New Markets: Tesco's Fresh & Easy to Move Into Modesto, California Market; Open its First Store in the City Early Next Year

Fresh & Easy Buzz has learned Tesco's Fresh & Easy Neighborhood Market will open its first small-format, convenience-oriented grocery store in the Central Valley city of Modesto, California early next year.

The Fresh & Easy grocery market will be located in part of a building occupied until earlier this year by independent grocery store Michotti's Marketplace, which closed for lack of business, according to Tom Klein of San Francisco-based Crosspoint Realty Services, owner of the Sylvan Square shopping center where the building and future Fresh & Easy Neighborhood Market grocery store is located.

Klein says the building which formerly housed the independent supermarket is about 30,000 square feet.

Crosspoint Realty will divide the building in half, with Tesco taking about 15,000 square foot to remodel for its Fresh & Easy format. The real estate firm will lease the other 15,000 square feet of retail space to another tenant. The retail selling space for the Fresh & Easy grocery market will be about 13,000 square feet, which is about average for the chain.

The 30,000 square foot Michotti's Marketplace was the anchor retail tenant in the Sylvan Square shopping center. The center is located on the northeast corner of Coffee Road and Sylvan Avenue in the city of about 210,000 residents. Modesto is the county seat of Stanislaus County, which has a population of about 520,000.

The Sylvan Square shopping center currently has a Walgreens drug store, Ace Hardware store and a couple of restaurants in it, according to Crosspoint Realty's Klein.

Additionally, the commercial real estate firm is currently searching for a tenant for an empty 6,000 square foot building which is located between the building that will be the future home to the Fresh & Easy grocery store and the Ace Hardware store, Klein says. The building, which Klein says was home to and education-oriented supply store, has only currently become vacant, closing about a month ago.

Region experiencing economic pains

Modesto, Stanislaus County and the surrounding tri-county region, which includes San Joaquin and Merced counties, are currently experiencing difficult economic times.

The three counties have regularly been number one (Merced County), two (Stanislaus) and three (San Joaquin) in the U.S. in the number of home foreclosures nationwide, according to monthly statistics compiled by the U.S. department of Housing and Urban Development.

Home values in all three counties are 40 -to- 50% less than they were just two years ago. However, prior to about two years ago housing values soared in the region over the last decade, providing some cushion for people who were fortunate to have bought their homes 10 or more years ago. For those who bought homes in the area in the last few years though, things are tough.

Modesto and the surrounding region also has experienced a rapid growth in unemployment numbers since late last year. Stanislaus County's current unemployment rate of about 11% is nearly double the state of California's current average of about 6.3%. And, by comparison, the nearby San Francisco Bay Area, which has a much more diverse economy, is still and overall unemployment rate of about 4.6%.

The Modesto region historically has unemployment numbers that run three points or so higher than the state average do to the seasonal natural of the agricultural industry, which remains the area's number one source of economic activity, despite lots of diversification into manufacturing, services, health care and retail over the last 20 years.

Future Fresh & Easy location has interesting history

The building in Modesto's Sylvan Square Shopping Center where Tesco will open its first Fresh & Easy grocery store in the city early next year has a long history of food retailers doing business in it for years and then closing their stores for lack of business, according to a long time Modesto-based food broker and city resident who's a Fresh & Easy Buzz reader and correspondent.

In the 1970's to the 1980's the building was home to an Alpha Beta supermarket. Until the early 1990's, when it was acquired by then Salt Lake City Utah-based American Stores, Inc., Alpha Beta was a major supermarket chain in California. Albertsons, Inc. acquired American stores in the 1990's.

Albertsons, Inc. was acquired by SuperValu, Inc. and the Cerebus investment firm two years ago. Cerebus bought Albertsons' Northern California division of about 132 stores as part of the buyout deal involving SuperValu, Inc., then sold that operation to Modesto-based Save Mart., Inc.

Save Mart operates those stores under its Save Mart banner in the Central Valley and under the Lucky banner in the Bay Area. Save Mart currently operates about 255 supermarkets and warehouse stores under the Save Mart, Lucky, S-Mart and FoodMaxx banners in Northern California and the Central Valley.

The Sylvan Square Alpha Beta supermarket closed in the 1980's. A short while later a local multi-store independent, Richland Markets, took over the location and operated a Richland Market supermarket in the building for many years, according to the Modesto food broker and long time city resident.

Then, siting a lack of business at the store, Richland closed the unit in the late 1990's, he says. Michotti's Marketplace lease the location about six years ago and closed earlier this year, sighting a lack of business as its reason for doing so, according to our Modesto food broker correspondent and source.

When we told the long time Modesto resident and 30-plus year Northern California food broker Tesco's Fresh & Easy was putting a store in the now empty once again building, his response was one of caution and ambivalence.

He says the location is a tough one, evidenced by the failure of the previous grocers to make a long-term go of the site.

However, he also says because of Fresh & Easy's small-format size and limited assortment merchandising operation, they might be able to succeed in the Sylvan Center because most of the shoppers in the neighborhood have always used the various grocery stores which have operated at the location as more limited, neighborhood or convenience shopping venues, rather than as their primary grocery store.

Of course, Tesco's positioning and goal with its Fresh & Easy stores is for the markets to be primary, and to a limited degree secondary, shopping venues for neighborhood residents. Therefore, if this long-time Modesto resident, food broker, and player in the local food and grocery retailing industry is right about the nature of how neighborhood residents have historically shopped the supermarkets in the location, Fresh & Easy will have its work cut out for it in terms of gaining primary shoppers to the Sylvan Square store.

Critical mass and Tesco in Modesto

Tesco's moving into the Modesto market isn't a surprise to Fresh & Easy Buzz. As we've written often, the retailer's goal in California, Arizona and Nevada, its current three market regions, is to build a "critical mass" of Fresh & Easy grocery stores in all three regions.

In March when we reported here that Tesco will built its Northern California distribution center in Stockton, which is only 30 miles from Modesto, we said the grocer was looking for store locations in Stockton, Lodi, Galt, Manteca, Tracy and Modesto, all cities within no more than 30 minutes of each other along Highway 99, the region's major transportation artery.

As we reported here in February, Tesco will open 19 stores in the Sacramento Metropolitan region starting early next year. One of those stores is in Galt, which we mentioned above.

The retailer also will start opening the first of 18 confirmed Fresh & Easy stores in the San Francisco Bay Area in early 2009, as we first reported late last year and Tesco confirmed in this piece we published on January 30.

Modesto is about 65 miles from Sacramento straight down Highway 99. Modesto also is only about 50 miles over the Altamont Pass to the East Bay Area city of Livermore and only about 90 miles from San Francisco.

Therefore, locating Fresh & Easy stores in Modesto and eventually the surrounding area is just part of what we call the grocery chain's "critical mass" store location strategy. Think Starbucks and Walgreens and Rite Aid drug stores in terms of how they locate stores within a couple miles of one another in key markets. Tesco's strategy in its market regions with Fresh & Easy is similar, just applied to grocery stores rather than coffee shops or drug stores.

Critical mass in the neighborhood

We also have reported, although Tesco has yet to confirm, the retailer plans to build at least an initial five Fresh & Easy grocery stores in the southern Central Valley city of Bakersfield and the surrounding metro region. Bakersfield is roughly half way between Los Angeles and Modesto.

We also reported here in March, that based on information from our commercial real estate sources in the area, Fresh & Easy representatives have been looking for store locations in the Fresno region. Fresno is less than an hours drive from Bakersfield, and only about a two hour drive from Modesto.

We also know Tesco is looking for a few sites in between Fresno and Modesto, in the Merced County region.

It's all about "critical mass." The long term California strategy for Tesco is to have stores throughout the state, about 1.5 -to- 2 miles apart, so the grocery chain can it hopes become sort of the de facto neighborhood grocery store for the states residents and grocery shoppers.

Longer term plans call for opening stores in the far north of California (thus far the farthest north stores confirmed are in the Sacramento region and the city of Napa), moving right in to Oregon and then Washington state.

Those plans have been put off a bit by Tesco for a few reasons: they've discovered just how hard it is to open a new store every three days in the U.S., Fresh & Easy store performance has been less than the retailer hoped it would be thus far, and the recessionary U.S. economy has made the British grocery chain more cautious than it was when it embarked on its Fresh & Easy venture, which at that time found the U.S. economy was doing well compared to its present state.

Modesto famous

Modesto is famous in agriculture, business and wine circles as being the home of the World's second-largest winery, 75 year old, family-owned E.J Gallo Winery, which has its corporate headquarters in the city.

Modesto also is the corporate home to Save Mart, Inc. one of the largest privately-owned supermarket chains in the U.S., with about $6 billion in annual sales and about 25,000 employees.

Save Mart and Gallo are Modesto's top two corporate employers, as well as being the leading philanthropic corporate citizens in the city and region.

For example, the city's brand new performing arts center which opened earlier this year is named the Gallo Center for the Arts. The Gallo family donated in the neighborhood of $15 -to- $20 million dollars towards building and having the state of the art performing arts facility named after them. The facility cost much more than the amount of the Gallo donation to built but the family were the single-largest donors and catalysts behind the project.

Gallo also gives money to every imaginable charity in the region, from feeding the hungry and supporting dozens of local charities, to funding medical research and providing college scholarships to high school students in need.

Save Mart, which was founded in Modesto over half a century ago, operates seven Save mart banner supermarkets and one FoodMaxx warehouse store in its home town, along with having stores in nearly every nearby city and town.

In addition to being one of Modesto's top two employers, Save Mart also is along with Gallo the cities other top philanthropist and supporter of community events and causes.

For example, this weekend one of Modesto's biggest events, the California Invitational Relays, is taking place at Modesto Junior College, the city's and region's community college campus. Save Mart not only is the main sponsor of the world renown track and field event, which is a qualifying stop for the upcoming Olympic Games, it was the local supermarket chain that stepped in and took over sponsorship of the event in the mid 1990's when it looked like its organizers would have to stop holding the annual track and field competition for lack of money.

Over the years under Save Mart's sponsorship, the event has become much more than a world renown track and field competition. Save Mart has brought major vendors/suppliers like Coca-Cola and the Kingsford Charcoal Briquets (Clorox Co.) and Budweiser Beer (Anheuser Busch) brands, along with numerous others, in as co-sponsors of the event.

This weekend, along with the world-class track and field competition, there's a nationally sanctioned BBQ grilling competition drawing world-class competitors from throughout the U.S., a parents' and kids' fun run event, a food fair, and other activities as part of the event, all coordinated by Save Mart. Further, all of the proceeds from the event go to the grocery chain's Save Mart Cares charity, and are used to support local community groups and organizations.

Through its charitable arm, Save Mart also donates millions of dollars each year to numerous groups and non-profit organizations in the region.

The retailer's annual United Way employee campaign also is the top corporate-producing one for the Modesto region's United Way office. Additionally, among its numerous charitable activities, Save Mart holds regular food drives in its stores for the region's food banks, and often matches the amount of food and grocery products its customers donate at the end of each in-store food drive.

These activities are just the tip of the iceberg in terms of the locally-based supermarket chain's charitable contributions.

Modesto also is the hometown of movie director and producer George Lucas, who now lives in the San Francisco Bay Area where his Lucasfilm empire is based. Lucas', who was born and raised in Modesto and still has family living in the city, based his iconic 1973 hit movie American Graffiti on his teenage years growing up in Modesto, where "Cruising McHenry Avenue" was the hip and cool thing to do.

Modesto infamous

Modesto also has an infamous side. Most recently, the city received worldwide attention as the place where a fertilizer salesman named Scott Peterson, who maintains he is innocent to this day as he sits on California's death row, was convicted of murdering his pregnant wife Laci Peterson.

Not too long before the Peterson case, Modesto was in the news on another infamous note because of a missing intern named Chandra Levy , who disappeared while working at a governmental internship in Washington D.C. Her remains were found and identified in 2002.

Part of the reason the case received such widespread publicity is because the Modesto region's popular at the time U.S. Congressman Gary Condit was found to be having an affair with Ms. Levy, right up until she disappeared from her Washington D.C. apartment. Condit lost his Congressional seat from the Modesto region over the affair, when a former supporter of his ran against him and won in the election following the news of his affair with the missing intern.

A growing city and region

Over the last 25 -to- 30 years, Modesto has grown from a small, primarily farm economy-oriented town of about 80,000 residents to a big central city of well over 200,000. Much of that growth is the result of San Francisco Bay Area residents who've moved to the city and surrounding region because housing costs are nearly 50% cheaper than in the Bay Area. Many of these residents commute to their jobs in the Bay Area daily.

The tri-county area--San Joaquin, Stanislaus and Merced counties--today have a population of about 1.4 million residents. The nearby nine-county Bay Area has nearly 7 million residents.

Combined, the two markets with over 8 million people, offer a food retailer the opportunity to sell lots of groceries. Both markets are very competitive food and grocery retailing markets as well, with respective healthy chain and independent food retailing sectors.