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.
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.
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.
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