exceded its full-year operating loss by $97 million (U.S.).

That's a sales-to-profit ratio that paints a rather grim 52-week performance record for Fresh & Easy Neighborhood Market USA.

Tesco did report that same store sales for the 115 Fresh & Easy markets opened at the end of the fiscal year rose by 30% over a year ago. That's a big positive for the grocery and fresh foods chain since as we've previously reported, one of Fresh & Easy's problems has been the fact that many of its existing stores are underperforming. However, there's no way to tell how many of the 115 stores contributed to the 30% same stores sales gain -- it could be the 50 best performing of the 115 stores, for example -- but any increase in same store sales is positive news for Fresh & Easy. It doesn't deal with the underperforming store issue though.

Tesco didn't report any additional data for Fresh & Easy, such as gross margin information, as we said in our piece yesterday would be the case, and as you can see in the chart here (scroll down to the "United States Results" headline at the link. In fact, it includes gross margin as a line item in the graph but puts not available (n/a) under the line item.

Tesco has hoped to reach break even with Fresh & Easy at the end of the current 2009-2010 fiscal year, which began on March 1, 2009. The odds of achieving that target are slim to none, in our analysis.

But Tesco PLC CEO Terry Leahy said today in the conference call announcing the retailer's full-year profit results that in such a severe economic recession "it's pointless" predicting when Fresh & Easy will break even.

"The danger is that in order to rush to break even you'd slow your ability to target long-term expansion," he added in today's conference call.

However, since food and grocery retailing has been one of the few sectors doing well to fairly well in the U.S. in the current recession, and retailers offering a discount format model like Tesco says Fresh & Easy is are doing the best in the sector, we find Tesco's putting the primary if not entire focus of the problems with Fresh & Easy on the economic recession very hard to buy, as we've said previously.

Without a doubt the economic recession is hurting retailers of all types, including grocers. But the fact is that food and grocery retailers like Wal-Mart, Aldi USA and Supervalu, Inc.'s Sav-A-Lot, all discount-oriented sellers of groceries, are doing well in the recession, as shoppers are moving to grocers that offer the most real and perceived value in the economic downturn.

Tesco touts Fresh & Easy as offering food and grocery items at up to 15% cheaper everyday than its competitors in California, Nevada and Arizona. Additionally, the grocer regularly distributes $5-off (purchases of $20 or more) and $6-off (purchases of $30 or more) deep discount store coupons (although it has cut back on these coupons dramatically since February of this year), and beginning in late February has been offering numerous loss-leader, deep-discount priced food and grocery items in its advertising fliers, which it changed to a weekly ad circular in February, from its previous once-every-three-weeks duration.

Therefore, based on this food retailing model -- low everyday prices and super hot promotional prices and the discount coupons -- wouldn't it seem that shoppers struggling with cash in the recession would beat a path to any grocery store that offers such value?

Logic and economics suggests they would.

But they aren't flocking to Fresh & Easy, nor were they before the real effects of the recession were felt in about March 2008. The current recession officially started in December 2007. But until about March 2008 consumer spending was at its previous December 2007 levels. And the full effect of the recession didn't really start being felt until the summer of 2008.

But Tesco PLC CEO and Tesco Fresh & Easy USA CEO Tim Mason have been attributing nearly all of Fresh & Easy's problems to the recession. We certainly think the recession is a contributor -- the Fresh & Easy's problems, and therefore a major contributor to its loss, are much broader than the macro economic influence of the current economic recession.

Stay tuned to Fresh & Easy Buzz for upcoming analysis on Tesco's full-year financial report today, with a particular focus on Fresh & Easy Neigborhood Market USA.

Below are links to Tesco's full reporting:

REG-Tesco PLC Final Results - Part 1

REG-Tesco PLC Final Results - Part 2

REG-Tesco PLC Final Results - Part 3

REG-Tesco PLC Final Results - Part 4

>Additional information, including a video interview with Tesco PLC CEO Terry Leahy, is available on the Tesco PLC corporate Web site here.

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