Deja Vu All Over Again: Perishable Pundit Writes About 'Duality' Fresh & Easy Buzz Recently Observed At SoCal and Las Vegas Fresh & Easy Store Visits

Jim Prevor, who writes and publishes the Perishable Pundit food and grocery industry blog, writes today about a recent visit he made to two Fresh & Easy grocery stores in the Southern California desert region cities of Indio and Palm Desert.

Fresh & Easy Buzz visited both of these stores when in the region recently as well.

As a metaphor for a larger issue (as well as a factual comparison), Mr. Prevor calls the two stores, which aren't far from one another, "Tale of Two Tescos."

This is due in the non-metaphorical aspect of this piece to the fact the Indio store is in a new, built from the ground up building, while the Palm Desert store is in a converted former retail store building, like most of the current 61 Fresh & Easy grocery stores in Southern California, Arizona and Nevada are.

The contrast between the two Fresh & Easy grocery store buildings wouldn't be lost on Charles Dickens, if one may be given permission to make an analogy between a great work of sociological-inspired literature and two grocery store buildings.

While visiting the two stores we noticed the same thing as Mr. Prevor did: the Indio store is open, warmer and more welcoming, has lots of natural light, offers cleaner lines, and is clearly much more energy efficient in terms of being built to "greener" building standards than the converted retail store in Palm Desert. It's built to Tesco Fresh & Easy new store prototype.

Last weekend while at the Food Marketing Institute (FMI) convention in Las Vegas, we visited a number of that region's Fresh & Easy stores, including a store like the one in Indio built from the ground up. The other Las Vegas Metro region stores we visited were all in former retail buildings which Tesco has remodeled into its Fresh & Easy format.

The contrast between the new Las Vegas store and the others in the area were striking to us as was the case when we compared and contrasted the Indio store with most of the other converted- building Fresh & Easy markets in Southern California, including the Palm Desert unit.

Read Jim Prevor's piece, "Tale of Two Tescos," here.

In his piece today, Mr. Prevor also talks about some weekly sales numbers he has, according to information from his sources. He says he is finding some Fresh & Easy stores doing $100,000 -to- $120,000 a week, "but we are also finding many stores stuck in the $50,000 -to- $60,000 -a-week range," he writes.

Since earlier this year, Fresh & Easy Buzz has suggested overall per-store, per-week sales at Tesco's Fresh & Easy grocery chain are in the $60,000 (low range) -to- $100,000 range, based on information from our sources. Our current analysis is today's number is closer to the $100,000 figure than the $60,000 sales number.

Other analysts have offered estimates of $50,000 -to- 60,000 a week in sales. However, based on our source information, we've said that's too low.

We also have continued to make the point that only estimating in a range--like the $60,000 -to- 100,000 range we've offered--is appropriate unless one's source is the CFO of Tesco, or someone very close to that position.

Mr. Prevor's current weekly sales estimates are right in line with those we've been offering for nearly five months.

Based on our source information, we've been seeing an improvement in sales at some of the stores. Even more interesting--but logical--is that a number of the better performing stores have seen sales increases. Most of the poorly performing stores continue to do so.

The data that a number of the already previously better performing stores have seen sales increases doesn't surprise us since we've been arguing one of the problems Fresh & Easy has is that it's put numerous stores into buildings which previously housed supermarkets like Albertsons and Ralphs, and drug stores like Rite Aid. These retailers closed their respective stores in those buildings and locations for a number of reasons. One of those key reasons is because the stores were underperforming in sales in the locations.

From what we've been able to determine, one can trace many of the poorest performing Fresh & Easy stores to previously poor performing (under other ownership) retail locations, be they former supermarkets or other retail format stores.

As a result, as we've written before, we believe a number of the current 61 Fresh & Easy stores are located in proven underperforming locations.

This doesn't mean Tesco can't get the stores in the locations to eventually perform well. But it does mean the probability of the grocer doing so is considerably less than if it had used more optimum location picking strategies, rather than being driven more by the availability of empty retail buildings than by the potential of the site to perform. The empty building primacy was less than optimum in other words.

The more built from the ground up stores for Tesco, the better, in our analysis.

For example, we recently visited the site of the future Fresh & Easy grocery market in San Francisco's low-income Bayview-Hunters Point neighborhood. The Fresh & Easy store will be the ground floor retail anchor of a primarily residential but mixed-use condominium complex currently being built.

The ground floor location is optimum, as is the geographical location of the store for Tesco. It's a low-income neighborhood but it is rapidly changing and gentrifying in many ways.

Plus the neighborhood is underserved by supermarkets, as in only one for a neighborhood of perhaps 100,000 residents, and another who knows how many tens of thousands who go through the neighborhood each day in their cars or on the city's municipal transportation system.

Why it's a good location: There are no other grocer stores in the neighborhood, the complex is right on a major public transportation line, and with all the current housing in the neighborhood, plus all the new residents who will move into the new complex, there's a built in customer base for the store.

We aren't predicting here of course, but it wouldn't surprise Fresh & Easy Buzz if not too long after this San Francisco store opens next year, it becomes the number one performing Fresh & Easy grocery market in the fledgling chain, or very close to it.

But you say...if that couldn't just be the case with all of the 61 current stores. And it isn't.

Like we've often suggested though, there's plenty of time to change that, assuming the correct strategic decisions are made, executed well, and communicated comprehensively.

We are still waiting for that to happen. Stay tuned.

The 'Pause,' 'Critical Mass,' The Ten Former Rite Aid Stores...And More: Fresh & Easy Vegas; the Local Angle

The Las Vegas, Nevada Metropolitan region, an urban and suburban area of about 1.7 million residents, is one of three market regions (Southern California and the Phoenix, Arizona and East Valley regions being the other two) in the U.S. where Tesco is currently operating its small-format, convenience-oriented Fresh & Easy basic discount grocery, fresh and specialty foods format grocery stores.

There currently are 59 Fresh & Easy grocery stores open, with two more scheduled to open in the next two weeks. Once those two stores in the pipeline open, no other Fresh & Easy grocery markets are set to open until July.

Tesco recently acquired ten former Rite Aid drug stores (empty buildings) in the Las Vegas region, and the retailer is in the process of converting the stores to its 10,000 -to- 13,000 square foot Fresh & Easy grocery market format.

We reported here last Saturday on the grocer's plans to take a three month new store opening "pause," based on a post in Fresh & Easy's corporate marketing blog.

We've also discussed what we call Fresh & Easy's "critical mass"retail strategy, in which the grocery chain is focusing on defined geographical regions (the three above plus Northern California coming up) in its store rollout program, opening stores fairly close to each other relatively speaking, using a strategy similar to that of Starbucks and the drug store chains Wallgreen's and Rite Aid, for example. The theory being: have enough stores in a defined geographical area so that Fresh & Easy can become either the de facto neighborhood grocer or the neighborhood grocery market of choice.

Vegas is a key region for Fresh & Easy, which is why it decided to acquire the ten empty Rite Aid locations. It's all about "critical mass."

One of the Las Vegas Metro region's daily newspapers, The Las Vegas Review Journal, has a story in today's edition which provides a good local angle on Fresh & Easy in the region. You can read the article here.

Editor's note: We happen to know a little something about those ten former Rite Aid stores in the region. This includes the fact that a number of the stores were closed because they were underperforming locations. Based on this fact, we are a bit skeptical about the ability of a number of those store locations to perform well as grocery stores; of any kind. We plan on writing more about this soon.

Tesco's Corp. Finance and Strategy Director Andrew Higginson Says Reports of Fresh & Easy Store Underperformance Are 'A Load of Rubbish'

Tesco's corporate director of finance and strategy Andrew Higginson tells the United Kingdom's Daily Mail newspaper in a story in this morning's edition that reports such as ours and those by London-based investment house Piper Jaffray, which suggest the retailer's USA Fresh & Easy Neighborhood Market small-format grocery stores are under-performing in sales expectations to date, are "a load of rubbish."

Our analysis, based on multiple sources, is that the Fresh & Easy grocery markets are doing about $60,000 -to- $100,000 per-store, per-week in sales, compared to internal Tesco sales targets of about $200,000 per-store, per-week, for this point in time. We published our sales analysis before the Piper Jaffray investment firm, which is quoted in the Daily Mail article, offered their sales estimates. The first Fresh & Easy grocery stores were opened in November, 2007. There currently are 59 units open in Southern California, Arizona and Nevada.

Higgins says some of the sales estimate numbers he's read "are not figures he recognizes." "I think it's a load of rubbish. You have competitors queuing up to knock it [Fresh & Easy]. The business is doing fine and the consumer reaction is terrific," he tells a reporter for the Daily Mail in this story in today's edition.

"To be honest," Higginson adds," it's a voyage of discovery, a bit like when the dotcom boom. If customers say they love it that's the key metric really and the rest is just logistics." (Scotty, the chief engineer of the Starship Enterprise (see pic at top) on Star Trek was from the UK after all, so that helps expalin the "voyage of discovery" metaphor. But, read further.]

Really?

First, we think the gloom and doom crowd who are saying Tesco's Fresh & Easy small-format, basic grocery and fresh foods grocery market venture is destined for failure are wrong. So we agree that it's rubbish to make that specific statement at this point it time. The jury is still out on that assertion.

However, to dismiss the fact the stores are under-performing sales-wise is just mere spin, which if course as Tesco's CFO, Mr. Higginson is permitted to do so by the laws of corporate public relations.

Additionally, to dismiss all criticism, including much that has been constructive, demonstrates in our analysis one of the reasons the USA Fresh & Easy venture is having serious problems in the first place. Call it ethnocentrism, with a bit of hubris tossed in for good measure. If Tesco is to move forward in a successful manner with the stores in the U.S. it must first take an objective view of the Fresh & Easy format, operations, marketing and merchandising elements, followed by tweaking aspects in each of those key areas, as we've suggested before. It's not rubbish; it's real.

Lastly, we find this quote from Mr. Higginson to be amazing in three ways (both good and not so good mind you): "To be honest, it's a voyage of discovery, a bit when the dotcom boom. If customers say they love it that's the key metric really and the rest is just logistics."

The first thing that strikes us about the quote is positive. We like the idea that a huge (the world's third-largest) retail corporation like Tesco is willing to go on a voyage of retail discovery, especially in a rough-and-tumble grocery market like the Western USA market. Doing so speaks to one of the reasons Tesco has been so successful under the helm of CEO Sir Terry Leahy, which is that the retailer has realized a huge corporation and retailer can still be an entrepreneurial and adventurous one. In fact, that's it's essential to be in order to grow.

This spirit of adventure (and understanding that its future lies outside the UK) has guided Tesco's international expansion since the early 1990's, when Sir Terry and company decided to take the retail company on its global voyage.

The second thing about the quote is: We are surprised a CFO would reference the dotcom boom (which resulted in a bust) in the U.S. We get the aspect of it in which Mr. Higginson likens it to a "voyage" regarding Fresh & Easy. However, so many hundreds of billions of dollars of equity and value were lost in the U.S. by corporations, investment houses and individuals during the 1990's dotcom boom and bust we aren't sure it's a good idea to compare ones multi-billion dollar grocery retailing venture in the U.S. to that phenomenon. Why? Well, lets just say the dotcom boom didn't turn out too well for most from a financial perspective. Although, we did like its "spirit of adventure" in many ways personally.

Webvan and the 1990's U.S. dotcom boom and bust

Further, one of the casualties of the dotcom boom was what was to be the future of grocery retailing in the Western USA, if not the entire nation. That major casualty of the dotcom era was an online grocery delivery service called Webvan.

Webvan, which was based in Foster City in the San Francisco Bay Area in Northern California, was an online grocery retailing company which was founded in the 'go-go' 1990's by Lewis Borders, who was the co-founder of the hugely successful Borders Book store chain, which he later sold for billions.

Speaking of billions, that's about how much Lewis Borders and his team spent of investor money to create, build, operate and market Webvan. Webvan, which was touted as the next revolution in grocery retailing--and was promoted as such by most of the U.S. media--spent $1 billion to have its huge order-fulfillment, distribution center and corporate headquarters built in Oakland, California, not far from the Oakland International Airport, as well as for satellite facilities in the other U.S. markets it served.

Webvan operated in seven U.S. markets: the San Francisco Bay Area (it's first); Los Angeles; Orange County (Southern California); San Diego;; Seattle, Washington; Portland Oregon; and Chicago, Illinois. It was a Western U.S. retail strategy, which it then rolled out to Chicago. Sound strategically familiar?

Webvan spent tens of millions more on a fleet of custom-made, state-of-the-art delivery trucks (the "Van" in Webvan), a cutting-edge computer and internet-based (the "Web" in Webvan) ordering and processing system, office and warehouse equipment, marketing, sales promotion, salaries and bonuses and other "essentials."

A little over a year into its launch, Webvan had burned-through its initial billion or so of initial capital, which it raised from cream-of-the-crop U.S. venture capital and investment banking firms. However, the revolutionary grocery company still raised millions more from these same platinum investment firms via additional rounds of financing.

The problems--chief among them sales under-performance vis-a-vis targets--continued to mount. A few analysts who had always been objective about the "Webvan grocery retailing revolution" sounded the alarm that there was trouble in paradise. However, most of the U.S. and international business and popular press continued to use phrases like "The Webvan revolution," "How Webvan is putting a chill in the hearts of traditional grocers," and the "Webvan invasion," in stories about the fledgling company.

And, Webvan kept putting the lipstick on the dying pig, so to speak. It told the world things were going great, that its national U.S. expansion into the east coast and other parts of the country were right on track, and that the online grocery ordering and delivery service was gaining new customers weekly. Webvan even acquired a rival online grocery retailer, Homegrocer.com as part of its expansion strategy.

Then, in early July of 2001, Webvan announced it had ceased all operation--including the immediate firing of about 2,000 employees--and that it was filing for Chapter 11 bankruptcy protection.

The company said all that was left to do was conduct an orderly winding-down of business operations and the sale of any remaining assets after creditors had been paid. Webvan's once soaring stock wasn't worth as much as the paper the stock certificates were printed on. Most of the U.S. business and popular press outlets were "shocked" at Webvan's demise.

Conclusion

We aren't suggesting Tesco will experience anything similar to the Webvan experience with its Fresh & Easy Neighborhood market venture in the USA corporately. After all, its an international retailing corporation with over $60 billion in annual sales, as well as being the market share leader at home in the UK, with over 30% of that nation's grocery sales market all to itself.

However, we do think there are some cautionary tales in the Webvan experience for Tesco's Fresh & Easy Neighborhood Market venture.

For example: there are similar operations, marketing and merchandising mistakes being made by Fresh & Easy, the similar upfront investment sums are close, the Western U.S.--then Pacific Northwest and on to Chicago regional-to-national rollout strategies are rather similar--and, perhaps most strikingly, are the similarities (at least until marketing chief Simon Uwins announced the three-month pause in new store openings which we reported here last Saturday) in the messaging strategies of the late Webvan and present Tesco regarding Fresh & Easy: "That it's all a bunch of rubbish" and things are going just fine, thank you.

Mr. Uwins took the first (right) step in saying all is not fine in paradise when he got out in front of the story by posting in his corporate blog that the retailer needs to "kick the [Fresh & Easy store] tires" a bit and evaluate operations and other aspects to date. Had Webvan done that earlier they might still be around--although we doubt it in their case, as time essentially ran out for them.

Tesco is one of the world's most innovative and successful retailers. It's not Webvan. But even the mighty--especially when doing business in a foreign land--can learn from the experience and mistakes of a dotcom voyager like Webvan.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Tesco's Fresh & Easy Neighborhood Market Venture Fledgling Even Further? More Analysis and Commentary

The United Kingdom-based newspaper the Guardian is reporting today that New York-based investment firm Piper Jaffray has now revised downward its previous research estimate that Tesco's Fresh & Easy Neighborhood Market USA retail grocery chain is doing average weekly sales of about $170,000 week.

In a research note titled, "Miles Off Target," Piper Jaffray analyst Mike Dennis says research among Tesco Fresh & Easy's suppliers suggests first half sales at the retailer's U.S. small-format grocery store venture could be just $30 million, compared to the brokerage company's own estimate of $100 million.

A couple notes: first, Tesco opened its first Fresh & Easy grocery stores in early November, 2007. Therefore, when Piper Jeffray says "first half" sales they must mean four and one half months, since that's about the longest period the first Fresh & Easy stores have been open. That's a bit less than a "first half" in terms of any sales analysis we are aware of. But we get their point.

Secondly, only about 35% of the total 59 Fresh & Easy grocery markets opened to date were opened by January 1, 2008. That means over half of the stores have only been open for a little over two months. Further, about 35% of those (the 35%) stores opened just last month. So, when Piper Jaffray uses a term like "first half" sales, readers need to keep our numbers and explanation above in mind.

Further, the Guardian report doesn't say how many open and operating stores the Piper Jaffray report bases its estimate that "first half" sales should be about $100 million on. That's an important missing piece of data one needs to have when evaluating the brokerage firm's research and analysis. It's also key in analyzing average weekly per-store sales. For example, if the "first half" is defined as beginning when Tesco opened its first Fresh & Easy stores in November, 2007 (which it would have to be), that means we are looking at a "first half" universe of about 18 -to- 19 weeks.

For argument sake, lets say Piper Jaffray's numbers are correct. If they are, then that means the broker's original estimate of Fresh & Easy's below target weekly sales of about $170,000 is too high. [Last month the broker estimated Tesco's weekly sales target was $200,00 at that point in time but that the actual average weekly store sales were about $170,000 per-store, per-week. By the way, our source information pegs Tesco's internal weekly sales targets for this point in time at about $150,000 -to- $200,000 per-store per-week.]

Additionally, a week before Piper Jaffray released its estimate of the below target Fresh & Easy weekly sales of $170,000 vs. the $200,000 Tesco target, we reported that based on information provided by our sources, the stores were actually performing far worse than that. Our report was (and analysis still is) that the Fresh & Easy grocery markets are averaging weekly sales of about $70,000 -to- $100,000 per-store, per-week, with some stores doing over $100,000 and others doing even less than $70,000.

Based on Piper Jaffray's research note today that Tesco's Fresh & Easy stores likely have done only $30 million in what the firm calls the "first half," our average weekly sales figures seem to be much closer to that number than the $170,000 per-week the broker initially estimated. As we have written numerous times after our initial report, we stick with our numbers.

Average sales per-store, per-week is the most important measure of the Fresh & Easy stores right now. Why? As we said, the first stores have only been open since November, 2007, and half of the current 59 stores open to date have only been operating from one -to- two months. Cumulative sales over whatever period of time defines the "first half" is really fairly meaningless, except that is demonstrates Tesco's Fresh & Easy chain is indeed not performing up to expected levels to date.

On this issue and overall store performance, our analysis agrees with that of Piper Jaffray. We both have been saying Fresh & Easy isn't hitting Tesco's internal sales targets to date. More importantly from our perspective, we've argued part of the reason for this under-performance is because the retailer is failing in its positioning as being a primary shopping destination; the "neighborhood grocery market" in Fresh & Easy Neighborhood Market.

Rather, to date the small-format grocery stores, which sell basic groceries as well as more upscale specialty offerings, are in the main secondary food stores for consumers, and even in many cases the markets' are currently tertiary shopping venues. Tesco can't meet it goals--either the sales targets or overall strategic positioning goals--unless the Fresh & Easy stores can become primary grocery shopping venues in the neighborhoods where they do business.

New blood at Fresh & Easy headquarters

On Wednesday, we were one of the first (we believe the first in the USA) to report Tesco is bringing in American-born and raised Jeff Adams, who currently runs the retailer's business in Thailand, as the number-two man at Fresh & Easy, right below CEO Tim Mason. Adams is a former Wal-Mart executive.

We've been one of the strongest voices in suggesting our analysis shows one of the major problems with Tesco's U.S. Fresh & Easy grocery store operations is the retailer's failure to understand how important local grocery retailing is in the U.S., especially in the Western U.S. cities of California and Arizona, where the grocer currently is launching its biggest retailing efforts.

[We recently received a note from a grocery industry veteran and correspondent in the UK. Our correspondent was responding to one of our pieces in which we talked about this "localism" failure. The UK grocery industry veteran commented that "when it comes to grocery retailing, the UK is a village. We wrote back and said..."There is no more of a grocery industry retailing village than California; which we can tell you is 100% true.]

We believe the naming of USA-born and former Wal-Mart retailer Adams to the number-two position at Fresh & Easy just might be an accepting of our argument that one of the chain's key problems is a failure thus far to understand and appreciate the local customs, demographics, history and nature of the different neighborhoods where it has its Fresh & Easy grocery stores.

Among these failures in "localism" include a product mix that needs revamping to reflect what best sells in the west and more of a neighborhood marketing approach with it's stores. All veterans of grocery marketing and retailing in the Western U.S. know there are significant differences between the Orange County market in Southern California, the Metro Las Vegas, Nevada market, and the Phoenix, Arizona market. There even are significant neighborhood-level differences within these markets, especially in California.

Of course, there are numerous similarities between these markets as well. But that's the easy part really. What's more difficult--and what matters most--is understanding the differences, committing to "localism," and then devising and implementing a neighborhood marketing-style strategy to address these key differences and variables.

Piper Jaffray's research note says Adams is perhaps being brought in part to impart some of what we call "localism." Dennis says: "He (Adams) is tasked with understanding what has gone wrong with the (Fresh & Easy) concept, and how they (Tesco) are to recover, if at all, their $700 million-plus investment so far." We don't disagree with that analysis in the main.

Fresh & Easy format and positioning problems

At this point in time in our analysis, we have not reached any conclusions on the Tesco Fresh & Easy format in the U.S. We believe it's still to early for any reasonable analyst to do so. As such, the jury is still out in our analysis.

However, we are of two minds in our analysis to date. First, in many ways, we believe the Fresh & Easy format itself may not be a successful one for U.S. grocery retailing. Why? It's combination format of low-price-leader basic grocery store and semi-upscale fresh foods retailer doesn't fit the model of success in the U.S. to date.

The most successful U.S. grocery chains tend to be more solidly positioned in their format. For example--Whole Foods Market, Inc. as a supernatural, upscale, lifestyle retailer, Wegmans as an upscale supermarket, Safeway Stores as a lifestyle supermarket, Trader Joe's as a clear specialty grocer format, Save-A-Lot and Aldi as small-format, limited assortment discount retailers. There are numerous other examples.

In other words, success in U.S. grocery retailing generally goes to those retailer's whose formats are clearly positioned--discount, upscale, high-low, everyday low-price--rather than to hybrid-type formats, which Fresh & Easy is. However, as we said, the jury is still out.

This gets us to our "second mind" in terms of our analysis of Fresh & Easy. In many ways, its hybrid format has lots to offer. It's very egalitarian in its concept: a limited assortment of basic groceries at generally low-prices; mixed with specialty and organic grocery items, prepared foods, a limited-assortment of fresh produce and meats, wines and craft beers, fresh flowers, and a selection of non-foods.

The format allows a shopper to pick up her Brawny brand (Proctor & Gamble) paper towels, Tide Detergent (P&G again) and Fresh & Easy brand milk and eggs, along with a bunch of ready-to-eat and ready-to-heat prepared foods, some fresh produce, a good bottle of wine, and even a bouquet of fresh flowers for the table.

The geography of the stores also is rather egalitarian. Unlike Trader Joe's and Whole Foods--which target their stores generally to higher-income and education-level neighborhoods--Tesco is locating its Fresh & Easy grocery stores in neighborhoods that range from upper-income, to low-to-middle income and low-income. Of course, this is further evidence of how important it is for the retailer to create and keep primary customers--rather than secondary and tertiary shoppers--if it wants to succeed. A grocery chain that locates stores everywhere, rather than niche marketing like Trader Joe's and Whole Foods do, must have a significant base of primary shoppers to survive.

However, Fresh & Easy has some serious format and operations problems. First, the stores' still have serious out-of-stock problems in the fresh foods categories. This is a logistics problem, not one caused by massive sales. This problem is most serious in the late afternoons and evenings. The stores get daily deliveries each morning of fresh foods. The out-of-stocks problem has improved somewhat in the last 90 days since we began writing about it, but it still exists. (We still get emails from shoppers and vendors talking about it.)

In terms of the format problems, we mentioned a key one, which is the lack of local or neighborhood marketing and merchandising. Additionally, there's also a problem with the overall basic grocery product mix. It doesn't fit well with what sells best in the states' where the stores are located. Product selections have a real local flavor in the U.S. and Fresh & Easy doesn't reflect that fact of Western U.S. grocery merchandising.

Further, the ratio of Fresh & Easy store brand everyday grocery products to national brands is to high, in our analysis. Based on our store research, its about 65% Fresh & Easy brand -to- 35% national brand. We think an at least 50%--50% ratio is needed based on the limited assortment philosophy the retailer needs to use in its average 10,000 square foot stores.

The primary reason we suggest this, is that the stores are missing some very key--and top-selling--national brand items in key categories. Many of these items are the number one or two sellers in their respective categories. This omission gets back to the fact that Tesco has failed to understand and properly research what is called the "California product mix" and the "Arizona mix" by Western USA grocery retailing and manufacturer marketing and sales veterans.

There are a few more problems with the Fresh & Easy format and positioning, but these are the highlights--and most important. We argue that a failure by Tesco to address and fix each of these problems will likely result in a failure in the medium to long run for its USA Fresh & Easy Neighborhood Market venture. These format and positioning problems are fixable though.

The grocer needs to fix the fresh foods out-of-stocks problem yesterday. It's not even so much because it is causing lost sales, that's just the short-run problem. Far more important is that its defining the fledgling chain in the minds' of many consumers. They've gone into a Fresh & Easy market for the first or second time, seen lots of out-of-stocks in the fresh foods categories--especially prepared foods, which is the reason many consumers are trying the stores--and decided not to come back.

Not only are these shoppers unlikely to ever become primary customers, it's unlikely they will ever become secondary or tertiary ones as well. The definition of Fresh & Easy in these particular consumers' minds: "That grocery store that's always out of fresh, prepared foods." It doesn't matter that always is an exaggeration. What matters is that the problem (out-of-stocks) has defined the stores' in their minds. Further, in this era of viral marketing, where word-of-mouth means so much, a retailer needs vocal allies not vocal critics.

As we've written before, unlike a number of analysts, writers and others, we believe that despite these serious problems--and store under-performance to date--Tesco remains committed to Fresh & Easy and Western U.S. grocery retailing for the long haul. The grocer has too much money invested thus far.

Equally, if not even more important, Tesco has too much momentum built up to pull the plug, even if they decided to, which we don't believe they are even considering at this pint in time. There also is much British stiff-upper lip pride in the venture at Tesco HQ in the UK, as well as at Fresh & Easy Neighborhood Market corporate headquarters and stores in the U.S.

Further, Tesco should be very proud of its Fresh & Easy store-level employees. They are doing an excellent job, despite a rather paltry $10 per-hour wage and less than complete training do to the rapid new store opening schedule the grocer is embarked on.

Of course, the problem is, if the retailer doesn't first recognize a number of the problems we have identified above--which don't just come from our imagination but are informed from lots of observation and many sources from across the board--that long-term commitment will be meaningless. In fact, failure to fix these problems could mean prolonged agony. The addition of Jeff Adams though looks like it might be a start in the write direction. Stay tuned.

Note:
Tesco, parent company of Fresh & Easy Neighborhood Market, is having some sales problems at its stores at home in the United Kingdom. The Guardian article talks about that situation in the second half of the story.

Linkage:
Look through our February and January, 2008 archives, in addition to viewing March, and you will find numerous pieces analyzing Fresh & Easy, along with some suggested prescriptions for improvement.

Tesco Fresh & Easy Chief Tim Mason Sidesteps Questions on Store Performance But Says its Full-Bore Ahead for Fresh & Easy

Tesco Fresh & Easy Neighborhood Market CEO Tim Mason was in Sacramento, California last week as we reported here to announce the grocer's signing of leases for an initial 19 grocery store sites in the Sacramento region, including seven in the city of Sacramento.

While Mason was in Sacramento, he sat down with Jon Ortiz, a business reporter for the Sacramento Bee, for a Question and Answer session, which is published in today's edition of the Bee.

In the Q&A piece with the Sacramento Bee's Ortiz, Mason addresses the topic we were one of the first to report on--and one of only three industry analysts to put numbers to--which is that Tesco's Fresh & Easy grocery stores' are under-performing based on the company's sales goals.

Here is the reporter's question, and CEO Mason's answer:

Reporter Ortiz: "Some industry experts have speculated that Fresh & Easy isn't meeting its sales goals. How is the business performing?"

Tim Mason: "We are delighted with a lot of things about the business. We're delighted with the quality of staff that we've been able to attract. We're delighted with their morale and enthusiasm for the business. We're delighted with the response that we are getting from customers to the quality of the products and the value of their money, the ease of the shopping trip and the quality of the service.

Every week we get more customers. Every week we take more money. And nearly every week our basket size (average amount of spending per customer) [Our note: It's almost always called 'average ring' in the U.S. grocery retailing industry.] goes up. So the board of Tesco and I are pleased with the progress that we're making, and we think we've made a very good start."

In journalism, public relations and politics, CEO Mason's answer to reporter Ortiz's question is called a "non-denial denial." However, in our opinion it is as close to an admission as is going to be given that our--and others'--analysis is correct that Tesco's Fresh & Easy stores are under-performing in gross sales compared to corporate targets for this point in time.

However, unlike other analysts reporting on this issue, we believe Fresh & Easy's Mason--and Tesco CEO Sir Terry Leahy--are worried about this sales under-performance, but not critically. We argue this is the case because our analysis tells us Tesco is employing what we call a "build enough stores as fast as we can and they will come" strategy. In other words, the retailer's strategy is to first get open and operating a critical mass of stores as fast as possible, then fix the problems. We aren't suggesting they are right, by the way.

However, as we have pointed out in numerous pieces (read through our February and January archives on the blog) this is a gamble.

It's particularly a gamble because four months' after the first Fresh & Easy store opened in late October, 2007 in Hemet, California, the grocer still faces serious out-of-stock conditions in many of its stores, especially in the fresh foods and fresh, prepared foods' categories. Unfortunately for the retailer, this problem is one of its logistics and distribution system, rather than being caused by massive sales.

If Fresh & Easy doesn't fix this problem soon it could define the chain in consumers' minds as "that store that's always out of what I want." Such adverse positioning is very difficult for a grocer to overcome.

There are other problems as well. We detail some of them, and offer suggestions for moving forward in this piece we wrote on February 21, 2008

Additionally, unlike some other analysts, we believe despite these serious operations and merchandising problems that need immediate attention--and fixing by Tesco--that the British grocer is in it for the long-haul--good or bad--in the Western USA.

The retailer is building a new store about every three days in Southern California, Arizona and Nevada. Tesco has signed leases for an initial 18 sites for its small-format, convenience-oriented grocery stores in Northern California's San Francisco Bay Area, and inked deals on 19 sites in the nearby Sacramento region in Northern California. The first stores in Northern California are set to begin opening in late 2008 or in early 2009.

Tesco's Fresh & Easy also plans to build a distribution center in Stockton, California to service its Northern California grocery markets. (Sacramento Bee reporter Ortiz asked Mason about this distribution center in the Q&A. Mason confirmed the retailer would locate a DC in Northern California to serve its stores in the region when they open. However, he didn't go on the record regarding the Stockton location.) We stand by our report that the DC will be in Stockton.

Further, Tesco has explored potential store sites in the Chicago, Illinois region and has looked at possible opportunities in Florida and New York. The Pacific Northwest regions of Oregon and Washington are on the retailer's longer-term planning sheets as well, according to our sources.

Since, as we suggest, Tesco plans to be in the U.S. for the long-haul with its Fresh & Easy grocery store venture, unless it starts fixing its most serious distribution, logistics and store-level problems soon, the retailer is going to burn far more cash than it's budgeted for the venture. In fact, that $2 billion investment could double.

And, perhaps even far more serious, if it doesn't fix the out-of-stocks and other most serious problems now, they could come to define the grocer with shoppers, and not in a positive way.

Read the Q&A interview by Sacramento Bee reporter Jon Ortiz with Tesco Fresh & Easy Neighborhood Market CEO Tim Mason here.

A Report From the UK: British Supermarket Industry Writer Weighs in on Tesco's Fresh & Easy in the USA: We Offer Some Analysis and Commentary

James Thompson, a writer and columnist for the United Kingdom-based trade publication Retail Week, gave his homeland's number one retailer Tesco a bit of that famous British stiff upper lip and a vote of confidence in a column in yesterday's edition of the publication.

Responding to analysis last week by the New York-based investment firm Piper Jaffray, and additional analysis by people like us and a couple others, Thompson writes that in time he believes "Tesco will surely adjust its product proposition as it expands (Fresh & Easy) rapidly along the west coast and further inland" in the Western U.S.

In his above opinion, Thompson is referring to analysis--which we were one of the first to point out and have been strong in suggesting--that Tesco needs to better localize its Fresh & Easy grocery store product mix and retail operations to neighborhood demographics, traditions, history and culture. (In fact, we are just about the only voice talking about this regularly, as well as offering suggestions as to how Tesco could achieve this important merchandising element in American grocery retailing.)

To make his point that the British grocer will eventually alter its merchandising scheme in its U.S. Fresh & Easy stores, Thompson points out that Tesco plc. CEO Sir Terry Leahy did just that, and admitted so, with the retailer's supermarkets in Eastern Europe after they were introduced in the 1990's.

Tesco entered Eastern Europe with its supermarkets, first in Hungary in 1995, and in Poland, the Czech Republic and Slovakia in 1996. After some serious faltering with the stores in Eastern Europe, Tesco did make some changes as Thompson points out, paying more attention to local merchandising schemes, product selection, customs, culture and history.

[Of course, the U.S. is a far-bigger and historically less-forgiving market than Eastern Europe, simply do to its sheer economic size and hyper-aggressive competitive grocery retailing climate.]

Thompson also gives Tesco props for its rapid-fire Fresh & Easy store launch in the U.S. He argues the grocer has "launched it's U.S. operation (Fresh & Easy)--including a hugely impressive warehouse and vertically integrated food facility--bang on time and has not yet faltered in its roll-out program, which has surpassed 50 stores." There are 55 Tesco Fresh & Easy Neighborhood Market grocery stores open to date in Southern California, Arizona and the Las Vegas, Nevada Metropolitan region.

Thompson is right in the main about the store roll-out program. Tesco has essentially met its new store opening schedule despite some close calls. As we've written before, since the first stores opened in early November (the Hemet, California store actually soft-opened in late October), Tesco has opened a new store every two -to- three days on average, which is an impressive roll-out.

Thompson is wrong however regarding Tesco's huge 850,000 square foot distribution center in Riverside, California. It's is an impressive facility, that's for sure. That's not where he is wrong though. We agree on it's impressiveness, including its huge solar panel array on the roof.

Rather, Thompson fails to point out that Tesco didn't obtain the proper permits involving environmental and other aspects when it built the facility. As a result, Riverside County halted work on the DC, which ended-up costing Tesco additional money, and more importantly has affected its supply chain operations, as well as delaying the retailer's ability to fully-use the facility.

Chief among Tesco Fresh & Easy's distribution and supply chain problems has been frequent out-of-stock conditions in its stores. These out-of stocks are particularly serious in the fresh foods category, and especially among its fresh, prepared foods offerings.

This is the "vertically integrated" aspect of the Riverside distribution center Thompson is eluding to. Tesco has set up a commercial kitchen facility at the DC. There it prepares all of its Fresh & Easy brand fresh, prepared foods. It then distributes the prepared foods items to its stores on a daily basis in a direct-store-delivery (DSD) manner.

Prepared foods' out-of-stocks were horrible in the stores in November and December of 2007. This was particularly true in the late afternoon and evening hours. The conditions have improved somewhat in most of the stores--but the out-of-stock situation still exists.

In other words, Tesco's Fresh & Easy distribution center and vertically integrated prepared foods' operations have been less than problem-free. Thompson fails to mention these facts. But in fairness, he likely isn't aware of them. However, we do agree with him that Tesco's Fresh & Easy store roll-out process has been impressive. In fact, it might be too rapid.

We don't doubt that Tesco will fix the out-of stocks situation in the fresh, prepared foods category at some point. But that's not the key point. Rather, since many of the retailer's potential new customers went to shop at a Fresh & Easy store for the first time because they had heard so much about its extensive prepared foods offerings, but found major out-of-stocks in the category, their first impression wasn't a good one in many cases. If the problem isn't solved soon, it could come to define the chain in the short-to-medium run.

Essentially, as a start up, all of Fresh & Easy's customers are new ones. Making a bad first impression makes it very difficult to get return shoppers, let alone create primary shoppers, which is what the chain must do to achieve its goal of being a neighborhood grocery store rather than a convenience store chain.

We have received a number of emails from Fresh & Easy store-level workers, and have had conversations with others. They tell us training has been lacking a bit, and that turnover has been higher than it should be in their opinions. These correspondents attribute this primarily to the rapid-fire new store opening pace the retailer is conducting. They also tell us though, that in the main, they are enjoying working in the Fresh & Easy stores.

Our analysis also is that Tesco's rapid-fire new store opening pace has hurt the merchandising at the existing stores. We think the format has strong potential. However, the basic grocery, prepared foods, fresh produce and meat, and specialty products overall product selection needs lots of work. Of course, it appears to us Tesco has decided to follow a strategy of opening a critical mass of stores first, then fixing the problems later. Since timing can be everything at retail, it will be interesting to see if that strategy works.

Additionally, the pricing scheme, especially on the basic grocery items, also needs to be reviewed. Overall, the prices are low--perhaps too low to make margin--but the overall scheme is off in that many items are priced lower than need be and others are higher than they should be.

Tesco needs to spend more time studying Western USA supermarket pricing schemes and adjust Fresh & Easy's retail pricing to be more in line with the overall Western U.S. retail grocery industry pricing strategy. The U.S. is probably the most regional retail grocery market in the western world. Not only do product selections vary considerably in the west, Midwest and east coast, but so do the pricing schemes.

What we do agree with Thompson about is that Tesco is a good food retailer in terms of the nuts and bolts, along with innovation. Under CEO Leahy's leadership over the last years, the chain has doubled it's store count and sales, gone into parts of the world where U.S. supermarket chains seem to have no interest in going do to their largely non-global focus, and solidified its position at home in the UK as that nation's number one retailer, with a commanding 34% market share.

Ever the fair analyst, Thompson says "Tesco has no divine right to succeed in the U.S. and skeptics are right to question whether Fresh & Easy, in its present guise, is the ideal format." Further, he says, "Like other UK retailers that have gone before (Marks & Spencer and Sainsbury's for example), it (Tesco) could well find the U.S. market a tough nut to crack." However, he adds, "but the smart money is on the Cheshunt (Tesco's UK headquarters) retailer getting it right in the long-term--albeit with some refinements to Fresh & Easy along the way."

Tesco's UK "friends" in the business and trade press haven't been as optimistic as Thompson regarding Tesco's chances of making it with Fresh & Easy in the U.S. In our analysis, much of the "making it in the U.S." by the British mega-retailer will ultimately boil down to understanding and then practicing an important fact of U.S. grocery retailing: Localism.

Safeway Stores, Inc. learned the importance of the local approach after years of avoiding the fact. For example, in the 1980's you could go into a Safeway supermarket in San Jose, California, in a neighborhood where 70% of the residents were Hispanic. What you would find would be a six-foot or so Hispanic Foods section, containing mostly the basics of Hispanic or Latino grocery products and ingredients. The same in produce, the same in meat.

You could then drive 15 minutes outside of the neighborhood, to a neighborhood in a nearby city in which 65% or so of the residents were Asian. There you would find a three-foot section of Hispanic groceries--the chain's basic set.

The primary difference between the six-foot "expanded set" in the store with a 70% Hispanic demographic and the three-foot core set in the store where 65% of the shoppers were of Asian ethnicity, was that the six-foot set had more brands of the basics, and more facings. There were more brands and facings of peppers, beans, and other commodity items but very little if any key specialty items. In other words, with a few exceptions, there was no demographic product selection targeting based on a neighborhood's ethnic makeup and other variables.

Go in that same San Jose store today though, in that same neighborhood, which is now about 80% Hispanic, and you will find a store-within-a-store Hispanic foods section. Not only does the section have all the basics, it has scores of Hispanic specialty items, and even non-foods. The produce department is full of specialty produce used by Hispanic consumers. The fresh meat department is the same: specialty cuts of meat, poultry and fish designed to appeal to the ethnicity of the primary shopper in that store.

Safeway now does the same in the Asian foods' category. Further, the grocer micro-targets within a given category. For example, down the road from that San Jose store in the neighborhood with a 65% Asian ethnic demographic, is a neighborhood with a substantial population of immigrants from India. As a result, Safeway has a large Indian foods section within its Asian mix in that store.

The neighborhood marketing goes on and on: in the natural and organic foods' categories product selections are grown as the demographics warrant, foods targeted to African Americans are expanded in neighborhoods where the segment is high in population count, greatly expanded gourmet foods selections are created in high-income and "foodie-oriented" neighborhoods, and more. The local focus is where it begins, then its taken down to a neighborhood level and even looked at on a neighborhood-within-a-neighborhood level.I

It's no accident that when Safeway began implementing its local and neighborhood-oriented marketing programs in the mid-1990's as part of its Lifestyle store format development, the chain's fortunes began to dramatically improve. It was one of a number of key marketing and merchandising elements which has contributed to the grocer's success over the last decade.

Unlike some U.S. grocery industry analysts, commentators, consultants and grocery executives, we believe Tesco is in the U.S. for the long haul.

The retailer continues to roll-out a new Fresh & Easy grocery market in Southern California, Arizona and Nevada every few days, has signed leases for at least 18 stores (and has more in the pipeline) in the San Francisco Bay Area, has 19 store location leases inked (with more awaiting its pen) in the Sacramento region, is looking for store sites in the Chicago, Illinois area, has discussed going into Florida and New York, and may even be checking out the Pacific Northwest states of Oregon and Washington for store locations.

Fresh & Easy is far from a test for Tesco in the U.S. Rather, it's a long-term venture. As a result, the grocer needs to get it right. After all, it has about $2 billion riding on Fresh & Easy's success not to mention that strong British pride. [Read James Thompson's piece here or at the link above.]

Tesco's Fresh & Easy Management Comments Further on Poor Store Performance Analysis

Tesco's Fresh & Easy Neighborhood Market senior management has issued a statement in response to analysis by various observors that its USA Fresh & Easy small-format grocery store chain is currently underperforming in sales, and not meeting the retailer's projections, which calls for the stores to be averaging about $200,000 a week in gross sales at this point in time.

In its statement, Fresh & Easy said the convenience-oriented grocery stores "are proving very popular" with shoppers. Further, the statement said, "What we are seeing is growing sales, growing customers."

We've been one of the first analysts and publications to report that Fresh & Easy has been having numerous start-up problems, including missing its target sales numbers. Chief among these difficulties is that the stores are underperforming in weekly gross sales.

Based on information from our multiple sources, we pegged average weekly sales at the currently open 50 Fresh & Easy grocery markets in Southern California, Arizona and Nevada at between $60,000 -to- $100,000 per-week.

Recently, industry analyist Jim Prevor said his analysis shows even lower weekly sales. Prevor's estimate is in the $50,000 -to- $60,000 a week range.

Yesterday, the New York-based investment house Piper Jaffray, said its research suggests Tesco's Fresh & Easy grocery chain currently has average weekly sales of no more than $170,000 per-week. Further, the stock brokerage said Tesco needs to dramatically retool the stores' format if it expects to succeed in the U.S. Mike Dennis of Piper Jaffray added the firm estimates it would cost Tesco about $400,000 million to exit the U.S. market at this point in time.

As we reported yesterday, a Fresh & Easy spokesperson pushed-back against the analysts' who have reported this data. However, Fresh & Easy has not publicly denied, or questioned, any of the estimated weekly sales figures reported by Fresh & Easy Buzz, Prevor or Piper Jaffray.

In our recent pieces--and in fairness to Tesco's Fresh & Easy venture--we have said it's too early to call Tesco's small-format hybrid basic grocery store/fresh and specialty foods stores a failure. Half of the small-format grocery markets have been open for a blended averate of about 90 days. The other 50% have been open and operating for less than 60 days on average. It is, after all, a start up--and start ups underperform, eat cash, and do various things even the most brilliant strategists thought they had built-in safeguards against.

However, we've sited a number of serious structural problems with Fresh & Easy's store format and operations, which if aren't fixed soon, we believe could contribute to a failure of the venture in the U.S.

Chief among these serious problems are:

>A "format muddle" in the minds' of shoppers as to what a Fresh & Easy store is. The stores are a hybid discount basic grocery store and semi-upscale fresh and specialty foods market. The grocery markets are sort of a Supervalu, Inc. Save-A-Lot meets Trader Joe's. We aren't ready to say the Fresh & Easy format itself is doomed to failure. However, we do have questions in terms of its positioning. A major problem is that Tesco has done a poor job thus far in communicating to consumers through its marketing and merchandising what these "Fresh & Easy" stores are. This must be fixed, and fast.

Further, the product mix--both in the basic grocery and specialty categories--isn't correct. The stores aren't selling enough major branded grocery items in key categories, and enough of the top-selling specialty items aren't on the stores' shelves. Fresh & Easy needs to regionalize its stores' product merchandising mix better (much better) and offer many more locally-produced items as well.

On the basic grocery category front, the pricing needs to be reworked. Fresh & Easy's positioning in the everyday grocery product category is "low-price," and many of the prices are good relative to nearby supermarkets. However, the "low-price" scheme isn't integrated enough--many items are too high, others are too low. It needs reworking to better reflect the stores' respective neighborhoods and its retail competion in the "everyday low price" retail grocery store segment.

>A very serious second problem is the regular out-of-stock situation in most of the grocery stores. These out-of-stocks are particulary chronic in the prepared and other fresh foods categories.

Many consumers are trying Fresh & Easy because they've heard much about its prepared foods offerings. The out-of-stock situation is not only losing sales for the retailer, but is badly affecting its ability to retain customers. Shoppers make their first trip into a Fresh & Easy, see the out-of-stocks in the prepared foods cases, and never return.

This out-of-stock condition is most apparent in the late afternoon and evening hours. It's a logistics and distribution problem, not one of massive category sales. If Tesco doesn't fix this problem soon, it will come to define Fresh & Easy as "that store which is always out of stuff."

>A third serious problem we strongly believe is that the Fresh & Easy stores have little or no sense of place to them. Think Starbucks or Whole Foods Market and you will understand what we mean by a retailer that creates retail stores with a strong sense of place.

Tesco needs to put the "Neighborhood" in its Fresh & Easy Neighborhood Markets. There just isn't enough "there," "there," as a writer once commented about 1960's downtown Oakland, California. (Note: If you visit downtown Oakland today, you will see its getting its groove on, and that there is much "there," "there" today compared to the 1960's. So it is doable for Tesco.)

In this earlier piece, we suggested a few ways Tesco could create a better sense of place in its Fresh & Easy grocery stores. One key reason for doing so is that in order to succeed as a neighborhood grocery store, Fresh & Easy needs to create primary shoppers, rather than just secondary and tertiary ones, which primarily is the case at present.

Regarding the stores' sales analysis, the Tesco Fresh & Easy Neighborhood Market spokesman says the retailer is continuing to go forward with its rapid new store-opening program and plans. Fresh & Easy is on target to have 150 -to- 200 of the small-format grocery stores open by the end of this year.

Additionally, it plans to enter the Northern California market with an initial 18 stores in the San Francisco Bay Area, opening the first stores either in late 2008, or more likely in early 2009. Tesco has signed leases for empty retail buildings to be remodeled or for property to build new stores on for all 18 of these initial Bay Area locations.

If you have any suggestions, comments or information, you can email us at freshneasybuzz@yahoo.com. Our policy is that after vetting any information you give us, if we do feel comfortable using it (if it passes our fact-checking tests) we will keep you 100% anonymous, unless you tell us it is OK to use your name. Comments also are welcomed here on the blog.