Fresh & Easy Neighborhood Market to Shrink Health & Body Care Sections in Stores; Add Candy and Snack Items

Fresh & Easy will continue to merchandise its 'retreat' private brand body care line (above) in the slimmed-down HABC departments. The products contain no artificial colors, parabens, mineral oils or SLS detergents.

Category Management & Merchandising
News & Analysis

Fresh & Easy Neighborhood Market is preparing for a fairly major chain-wide category re-merchandising project, in which the Tesco-owned fresh food and grocery chain will be significantly reducing the HABC (health and body care) sections and product SKU-counts in its 172 stores, Fresh & Easy Buzz has learned.

The project is set to start soon. Current plans call for it to be completed by early-to-mid summer.

In its new schematic, Fresh & Easy plans to reset the HABC section in each store, consolidating it down to just a single aisle - aisle six - which is an about a 40% space reduction.

In order to achieve the single-aisle consolidation, Fresh & Easy is eliminating numerous items and will offer an even more limited assortment of HABC category SKUs than it currently merchandises, putting a focus on carrying just the basic health and beauty/body care items, under a few national brands. Fresh & Easy will continue to offer its 'retreat' private brand HABC products in the store sections.

The HABC category reset will free-up shelf-space in the back in the stores, which is where the sections are located.  Fresh & Easy's merchandising team then plans to replace the HABA SKUs with a selection of bulk candy, along with adding new packaged cookie and snack food items.

Additionally, the HABC category reset will free-up space on aisle five in the stores. Fresh & Easy plans to use that space to add a variety of new packaged snack chip and related items, with a focus on the Frito-Lay brand.

Two aisle end-caps will also become available because of the HABA category reset. Current plans call for the end-caps to be used to merchandise vitamins, dietary supplements and energy bars, according to our sources.

Health and beauty/body care has been among the worst performing categories for Fresh & Easy Neighborhood Market since the chain's first stores were opened in November 2007. This poor category sales performance is the reason for the planned merchandising change and reset project, according to our sources.

By decreasing the amount of space for HABC in the small-format (10,000-12,000 square-foot) Fresh & Easy stores and reducing the number of SKUs offered in the poorly-performing category, then using the space to add the bulk candy and packaged cookie and snack food SKUs (which are traditionally higher-velocity categories and items) the grocery chain hopes to better maximize the available space, resulting in increased sales-per-square-foot in the stores.

Health and beauty/body care items are generally a good category for grocers because the items tend to offer retailer's higher margins than many consumable categories, like snack items, do. However, if the items aren't selling at a decent velocity, margin - good or bad - tends to be a moot point, as is the case with the overall category at Tesco's Fresh & Easy Neighborhood Market, where as we noted, HABC is a poor performer.

With this fact in mind, you can better see the philosophy behind Fresh & Easy's wanting to use the shelf space that will be freed-up by the HABC category reset to merchandise products like Frito-Lay brand snack chips, which tend to move off the shelves at a relatively high velocity in most grocery, drug, convenience and mass merchandiser stores.

Snack food giant Frito-Lay is owned by PepsiCo, best know as the maker and marketer of soft drinks, along with its snack chip brand. Fresh & Easy Neighborhood Market recently added a number of new Pepsi/PepsiCo brand soft drinks SKUs, along with those from Coca-Cola, to its stores. That and the planned offering of the new Frito-Lay snack chip SKUs is part of an overall planned increase in business the grocery chain has planned with Pepsi-Frito-Lay.

Pepsi and Frito-Lay distribute soft drinks and snack chips to all retail stores on a direct-store-delivery (DSD) basis, which includes having distributor service people merchandise the products. Store clerks replenish the shelves between deliveries, as needed. DSD, which Pepsi and Frito-Lay do very well, is a plus for retailers, including Fresh & Easy, because it not only provides vendor labor (stocking and merchandising), it also helps to manage inventory (which is good for cash flow) because the retailer need not slot the DSD items in its central distribution center and truck the SKUs to its stores.

One reason the HABC category has performed poorly in the Fresh & Easy stores is because in the main shoppers aren't using the stores as primary and in many cases even secondary shopping venues in significant numbers.

From a theoretical standpoint this might make sense since the Fresh & Easy format was designed to be a fill-in fresh food and grocery store, which shoppers would use for convenience purposes, along with shopping at bigger supermarkets and mass merchandise outlets.

But theory isn't always reality - and in practice this strategy isn't working very well for Tesco's Fresh & Easy, which needs to get its average market basket purchase size (the average amount of money a shopper spends per trip to a grocery store) up considerably, along with producing a significant increase in average store sales-per-square-foot.

In order to achieve these twin goals - which are just two of about five key metrics it needs to significantly improve in order to stem its $200 million-plus annual loss - Tesco's Fresh & Easy needs to get those customers who regularly shop at the stores (primary) to spend more money on each shopping trip. It also needs to convert a decent percentage of people who shop at the stores on an infrequent basis to more frequent customers, thereby increasing its total universe of at least secondary shoppers.

Shrinking the HABC sections and SKU-count won't alone do either of those two things for Fresh & Easy Neighborhood Market.

However, it will likely make better use the available space, at least from the perspective that the added consumables - bulk candy, packaged cookie, snack chip and other items - will most certainly sell in higher velocity that the HABC items currently are.

The average retail price points of the HABA items set to be discontinued are only slightly higher than the avewrage price points of the bulk candy and others snack food items that are replacing the SKUs. As a result, if the new consumable items set to replace the discontinued HABA SKUs sell at an about 15%-20% higher overall rate of velocity than the replaced SKUs, Fresh & Easy could then see a slightly measurable increase in store sales-per-square-foot attributable to the category re-merchandising project, in our analysis.

Product category merchandising - and item mix selection - is a dynamic process in food and grocery retailing. We like to compare it to painting the Golden Gate bridge, where once the painters finish painting one end of the famed span (a couple years after starting), they immediatly start over again on the end where they first began.

In other words, merchandising and re-merchandising is, or should be, an ongoing process, the goal of which is to continually fine-tune the product assortment offered and how it's merchandised, in order to optimize the stores' sales-per-square-foot.

This process is even more important in small-format, limited SKU-assortment stores like Tesco's Fresh & Easy because with few items - the 4,500-5,000 SKUs offered - there's less room for error than there is in the average supermarket, which carries 35,000-plus SKUs.

For a limited assortment grocer like Fresh & Easy Neighborhood Market to do well, it's essential, among other criteria, that it maximize its product mix, and localize it to the demographics and lifestyle criteria in its various market regions, which is something the Tesco-owned fresh food and grocery chain does not do, which is why you see the same product assortment in a Fresh & Easy store in a neighborhood that is 60% Latino but has few Asian-Americans as you do in a neighborhood that's 60% Asian but has a Latino population of 5%, for example.

In our analysis, Tesco's Fresh & Easy needs to put a much greater focus on analyzing and tweaking the product mix it offers in its stores.

We would look at a strategy that offers about 6,500 SKUs total, adding about 1,300 new SKUs to the stores. About 65% of those SKUs would be what's called a "core-mix," meaning the items would be slotted  in all Fresh & Easy stores. The remaining percentage of SKUs would be regionalized and localized, based on market region and neighborhood demographic/ lifestyle-oriented criteria.

As an example, Fresh & Easy stores in neighborhoods with significant Latino consumers would have a greater selection of Hispanic food items. And if the majority of those consumers were from Puerto Rico or Central America, for example, rather than from Mexico, the brands and items would be selected based on those regional preferences, which are real and significant. The same with Asian consumers.

Factors like education level (college graduates) age, percentage of married vs. single people and other key demographic and lifestyle-oriented variables should also be factored into the selection of that 35% of the total SKU-count that is regionalized and localized. And by addng the 1,500 new SKUs, Fresh & Easy could have roughly the same amount of items in its "core mix" as it currently carries in its stores in total.

As we said earlier, category merchandising and product assortment selection is a dynamic process, which is something United Kingdom-based Tesco needs to focus on like a lazer beam if it's going to even come close to breakng even with Fresh & Easy Neighborhood Market by the end of its 2012/13 fiscal year, which is less than two years away.

Category Management Report: Fresh & Easy Conducting Wine Category Review and SKU Rationalization; We Offer Some Analysis

Tesco's Fresh & Easy Neighborhood Market has been conducting a category review and sku rationalization in its wine, craft beers and liquor category, Fresh & Easy Buzz has learned from sources involved in the process. The focus is primarily on wines, which is a key product category for the Fresh & Easy stores.

All of the current 96 Fresh & Easy stores, except two in Southern California we are aware of (Hollywood and Van Nuys), sell wine and craft beers. A number of the combination grocery and fresh foods markets sell hard liquor along with wine and beer. Not all of the units offer the spirits for sale however. The Hollywood and Van Nuys stores don't have permits to sell alcoholic beverages of any kind.

The wine category sku rationalization process is being led by category manager Karen Fletcher, who came to Fresh & Easy Neighborhood Market USA from Tesco in the United Kingdom as part of the start-up team. Ms. Fletcher is a native of Britain.

The category review also comes not to long after Fresh & Easy Neighborhood Market went through a series of changes in its grocery merchandising department, which found former director of grocery Charlotte Maxwell, also a British national, leaving Fresh & Easy corporate headquarters and her position to return to Tesco in the UK to accept a director position at corporate headquarters there, as we've thus far been the only publication to report.

Ms. Maxwell was replaced as Fresh & Easy's corporate director of grocery merchandising by Sean McCurley, who previously was director of fresh foods. That position was equal to Ms. Maxwell's in terms of the company structure. Mr. McCurley also is a British citizen.

As part of the wine category review and sku rationalization, Fresh & Easy is looking at reducing the overall number of skus the stores carry in the category, focusing on fewer items and maximizing total sales per item count, according to our sources. Some slow moving wine skus have already been discontinued.

There also has been some merchandising-related discussion as part of the category review involving flipping the wine and beer aisles towards the store's freezer case sections from their current locations, although our sources said they aren't sure of the current status of this previous discussion.

When Fresh & Easy Neighborhood Market USA was first organized, the wine and beer department was under the grocery department, which is normally the case with food retailing companies. However, sometime later category manager Karen Fletcher requested her category be placed in the fresh department and that she report to Sean McCurley, who ran fresh at the time, rather then Ms. Maxwell, who then was in charge of grocery.

Fresh & Easy's senior corporate directors approved of the change. Following Ms. Maxwell's departure back to Tesco in the UK and Sean McCurley assuming her grocery director position, the wine, beer and spirits category was moved back over to grocery with Ms. Fletcher's blessing, according to our sources.

Wine primarily, but also beer and spirits, is a major focus for Fresh & Easy, as it is internationally for Tesco. Karen Fletcher was brought over to the U.S. to build the category as an integral part of the Fresh & Easy merchandising mix. Part of that strategy includes having numerous proprietary, specialty-blended wines produced for the grocery chain, including numerous wines from Australia. Tesco is among the leading retail buyers of Australian wines in the world.

Wine category analysis

The wine category hasn't yet been all that Tesco has expected it to be at the Fresh & Easy stores. Our analysis is this has to do with a number of factors, most notably the fact California wines, which Fresh & Easy stores are short on compared to its competitors, are much more popular than foreign wines in California, Nevada and Arizona, where the current 96 Fresh & Easy grocery and fresh foods markets are located.

Even more so, it has to do with the highly competitive nature of wine, beer and spirits retailing in each of these markets. Not only are major supermarkets like Safeway Stores, Inc. major wine retailers in the Western U.S., for example, but there are category killer retailers like Beverages & More and Cost-Plus World Market, along with Trader Joe's and many others (including scores of independents), that have been selling wine in these markets very successfully for decades. These retails know the market, the customer base, and the wine producers almost as much as they know their own family members in many cases.

As a result, Fresh & Easy has far more competition in its Western U.S. markets than say Tesco has in its home market of the UK when it comes to wine retailing.

The wine category product mix at Fresh & Easy also lacks proper regionalization, sub-regionalization and localization. Perhaps this has been recognized and is one of the reasons for the category review and sku rationalization?

Like it has done with its entire product mix, Tesco basically has tried to merchandise its Fresh & Easy stores in many ways like they are British small-format stores (read Tesco Express) in the UK, merely transplanted to the Western U.S. This has resulted in lots of failures, lost sales and missed opportunities.

Additionally, when it comes to the wine category, there arguably isn't a category that it's more important to regionalize, sub-regionalize and localize. Wines that do extremely well in Northern California, for example, often sell poorly in Southern California. The same regional differences hold true in Nevada and Arizona. Wine brands in the U.S. are regional and even sub-regional. What sells well in San Francisco often isn't what sells well just 80 and 90 miles away in the Central Valley cities of Stockton or Modesto, for example.

Further, since Fresh & Easy has so many proprietary brands, wine brands consumers have never heard of, they have had to hope shoppers might merely like the price or how the bottle looks and give them a try. That's a tough way to sell wine, especially in California.

A number of the proprietary Fresh & Easy wines have done well though, particularly its $1.99 a bottle ($2.99 in Nevada and Arizona) Big Kahuna brand, which is a clone of Trader Joe's famous and super-successful "Two Buck Chuck" value-priced wine brand and line. Big Kahuna is an Australian wine. TJ's "Two Buck Chuck," which last year won the top award in the California State Fair Wine Competition, is a California wine. It's produced by Ceres, California-based Bronco Winery.

In terms of the wine category review and sku rationalization, Fresh & Easy needs to add more California wines, sub-regionalize and localize its wine brand and item selection and merchandising program if it wants to be a successful wine retailer in its respective markets, in our analysis.

This is especially true in California, which is a bigger wine sales market than Nevada and Arizona combined are. (Southern California alone and Northern California alone are both respectively even bigger than both states combined. Since California is the major U.S. wine-producing state, as well as one of the top wine regions in the world, consumers are much more familiar with wines then elsewhere in the U.S. The state also has the highest per capita wine consumption in the U.S.

It also follows that the state has the most competitive and generally the best wine retailers in the country.

California wine consumers are big on sub-regional differences. For example, consumers in Southern California want lots of wines from the Santa Barbara region (a major local wine producing region) want lots of wines in stores from that region, along with from elsewhere in California, the U.S. and the world.

In Northern California (which is the main wine-producing region in the state) consumers expect to see lots of Napa and Sonoma-produced wines on store shelves, along with wines from the coastal region and the Central Valley and Foothill regions. Farther up north it's important to add far Northern California and even some Oregon and Washington State-produced wines.

In fact, in the Central Valley, a good wine retailer also merchandises as many wines from that home region and the nearby Sierra Nevada foothill region than he or she does from Napa and Sonoma.

And in coastal Northern California (the Monterey-Big Sur wine region), good wine retailers there will put a major focus on wines from that wine-producing area.

It's all about localization -- and California is full of local, micro wine regions.

Having a basic selection of proprietary, branded wines is fine for Fresh & Easy. However, as long as that is the major focus in the stores it won't be a top wine retailer in its respective markets. There are too many good wine retailers doing the right things for that to happen.

However, if as part of this category review the retailer focuses on the three things we outlined earlier, it has a far better chance of improving its current wine category sales and eventually joining the ranks of the top wine retailers in the markets it has its stores in.

When it comes to wine merchandising and retailing in the Western USA, especially in California, everything is local, despite the fact imports have an important place in the overall category product mix.