Kroger-Owned Fry's Store Coupon Jujitsu Ensnares Tesco-Owned Fresh & Easy Neighborhood Market in Arizona

Analysis

We've written extensively about Fresh & Easy Neighborhood Market's chronic use of its 25%-off (pictured above) and 20%-off deep-discount store coupons as a way to create and maintain sales in its 155 stores in California, Nevada and Arizona. [Click: here, here and here for a selection of those past stories.]

As a current example of that chronic use, the Tesco-owned grocer currently has three versions of the 25%-off and 20%-off store coupons in distribution - one good for $5-off purchases of $20 or more (expires on November 30); another good for $6-off purchases of $30 or more (good until November 22); and a third offering $10-off purchases of $50 or greater (expires on November 22). The coupons are available online, which means shoppers can download the discount vouchers and use one each time they shop at a Fresh & Easy store in November.

The thrust of our writing about the Fresh & Easy store coupons, which give customers a full 20%-25%-off their total purchase amount if they buy the minimum amount required to redeem the coupons, has been three-fold.

Price perception: First, we've suggested that by chronically using the store coupons - Fresh & Easy has used them regularly with only a couple slight pauses since November 2007 when its first stores opened - the grocer has established to its detriment a retail pricing policy and related shopper perception that says because Fresh & Easy nearly always has the coupons in circulation, the everyday prices at the stores are too high. But with the coupons the prices are low.

We believe on some level Fresh & Easy's senior management has learned this to be true because when it attempts to stop issuing the store coupons for more than a few weeks at a time, store sales drop considerably. Additionally, customers complain about the lack of coupons on Fresh & Easy Neighborhood Market's Facebook and Twitter sites, saying that without the store coupons being available they will be doing far less shopping at the stores.

For example, at one point in 2009 Fresh & Easy stopped issuing the store coupons for nearly two months, the longest period it hasn't had at least one version of the discount vouchers in circulation. As a result, sales at the stores dropped significantly, and customer complaints went through the social media site roof. The result: Fresh & Easy Neighborhood Market started issuing the store coupons again regularly, and hasn't stopped doing so since then. [See - May 20, 2009: Breaking Buzz: Tesco's Fresh & Easy Issues Another New Discount Store Coupon ($10-off $50 Though); We Told You the Coupons Would 'Be Back.' Also - May 1, 2009: Fresh & Easy Brings Back $6-Off Deep-Discount Store Coupon; Latest Version Good For Nearly One Month; New Promo Strategy Didn't Last Long; and May 7, 2009: 'They're Back' in Full-Force: Tesco's Fresh & Easy Adds New $6-Off Online Coupon to Just-Recently Direct-Mailed $6-Off Coupon; Tough to 'Terminate.']

Fresh & Easy's senior management has compounded this problem by refusing to accept manufacturers' cents-off coupons in the stores, saying publicly in its marketing communications that the reason it doesn't accept the coupons is because its everyday prices are already low.

This argument doesn't hold water though because if that were the case, then why would Fresh & Easy need to regularly issue the deep-discount store coupons, which offer a far-higher percentage discount than manufacturers' cents-off coupons do? The Fresh & Easy-issued store coupons are a discount off a shopper's entire purchase, while manufactures' coupons are a discount off a single item. Grocer's get reimbursed by the manufacturers for the item coupons, while the discount from Fresh & Easy's store coupons comes out of the grocer's profit margin, which leads to our second argument as to why the chronic use of the store coupons has become a trap for Tesco's Fresh & Easy Neighborhood Market.

Gross Margin: In October Tesco reported its Fresh & Easy chain has a negative-38% gross margin. To put that in perspective, most healthy grocers have a gross margin that's at least in the plus-20% level. In order for Fresh & Easy Neighborhood Market to break-even by the end of 2013, as Tesco says it will, the grocer has to get its gross margin up from the current negative-38% to something at least close to what a healthy grocer produces in order to make a profit. Doing so is a huge task for Tesco.

In our analysis, one of the key contributors, but far from the only one, to Fresh & Easy's negative- 38% gross margin is the chain's chronic use of the deep-discount store coupons, which as mentioned earlier reduce a shopper's total market basket of purchases by a whopping 20% if the customer buys the minimum dollar amount - the $30 minimum purchase to get the $6 off, for example. Even if a customer buys $60 worth of groceries and gets the $6-off, that's still a 10% bite out of the market basket - $54 instead of $60 for the hypothetical purchase.

Since the store coupons are in distribution nearly always, and since shoppers use the coupons so often, Fresh & Easy is taking constant hits to its margins simply by virtue of having established the store coupons as a regular feature of how it does business. (This goes hand-in-hand with having created the price-perception in the minds of customers, which we detailed above.)

A vulnerable promotional tool: Lastly, we've suggested that in addition to the two key factors outlined above, the chronic use of the deep-discount store coupons by Tesco's Fresh & Easy - rather than using them as an infrequent (once a quarter or so) promotional tool as is the industry norm - is such a simplistic form of promotion that it presents an opportunity for competitors in a given market, particularly big ones with high market share, to make a defensive move, accepting the Fresh & Easy coupons in their respective stores, therefore rendering what has become Fresh & Easy's primary promotional tool, the deep-discount coupons, a seriously blunted one.

Fry's store coupon Jujitsu

Last year in Arizona, where Tesco's Fresh & Easy has 28 stores in the Phoenix metropolitan region, Kroger-owned Fry's Supermarkets did just that - it periodically excepted the Fresh & Easy Neighborhood Market store coupons in its 120 Arizona stores, as we wrote about in this February 2009 piece - February 3, 2009 Competitor News: 'Grocer-Gone-Wild:' Arizona's Fry's and its 'Bring it On' 'Take All Competitors' (Including Tesco's Fresh & Easy) Store Coupon Move.

Fry's did a handful of one-week promotions in 2009, in which it accepted the Fresh & Easy store coupons, along with those of all its other competitors, touting the move in its weekly advertising circular and in other forms of media advertising and promotion.

The direct or default target of Fry's in accepting the store coupons was Tesco's Fresh & Easy, since none of the other grocery chains in the market issue similar store coupons on a regular basis. (A couple do so on occasion.) In the promotion, Fry's also offered to round-up all manufacturers' cents-off coupons to a $1 value, regardless of the coupon's face value.

Fry's offered the deal a couple times early this year, once again. But beginning mid-year, the supermarket chain, which is the number two market share leader in metropolitan Phoenix, just a couple points behind Walmart Stores, went full-bore, offering to accept all competitors store coupons, along with offering the $1 value for all manufacturers' cents off coupons, nearly every week. Fry's has continued the promotion nearly every week, including at present, during the last half of 2010.

Since Fry's only accepted the store coupons of its competitors infrequently last year, the resulting loss of sales at the Fresh & Easy stores that can be attributed directly to the Fry's defensive move in 2009 wasn't all that significant or regular.

However, that's changed. Because Fry's has been taking its competitors' (which means primarily Fresh & Easy since it's the only grocer in the market regularly distributing such coupons) store coupons nearly every week since the middle of this year, numerous customers who normally shopped at Fresh & Easy because of the coupons have been and are now taking the deep-discount vouchers to Fry's, which has resulted in a significant blunting of what is Fresh & Easy Neighborhood Market's primary offensive promotional tool - the deep-discount store coupons.

We know this to be the case for a couple reasons. First, Fresh & Easy Buzz has talked to managers and grocery checkers at over 25 Fry's stores in metro Phoenix since the middle of this year. The store workers tell us their tills are overflowing with Fresh & Easy store coupons, which are being redeemed by shoppers who download the discount slips of paper from the Fresh & Easy site, print them out, but then use the coupons at a Fry's store instead of at a Fresh & Easy market.

Additionally, because of the regular acceptance of the Fresh & Easy store coupons at Fry's this year, Arizona's numerous grocery deal and coupon blogs have been recommending to their readers that instead of using the vouchers at a Fresh & Easy store, they instead use them at Fry's, in large part because Fry's runs its $1 value manufacturers' cents-off coupon promotion at the same time. Fry's lets shoppers first deduct the Fresh & Easy coupon from their total grocery purchase amount before then deducting the manufacturers' item coupons, which means even greater savings, which is what the Arizona blog sites are all about. [For some examples of what the numerous popular Arizona consumer coupon/grocery deal blogs are saying about using the Fresh & Easy store coupons at Fry's, take a look: here, here, here, here and here.]

Here's an example of the savings shoppers can get using both the Fresh & Easy store coupon and the $1 value manufacturers' coupons at Fry's: A customer buys $50 worth of groceries. She then uses the $10-off $50 Fresh & Easy coupon, bringing her grocery order to $40. She then can use her manufacturers' cents off coupons against the $40 total. Remember all of the coupons at Fry's are worth $1, regardless of their face value. Therefore, let's assume she has $10 worth of the single-item manufacturers' coupons, each worth $1 at Fry's. As a result, her original $50 purchase, reduced to $40 after using the Fresh & Easy $10 coupon, is now a mere $30, a whopping savings of $20.

Without a doubt the loss on profit for Fry's on these transactions is significant. Fry's eats the $10 discount from the Fresh & Easy coupon, plus the amount from each manufacturers' cents off coupon over the face value. For example, giving $1 off on a 50-cent item coupon results in a loss on the amount of 50% for Fry's. The manufacturer only reimburses the grocer for the face value amount of the coupon plus a small handling charge.

However, because Fry's is a close second to Walmart in market share in the region, and because Kroger wants to protect its turf, along with the fact that Fry's is a small (but important) piece of Kroger's overall revenue base, it's decided it can take the hit in order to protect and it hopes grow that market share, despite what will obviously be a negative effect on the Fry's bottom line. Think of it as Fry's version of Jujitsu applied to a competitors promotional program, in this case Fresh & Easy's store coupons, which to date has been its most important promotional tool in terms of generating sales, and therefore its most vulnerable one.

Additionally, the point of this analysis isn't how accepting the competitor store coupons will affect Fry's bottom line. Rather, it's to empirically demonstrate the trap Tesco's Fresh & Easy finds itself in, regardless if it knows it or not, in terms of the vulnerability of its chief promotional tool, the deep-discount store coupons.

Broader implications of Fresh & Easy's store coupon trap

For example, if Fry's can accept the Fresh & Easy store coupons in Arizona, so can Kroger-owned Ralphs, Safeway's Vons or Albertsons in Southern California.

Further, in Northern California, where Fresh & Easy plans to open its first batch of stores in early 2011, one or more competitors could decide to follow the Fry's model and as a preemptive strike against Tesco's Fresh & Easy Neighborhood Market announce a couple weeks before the first stores open - or even worse start accepting the coupons a couple weeks before the stores even open, doing an old fashion competitor pantry-loading scheme - that it will accept the Fresh & Easy store coupons in its stores for a month, or two, or three, for example. Doing so would likely significantly hurt sales, something no grocer particularly wants to happen when it's just entering a market for the first time.

One might suggest the fact Fry's is accepting the store coupons is a good thing for Fresh & Easy, since we argue the discount vouchers are a key contributor to its double-digit negative gross margin. But also recall we argue that without the coupons, sales at the Fresh & Easy stores drop like a ton of 10 pound Gold Medal Flour bags, which is why the grocer continues to issue them on a regular and even overlapping basis, as is the case this month. In other words, It's a store coupon "Catch-22" for Tesco's Fresh & Easy in our analysis: Can't live with the coupons, can't live without them.

If our analysis is wrong, then the simple thing would be for Fresh & Easy to stop issuing the store coupons, at least in the Arizona market. After all, if it's true the reason the grocery chain doesn't accept manufacturers' cents-off coupons is because its everyday prices are already low, which Fresh & Easy executives have said is the case, then the same argument should hold for not issuing its own discount coupons, which lower a shopper's total purchase amount (and Fresh & Easy's margin) far more than even a big stack of manufacturers' cents-off coupons do.

But that's far from being the case in everyday practice, as we've noted in Fresh & Easy Buzz for nearly three years. Additionally, the fact Fresh & Easy has three different versions of the store coupons in distribution this month is ample evidence the grocer needs the coupons in order to maintain sales at the present level. If not, it would use the coupons much more cautiously.

From a merchandising perspective, Fresh & Easy has created a serious price perception problem for itself in the minds of customers with the chronic use of the store coupons. Based on our research and analysis, many of the grocer's regular customers factor-in the discount from the coupon as the de rigueur price they should pay for their purchases at Fresh & Easy. Take the coupons away for any extended period of time and those shoppers will likely adjust that mental calculus, perceiving the non-coupon cost of shopping at Fresh & Easy to be too high, compared to some of its competitors. That's what experience has shown thus far, based on our research and analysis.

Added struggle in Arizona

Ironically, we don't think Fry's acceptance of the store coupons is directly aimed at Fresh & Easy, at least not from the perspective that Kroger thinks the Tesco-owned chain is a direct threat in metropolitan Phoenix. After all, Fresh & Easy isn't even among the top six-seven grocers in terms of market share in the region. But Fresh & Easy is owned by Tesco, which is the third-largest food and grocery retailer in the world. And that fact might just be good enough for Kroger Co. to want to make sure Tesco has a very difficult time gaining any sort of foothold in Arizona with Fresh & Easy, along with letting it know that attempting to do so will come at a significant cost.

Tesco's Fresh & Easy recently closed six stores in metropolitan Phoenix, leaving it with the current 28 units, down from 34. Additionally, the grocer plans to focus its new store openings in 2011 primarily in California, as we've previously reported. It will likely open a handful of new stores in Arizona next year.

Tesco's 28 Fresh & Easy stores in metro Phoenix have been struggling overall in terms of sales before the pressure from Fry's defensive store coupon acceptance move. The fact that Fry's is taking the Fresh & Easy store coupons during the crucial Thanksgiving holiday season - we're told it will continue to do so for Christmas as well - is exerting even more pressure on Fresh & Easy Neighborhood Market's Arizona operations.

And since metropolitan Phoenix is arguably the most competitive food and grocery retailing market in the U.S., or close to it, and it's only getting more competitive, the outlook for Tesco's Fresh & Easy in the region is a fairly poor one at present. The fact Fry's is blunting Fresh & Easy's most-popular promotional tool, its deep-discount store coupons, makes Tesco's struggle in the market an even more challenging one.

[Editor's Note: This is part one of a two-part analysis piece. In part two we will offer some ways in which Tesco's Fresh & Easy may be able to escape from the chronic store coupon trap it appears to have set for itself.]

Winco Foods is 'Moving Fast-Forward' With Metro Phoenix, Arizona Market Entry

Metro Phoenix, Arizona Market Report

News & Analysis

In this piece last week on April 27 - WinCo Foods' Entry Will Put the 'Ultra' in the Already 'Hyper-Competitive' Metro Phoenix, Arizona Market - we wrote this (in italics below), about Idaho-Based Winco Foods and the Metro Phoenix, Arizona market:

"We know (although they haven't confirmed it) that WinCo Foods is looking at multiple sites for stores in Metro Phoenix, and may already have decided on at least two additional locations, based on information from our sources. As a result, even if the neighborhood group is successful in getting the project killed when the Glendale City Council votes on it next month, the setback isn't going to stop Winco from entering the Metro Phoenix, Arizona market, with its mega-food and grocery stores."

In the piece we also noted the Arizona Republic newspaper reported that day on one for sure planned WinCo store site in Glendale, Arizona, a Phoenix suburb.

Today, Arizona commercial real estate executive Ed Beeh, the executive vice president of SRS Real Estate Partners in Phoenix, which is representing Winco Foods in the market, went on the record with the Phoenix Business Journal, sharing with the publication a second (in addition to the one reported on by the Arizona Republic, mentioned in our April 27 story) specific proposed Winco store location. [The Phoenix Business Journal story.]

Beeh told the publication WinCo Foods has purchased a former Walmart site near Seventh Avenue and Bell Road in north Phoenix for one of its 90,000 -to- 1000,00 square foot discount mega-supermarkets. He didn't provide any additional information about that location though - or mention any others. (This is one of the two additional but not specifically named locations mentioned in our April 27 post.)

However, Greg Laing, a commercial real estate executive in Metro Phoenix, who's firm Phoenix Commercial Advisors represents the Arizona-based Sprouts Farmers Market grocery chain, told the publication he believes WinCo also has contracts on store sites at the southeast corner of Alma School Road and the San Tan Freeway in Chandler, and at the northwest corner of Pecos Road and the San Tan in Gilbert. Fresh & Easy Buzz knows Laing to be a straight-shooter in Arizona commercial real estate circles. Therefore, we put stock in what he is saying.

Both Chandler and Gilbert are in Metro Phoenix.

Tesco's Fresh & Easy Neighborhood Market has stores in both Chandler and Gilbert , as well as in Phoenix.

All of this information tracks with what we started hearing from sources - and have been reporting, first on our twitter.com feed early this year, and more recently on the blog: That Winco Foods has made a major commitment to the Metropolitan Phoenix, Arizona market, and plans to open multiple stores in the region.

As we've also noted, Winco is looking for numerous store sites in the market region. And by numerous, we mean additional future locations beyond those mentioned thus far. (It takes Winco some time, like it does Walmart, to build one of its mega stores.)

As we said in our April 27 piece, Winco Foods will be a game changer in Metro Phoenix once it has a number of stores up and running, particularly in the discount segment, but also overall in food and grocery retailing.

Winco also poses an interesting competitive challenge in the market to Walmart. In the food and grocery retail categories, the two chains have very similar positioning, merchandising and pricing strategies and policies.

Like Walmart, Winco is an everyday-low-price, rather than a high-low, operator.

In the various Western U.S. markets where Winco and Walmart compete, the Idaho-based, employee-owned chain regularly does market basket price comparisons against its competitors, including Walmart, and then publishes the results, claiming to beat the brawny big box retailer from Bentonville every time.

WinCo Foods, which bills itself as "The Supermarket Low Price Leader," opened three new stores today - two units in the Utah cities of Ogden and Orem, and one in Sumner, Washington.

Walmart is the market share leader in Metro Phoenix and all of Arizona, however. And Winco will have its competitive legs challenged by the mega-chain in the market.

WinCo Foods also will be challenged by Kroger's Fry's (number two market share in Metro Phoenix) and Safeway (third) particularly, but also the numerous other food and grocery retailers with stores in Metro Phoenix, like Target, Costco, Walmart's Sam's Club, Bashas' and a host of others, including Tesco's Fresh & Easy, which has been putting a focus on price and value since late 2008-early 2009, to the present.

Most of these grocers already compete with WinCo Foods in one of the six western states - Washington, Idaho, California, Nevada, Oregon and Utah - where the supermarket chain has its current 74 stores. So they have a good idea what's coming. And you can bet they're concerned - and worried.

Linkage - Related Posts:

April 27, 2010: WinCo Foods' Entry Will Put the 'Ultra' in the Already 'Hyper-Competitive' Metro Phoenix, Arizona Market

December 29, 2008: Competor News: Winco Foods to Expand in California and Nevada in 2009; Put Aggressive Focus on Central Valley, Northern California and Northern Nevada.]

WinCo Foods' Entry Will Put the 'Ultra' in the Already 'Hyper-Competitive' Metro Phoenix, Arizona Market

Metropolitan Phoenix, Arizona Market Report: Analysis & Commentary

Early this year we posted a "tweet" on our Twitter.com site, in which we predicted Idaho-based grocery chain WinCo Foods was planning to enter the Arizona market, starting with a few stores - the first opening likely in 2011 - in the Metropolitan Phoenix market region.

Our knowledge came as the result of information we first started receiving from sources in December 2009 that WinCo had set its sights on the hyper-competitive Metro Phoenix market.

Additionally, before posting our tweet, we checked in with a source at WinCo Foods via e-mail. And although the source said they couldn't "confirm" WinCo was "planning" to open one or more stores in the region, they said they could tell us "WinCo is very interested in getting into the Arizona market," which is about as good of a non-confirmation, confirmation as you can get.

Glendale bound

Today, the Arizona Republic offers about as good of a non-WinCo Foods' spokesperson confirmation as a publication can get, in a story by staff writer Rebekah L. Sanders.

In the story, "Plan to put grocer at Glendale farm site irks neighbors," Ms. Sanders reports that a group of neighborhood residents in a semi-rural part of the Phoenix suburb of Glendale, Arizona, are objecting to a developer, and WinCo Foods', plans to locate one of the big (average 90,000 -to- 100,000 square foot) WinCo discount food and grocery stores on a vacant plot of land where the developer is planning a shopping center featuring the supermarket, four medium sized retail buildings, and 13 smaller shops. [Click here to read the Arizona Republic story.]

The project-area near Glendale is set to become a food and grocery retailing hot corner.

For example, Walmart is building a new (40,000 -to- 45,000 square foot) Neighborhood Market supermarket about one mile away.

Additionally, the CVS drug chain is building a new store nearby. CVS sells a fairly healthy selection of packaged food and grocery products, beverages (adult and non-adult) and perishables items in its drug stores. It also devotes about half of its weekly 12-page advertising circular to the promotion of consumables and non-foods packaged goods.

Evaluating the odds

Winco could be in for a fight from the neighborhood group in terms of gaining approval for its first Metro Phoenix store in Glendale, although the two members of the City Council, who's districts border the planned center, support the project, according to the Arizona Republic story. A similar group of neighborhood residents was successful in preventing retailer Target from building a 100,000-plus square foot store in the area a few years ago.

However, this was before Arizona's economy went into free-fall in 2008. With unemployment in the area at about 10%, it's going to be difficult for the City Council to say no to the project, particularly since WinCo employs about 300-400 workers in a single store. Those are 300 badly needed new jobs in the Glendale area. The odds: We put our money on approval by the council, perhaps with some minor changes to the current plan for the center.

What we know

We know (although they haven't confirmed it) that WinCo Foods is looking at multiple sites for stores in Metro Phoenix, and may already have decided on at least two additional locations, based on information from our sources. As a result, even if the neighborhood group is successful in getting the project killed when the Glendale City Council votes on it next month, the setback isn't going to stop Winco from entering the Metro Phoenix, Arizona market, with its mega-food and grocery stores.

WinCo Foods is a majority employee-owned company. In fact, just last week WinCo said it bought out the 10% of the company - the only part of Winco Foods owned by an outside investor - held by Seattle, Washington-based investment firm Endeavour Capital Management. WinCo said its employees now own 87% of the company, through its ESOP (employee stock ownership plan). The remaining 12% is privately-held by WinCo Foods under a different ownership structure.

WinCo is non-union, and since it's majority employee-owned - and the employee-owners have said no to being unionized more than once - we doubt that status will change in the foreseeable future, if ever, even though the United Food And Commercial Workers union (UFCW) has been trying to organize the owner-employees for many years.

WinCo puts the 'ultra' in 'hyper-competitive'

Metropolitan Phoenix, Arizona is arguably the most competitive food and grocery retailing market in the U.S. In our analysis it's not arguable.

WinCo Foods, which has 71 stores located in six western states - Washington, Idaho, California, Nevada, Oregon and Utah, and has opened about eight new mega-stores in the last 15 months - is one of the most competitive food and grocery retailing chains in the United States, particularly in the price-impact segment.

It's stores, which devote the majority of the 90,000 -to- 100,000 square feet to consumable and non-foods packaged goods - but not electronics, clothing and other general merchandise like Walmart and Target do in their mega-stores - are also destination markets, meaning that on average customers will come from many miles away to shop at them. This is one of the reasons why, with just 71 stores, WinCo has estimated annual sales of $4-$4.5 billion.

Once it gets just a handful of stores opened in Metropolitan Phoenix, we predict WinCo will begin to become a game-changer in the market. It will not only take sales from nearby - and not so nearby - Walmart Supercenters and Neighborhood Market supermarkets, but also from conventional supermarket chains like Kroger's Fry's, Safeway, Albertsons, Bashas', and even Tesco's Fresh & Easy and other grocers in the market.

This isn't to say Arizona and Metro Phoenix - and particularly market share leader Walmart -will be by any means be easy pickings for WinCo Foods.

And in terms of putting market share numbers up on the board, it will take numerous WinCo stores open and operating in the market before that can happen. Rather, in our analysis, WinCo will find, once it opens in the region, that the Metropolitan Phoenix food and grocery retailing market will be the most competitive - actually hyper-competitive - of all the markets it's in to date.

Let the fireworks begin. Stay tuned.

[Related story - December 29, 2008: Competor News: Winco Foods to Expand in California and Nevada in 2009; Put Aggressive Focus on Central Valley, Northern California and Northern Nevada.]

[Competitive related posts here. Past reports & analysis of the hyper-competitive Metro Phoenix, Arizona market here, here and here . Click the "older posts," "new posts" links at the bottom of each page at those above links as well.]

Competitor News & Market Analysis: The Arizona Market Food Retailing 'Canary' Sings Again; Kroger Co.-owned Fry's Supermarkets Lays Off 90 Employees

Arizona Market Region Report: Food & Grocery Retailing in the Recession

Back in June, 2008, Fresh & Easy Buzz suggested in this piece [Arizona Region Market Report: First Signs of A Weakening Might Be Starting to Show in the 'White-Hot,' 'Super-Competitive' Arizona Market] that we were seeing the first signs of possible food and grocery retailer layoffs and potential store closings in Arizona with the announcement by Arizona-based Bashas' that it was firing numerous employees at its corporate headquarters.

Last month, the recession and related white hot competition in Arizona struck Bashas' again in the form of more layoffs and the closing of five if its Arizona stores, as we reported on in this February 6, 2009 piece: Arizona Market Region Analysis: Bashas' Worker Layoffs, Closing of Stores Could be the 'Canary in the Coal Mine' in Ultra-Competitive Arizona Market.

Well that food retailing canary made itself heard again just two weeks ago in Arizona. The Kroger Co.-owned 120-store Fry's supermarket chain in the state fired about 90 workers, according to Joe Ellen Lynn, Fry's corporate spokesperson. The layoffs were first reported by the Arizona Republic newspaper on March 13. We varified it with Fry's and other sources.

Fry's employees about 18,000 workers in Arizona, according to the chain.

The Fry's employees appear to have been all from the chain's corporate headquarters because United Food & Commercial Workers union Local 99, which represents Fry's store-level workers in Arizona, says none of its members who work for the supermarket chain have been laid off to date.

Headquarters staff and some other exempt employee positions such as regional field reps and the like are non-union positions.

Retailers, particularly supermarket chains, and especially unionized chains, almost always terminate headquarters and non-direct store-level employees as a first cost-cutting step when such reductions are needed or desired by senior management.

Based on our research, this appears to be what Fry's has done.

Arizona is struggling in the current recession. Unemployment is fast-growing. Residential real estate activity has come to virtually a complete halt. And commercial real estate activity, which was booming just a little over a year ago, is down dramatically.

Arizona also is one of the most competitive food and grocery retailing markets in the U.S., as we've frequently mentioned in Fresh & Easy Buzz.

Mix these two conditions together, the recession and white hot competitive food retailing climate in the state, and something has got to give, an argument we started making about one year ago.

We've seen this give first with Bashas' and now with Fry's.

Additionally, Tesco's Fresh & Easy Neighborhood Market has slowed the opening of a number of new stores in Arizona.

Safeway Stores, Inc. basically isn't planning any new stores in the state beyond those it might already have in the pipeline.

Fry's and Albertsons also are pretty steady-state in terms of new store plans at present in Arizona.

Wal-Mart though remains pretty much on schedule in terms of continuing to open new stores in the state, particularly its combined food and general merchandise mega-Supercenters.

That strategy is paying off for Wal-Mart in the food and grocery sector. The retailer has now grown its way to becoming the number one food-grocery sales market share leader overall in Arizona, but just by a couple hairs, which demonstrates the state's super-competitive market.

Wal-Mart is currently number one with a 24% market share, according to recently published research. Kroger's Fry's is right behind Wal-Mart, with an about 21.5% share. Safeway is third with about 18.5%. And Bashas' is neck-to-neck with Safeway, with Albertsons right in the game. It's the market share version of a win-by-the-neck horse race, in other words.

We first started suggesting slightly over a year ago that the Arizona market, particulary the Phoenix Metropolitan region market where Tesco's Fresh & Easy Neighborhood market has its grocery and fresh foods stores, was getting close to beign overstored. In mid-2008 we began suggesting Arizona was overstored, particulary adding the economic recession into the equation.

It's our analysis that the Bashas' and Fry's layoffs are the result of this retail saturation in the state. The economic recession, which is hitting Arizona like a hammer, is an added factor.

It's likely that if economic times were better, the Bashas' and Fry's layoffs could have been avoided -- maybe. But economic prosperity is never a constant. Therefore, overstoring must always be analyzed based on the economy being an independent rather than dependent variable. Independent variables are those subject to change. Dependent variables are constants.
It's our further analysis that more cutbacks will come among grocers in Arizona. We likely not only will see additional layoffs. but we suspect to see more store closings as well.

For example, Tesco's Fresh & Easy is bleeding cash. The question is how long the grocer is willing to do so. Right now we don't think openingadditional stores in Arizona will do much of anything to solve that situation. Same store sales growth is what's needed.

But since Tesco is moving to a much more price and promotional-focused and value proposition-oriented positioning of its Fresh & Easy stores, it's also at the same time becoming a stronger competitor to the major players like Wal-Mart, Fry's, Safeway, Bashas and Albertsons, as shoppers search all over for good deals. [Read our March 2, 2009 piece here: Fresh & Easy Buzz Redux: Much of the Value Proposition-Based Analysis and Suggestions We've Been Offering Now Being Adopted By Tesco's Fresh & Easy.] That value proposition-based positioning, if done fully and comprehensively, also might be what helps Tesco's Fresh & Easy to bleed far less cash over time.

In Fry's case, its parent company Kroger Co., just reported a solid 8% income gain in its latest quarter just ended two weeks ago.

But Fry's is facing serious competition, as all the others are in Arizona, despite its parent company doing well. This should be another indication about what we mean when we call the Arizona market a white hot one.

As such, we expect to see more shoes drop in the food and grocery retailing sector in Arizona between now and this summer. The recession isn't improving, and even the most optimistic forecast calls for only seeing some demonstrable improvement in the overall U.S. economy by the end of this year. (And remember, Arizona is one of the hardest hit states.)

At the same time, the competition is heating up even more so in the Arizona market region, particularly from an everyday price and price-promotional perspective. When this type of competition in a near or already overstored market happens like it is, something has to give among one or more of the players.

Linkage - Select Related Posts:

>April 1, 2009: Competitor News: Bashas' Chain Launching 10,000-Plus Item Storewide Price Slashing Program This Week in its Arizona Supermarkets

>February 3, 2009: Competitor News: 'Grocer-Gone-Wild:' Arizona's Fry's and its 'Bring it On' 'Take All Competitors' (Including Tesco's Fresh & Easy) Store Coupon Move

February 12, 2009: Consumer Use of Manufacturers' 'Cents Off' Coupons Continues to Grow: The Latest American Rage: Home Coupon-Clipping and Coupon-Trading Parties

>March 19, 2009: Ground Control to Shopper: Point-of-Purchase-Based Mobile Couponing the Next Hot Ticket; Kroger Co. Leading the Food Retailing Pack

>December 16, 2008: Food & Grocery Retailing in the Recession: Bashas' Broadening the Shopper-Base in its Hispanic Format Food City Stores; Shoppers Search for Value

>March 11, 2009: Fresh & Easy Buzz Redux: Tesco's Fresh & Easy Changes its Promotional Advertising Flyer to 'Weekly;' Something We've Been Suggesting For About A Year

>February 6, 2009: Arizona Market Region Analysis: Bashas' Worker Layoffs, Closing of Stores Could be the 'Canary in the Coal Mine' in Ultra-Competitive Arizona Market

>December 12, 2008: Fresh & Easy Looking For Gold in Gilbert: Second Store in the Arizona City Set to Open Jan. 7; A Third Fresh & Easy Market to Open In Fall, 2009

>December 12, 2008: Marketing & Promotions Report: Manufacturers' Coupons Becoming the 'New Black;' Use Among Consumers Soaring; Marketers Distributing More Than Before

>October 2, 2008: Arizona Market Report: Fresh & Easy Opens Two New Stores; Marketside Opens in Three Days; Analysis of One Of the Most Competitive Markets in the U.S.

>June 8, 2008: Arizona Region Market Report: First Signs of A Weakening Might Be Starting to Show in the 'White-Hot,' 'Super-Competitive' Arizona Market

>September 15, 2008: Wal-Mart Expanding its Discount Store-to-Supercenter Conversion Program As Part of its Strategy to Grab Even More Food and Grocery Sales Market Share

>September 29, 2008: Special Report: Wal-Mart, Inc. Studying Second Small-Format Food and Grocery Store Concept; the 'Bodega' or Modern Version of the Corner Grocery Store

>August 8, 2008: Analysis & Commentary: Wal-Mart's Marketside As Part Of it's Multi-Format Category-Killer Strategy Spells Trouble For Tesco's Fresh & Easy

>April 14, 2008: New Multi-Supercenter and Multi-Format Strategies Are Showing Wal-Mart to Be A More Agile Grocery Retailer in the U.S.

>November 19, 2008: Competitor News: Wal-Mart Lowering Prices on Holiday Items and Staples; New Formats Coming; Online Grocery Sales; Hundreds of New Stores FY 2009-2010

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

Competitor News: Bashas' Chain Launching 10,000-Plus Item Storewide Price Slashing Program This Week in its Arizona Supermarkets

Arizona Market Region Report: Food & Grocery Retailing in the Recession

Bashas', Arizona's home state supermarket chain, is fighting back against the economic recession and stiff competition from numerous food and grocery retailers in the state by launching a major price-slashing initiative in its 100-plus Bashas' flagship banner supermarkets. Arizona-based Bashas operates about 156 supermarkets in the state (out of about 161 total) under the Bashas', Food City (Latino format) A.J.'s Fine Foods (upscale format), Eddie's Country Store and Bashas' Dine (prepared foods focus) banners. Bashas also operates the small Sportsman's Fine Wine & Spirits chain in Arizona.

Mike Proulx, Bashas' president and CEO, said starting this week the supermarket chain is slashing the everyday prices on more than 10,000 nationally branded and private label food and grocery items across all store categories and departments.

The current economic recession and the added competition from chains like Wal-Mart, Safeway, Kroger Co-owned Fry's, Albertsons, Costco, Tesco's Fresh & Easy Neighborhood Market and others in Arizona is what's behind the aggressive price-slashing value move by hometown chain Bashas'.

"In the 77 years that Bashas' has been in business, we've weathered countless economic downturns," Bashas' CEO Mike Proulx said in announcing the storewide price reductions. "Not only was our company formed during the height of the Great Depression, but we've survived the ups and downs of the supermarket industry, increased competition and national economic fluctuations. As Arizona's hometown grocer, we knew we needed to do something more for families looking to stretch their dollars during these tough economic times."

Bashas' is serious about trying to protect its turf in the white hot competitive Arizona market region, a state that has been hit among the hardest by the housing foreclosure crisis, credit crisis, unemployment and overall recessionary blues.

In addition to its massive category-wide price reduction move this week, Bashas' is going back to some of that old time food retailing religion in the form of offering shoppers a good old supermarket sweepstakes promotion.

The promotion is a win-free-groceries-for-a-year sweepstakes, for which one lucky winner will walk away with $5,200 in Bashas' gift cards, or the equivalent of $100 a week in free groceries for an entire year, according to Johnny Basha, the vice chairman of the company and a member of the Basha family, owners of the supermarket chain.

Additionally, fifty-three second-prize winners will each receive a Bashas' gift card worth $50. One winner will be chosen from each participating Bashas' store in metropolitan Phoenix and Tucson.

Contests and sweepstakes like this are making a comeback in the supermarket industry in these tough economic times, designed as ways to get shoppers into the stores. For example, Safeway Stores, Inc., which is a major player in Arizona food retailing, currently is running a customer sweepstakes-drawing around its "Ranchers Reserve" store brand beef line. The first prize winner receives a brand new pickup truck and Airstream travel trailer. There are numerous second prize winners as well.

Bashas' started offering the sweepstakes in its stores this week. Shoppers can enter until April 30. The grocer says the prize drawing will take place in May.

As we reported and detailed in this February 6 piece [Arizona Market Region Analysis: Bashas' Worker Layoffs, Closing of Stores Could be the 'Canary in the Coal Mine' in Ultra-Competitive Arizona Market] the Arizona-based chain laid off 203 employees as a way to cut expenses amidst the double whammy of economic recession and heavy competition in Arizona. those firings came on top of previous layoffs earlier.

The hometown Arizona-based supermarket chain also is closing five of its stores in the state.

Having made the layoffs and decided on the closing of the five less than desired performing stores, and thus focusing on the expense control side of the ledger, Bashas' now appears to be putting its focus on the demand or sales side, kicking off the major price-slashing program as a way to keep and gain shoppers in Arizona.

The primary, although not exclusive, focus of the price reductions on the 10,000-plus items is on essentials or basic everyday food and grocery products that shoppers by most frequently. That obviously makes sense as that's where the hottest competition among competing grocers currently is, not only in Arizona, but throughout the United States.

As we discussed in past stories in Fresh & Easy Buzz, Bashas has always been a tough competitor. Years ago when Safeway became a major player in Arizona many analysts were writing Bashas' off. They survived. When Kroger Co. came to town in a big way... ditto. And the biggest threat, Wal-Mart, hasn't rendered Bashas' a failure, although the brawny big box retailer from Bentonville, Arkansas is the most serious threat to Bashas and all of the other supermarket chains doing business in Arizona to date.

Bashas' is showing with the major price reduction program that it gets value -- that merely being the hometown grocery chain isn't enough in the current recession.

But it's also clear that the Arizona-based supermarket chain is struggling, based on the layoffs, store closings and felt need to reduce the everyday prices on so many items. Although such price reductions are hardly exclusive to Bashas' in the current econopmic climate -- many supermarket chains are making similar moves, although at 10,000-plus items Bashas' is about the most extensive we've heard of thus far.

Arizona is shaping up as competition central in U.S. food and grocery retailing in the recession. Tesco's Fresh & Easy certainly has its job cut out for it competing with these long time major players like Bashas', Safeway, Kroger, Wal-Mart and the others in the state.

Linkage - Select Related Posts:

>December 16, 2008: Food & Grocery Retailing in the Recession: Bashas' Broadening the Shopper-Base in its Hispanic Format Food City Stores; Shoppers Search for Value

>February 6, 2009: Arizona Market Region Analysis: Bashas' Worker Layoffs, Closing of Stores Could be the 'Canary in the Coal Mine' in Ultra-Competitive Arizona Market

>February 3, 2009: Competitor News: 'Grocer-Gone-Wild:' Arizona's Fry's and its 'Bring it On' 'Take All Competitors' (Including Tesco's Fresh & Easy) Store Coupon Move

>December 12, 2008: Fresh & Easy Looking For Gold in Gilbert: Second Store in the Arizona City Set to Open Jan. 7; A Third Fresh & Easy Market to Open In Fall, 2009

>December 12, 2008: Marketing & Promotions Report: Manufacturers' Coupons Becoming the 'New Black;' Use Among Consumers Soaring; Marketers Distributing More Than Before

>October 2, 2008: Arizona Market Report: Fresh & Easy Opens Two New Stores; Marketside Opens in Three Days; Analysis of One Of the Most Competitive Markets in the U.S.

>June 8, 2008: Arizona Region Market Report: First Signs of A Weakening Might Be Starting to Show in the 'White-Hot,' 'Super-Competitive' Arizona Market

>April 9, 2008: Arizona's Shopper and Employee-Beloved Bashas' Named One of 'The Best' Places to Work in the State For Second Year in a Row

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

Arizona Market Region Analysis: Bashas' Worker Layoffs, Closing of Stores Could be the 'Canary in the Coal Mine' in Ultra-Competitive Arizona Market

The Arizona Market Region: Overstored? We think so. Ultra-competitive? Yes indeed. Economically battered? Yes -- without a doubt.

Beginning in early 2008 Fresh & Easy Buzz first put forth the proposition that the Arizona food and grocery retailing market -- particularly the Phoenix Metropolitan region which is one of the three market regions for Tesco' Fresh & Easy Neighborhood Market and where the grocery and fresh foods chain has been opening numerous new stores since November-December, 2007 -- was close to becoming or already was overstored (more stores selling food and groceries than the market can take.) We've continued to put forth this proposition since then in a variety of stories related to the Arizona market.

As a companion proposition, we've been suggesting for many months that the perfect (bad) storm of the housing foreclosure crisis (Arizona is one of the top five states in the U.S. in terms of per-capita foreclosures), the financial and credit crisis, and the ever-deepening economic recession (and the massive monthly job losses that have been a part of it) would soon start taking its toll on grocers in Arizona, combined with this near or already overstored phenomenon, expressing itself in three ways: the postponement of new store openings, worker layoffs, and eventually the closing by one or more grocery chains of existing stores.

Employee layoffs, new store opening postponements

The first sign, from a worker layoff perspective, that the combination of overstoring and a very bad economy in Arizona (the state has one of the highest unemployment percentages in the U.S., for example) were beginning to take a toll on the state's food and grocery retailing industry appeared in the summer of 2008 when the Arizona-based Bashas supermarket chain fired about 203 employees, 100 at their corporate headquarters and the remaining others at store-level. Bashas President Mike Proux said at the time doing so was necessary in order for the grocer to remain competitive in the highly-competitive market and economically struggling state.

Then in the fall of 2008 a number of grocery chains with operations in Arizona postponed the openings of a number of new stores they had planned to open in the state this year. These grocers include: Tesco's Fresh & Easy, Wal-Mart (although in its case just a couple units) Kroger Co. and Whole Foods Market, Inc. The reason for doing so is the combination of a bad economy and a super-competitive market -- and in our analysis the overstoring in Arizona. The ultra-high level of competition is and continues to be enhanced by the poor economy, as grocers must slash prices and increase the value of their respective promotions in order to compete for shoppers' food dollars.

Bashas employee layoffs, store closings

Now another shoe has dropped in the Arizona market, again involving Bashas, which has about 156 supermarkets in Arizona and employes 13,000 workers.

Bashas laid off another 350 workers, almost all at store-level, during the last week of January, saying it needed to do so because of the recession and the super-competitive food and grocery retailing climate in Arizona. The 350 laid off employees represent 3% of Bashas total employee payroll.

"It's no secret that we're battling on several fronts for the future viability and profitability of the company, and we're facing fierce competition and the economic recession," Kristy Nied, a spokeswoman for Bashas' said in a statement last week attributed to the company's president.

This week Bashas has taken another cost-cutting move. The Arizona-based grocery chain is closing five of its stores in the state, saying it has to do so in order to lower its costs and continue to compete as best it can in the white-hot competitive Arizona market.

Three of the five stores Bashas will close are in the Phoenix Metropolitan region, the region where Tesco's Fresh & Easy has its 30-plus stores and the market region we've been saying is the most overstored in the state.

Two of the Phoenix Metro market stores are flagship Bashas banner supermarkets. The third store being closed is one of the chain's Food City banner Latino consumer-centered format supermarkets.

Bashas also is closing another one of its Food City banner supermarkets. That store is located near the Arizona city of Yuma. The fifth store the supermarket chain is closing is its Ike's Farmers Market banner store in Tucson. That store, a one and only, is Bashas' natural and organic foods-centered format test store.

The grocer created the Ike's Farmers Market format as its entry into the natural grocery store retailing segment in its home state as a counter to the numerous natural foods chains that have entered the market with numerous stores in the last few years. These players include Whole Foods Market, Inc. Colorado-based Sunflower Farmers Market and Arizona-based Sprouts Farmers Market.

Bashas says its closing the Ike's Farmers Market test store not so much because it isn't pleased with the format but rather because the Tucson location isn't a good one for the store or the format. The grocer further says it may try the Ike's format in another part of the state in the future.

But, generally speaking, when a chain closes the only store of a new format (the test store), it usually results in the elimination of that new format completely. We don't suspect Arizona shoppers will be seeing a new Ike's Farmers Market store popping up in the state in the near future at the very least. In other words, the Ike's Farmers Market format may not be going into lifelong retirement, but if not, it's likely to be a very long period of hibernation.

Overstoring and economic recession

Thus far Bashas is the only grocery chain in Arizona we are aware of that's laid off employees and plans to close stores due primarily to the combination of the severe economic recession and the ultra-competitive nature of the food and grocery retailing market in the state. But they might not be the only grocer to do so in the near future.

What is a fact though is that many grocery chains with substantial business (and store count) in Arizona are pulling back.

For example, we know that Safeway Stores, Inc., which operates over 100 supermarkets under the Safeway banner in Arizona, currently has no plans to acquire sites for new stores in the state under the present economic and ultra-competitive climate in the market. Instead the grocery chain, which is the fifth-largest seller of food and groceries in the U.S. in terms of annual sales, is focusing its resources on making its existing stores in the state more competitive through offering lower everyday prices and stronger promotions, along with other programs.

Tesco's Fresh & Easy Neighborhood Market, which has slowed the opening of new stores in all three of the markets it's in -- Metro Phoenix, Arizona, Southern California and southern Nevada, as well as postponing its planned Northern California market region launch -- also is taking a serious look about how it should go forward in Arizona, both in terms of its existing stores and the opening of new stores, many of which are currently in the pipeline and were previously set to open throughout this year. Some are still opening. Others are being postponed.

As we've suggested since early 2008, before the recession took full bloom, the Arizona food and grocery retailing market was then near or already overstored.

Additionally, because Wal-Mart Stores, Inc. has been opening so many of its combination food and general merchandise Supercenters, Sam's Club membership warehouse stores and Wal-Mart Neighborhood Market supermarkets -- plus its first four small-format Marketside grocery and fresh foods markets last year -- in the state over the past five years, adding serious competitive heat to food retailing in Arizona, the competitive nature of the market has been given an added jolt of enhanced competition not seen prior to Wal-Mart becoming a major player in the state, which it wasn't a mere four or five years ago.

In our analysis of the Arizona food and grocery retailing market, the combination of so many stores being in the state, along with the severe economic recession, has created a ultra-competitive environment among retailers. This high-level of competition is forcing grocers to compete super-aggressively on price, which means reducing gross margins, which means reducing income. As a result, at some point something has to give. This something is what we're seeing with Bashas -- the elimination of jobs and now the closing of the five stores.

Since we believe the recession is going to last at least for the rest of 2009 -- and even if it doesn't last the rest of the year the economy won't likely show much improvement before the end of 2009 because unemployment growth and other such conditions keep occurring for months after a recession is over (lagging indicators in economists' jargon) -- we expect to see some combination of more postponements of new store openings in Arizona, additional store closings, and more job reductions in the food retailing sector, and not just from Bashas.

Wal-Mart, Safeway and Kroger, the "big three" chains in the Arizona market in terms of overall U.S. annual sales (Wal-Mart is number one, Kroger number three and Safeway number five), should be able to stay the course, particularly Wal-Mart which actually is benefiting in the market, like it is elsewhere in the U.S., from consumers switching to its stores from supermarket chains for their food and grocery shopping needs.

However, the rest of the players in the Arizona market aren't as fortunate. Most will have to at a minimum postpone most new store openings and cut costs at store-level significantly if they want to avoid layoffs and store closures. This includes Tesco's Fresh & Easy Neighborhood Market, as well as numerous others, both chains and independents.

For example, the private equity firm Cerebus, which owns the Albertson's stores in Arizona, will likely be closing 3 -to- 6 underperforming Albertsons units in Arizona in the coming months.

Cerebus owns 80% of the failing automaker Chrysler, and has been racing through billions of dollars in cash every month, despite the recent billion of dollars of government bailout money given the car maker, keeping the company alive. As a result, it has very little operating capital available for the other companies it owns, such as Albertsons LLC, which operates the Arizona Albertsons banner supermarkets, as well as those in a couple other markets. Most of the Albertsons banner stores, like the Southern California chain, are owned by Supervalu, Inc., the fourth-largest food and grocery retailer in the U.S., after number three Costco.

Super-competition good for shoppers though

Meanwhile, the ultra-competitive climate among grocers in Arizona is good for the state's food and grocery shoppers in this severe recession. Retailers are offering the hottest promotions in decades in the market, including triple and even quadruple coupon offers on manufacturers' "cents off" coupons, deep discount store coupons ranging from 10% -to- 20% off total grocery purchases, and numerous buy-one-get-one (item) free and $1 an item offers each week.

Most major Arizona grocers also have lowered everyday prices across all product categories in their stores significantly over the last six months, and are offering far more items at temporary price reductions in-store than they were just a year ago, in addition to the numerous deals featured in their advertising circulars each week, along with the coupon offers and other promotions.

More competition to come

It's our analysis that the high-level of competition in the Arizona market is only going to get stronger, particularly on a price-competitive basis, between now and the end of the year. When this form of competitive evolution (or perhaps devolution is a better term) happens for a prolonged period of time, even in the food and grocery industry which is the most recession- resistant (but not recession-proof) of all retailing sectors, the players have to adapt (cut costs) in order to survive. And just as in the evolutionary process in nature, not every player will always survive.

Tesco's Fresh & Easy and the Arizona market

The primary reason Bashas is thus far the only supermarket chain doing business in the Arizona market to fire a substantial number of employees and close existing stores is because the homegrown grocer has all of its food retailing eggs in a one state basket -- Arizona.

All but a handful of Bashas 160 supermarkets are in Arizona, which is suffering among the worse of all 50 U.S. states with housing foreclosures and unemployment, along with all of the other economic negatives that come with those dual negatives. Therefore, since nearly 100% of the grocery chain's sales come from the Arizona market, which is being battered economically, and since the supermarket chain has no significant sales in other states not being hit as severely by the recession as Arizona is, it doesn't have a buffer to protect it like Wal-Mart, Safeway and Kroger, which have stores throughout the U.S., do.

As a result, with all of its eggs in the Arizona food and grocery retailing market basket, Bashas really has no choice but to cut back by laying off workers and closing stores once it's exhausted all of the other avenues to cutting costs in a market impacted severely by the dual forces of economic recession and ultra-competitiveness.

Tesco is in a fairly similar strategic position with its Fresh & Easy chain. All of the grocer's about111 stores are located in just three markets -- Metro Phoenix, Arizona, Southern California and Metropolitan Las Vegas, Nevada. The Las Vegas region is in just as bad of shape as Arizona is in terms of housing foreclosures, rapidly-rising unemployment and other negative recessionary factors. Southern California is in better shape than Arizona and Nevada -- but only slightly better.

As a result of having all of its food retailing eggs in just three baskets, two of which, Arizona and Nevada, are among the most recession-afflicted states in the U.S., and a third region, Southern California, that's not far behind, Tesco is taking a major hit on three of its market fronts.

Unlike say Safeway, which has stores in Northern California's Bay Area and in the Seattle, Washington region -- two regions in the west certainly hurt by the recession but not nearly as much as Arizona, Nevada and Southern California are -- Tesco's Fresh & Easy has no such U.S. market region buffers to assist it. Instead Tesco happens to have chosen three states, and markets, for all of its Fresh & Easy stores that are being impacted among the most severely by the current recession. Of course Tesco couldn't have known this when they decided on these three states, all doing well at the time, when it decided where to launch its Fresh & Easy chain in late 2006/early 2007. The luck of the British, it seems. The only good news for Tesco in this regard is that it is a global retailer, which means it can buffer its U.S. business with its global sales. But not forever.

As a result of this U.S. geographical retailing determinism, Tesco's Fresh & Easy finds itself not only doing business in three of the states hardest hit by the recession, but in two of the most highly competitive market regions in the U.S. in this recession -- Southern California and Metropolitan Phoenix, Arizona -- as well. About 40% of the Fresh & Easy stores are in Southern California. The other about 60% are split near-equally between Metropolitan Phoenix, Arizona and southern Nevada.

This reality leaves an already struggling Tesco Fresh & Easy with even harder decisions than it would normally have if these market regions weren't so hard hit by the recession. That's one reason the grocer has postponed a number of new store openings in all three of the market regions.

But the big question for Tesco's Fresh & Easy is if doing that will be enough? It's going through cash in a way that is a big worry to both Tesco plc CEO Sir Terry Leahy, who is based at company headquarters in the United Kingdom, and to Tesco PLC shareholders.

By this time in its development, Tesco's sales target for the Fresh & Easy stores was to be average weekly gross sales of about $200,000 per store, per week. Based on our sources, maybe 30% -to- 40% of the Fresh & Easy markets are hitting that target at present. In addition, a number of the stores are static at about $90,000 -to- $130,000 in average weekly sales. This includes some units, such as the store in Hemet, California which was the very first Fresh & Easy market to open in late October, 2007.

This begs the question: 'Should Tesco's Fresh & Easy Neighborhood Market close those stores that have been open at least a year and are nowhere close to being able to hit the $200,000 weekly sales target in the near future'? We are referring to those stores that are doing say $90,000 -to- $130,000.

That's a question we know Tesco Fresh & Easy's senior management is asking itself, particulary as it pertains to the ultra-competitive Arizona market. We estimate there are at least five Fresh & Easy stores (the five aren't all in Arizona, but divided between all three markets) that are doing so poorly that they could be closed tomorrow and not have any appreciable effect on overall gross sales. In fact, closing those five stores would likely help a bit to stem Fresh & Easy Neighborhood Market's overall cash burn rate. (There are many more than five stores with sales in this $90,000 -to- $130,000 in weekly sales range. But we are saying we only "know" of five specific ones that could be closed right now per our reasoning above.)

As a result, it wouldn't surprise Fresh & Easy Buzz if Tesco closes in the neighborhood of five stores between now and the next few months. And if doing so would not hurt overall sales significantly, as our information suggests, and in fact would help stem some of the chain's losses -- why not do so? Closing five stores though would mean putting about 100-150 store employees out of work. So if it happens we hope they are offered jobs at other or new stores.

Of course Tesco need not close any Fresh & Easy stores at all if it doesn't want to. After all, Tesco plc is a huge, global corporation and retailer -- the third-largest in the world -- and can investment finance the Fresh & Easy chain for another couple years if it desires to, can't it, waiting for those underperforming stores to improve and hit that $200,000 a week in sales down the road, right?

That's a question United Kingdom-based Tesco plc CEO Sir Terry Leahy -- influenced by cash on hand and bottom line concerns, along with investor behavior -- will have to ultimately answer though.

Competitor News: 'Grocer-Gone-Wild:' Arizona's Fry's and its 'Bring it On' 'Take All Competitors' (Including Tesco's Fresh & Easy) Store Coupon Move

Food-Grocery Retailers and Discount Store Coupons: Arizona Market Region Report

No season of the year is more important to food and grocery retailers than the one that begins about two weeks before the Thanksgiving holiday in November, and runs on through Christmas, right up to New Years. U.S. shoppers buy big at the grocery store during this nearly two month time period, including buying types and varieties of food and grocery products, including higher-end items, they don't buy during the other 10 months of the year. It's a sales bonanza season for grocers.

The fall holiday food retailing season for grocers also is one of the most competitive in the U.S. supermarket industry. That makes sense after all, with shoppers buying so much more for the holidays than normal, each grocery chain wants to be the one that gets the biggest share of that spending. Therefore, the competition is fierce among grocers for shopper dollars in November-December, even more so than it is the rest of the year.

And nowhere in the U.S. was the recently-ended Thanksgiving-Christmas-New Years 2008 food and grocery retailing season more competitive than it was in Southern California, southern Nevada and Arizona, where Tesco's Fresh & Easy Neighborhood Market operates its 110 combination grocery and fresh foods markets.

Among these three states and market regions, the Phoenix, Arizona Metropolitan market region is arguably the most competitive.

For example, The United States' four leading food-grocery retailers (in order of annual sales of food and grocery products) -- Wal-Mart, Costco, Kroger Co. (Fry's and Smith's), Supervalu, Inc. (Albertsons) and Safeway Stores, Inc. -- all have numerous stores in the Arizona market. There's also Arizona-based powerhouse supermarket chain Bashas, which as "the local guy" has about 160 supermarkets in its home state. Then there's Trader Joe's, the popular hybrid natural foods chains Sprouts Farmers Market and Sunflower Farmers Market, natural superstore chain Whole Foods Market, numerous independent supermarkets, many ethnic grocers (the state has about a 40% Hispanic population) -- and of course Tesco's Fresh & Easy, which has over 30 stores in the region, with more on the way.

Store discount coupons and the Arizona market

When it comes to the use of store discount coupons -- like the $5 off purchases of $20 or more, the $6 off of purchases of $30 or more, and now the $10 off purchases of $50 or more that Tesco's Fresh & Easy has used in the Phoenix Metro market since its first stores opened there in the fall of 2007 -- the grocery and fresh foods chain has had that particular market niche (offering the store coupons) mostly to itself.

A couple of the chains in the market sometimes distribute such coupons -- but only as a rare promotional tool. For example, as we wrote in this piece yesterday, Safeway distributed a $10 off purchases of $50 or more store coupon, good for just three days, in its supplemental advertising circular on Super Bowl Sunday. But Fresh & Easy is the King of such discount store coupon distribution in Metro Phoenix, and the only chain that regularly offers the coupons to shoppers.

Fry's 'take all competitors' coupon strategy

However, and we aren't even sure if Tesco is aware of this, But the Kroger Co.-owned Fry's supermarket chain in Arizona mounted what can be best described as a "take all competitors'" strategic store coupon strategy for most of November and December, 2008, as a way to up the anti in the coupon derby in the very competitive Arizona market.

For most of the November and December 2008 holiday selling period, Fry's honored every one of its competitors' store coupons and manufacturers' "chain-specific" "in-ad" and retailer Web site coupons in its stores, including all of the $5 off and $6 off deep-discount store coupons issued by Tesco's Fresh & Easy Neighborhood Market in the Arizona market.

That's right, Fresh & Easy wasn't the only chain, or stores, where shoppers could use the "retailer-specific" $5 off and $6 off store coupons issued by Tesco's Fresh & Easy. Fry's stores welcomed the Fresh & Easy store coupons, along with every other type of coupon from every food retailing competitor in Arizona, during the super-competitive food and grocery retailing months of November and December, 2008.

Instead of issuing its own similar deep discount store coupons, Fry's just said to shoppers -- 'We will take every coupon you have, regardless of which retailer issued it, in our stores.' That's what we mean by a "take all" store coupon strategy. "Bring it on" might also be an apt description of the promotion.

Fry's promoted the "take all competitor coupons" program in its stores, in its weekly advertising circular, and on its Web site in a selective fashion. A number of local consumer-published Blogs that focus on supermarket and manufacturers' coupons in Arizona also mentioned the "Fry's takes all competitors' coupons promotion" in November and December as well.

For example, this is what Arizona coupon maven Stephanie Ashcraft, who publishes her own Blog about Arizona coupon deals, Savvy Savings Tucson, told Fresh & Easy Buzz in December, 2008 about the Fry's "take all competitors'" coupon program: "The first time I went to use one of the Fresh & Easy Neighborhood Market $6 off $30 purchase coupons at Fry's they scanned it and it took off $1.10. I had the cashier look at the coupon and they took off the remaining 4.90 off the order. I've used the coupon several times over the last few months at Frys while they've had this deal running. It's great! I'm able to combine that coupon with all my manufacture coupons which makes this truly a "screaming deal." They take that coupon off first, then deduct all my other coupons."

Ms Ashcraft also appears regularly on Arizona television stations offering her coupon savings tips for Arizona consumers. She mentioned the Fry's "take all competitors'" coupon program during one or more of her TV appearances in November and December, 2008, in addition to posting about it on her Blog.

The popular coupon Web site Pinching Your Pennies.com also posted about the Fry's take all competitors' coupons promotion, which ran until December 30, 2008. This was the entry from Pinching Your Pennies.com for the Fry's program: * "Fry's is Accepting all Competitor Coupons from Albertsons, Bashas, Safeway, Fresh & Easy, Walmart Neighborhood Market, Walmart Marketside, Sunflower Market, Sprouts, Whole Foods, AJ's, Trader Joes, Food City, Ranch Market and others. Extended thru 12/30/08."

Note that in the quote above (in italics) that coupon maven and grocer store penny-pinching expert Stephanie Ashcraft mentions combining the Fresh & Easy store coupons with manufacturers' "cents off" coupons at Fry's in order to save even more money on her purchases. This isn't something shoppers can do at Tesco's Fresh & Easy markets because the grocery chain doesn't accept manufacturers' "cents off" coupons in the stores.

As a result of the program and the various forms of publicity about it in Arizona, Fry's redeemed numerous chain-specific product "cents off" coupons offered by its competitors, and also accepted many of the Fresh & Easy $5 off and $6 off deep-discount store coupons in its Arizona supermarkets in November and December, 2008, accepting the Tesco coupons as if Fry's issued them itself.

Manufacturers, particularly big ones like Proctor & Gamble, General Mills, Kraft and numerous others, work with retailers, especially big chains, to offer "chain or retailer-specific" product "cents off" coupons that are only good at a specific retailer's stores, such as good only at Wal-Mart, Safeway, ect. The chain then runs the coupon in its weekly advertising circular ("in-ad" coupon) and/or on its Web site. The manufacturers' even pay the retailer a hefty fee in return for the grocery chain running the manufacturer's coupon in its paper advertising circulars and on its Web site.

We recently talked to a Fry's executive who said (on condition we not print he or she's name) the chain will do the "take all" competitor coupon promotion again, accepting all competitor coupons, be they special in-ad specific item store coupons from the likes of Safeway, Bashas, Wal-Mart or Albertsons, or the deep discount store coupons offered by Tesco's Fresh & Easy (or any other retailers) -- that up until November and December of last year were good only at a Fresh & Easy Neighborhood Market store in Arizona. Fry's isn't announcing yet when it will do the promotion again, at least not to us or any other publication. But it will do so again. We are rather certain of that fact.

Meanwhile, the strategy of accepting all its competitors' coupons is a powerful one. (Also a potentially expensive one.) In a sense, for whatever period of time a supermarket chain does so, it can render all of its competitors' coupon-oriented promotions much weaker than they would be without such a defensive strategic move by a competing retailer like Fry's. And the bigger the chain (the more market share it has), the weaker it makes the competitors coupon efforts and programs.

Imagine, for example, if two big chains, say Fry's and Safeway, in a market like Arizona both took all competitors' coupons at the same time. That would make such coupon promotions from all the others even weaker, or perhaps make all such offensive moves moot for whatever period of time the two chains accepted the competitor coupons for.

As we said, we aren't sure if Tesco's Fresh & Easy knows, at least until now, that a competitor, Kroger Co.-owned Fry's, was redeeming its $5 off and $6 off store coupons for most of November and December of last year. But many Arizona shoppers knew, as Fry's took in some pretty big stacks of Fresh & Easy Neighborhood Market-issued store coupons during the nearly two month promotional period.

So you see, as we often suggest, just when you think the competition in food and grocery retailing in the Western U.S. has gotten about as hot as it can get, a grocery chain like Fry's in this particular case, steps in as it did in November-December, 2008 and turns that heat up just a notch more. And with the current recession getting worse, especially in California, Arizona, Nevada and most of the other western states, expect this competition to intensify.

In fact, we suspect it might not just be Kroger Co.-owned Fry's that decides to accept all competitors' coupons, including the Fresh & Easy deep discount store coupons, next time around. Another chain or two might join in the defensive action. And we suspect that "next time around" for taking all of its competitors' coupons will be fairly soon for Fry's. Stay tuned.

Food & Grocery Retailing in the Recession: Bashas Broadening the Shopper-Base in its Hispanic Format Food City Stores; Shoppers Search for Value

Competitor News: Arizona Region Market Report - and Beyond

Arizona-based, family-owned supermarket chain Bashas uses a multi-format food and grocery retailing strategy in the state.

The hometown supermarket chain, which operates about 160 stores in Arizona, has its namesake banner Bashas supermarkets, which consist of both superstores and conventional supermarkets. This banner is the bullwork of the grocery chain's business in the state.

But Bashas strategy also includes covering niche markets with its additional food retailing formats. These include the retailer's AJ's Fine Foods banner, which are supermarkets that focus on merchandising specialty, gourmet, natural, organic, premium and fresh, prepared foods in an upscale retail setting.

AJ's Fine Foods, which pioneered specialty and gourmet food and grocery retailing in the state, was a popular multi-store independent for many years in the Metro Phoenix market. Bashas acquired it a number of years ago and has selectively added new stores.

In addition to its flagship Bashas banner and its AJ's Fine Foods upscale supermarkets, Bashas also operates a small chain of upscale wine and spirits stores, Sportsman's Wines. The current four-store mini-chain (two stores in Scottdale, one in Phoenix and one in Glendale) was acquired by Bashas not too long ago from the family that founded and operated the popular Phoenix Metropolitan region upscale wine and spirits mini-chain for a number of years.

In acquiring Sportsman's, Bashas saw a number of synergies between it and its AJ's Fine Foods upscale target consumer, which was part of the grocer's motivation for buying it. Bashas also acquired Sportsman's it has said as a way to improve the supermarket chain's overall expertise in wine and spirits merchandising, as well as to open new stores and build the business in and of itself. This upscale segment isn't doing all that well for Bashas at present, as is the case with pretty much all upscale food retailers in this recession.

Bashas also is testing a natural foods store in Arizona, Ike's Farmers Market. That store is located in Oro Valley, Arizona.

But it's not just conventional superstore/supermarket, upscale specialty and natural foods formats Bashas includes in its multi-format strategy in Arizona. The grocery chain also operates Food City, which is a format and banner targeting the state's extensive Hispanic or Latino population, which comprises about 40% off all Arizona residents.

Basha's currently operates 61 Food City supermarkets, with store number 62 set to open soon in El Mirage, Arizona. The stores are full supermarkets with a focus on the fresh foods, groceries and non-foods Hispanic consumers buy and use most often. Food City stores also carry a strong selection of basic food and grocery items just like those found in all supermarkets. After all, Latino consumers have particular food preferences, but they also purchase many of the same brands and products Americans from all ethnic backgrounds buy.

Among the special features the Food City stores offer are huge fresh produce and meat departments. Many of the stores also have full-service pharmacies in-store. In addition, the stores offer a full check-cashing service because many Hispanic consumers, as well as others, don't use banks but rather prefer or have to cash their payroll checks at a supermarket or discount store like Wal-Mart, essentially using the stores as their financial instituion.

It's estimated that in both California, Nevada and Arizona, for example, as many as 25% of people don't use banks but rather use supermarkets and discount stores for their "banking" services such as payroll check cashing. Tesco's Fresh & Easy stores don't cash payroll checks or take paper, personal checks. Just cash, debit and credit cards. All 104 Fresh & Easy markets are in California, Nevada and Arizona.

As a result of not cashing payroll checks, Tesco is missing out on this huge, potential customer base in its Fresh & Easy stores. Wal-Mart, Kroger, Safeway, Bashas --the leading food and grocery retailers in these three states -- not only all cash payroll checks, they encourage it as policy because of all of the business it brings to their stores.

When it comes to basic food and grocery items, It is just this aspect of its Food City stores -- that they sell lots of basic food and grocery products at discount prices -- that Bashas is using in a new merchandising and marketing program designed to position the stores to a wider customer base -- everybody -- that's looking to save money in this severe economic recession, which has hit Arizona particularly hard.

In fact, in just the last month Bashas has added more basic or mainstream food and grocery items to its Food City banner stores, products that appeal to a wider audience, and focused on further discounting these "American-style" food and grocery items.

The new approach and program designed to increase business in the Food City supermarkets appears to be baring some recessionary shopper fruit, according to a recent piece in the Arizona Republic, written by staff writer Cathryn Creno, who covers the Arizona food and grocery retailing industry for the paper. Additionally, Fresh & Easy Buzz recently was in a couple Food City stores and observed an ethnically diverse consumer base shopping the supermarkets.

You can read the Arizona Republic story here.

Bashas isn't eliminating its Hispanic shopper niche in the Food City banner stores. Rather it's attempting to broaden the shopper base during the current bad economic times, which is creating in what our research has found are some profound changes in consumer food and grocery shopping patterns of behavior, particualrly in the Western U.S., where numerous different retail formats selling food and groceries exist.

For example, we're finding consumers shopping alternative formats much more than ever before in recent history in this recession.

Many shoppers are seeking out food and grocery bargains at dollar and 99-cent stores and salvage grocers and others, for example. Salvage grocers (also sometimes called "scratch & dent" grocers) are those that primarily sell slightly damaged or blemished food and grocery products, as well as manufacturers' close-outs.

Berkeley, California-based Grocery Outlet, which operates a chain of franchised salvage-type supermarkets (including stores in California, Nevada and Arizona), has reported this year its sales are up by at least 10-15%, and its owner-operators report seeing new faces in their stores daily.

Many shoppers also are seeking out ethnic supermarkets looking for bargains. These include Hispanic consumer-oriented stores like Food City and Asian foods-focused discount supermarkets as well.

The 99-Ranch Asian supermarket chain for example says its seeing more and more non-Asian shoppers in its big supermarkets located in California and elsewhere in the U.S. than it's ever seen before. The stores offer both basic food and grocery items and Asian foods at discount prices. The stores fresh meat and produce departments, which offer lots of value-priced items, have become particularly popular with non-Asian shoppers over the last few months, the company says, and we have observed having visited a number of the stores recently and seen shoppers of various different ethnic backgrounds in the markets.

As we wrote about yesterday in this piece [ Food & Grocery Retailing in the Recession: Wal-Mart CEO Describes Changes in Consumer Behavior-More Cheap Basics, More Cooking at Home; More Leftovers], Wal-Mart CEO Lee Scott said on the NBC news program "Meet the Press" on Sunday that the mega-chain is seeing shoppers buy more cheaper, basic food and grocery items in its U.S. stores, including purchasing more frozen foods when they are on sale in place of fresh, prepared foods, for example. Wal-Mart's research he said shows consumers are buying these items on sale and storing them rather than purchasing more expensive fresh foods on a weekly basis.

Scott's observations are echoed by numerous supermarket chain executives we've talked with in the last month. They say there's a clear trend people are cooking and eating more at home. That they are buying more food ingredients instead of highly processed and fresh, prepared foods.

These industry executives also tell us price (and discounting) is King right now. They are seeing more "cherry picking" of weekly advertising circular specials and in many cases reduced market basket sizes which they attribute to shoppers buying from two or more supermarkets depending on a given week's ads.

Our research shows there's a "search for value" among U.S. shoppers right now. Additionally, with the drop in the per-gallon price of gasoline below $2.00, shoppers are more willing to drive around to different stores for deals than they were just a little over a month ago when gas was over $4 gallon.

This "flight to value" means food and grocery retailers, regardless of the format stores they operate, must tighten their belts and emphasise the value proposition, with a particular focus on selling basic food and grocery items for the best prices possible in their stores. Retailers also must focus their weekly promotions on more basic items and get creative in promotions.

Shoppers are still looking for indulgent and premium products but are buying them more as irregular treats rather than on a regular basis like they were doing as recently as the first quarter of this year.

Right now it's all about the basics. For example"

>Leftovers have taken on new status in households, something else Wal-Mart Stores, Inc. CEO Lee Scott said shoppers are telling Wal-Mart.

>Manufacturers' cents-off coupons are becoming gold. Weekly supermarket advertising circulars are getting read rather than tossed in the garbage can. Unlike all of its major competitors in the Southern California, Nevada and Arizona markets, Tesco Fresh & Easy Neighborhood Market stores don't accept manufacturers' cents off coupons. [Read more here: Marketing & Promotions Report: Manufacturers' Coupons Becoming the 'New Black;' Use Among Consumers Soaring; Marketers Distributing More Than Before.]

>Consumers who never set foot in a 99-cent store are doing so; and buying food and grocery items in these stores.

>Non-profit retail food cooperative markets, where in return for paying an annual fee and/or volunteering hours to work in the stores, owner-customers receive 20% or more off the price of groceries, are booming.

>Wal-Mart is seeing a substantial cohort of higher-income consumers shopping in its Supercenters and Sam's Club stores. Additionally, the retailer's sales and income for the last two quarters demonstrate it's thriving in the down economy, according to CEO Scott and Wal-Mart USA president Eduardo Castro-Wright.

Price and value is top of mind among food and grocery shoppers. The challenge for retailers right now is to position their respective stores in the minds of these consumers as the place to shop in order to get that value.

And as we've been writing about, our analysis is doing so is job one for Tesco's Fresh & Easy Neighborhood Market right now -- to create a real value proposition for its 104 stores in Southern California, Nevada and Arizona, and do it fast -- and then hammer home that value proposition regularly in-store and through marketing programs in a regular, repetitive, consistent, concise and clear way.

Tesco's Fresh & Easy model seems designed to achieve this but the execution by Fresh & Easy USA corporate just hasn't been and isn't there. We wonder why since United Kingdom-based Tesco plc. is a proven global retailer?

Is it because the U.S. is the toughest market the retailer has faced to date? Is it because Tesco flubbed with Fresh & Easy? Or is it a senior management problem at Fresh & Easy Neighborhood Market in Southern California. Or, perhaps, a combination of all three?

We've argued that's it's all three, along with a couple other details. But most of all, Tesco's Fresh & Easy Neighborhood Market has failed to date to capitalize on what we believe could be its greatest strength, particularly in the recession, which is the creation of a solid value proposition, followed by a tight merchandising and marketing program designed to implement it. There's no time to do so like the present, after all.