Analysis & Commentary: The Seven Retail Operations Changes Tesco's Fresh & Easy Neighborhood Market Needs to Make to Help it Get On the Success Track

First in a Series. Today: Tesco's Fresh & Easy's - Retail Operations

Fresh & Easy Buzz has been writing of late about and offering analysis on the change in positioning by Tesco's Fresh & Easy Neighborhood Market to a more "value-based" retail positioning model, which is something we've been saying for over a year that the grocery chain needs to do. [March 2, 2009: Fresh & Easy Buzz Redux: Much of the Value Proposition-Based Analysis and Suggestions We've Been Offering Now Being Adopted By Tesco's Fresh & Easy.]

However, we've always stressed a "value proposition," which is far more than just getting "down and dirty" on price, as Tesco Fresh & Easy CEO Tim Mason put it in a recent interview in the Sunday London Times. [February 26, 2009: Tesco Fresh & Easy, Research and Course Correction: What 'Was' Said and 'its' Context Matters Little; What 'Is' Matters Much, What's Done Matters More.] Although, in the current super-competitive aand recessionary food retailing climate in California, Nevada and Arizona, where Tesco's Fresh & Easy Neighborhood Market has its current 115 stores, getting "down and dirty" with low everyday prices and hot and deep promotional price offerings is a must -- regardless of what any other analyst might tell you.

Safeway is doing it. Kroger as well. Ditto on Supervalu.

Add Wal-Mart and basically all the other grocery chains to that list in these respective markets, as well as throughout most of the United States. Right now, "all grocers are discounters" in their own ways. Even Whole Foods Market, the natural-organic and premium grocer, is putting value above all else in its merchandising, marketing-promotions and operations right now. [August 4, 2008: The Value Proposition: Whole Foods Market's New Focus on 'Value' Demonstrates the Importance of the Value Proposition Currently in U.S. Food Retailing.]

But mere hot promotional pricing and advertising does not value make alone. That's something all grocer's need to keep top-of-mind, and most all successful ones do. [June 18, 2008: Tesco's Fresh & Easy and it's 'Value Proposition:' We Asked, They Answered; Discussion, Deconstruction and Fresh & Easy Buzz Analysis.]

Additionally, as we've detailed in Fresh & Easy Buzz for over a year, the problems Tesco has and is having with its small-format, convenience-oriented, combination grocery and fresh foods Fresh & Easy chain are far from exclusively price and promotional pricing-based. They involve other merchandising, marketing and retail operational omissions, mistakes and failures, which we've outlined in the Blog since December, 2007.

These problems, a theme we've been in the forefront of offering analysis and suggestions on regarding Tesco's Fresh & Easy, stem in our analysis from a failure to understand that food and grocery retailing in the U.S. (and in California, Nevada and Arizona) is a regional, sub-regional, sub-sub-regional and local business. [November 24, 2008: A Single Bird in the Ad (Even Wrapped in Bacon and Sage) Does Not Make For A Good Thanksgiving Promotion For A Neighborhood Grocer For 'Everybody.']

Like former Democratic Speaker of the House Thomas "Tip" O'Neill was famous for saying about politics, that "All politics is local," so to is it the case that "All food and grocery retailing in the U.S. must be locally-based," reflecting the unique democraphics, culture, history and local consumer behavior in the regions, sub-regions, sub-sub regions and neighborhoods where a retailer's stores are located.

This doesn't mean all U.S. food retailing is or should be done by locally-based independents. No indeed. What it means is that those chains that are successful in the U.S. generally put a serious and considerable focus on local and neighborhood merchandising and marketing in each of the market regions where they operate stores.

It's also why food retailing in the U.S. is, by-and-large, a regional business, with regional chains being the market share leaders in most regions of the country. Examples include Stater Bros in Southern California's Inland Empire region, Bashas in Arizona, and Save Mart and Raley's in Northern California. Each of these privately-held, regional chains is the number one, two or three market share leader in its respective regional and local markets. In fact, the only one of the four that isn't the market share leader in its respective market is bashas in Arizona. All do $3 billion-plus a year in sales. Save Mart does about $6.5 billion annually with about 230 stores.
It's also why the big chains like Kroger Co., Safeway Stores, Inc. and Supervalu operate multiple supermarket banners. Each of these three chains became semi-national food retailers not by organic growth, but rather through acquisitions of leading regional supermarket chains, nearly all of which were privately-held and built up by the local families or business people that owned them. And it is this local banner policy that helps them to be the market share leaders in the parts of the U.S. where they hold that status.

In Southern California, for example, that includes the number one and two market share leaders, Safeway Stores, Inc. and Kroger Co. Safeway-owned Vons was a privately held chain in Southern California before Safeway acquired it. Ralphs also was a privately-held chain, which was acquired by Southern California-basedsupermarket investor Ron Burkle's Yucaipa Companies in the 1980's, then acquired from Burkle by Kroger Co. in the 1990's.

The stength of the Vons' and Ralphs brands goes back to their privately-held, regional supermarket status, a status the owners of each of the chain's built by focusing on the local in Southern California. Safeway and Kroger realized this, which is why they never changed the names of the respective chains to "Safeway" or "Kroger."

Lastly, the local nature of food and grocery retailing also explains why multi and single-store independents are such a powerful and successful retailing force in the business in the U.S. It also expalins why, despite the long time and ongoing threat to independents from the mega-chains, the independent grocer sector continues to survive and even thrive. It's all about thinking and acting local in significant measure.

It's been our analysis for well over a year that unless and until Tesco realizes this fact about U.S. food and grocery retailing -- the regional, sub-regional, sub-sub-region and local nature of the business -- it will continue to miss the mark on creating a successful Fresh & Easy Neighborhood Market chain.

Ironically the word "neighborhood" is in the chain's name. But Tesco has yet to put the "neighborhood" in Fresh & Easy Neighborhood Market in terms of understanding and then acting on, with its merchandising, marketing and operations, the local natural of food and grocery retailing in America. [April 3, 2008: Our 'Fresh & Easy Stores' Lack A Sense of Place' Theory is Growing; Read What We and Others Are Saying Tesco Needs to Do With Fresh & Easy.] [October 8, 2008: Putting the 'Neighborhood' in Neighborhood Market: 'Localism' and Tesco's Proposed Fresh & Easy Neighborhood Market in Sacramento's Oak Park.]

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Over the next few weeks, Fresh & Easy Buzz will be offering analysis of the current state of Tesco's Fresh & Easy Neighborhood Market in five key areas: (1) retail merchandising (today's focus) (2) merchandising, (3) marketing-promotions, (4) format, and (5) store location strategy, along with offering suggestions for changes the grocer should make, in our analysis, going forward in each of these respective areas, combining them all into a whole.

Nearly all of these suggestions we write about today and will write about in the upcoming stories are ones we've made in one form or another for about a year. We will add some new suggestions in the upcoming pieces.

Today, we focus on the retail operations area in the piece below:

As we mentioned earlier in this piece, Tesco needs to make many more changes -- all then tied into a comprehensive, defined Fresh & Easy format, with a clear and solid merchandising, marketing and operations strategy, which is then communicated to consumers in a comprehensive manner -- rather than merely getting "down on dirty" on its promotional pricing, which is something though it does need to do right now, but is only one tactic in what needs to become an overall strategy.

The most basic, needed and logical "no brainer" changes Tesco should make -- and can make rapidly -- are in its retail store operations policy and practice.

Below are seven retail operations changes, which we first offered about a year ago and have continued to regularly write about, that Tesco should make.

The changes were important for Tesco to have made (which it didn't) in the non-recessionary period in which we first made them over a year ago. They are even more important now, in the current and likely to last for probably all of 2009 and 2010, economic recession

The Seven retail operations changes Tesco's Fresh & Easy needs to make:

1. Accept WIC Vouchers (Women's, Children's & Infants Program) issued by the U.S. government to the poorest of poor mothers. [September 7, 2008: Analysis & Commentary: Should Tesco's Fresh & Easy Put An Asterisk Next to its Motto? Yes; Unless it Corrects Four Operational Omissions.]

The U.S. government issues WIC Vouchers, which come in a paper form that looks similar to a check, to the poorest of poor mothers so they are able to purchase infant formula, whole milk, cereals and related nutritious and healthy-oriented foods and beverages for their infants and toddlers, as well as for themselves. The federal government is in the process of expanding the varieties of healthy foods mothers can buy with the vouchers. Some of the new categories will include more fresh produce and additional whole grain cereals and breads.

Tesco's Fresh & Easy stores do not accept the WIC vouchers from poor mothers. What a mistake. By not accepting the vouchers, the grocer excludes an entire group of potential customers. These potential customers also tend to purchase other food and grocery items with food stamps and cash at stores that accept the WIC vouchers.

In the current recession, distribution of the WIC vouchers has and is dramatically increasing. Additionally, the $787 billion economic stimulus bill recently signed by the President allocates additional funds for WIC because of the increased demand for the assistance, including from many mothers not previously needing WIC.

All of Fresh & Easy's major (and most minor) competitors accept WIC. So should Tesco's Fresh & Easy. Why turn down a potenital sale, after all? Particularly for a grocer that needs such sales. Lastly, accepting the WIC vouchers is the right think to do for Tesco from a social responsibility standpoint. WIC is a part of the relationship between the U.S supermarket industry, the federal government and American citizens -- part of the socioeconomic compact.[December 29, 2008: Tesco's Fresh & Easy, 'Food Deserts' and WIC Vouchers; A 'Year-End' Analysis & Commentary.]

2. Accept manufacturer's "cents off" item coupons. Fresh & Easy stores don't accept the the popular coupons issued by food, grocery and consumer packaged goods manufacturers and marketers, which allow consumers to receive anywhere from a 25-cent to a $1 disount (and at times buy-on-get-one-free and other offerings) on food, grocery and related items. [December 12, 2008: Marketing & Promotions Report: Manufacturers' Coupons Becoming the 'New Black;' Use Among Consumers Soaring; Marketers Distributing More Than Before.]

All of the grocer's competitors accept them. Many like Kroger-owned Fry's (Arizona) and Albertson's (Southern California, Arizona) even promote acceptance of the coupons aggressively, by regularlydoubling and even tripling the manufacturer's coupons in special promotions.

Consumers are using the manufacturers' "cents off" coupons, and shopping at stores that accept the coupons, in greater volume than at anytime in recent history. Manufacturers'-marketers are distributing the coupons in greater volume today than they have been doing for many years -- if not in history.

Can Tesco's Fresh & Easy really afford to exclude coupon-clipping shoppers, and their dollars, from its customer mix? We think not, particularly since the use of the coupons is so fast- growing in the recession. But even in a non-recession accepting the manufacturers' coupons is a "no-brainer."

Some might argue that since about 60% of the items sold in Fresh & Easy stores are under its store brand, that taking the coupons doesn't make since. We beg to differ. That leaves a potential universe of 40% of the items sold in the stores available for manufacturers' "cents off" coupon shoppers. Again, a "no brainer."

3. Accept paper, personal checks. It's near-impossible to find a major supermarket or grocery store in California, Nevada and Arizona (or elsewhere in the U.S.) that doesn't accept paper, personal checks. Tesco's Fresh & Easy doesn't accept them; only cash, debit cards and credit cards.

Many supermarkets would love to stop taking paper, personal checks. But they don't, and won't anytime in the near-future.

Why? A couple reasons:

>Too many consumers in the 55-plus age bracket still prefer using paper checks to using cash, debit cards or credit cards to pay for their groceries.

>Additionally, the U.S. supermarket business is all about creating options. The industry has become successful in large part by increasingly offering shoppers multiple options to pay for their grocery purchases. That's why the industry finally began taking credit cards in the 1980's after holding out on doing so for many years after they were introduced.

And in the current recession, more and more consumers are going back to paying for their food and grocery purchases with paper. personal checks for two reasons:

>It allows them to better control the amount of money they spend at the supermarket. It's just too easy to add an extra $20 (or more) on that debit card, as we all know.

> In the case of credit cards, many consumers have maxed-out their credit limits. Many consumers also have had their credit limits reduced by banks because of the credit crisis.

>Lastly, consumers are getting smart. They know that paying for essentials like food and groceries with a credit card is a prescription for even more debt than they already have. Therefore many have stopped using the plastic at the supermarket. The savings rate in the U.S. is also up, another indication that American consumers are using their credit cards less. Additionally, retailers like Wal-Mart, Target and a few others have recently reported shoppers using credit cards far less in their stores, particularly for essential food and grocery items.

By not taking paper, personal checks, Tesco's Fresh & Easy is excluding potential customers who prefer this method of payment.

The food retailing business is not one in which you can force consumers to use payment methods that the retailer prefers. Rather, it's all about offering a wide-variety of payment options so as to draw shoppers to your stores.

Can Tesco's Fresh & Easy really afford to say to consumers who prefer using paper, personal checks "no thanks, we don't accept them"? We think not. But the grocer's competitors love it.

4. Cash payroll and government-issued checks. Wal-Mart, Safeway (Vons and Safeway banners in California, Nevada and Arizona), Kroger (Ralphs, Fry's, Smiths), Supervalu (Albertsons), Bashas and nearly every other food and grocery retailer in California, Nevada and Arizona, cash shoppers' payroll checks -- and even encourage the practice. Tesco's Fresh & Easy doesn't.

Why do these grocery chains cash payroll checks? Because it brings added business to a store, and thus to a grocery chain's overall sales numbers.

Wal-Mart even lowered the amount of money it charges to cash payroll and government (Social Security, SSI, Veterans, Unemployment, Welfare) checks to $4 last year, regardless of the check amount, as way to encourage consumers to bring their checks to a Wal-Mart store and cash them. Prior to that change in 2008, the greater the value of the check, the more Wal-Mart charged to cash it.

But, Tesco's Fresh & Easy does not cash payroll or government-issued checks, as a matter of the company's retail operations policy.

Unemployment is unfortunately booming in the U.S., particularly in California (over 10% for February), Nevada and Arizona, which are among the hardest three states hit by the housing foreclosure mess, the financial crisis and the recession in general.

Tens of thousands of new people are going on unemployment in the three states each month.

Many people receiving unemployment checks cash them at the supermarket -- just like many people do with their other government-issues checks, as well as payroll checks -- and then buy their groceries at the store after cashing the checks. Kroger and Safeway owned stores even in most cases cash the checks for free with a minimum purchase.

None of these thousands of consumers are cashing their payroll or government-issues checks at Tesco Fresh & Easy stores, and then buying groceries with the cash though, since the grocer does not cash such checks.

This pleases Wal-Mart, Safeway, Kroger, Supervalu, Bashas, ect. though. They love the added business that cashing payroll and government-issued checks bring their respective stores.

5. Add two full-service checkout lanes in each Fresh & Easy store.The Fresh & Easy stores offer only self-service checkout in which shoppers must scan and bag their own grocery orders. Store clerks then collect the customer's cash or process her debit or credit card transaction. In other words, the clerks still have to make change for cash purchases or process the card transactions.

If asked the store clerks also will (cheerfully) assist shoppers with checkout. But anyone who has any experience in the U.S. food retailing business knows customers hate asking such things, particularly since they get full service, in many cases including carryout service to their cars, at stores that offer as good or better prices than Tesco's Fresh & Easy stores do.

Tesco said their "research" showed shoppers would love this self-service model. A few do. But a "few" shoppers that love a particular feature like forced self-checkout don't make a successful grocery chain. [May 20, 2008: Take One Dose of 'Internal Research', Add An 'Independent' Survey From An Unnamed Source, and You Get A Consumer Preference For Self-Service Checkout.]

Most shoppers don't like a self-service-only forced choice by a retailer though. And many who tried it once or twice, according to our research, have never set foot in a Fresh & Easy store again. This is particularly the case with consumers in the 55-plus age bracket -- you know, the ones who have the most income and wealth in the U.S. and just happen to be the fastest-growing demographic.

Tesco should add two full-service checkout lanes in each of its Fresh & Easy stores. This would be smart in that it would welcome all those shoppers who hate the self-service-only system. Doing so creates "choice" rather than trying to force "choice" with self-service-only checkout. Ask you local consumer researcher if "choice" is a key element of American consumers. Yes, yes and yes, it is.

Additionally, adding the two full-serve checkout would also create a larger potential customer base for the Fresh & Easy stores, since self-checkout-only is a barrier to entry for many shoppers from the start. Why exclude?

At the same time, adding the two full-service checkout lanes would still allow Tesco's Fresh & Easy to keep a partial self-service checkout system, preserving for the most part its cost-cutting model. Of course, if the full-service lanes prove much more popular than the self-service, then we would think additional conversions would be warranted. There's only one way to find out -- convert two of the existing self-service checkout lanes to full-service.

Adding these two full-service lanes would also provide a simple operational system for accepting items number one, two and three in our list -- the paper WIC vouchers, paper manufacturers' "cents off" coupons, paper, personal checks and payroll and government-issues checks.

For example, all Fresh & Easy needs to do is put signage in the front-end checkout area of the stores that lets shoppers know in advance of checking out that if they are using the WIC vouchers, paper manufacturers' coupons or paper personal, payroll or government checks (or any combination of paper methods of payment and coupons) that they should then go to one of the two full-service checkout lanes.

If this proves to create too much traffic in those two lanes, then it isn't difficult to also accept the paper methods of payment at the self-serve checkout lanes. We probably would create a system to do both. But that's a simple logistic task that doesn't take much to implement. [July 14, 2008: Breaking News & Analysis: CA Assemblyman Introduces 'Tesco Fresh & Easy Law' to Ban Stores With Self-Checkout-Only From Selling Alcoholic Beverages.]

6. Add paper grocery sacks to the stores rather than offering only free single-use plastic bags, the "Bags for Life," which are reusable, synthetic bags sold for 20-cents each, and the more expensive canvas reusable bags (which start at 99-cents each).

This is all about offering customer choice.

Many consumers hate the single-use plastic bags. That's why nearly 100% of all U.S. grocers offer the "paper or plastic option."

Additionally, even though we like the 20-cent each reusable "Bags for Life," the fact is many shoppers just don't want to pay 20-cents for a bag, or two or three or four, so they go by default with taking the free plastic single-use carrier bags at Fresh & Easy. But many of these shoppers would go for paper if it were available.

Fresh & Easy should add the paper carrier bag option, even if it has to charge 10-15-cents per bag for it.

We wouldn't charge for the paper bags unless we also charged for the single-use plastic carrier bags though. The reason being that charging for one suggests favoring plastic over paper. That's a bad message to send.

Instead, if the grocer has to charge, which is what small-format, hard-disount grocery chain Aldi does, for example, then charge 10-cents each for both paper and plastic -- or offer both for free. Then give each shopper 5 cents back for every paper bag they bring back to the store, like many other grocers do. Also continue to push the reusable bags.

We favor the promotion of all kinds of reusable carrier bags, and Fresh & Easy is doing a good job at it, offering a range of bags from 20-cents each (the "Bags for Life), to 99-cents (an inexpensive cotton carrier bag) on up. But that fact is consumers aren't yet taking reusable bags to the store in any significant numbers. Therefore, offering both the paper and plastic option remains a smart thing for any competitive food and grocery retailer to do. [August 13, 2008: Tesco to Offer Shoppers Free Plastic Bags in UK Stores Only if Requested; Still Offering Plastic Bags-Only in Fresh & Easy USA Stores; No Paper Option.] [Click here for more posts on the subject.]

7. Add small, "neighborhood" customer assistance and service kiosks to each Fresh & Easy store.

Like the other six operational changes suggested above, this also is one we first suggested about a year ago. It's really more of an operational addition rather than a change though.

It also serves an additional, overall positioning purpose for Tesco's Fresh & Easy in that it helps put the "neighborhood" in Fresh & Easy Neighborhood Market.

We suggest that in each Fresh & Easy store Tesco install a small kiosk type area in the front-end of the store. This kiosk would be staffed by a store clerk. The kiosk would be used as a "neigborhood" and store informational center. Neighborhood groups could have the store distribute their information at the kiosk. The store could also distribute coupons and other information at the kiosk, like its literature and related materials for its store charity prograsm and "shop for schools."

The kiosk also could be used to pre-approve paper, person checks and either to pre-approve or even cash payroll and government-issued checks. That way time would be saved by shoppers and store clerks at checkout.

Additionally, Tesco's Fresh & Easy could use the "neighborhood" store kiosks to sell a selected variety of products, both for store sales as well as community and neighborhood assistance.

On the community-neighborhood side of the equation, sales could include things like bus and other mass-transit passes, tickets to local events and fund-raisers, along with related communitiy-based products. (We don't mean consumer packaged goods by products. BUt rather the type of things we describe.)

In terms of products for added store sales, items could include: pre-paid cell phones and phone cards, local area maps, Fresh & Easy gift cards, Fresh & Easy coupon books (a new creation) and other, similar products that could evolve over time.

These store "neighborhood" kiosks, which would be small and take up very little floor space, serve multiple purposes.

First, they assist with the check cashing process, as mentioned above. Additionally, they allow Fresh & Easy stores to add some incremental sales by selling the types of products mentioned. Further, they offer an added customer service element to the stores, and to the neighborhoods, and from a longer term positioning standpoint. Lastly, they help to better communicate what Tesco says is a central position of the Fresh & Easy format, which is to be the "neighborhood grocery store."

Safeway Stores operates similar customer service centers at the front-end of most of its stores, for example. Customers love it and it works out very well for store operations.

Adding the "neighborhood" service kiosks in the Fresh & Easy stores also would help add a better "sense of place" to the stores, something that we've been saying for over a year in our analysis is much needed. Remeber, the whole is more than the sum of its parts in food retailing.

Conclusion

Tesco's retail operations policy is a top-down, command-and-control-style model.

The policy says to shoppers: We want you to shop at our Fresh & Easy markets as long as you are willing to" pay with cash, debit and credit card only; aren't a poor mother who needs to use WIC coupons to feed her kids; are willing to not use manufacturers' "cents off" coupons to save on your grocery bill; are willing to scan and bag your own grocery order; and a will accept single-use plastic bags only, or pay for your own bag, but not be offered paper bags, even if that is your preference.

That's a mouthful.

On the other hand, all of Tesco Fresh & Easy's competitors say in their policies, which are bottom-up (choice) rather than top-down policies: We invite you to shop at our stores by offering you as many ways of paying for your grocery purchases as we can think of offering -- cash, paper checks, cashing payroll checks, credit cards, debit cards.

Their policies also say: We also invite you to use manufacturers' coupons to save money on your total grocery bill. We provide full checkout service (and in a few cases offer the option of self-checkout along with it). We offer you a choice of paper or plastic bags (and in many cases will carry the groceries out to your car), along with selling a variety of reusable bags. And we invite poor mothers to use their WIC vouchers in our stores. Your money is as good as anybody elses. And we treat you fairly.

Compare and contrast the two retail operations strategies and policies -- Tesco Fresh & Easy's and all the others. Which one seems like it would induce the greatest number of potential consumers to shop in a grocery chain's stores?

American consumers love choice and options. For that matter, even former Sovet Block nation consumers in Eastern Europe like and demand more choice than the Tesco Fresh & Easy command and control retail operations policy provides, despite having lived under command and control economies until recent times.

One of the positioning elements of the Tesco Fresh & Easy stores is that they are "for everybody." The grocer says the stores are for all consumers; that they are neighborhood markets where Tesco wants people to do the majority of their grocery shopping at. That's the positioning.

But how can a retailer say it's stores are for "everybody," all consumers, when its retail operations policy excludes so many by limiting choice? The answer is, it can't.

There's a major disconnect between what Tesco says is the positioning of the Fresh & Easy stores and what's its retail operations policy is. By making the changes we offer, the grocery chain can go a very long ways towards making a better connection between what it wants the Fresh & Easy stores to be and what its operations strategy and policy has created.

Food and grocery retailing is a wholistic and comprehensive process and strategy. You can't just tinker with one element of merchandising or marketing, for example, if their are problems, and expect doing so to solve those problems.

This gets us back to the value proposition concept and practive. Tesco Fresh & Easy Neighborhood Market CEO has indicated the grocery chain has discovered it needs to compete better on promotional pricing, as well as adopting some elements of what we've been saying it needs to do in terms of the value proposition. But remember, value isn't just hot pricing.

Because of its consumer-limiting retail operations strategy, policy and practice, it's our analysis that what Fresh & Easy could likely end up doing, unless it makes the changes we suggest and creates a pro-customer-choice environment for its stores, is that by offering the hot promotional prices it has started offering (which we agree with as part of a wholistic strategy), is to create a class of "cherry-picking" shoppers, who just shop the stores for the promoteddeals, then go elsewhere to one (or more) of Fresh & Easy's competitors to buy the rest of their food and groceries.

The reason behind this is because many shoppers will shop a store if it has a few deals with prices so hot they just can't pass them up. But they won't spend much time in that store, and spend money on other items that are more profitable for the retailer, if that particular retailer has created a retail operations policy and practice that so limits customer choice that it alientates shoppers, which we argue Tesco has done with its command and control policy at Fresh & Easy.

The whole -- retail operations, merchandising, marketing -- after all, is much greater than the sum of its parts -- offer hot promotional deals and all will be solve -- in food and grocery retailing.

Making the seven simple retail operations changes we detailed above, as we've argued for some time now, will also add sales to Fresh & Easy, along with opening up a much larger potential customer base for the stores than currently exists.

Adding sales, creating more customers -- isn't that what it's all about? Indeed it is. It's a "no brainer."

Analysis & Commentary: Fresh & Easy Neighborhood Market and Tesco's Lowered Expectations

Tesco plc CEO Sir Terry Leahy outside one of the global retailer's United Kingdom stores. Sir Terry -- 'A Pence for your thoughts?'

As we reported and wrote about here on November 12 and again here on November 19, Tesco Fresh & Easy Neighborhood Market USA CEO Tim Mason announced on November 12 that the grocery chain was scaling back its heretofore rapid new store opening program, which has had the retailer opening a new small-format, convenience-oriented Fresh & Easy grocery and fresh foods market about every three days in the Southern California, Metropolitan Las Vegas, Nevada and Metro Phoenix, Arizona market regions since November, 2007.

This retrenchment includes postponing Tesco's entry into Northern California, which the grocer plans to be its fourth and newest market region.

The first stores in Northern California's San Francisco Bay Area and in the Sacramento-Vacaville Metropolitan market region were originally supposed to be open in mid-2008, according to Tesco's first announcement about the new market launch in late 2007. During the first quarter of this year Tesco revised that target, saying the first Northern California Fresh & Easy markets would start opening by the end of 2008, which would be right about now. Then once again earlier this year the grocer revised the target again, saying plans called for the Northern California stores to begin opening in early 2009.

Based on information from our sources, it's now doubtful any of Tesco's Fresh & Easy stores will open in Northern California in the first quarter of 2009. Rather, we see the first stores most likely not opening any sooner than the middle of next year.

300 stores by end of 2009: Fact or fallacy

For many months now Fresh & Easy Buzz has been saying Tesco's goal of having 300 Fresh & Easy stores open by the end of 2009, which is the number most of the mainstream press has been reporting over and over since late 2007, was unrealistic for a variety of reasons. Chief among these reasons being the fact, as we've reported, the grocery chain is way behind in building its Northern California distribution center in Stockton, California, along with the simple fact the grocer's rapid new store opening pace isn't sustainable, considering the existing Fresh & Easy stores remain below Tesco's sales targets for this time in the chain's development, along with a few other reasons.

The sustainability issue also is why Fresh & Easy took a three month new store opening pause from early April until July 2 this year. Beginning on July 2, when it opened it Manhattan Beach, California Fresh & Easy market at 1700 Rosecrans, the grocery chain started up its rapid new store opening pace again, opening a new store about every three days or so in its three Western U.S. regional markets.

Instead of towing the 300 stores by the end of 2009 party line, we've suggested having about 175-200 Fresh & Easy stores open by the end of 2009 is a more likely realistic figure.

It appears we're spot on. Tesco Fresh & Easy Neighborhood Market CEO Tim Mason is now using that same number -- about 200 stores open and operating by the end of 2009 -- publicly and to the press. For example, in a brief report on November 12 in the Financial Times, staff writer Elizabeth Rigby writes: 'Mr. Mason now hopes to hit the 200 target by November next year, some 10 months later than planned.' He also used the 200 store estimate in his November 12 interview with The Times (United Kingdom) newspaper.

Additionally, Tesco's Fresh & Easy's Neigborhood Market's corporate spokesperson is now using the about 200 stores open by the end of 2009 figure as well when speaking to the press.

We talked to a source at Tesco's Fresh & Easy Neighborhood Market who told us on the condition we wouldn't mention the source's name that the 200 store number by the end of 2009 isn't even a sure thing. Rather, that the grocery chain could easily fall short of that number. This fits with what the Financial Times' Elizabeth Rigby wrote in her brief report on November 19: 'Mr Mason now hopes to hit the 200 target by November next year, some 10 months later than planned.' Notice the word HOPES in the sentence.

Since Fresh & Easy's original strategy called for the grocer to have 200 stores open by early 2009 (like by the end of February or March of next year), and then open about a hundred more in the remaining 10 months of 2009 to get near that 300 total number of units by the end of next year's original target, having around 100 less stores than projected by the end of next year will have a major impact on Tesco's Fresh & Easy model -- and sales and profit/loss target.

Among the impact includes taking longer to break even financially with Fresh & Easy. The Fresh & Easy Neighborhood Market business plan and related financials is based on having those 300 stores, or close to that number, (and the added volume they would bring) open by the end of 2009. Therefore, with fewer stores open the grocer is going to have to obtain significantly increased sales and substantially improved profit performance out of its existing stores (and the new stores it does open between now and the end of 2009) in order to keep its losses close to plan. Same stores sales and profits must increase in order to minimize losses.

Northern California here we come, later than we started from

In terms of postponing it Northern California market launch, we've identified thus far 46 Fresh & Easy store locations in the region -- 25 in the San Francisco Bay Area and 21 in the Sacramento-Vacaville region. Fresh & Easy has confirmed 37 of these locations -- 18 in the Bay Area and 19 in the Sacramento-Vacaville market region.

Most of these 46 Bay Area locations are vacant, former retail store buildings the grocer is currently or plans on remodeling into Fresh & Easy stores. As a result, the company holds leases on the majority of these locations. Therefore, even though Tesco is postponing opening the stores it still has to pay the monthly rent on those buildings. Commercial landlords seldom give retail tenants a rent vacation because they've changed their plans on when they plan to open their stores.

For example, if Fresh & Easy postpones opening the first stores in Northern California for six months -- from early 2009 -to- mid 2009. The company still has to pay the monthly rent on all those non-open stores. And if the first batch of the stores don't start opening until six months later than originally planned that means the second and third batch of stores won't open until more than six months later than originally planned, which means paying rent on those (second and third phase opening stores) unopened stores for an even longer period of time.

This is going to have an impact on the expense side of Tesco's balance sheet since empty stores don't generate income. In fact it could add hundreds of thousands of dollars in expenses to the company's balance sheet.

It's our analysis actually that it's wise for Fresh & Easy to postpone opening its Northern California stores. But we aren't sure the grocer should even go into Northern California with the current Fresh & Easy format, so that's little comfort overall.

What isn't wise though, and indications that something is wrong, is to keep putting off the dates which the first stores will open.

In his November 12 interview with The Times CEO Tim Mason said the reason for postponing the grocer's Northern California launch is due almost completely to the current financial crisis and recession. However, in the interview he also mentioned essentially being behind in constructing the retailer's Northern California distribution center in Stockton, which is about 35 miles from Sacramento and about 50 miles from San Francisco.

Fresh & Easy Buzz has know since early this year, as have others who follow Fresh & Easy closely such as Piper Jaffray-UK senior research analyst Mike Dennis, who's been writing in his regular notes to Tesco plc investors about the construction delay of the Northern California DC and how in his analysis it would cause Tesco's Fresh & Easy to postpone its entry into Northern California and therefore will result in his view in Tesco's failing to meet its sales and profit targets for Fresh & Easy. Dennis follows Tesco plc closely. He's also been one of the closest observers and analysts of Tesco's Fresh & Easy since it set up shop in Southern California.

Therefore, since Tesco's Fresh & Easy has known since earlier this year it was behind schedule (either on purpose or not) with its Northern California distribution center, why did it wait until November, 2008 to announce it wouldn't be entering Northern California on schedule? Some might say: "It's the economy stupid!" In other words, is the recessionary economy the real reason for postponing the launch, or is it because there's no way the Northern California distribution center is or will be ready anytime soon to service Fresh & Easy stores in Northern California? You be the judge.

However, even if the economy was booming, the retailer couldn't open stores in Northern California without its distribution center being open, which is one of the two reasons CEO TIm mason has given for postponing the launch. Perhaps Fresh & Easy saw the financial meltdown and recession coming in the first quarter of this year -- something the U.S. Treasury Department , Federal Reserve and nearly every independent economist missed -- and decided to delay construction on the Stockton DC just in case?

We don't doubt the financial crisis and recession has something to do with Tesco's plans to postpone its Northern California launch. However, without a distribution center the bad economy is a moot point. Therefore there's more to the decision than just the external factor of the financial crisis and recession, obviously.

Interestingly, the interviewer for The Times didn't ask Tim Mason the simple question: 'Why is it taking so much longer than planned to construct and open the Northern California distribution center in Stockton.' Since Mr. Mason mentioned this himself, that the DC is behin schedule, it certainly would have been a logical follow-up question for the interviewer to ask. Perhaps the interviewer did ask that important journalistic question but either it wasn't answered or if asked and answered the answer didn't appear in the November 12 profile piece in The Times?

Setting the bar too high with PR hype

Having roughly 100 fewer Fresh & Easy stores opened by the end of 2009 -- the 300 store number was used by the company right up until a couple weeks ago after all -- will also have a negative perceptual effect on Tesco's U.S. small-format, convenience-oriented food and grocery retailing venture.

This effect in part is by the global retailer's own creation. Beginning at least two years before it opened its first Fresh & Easy grocery and fresh foods market Tesco started building up the public relations hype in terms of what a major food retailing venture Fresh & Easy Neighborhood Market would be. British and U.S. newspapers ran bold headlines, with the urging of the retailer's PR staff, touting the "British Food Retailing Invasion." Story after story talked about how Tesco planned to open as many as 500 stores in three years. How it would begin in the Western U.S., move to the Midwest, then on to the east coast, concurring America.'

In effect, what Tesco did through its public relations program was to set the bar for Fresh & Easy so high, even if the grocery chain exceeded all expectations in its first year of operations, which it hasn't, doing so still likely would not have been good enough based on all the pre-store opening hype the company generated in the media.

Tesco couldn't control what the mainstream media wrote, and the press loves drama, but the company intentialy created much of this hype and fed it to the press. Much of the mainsteam media loves canned stories after all, especially press releases. Tesco's PR staff did their jobs and gave it to them. It wasn't the Pr folks' fault. Rather it was the fault of the corporate executives who encouraged the hype strategy.

As most entrepreneurs and good politicians know, a company or individual must walk a fine line when playing the expectations game. It's always far easier and much more popular to go beyond expectations than it is to not meet them. Tesco set the expectations so high for Fresh & Easy that it shouldn't be any wonder to the company's executives that their performance to date has been frequently criticized. Creating excessive PR hype can be a double-edged sword. If you live up to the hype you are a hero. If not you are a goat. But nobody else is to blame -- after all it's your hype. Nobody forced the company to create and communicate it.

In Tesco's case it set the bar so high for itself with all of its publicity generation about revolutionizing American food and grocery retailing and building a empire in a scant couple years that now each time it announces a cut-back, major change or postponement, it makes the retailer look like its failing.

Perception can be reality after all. But in Fresh & Easy Neigborhood Market's case the problems go beyond mere perception -- the grocery chain has real merchandising, marketing and operations problems.

Need for major change and new strategy

As we've argued in Fresh & Easy Buzz, it's our analysis these performance problems are based largely on a single faulty premise and strategy, that the retailer has tried to use a British model of food and grocery retailing in the Western United States. That instead of bringing in key executives with extensive experience in the market the retailer has relied almost completely on executives with experience primarily in the United Kingdom. From this faulty strategy a myriad of operational, merchandising and marketing problems have then been created.

Coupled with this change, Fresh & Easy Neighborhood Market then needs to fine tune its value propostion through merchandising. Once achieved it needs to create an integrated strategic merchandising and marketing program designed to coomunicate its value proposition on a consistant and regular basis -- tout if frequnetly and hammer it home.

For example, based on its no frills model and overall low everyday prices, consumers should be flocking to Fresh & Easy stores like they are to discounters like Wal-Mart and Aldi in the current severe economic recession. That isn't happening. Why? It's our analysis the reasons are the two we outlined above -- the faulty use of a British food and grocery retailing model and a failure to properly create and communicate a strong value proposition.

What would Sir Terry do?

Tesco is a great global retailer. But in terms of approaching the Western U.S. market in a smart, regional and local way, the way all successful grocers do, it's failed miserably in that regard. Why this is so, in our analysis, we find very hard to understand.

But two other British retailer's, Sainsbury's and Marks & Spencer, both did essentially the same thing when they entered the U.S. some years ago; both acquiring existing U.S. retailers, operating for some years -- and both failing.

Tesco however still has a strong chance to be a success with Fresh & Easy in the U.S.. But it's our analysis that unless major changes are made, and its use of the British food retailing model is dumped and replaced by an American regional, sub regional and localized strategy, those chances for success are at best slim.

Tesco plc CEO Sir Terry Leahy has been largely silent for most of the year about Fresh & Easy Neighborhood Market USA. That's mainly because he made Fresh & Easy Tim Mason's (the grocery chain's CEO) baby, so to speak.

But we can't help being curious about what Sir Terry thinks about the developments over the last year at Fresh & Easy's corporate headquarters: the fact seven category managers and buyers have left corporate headquarters since February, 2008 (and another four or five left in 2007 before the first store even opened); the sudden departure of co-vice president of operations Brain Pugh and the conditions leading up to that sudden departure; the need for Fresh & Easy to spend a significant chunk of change to create a new interior design package for the Fresh & Easy stores just a few months after the first stores opened, and now the postponement of the Northern California launch; along with a few other things.

Perhaps we will hear from Sir Terry soon?

Tesco Fresh & Easy CEO Tim Mason Says He's 'Deliriously Happy' With the Chain's Progress Thus Far; We Prefer Andy Grove's 'Only the Paranoid Survive'

The photograph of Tesco Fresh & Easy Neighborhood Market CEO Tim Mason is from today's The Times (United Kingdom). The Times caption to the photograph is: 'Not usually a man for taking the back seat, Tim Mason has led Tesco's drive into America and insists that his is 'deliriously happy' with the progress so far.'

We're pleased Tim Mason is 'diliriously happy.' He's worked hard since launching Fresh & Easy and certainly deserves some happiness on the one year anniversary of the first stores officially opening in November, 2007. But in our long experience we haven't know many if any CEO's who are 'dileriously happy' over sales, profits (Fresh & Easy has none of those yet) or any other aspect of their operations. They have some brief happiness. But no dilerium.

In fact, we prefer the philosophy of Andy Grove, the former CEO and one of the founders of Intel Corporation, who says "Only the Paranoid Survive." It's the philosophy (and he wrote a book of the same name) he used to create not just a company but a new industry, semiconductors. Intel is today one of the largest and fastest growing companies in the world. Having met Grove during his days building Intel, we just can't picture him ever being dileriously happy. But Grove's made so many Intel employees and shareholders millionaires he's received plenty of second-hand delirious happiness to last a lifetime.

In this November 12 piece in Fresh & Easy Buzz, "Analysis: Hard Times at Fresh & Easy - Northern California Expansion to Be Postponed or Shelved Do to Economy; But its Only a Symptom Not the Cause," we speculated briefly in writing as to why Tesco Fresh & Easy Neighborhood Market CEO Tim Mason chose a British newspaper, The Times, to give an exclusive interview about his decision to scale back growth at the Southern California-based fresh foods and grocery chain.

We also suggested it was in our analysis a less than brilliant move to do so because it just reinforces Tesco Fresh & Easy's problem of trying to operate a Western United States small-format supermarket chain using primarily British food and grocery retailing strategies and methods. If Fresh & Easy is an American chain like Tesco says it is, why then give breaking news to British papers and not a local paper like the Los Angeles Times?

And if you don't believe our "using a British food retailing model in the U.S." argument, we offer you just one bit of evidence told to us by more than one former Tesco Fresh & Easy Neighborhood Market employee.

That item is that the former corporate director of grocery at Fresh & Easy, who recently let the U.S. and returned to work at Tesco headquarters in the UK, used to regularly correct the chain's headquarters-based category managers and buyers who reported to her when they used American supermarket industry terms like product line rather the the British industry term product range. And upon hearing the common and often-used U.S. supermarket industry term average ring (means same thing as market basket size) the former director had no clue what the speaker was talking about, we've been told. Average ring wasn't used again by that employee.

We know in part of course why Mr. Mason (or maybe someone at Tesco corporate in the UK choice it for him?) chose the United Kingdom's The Times newspaper to give the exclusive interview to though rather than the Los Angeles Times, even though the LA Times is the newspaper of record in the region where Tesco Fresh & Easy Neighborhood market USA is headquartered and has about half of its stores.

First, Tesco has long standing, nurtured media relationships with UK newspapers such as The Times. And its media relationship with The Times is about the best one it has in the UK. Far better than say the relationship it has with the UK- Guardian.

Second, Tesco cares right now more about speaking to investors and UK stock analysts who follow Tesco and its Fresh & Easy USA venture, than it does doing something as logical as demonstrating its American street cred by giving such an exclusive interview, and breaking company news, to the local paper of record, the Los Angeles Times. Right now, investors trump market region realities. Plus, the Los Angeles Times might not of thought the news important. The UK is 'Tescoland.' But in the U.S. Tesco (Fresh & Easy) is a fledgling grocery chain in the view of many in the mainstream business press.

Lastly (and probably the most determining factor), evidenced by this article in today's The Times (UK), Mr. Mason and Tesco's Fresh & Easy got a "two-fer." In other words, by giving The Times the exclusive interview on November 11, which was published in the November 12 edition and carried some negative news for the grocer, Mr. Mason received a nice, extremely positive profile in today's Sunday Times, which actually has a higher readership than the daily The Times. As our friends in the UK like to say: A little "tit for tat."

The story even includes a brief Q&A by the writer with Tim Mason, featuring the kind of questions a corporate public relations department dreams about reporters asking.

The piece also features a photo (the one at the top of this piece from The Times) of Fresh & Easy Neighborhood Market CEO Tim Mason riding in a Fresh & Easy bicycle-powered rickshaw in front of Fresh & Easy's corporate office in El Segundo, California. The Times' story says the office is in Palm Beach, Los Angeles. That's incorrect. The Los Angeles Times would have caught that one fast.

The photo caption is: "Not usually a man for taking the back seat, Tim Mason has led Tesco's drive into America and insists that his is 'deliriously happy' with the progress so far." Funny thing though: Mr. Mason isn't smiling at all in the photograph. And the poor guy pedaling the bicycle rickshaw actually looks rather distressed.

We should say, we aren't putting The Times down for doing either of the interviews. This isn't a media criticism piece. Rather we're merely observing and offering some analysis on the topic.

The story is essentially a positive profile of Fresh & Easy CEO Tim Mason and Tesco's Fresh & Easy Neighborhood Market, as the piece's title: "Tesco's American dream is still in sight," might be the first clue to suggesting. We have no problem with that either. We are neither pro or con Tesco or Tesco's Fresh & Easy. We're merely humble analysts and writers after all.

Regarding the profile, we find this comment from CEO Tim Mason in the profile piece very interesting:

"Mr Mason, chief executive of Tesco's operation in the United States, believes that one of the biggest problems of the past year has been a failure to make enough of Fresh & Easy's price credentials. It claims to be 20 per cent cheaper than the average American supermarket, such as Ralphs or Albertsons, but it relies on an everyday low-price model rather than one-off specials, which can grab customers' attention."

We find it interesting for two reasons. First, it is one of the few, if not first, self-critical public comments we've observed CEO Mason make about his and his top executives' performance to date with Fresh & Easy. That's good. Self analysis, and some professional humility, generally leads to improved results. You've got to know, and admit, what you are doing wrong before you can change and fix it after all.

Second, we find it interesting because the quote sounds like it comes right out of Fresh & Easy Buzz. We've been writing regularly since about May of this year that Fresh & Easy needs (and it still does) to create and then tout and hammer home its stores' value proposition and message. We most recently addressed it in this piece on November 12. We also addressed it in an analysis piece in June, which you can read here. [Click here to read a selection of posts from the Blog regarding Fresh & Easy's value proposition and related issues.

Tesco's Fresh & Easy does not have at present a coherent value proposition strategy. It needs to develop one, then create an integrated marketing and merchandising (with emphasis on integrated) program to communicate it -- and communicate it in a consistent and regular manner. If Fresh & Easy can do that (which really isn't that difficult to do), it's our analysis and opinion Mr. Mason and Tesco will see a major increase in business, especially in this recessionary economy, which is going to be with us for sometime unfortunately.

By the way, Fresh & Easy better do some serious price comparisons if it plans on further communicating that its prices are 20% cheaper than the competition, as is mentioned in the interview profile in The Times with CEO Tim Mason.

Why? Because it just isn't true. Fresh & Easy's everyday prices are about 20% cheaper than some of its competitors. But the prices also are 10% and 5% cheaper than some of the grocer's other competitors. And some competitors have everyday prices as low as Fresh & Easy's. Some competitors even have lower everyday prices than Fresh & Easy stores do. If they keep making this claim they better have hard, empirical data to back it up if challenged. If not it could prove to be a very embarrassing situation if Tesco's Fresh & Easy is challenged on the claim.

Another interesting aspect of the profile in The Times is the comment by Fresh & Easy CEO Tim Mason the retailer didn't realize the United States (including the Western U.S. markets of Southern California, Metropolitan Las Vegas, Nevada and Metropolitan Phoenix, Arizona where the Fresh & Easy markets are located) was a mature market, and that therefore he attributes some of the grocery grocery chain's sluggishness to the fact. Below (in italics) is the quote:

"It has taken a bit longer to penetrate catchments around the stores than we thought it would [and] I think the reason is because this is the first mature market, well-served market, that we have opened into, so actually it's not filling a vacuum and, therefore, has to earn its place. But as we go into the second year, we would expect to see unbelievably good like-for-like growth."

To quote an average American second grader -- 'Duh.'

Before opening its first store in late October, 2007, Tesco said it conducted at least two years of extensive research on the U.S. food and grocery retailing market, focusing on the Western U.S. markets of California, Nevada and Arizona most particularly. If the fact the U.S. (and these market regions) is a mature food and grocery retailing market didn't come out on say day five (and we are being generous) of the research project, there is something seriously wrong and flawed with Tesco's extensive market research. A mere one hour conversation with say three individuals experienced in the Western U.S. food and grocery retailing market could have demonstrated conclusively that it is in fact a mature market.

But that's just the tip of the iceberg. What Tesco has failed to discover and understand is the the U.S., unlike the UK, is a multi-format regional, sub regional and local food and grocery retailing market. No where is this fact more evident than in California, and to just a slightly lessor extent in Arizona and Nevada.

There is no real national food retailing chain in America. Supermarket format chains Kroger, Supervalue and Safeway (the three largest supermarket chains in the U.S.) come closest to it. But none of the three are true national supermarket chains.

Wal-Mart, with its multi-format food, grocery and general merchandise stores -- Supercenters, Sam's Club, Neighborhood Marker supermarkets and now small-format Marketside -- is the closest (its a mass merchandiser not a supermarket chain) national chain that offers a full selection of food and groceries in the U.S. But Wal-Mart isn't even completely national, although its working on it.

On the other hand, just three chains - Tesco, Wal-Mart-owned Asda and Sainsbury's -- control nearly 60% of the food and grocery retail market in the UK. Add the Morrisons chain and what is known as "the big four" in the UK have a combined 70% -to- 74% market share in that nation.

Additionally, the remaining 30% of the market is controlled by three other chains -- the Co-op (which earlier this year acquired the Somerfield chain making it the fifth-largest grocery chain in the UK), Marks & Spencer and Waitrose. These three combined control nearly 20% of that remaining 30%. The remaining 10% is held by the German hard discount chains Aldi and Lidl, Denmark-based hard discount chain Netto and disconter Iceland. That's about it.

In the U.S., regional chains, mostly privately-held at that, are the number one and two market share leaders in most regions of the country. And these are multi-billion dollar chains, not small operations.

In California alone there are at least four multi-billion dollar chains: Stater Bros. in Southern California (about $3.6 billion annual sales), Smart & Final, also in Southern California (annual sales over $1 billion), Save Mart, based in the Central Valley (about $6.5 billion annual sales) and Sacramento-based Raley's (about $3.5 billion a year).

In addition there are numerous other chains at the $1 billion in annual sales mark, many others in the multiple hundreds of millions, and scores of multi store independents in the tens of million in annual sales.

Further, the U.S., especially the Western U.S., is packed with various format retailers that sell food and grocery products in one or more categories. There are the club stores: Costco and Sam's Club; warehouse discount franchise chains like Food-4-Less; drug chains like Long's, CVS and Rite Aid; scores of ethnic supermarkets, hundreds of natural foods stores; scores more specialty foods stores; and still other mass merchandisers like Target, which operates Super Target Wal-Mart Supercenter-like combination grocery and general merchandise mega stores, as well as selling shelf stable and perishable food and grocery items in its Target discount stores. There are others besides these.

The U.S., unlike the UK, not only is a mature market, its a regional, sub-regional and local food and grocery retailing market with players of all shapes, sizes and formats battling for a share of the consumers' stomach. Until Tesco figures that out and then formulates a strategy to position Fresh & Easy Neighborhood Market in a distinct way amongst this retail melting pot, its going to struggle far more than it needs to -- and struggle far more than its top executives are going to let on in interview profile pieces is really the case.

Analysis: Hard Times at Fresh & Easy - Northern California Expansion to Be Postponed or Shelved Do to Economy; But its Only a Symptom Not the Cause

Tesco Fresh & Easy Neighborhood Market USA CEO Tim Mason told The Times of London (United Kingdom) newspaper in an interview published in today's edition the financial crisis and economic recession in the U.S. has resulted in a decision by Tesco to slowdown the rapid expansion plans of its Southern, California-based Fresh & Easy grocery and fresh foods chain.

Tesco's Fresh & Easy currently operates 100 small-format, convenience-oriented grocery and fresh foods markets in Southern California, Metropolitan Las Vegas, Nevada and in the Phoenix, Arizona Metropolitan region.

Fresh & Easy Neighborhood Market CEO Mason added in the published interview that plans for the chain to expand into Northern California could be put on hold because of the recession gripping the United States.

As Fresh & Easy Buzz has previously reported, Tesco is way behind its original schedule already to open its Fresh & Easy Neighborhood Market distribution center (in Stockton, California) and first stores in Northern California. The first Fresh & Easy markets in the San Francisco Bay Area and in the Sacramento/Vacaville region, for example, were to have opened earlier this year, according to Tesco's original Northern California market Fresh & Easy store rollout plan

But late last year Tesco's Fresh & Easy Neighborhood Market changed its original schedule, saying then the first Northern California stores would be open by the end of this year. Then earlier this year, the retailer said the first Northern California stores wouldn't start opening until early in 2009.

Meanwhile, the Northern California distribution center in Stockton was originally set to be open by now. However, based on our sources in the area, it is nowhere even near ready for a first quarter 2009 opening. In fact, work appears to be non-existent at the facility site.

In his interview with The Times, which was conducted yesterday and published today, Tim Mason said: "It was prudent to take a far more flexible approach towards the expansion of the business (Fresh & Easy); in describing the grocery chain's retrenchment.

Below (in italics) is the story based on the interview with Tim Mason from today's The Times. Following that is a Fresh & Easy Buzz analysis:

Meltdown puts the brakes on Tesco's US dream
The Times - United Kingdom
November 12, 2008
By Steve Hawkes in Los Angeles

One of Tesco's most senior executives has said that the meltdown in the American economy will force the supermarket giant to slow the rollout of its fledgling Fresh & Easy business on the West Coast of America.

Tim Mason, chief executive of Fresh & Easy, said yesterday that plans for the chain to expand into northern California could be put on hold because of the recession gripping the United States.

In an interview with The Times, he said that it was prudent to take a far more flexible approach towards the expansion of the business, which celebrates its first anniversary today by opening its 100th store, in Orange County, south of Los Angeles.

Tesco had hoped to have 200 Fresh & Easy stores, modelled on its Tesco Express format, operating across southern California, Arizona and Nevada by February next year. Mr Mason said that now he hoped to reach this target by next November.

The group has talked of having 1,000 stores on the West Coast, stretching from Seattle to San Diego. However, a move into northern California would require huge capital investment because of the need for a new distribution centre.

Mr Mason said: “The industry is in a very different place than when we came out and did the feasibility research three years ago. Then the US consumer confidence index was at the highest level it had ever been.

In October the US consumer confidence index was the lowest it has been since 1967, so it's a big change.

We will still open stores every week, but it's prudent to slow things down a bit.

“There's a big cost step for us when we open up northern California and we can be quite flexible about when we do that. As things get to a point that we like how it's all coming together, we like the way the stores are growing into the second year, then we can accelerate. If the economy takes a turn for the worst, it would be unwise to accelerate.”

The comments come two days after shares in Tesco had suffered their biggest one-day fall for a month after it emerged that the group's sales in South Korea, Tesco's largest market outside the UK, and China had slowed in the tougher economic climate.

Yesterday the group unveiled plans for spate of store openings in the eastern China provinces of Shandong and Fujian next year.

Tesco is spending $1.25billion over five years trying to break into the US. The move has been the subject of speculation since the first store opened near Los Angeles a year ago.

The company has only recently begun to reveal financial infomation about Fresh & Easy, stating that sales in the six months to August 23 were £76 million while trading losses reached £60 million due to start up costs.

Some analysts believe the sales performance is below initial expectations.

Mr. Mason put the store opening programme on hold in March for three months to evaluate what Fresh & Easy could do better.

It has since put far more emphasis on price promotions to emphasise its claim to be 20 per cent cheaper than traditional US supermarkets, such as Albertsons or Ralphs.

Mr Mason conceded yesterday that the chain had found it harder than expected to crack America, not only because of the more mature nature of the market - “we are not filling a vacuum” - but also because of the economic slowdown.

Fresh & Easy has been unable to open some stores in Phoenix and Las Vegas because property developers decided to shelve plans for certain sites.

“You only have to look at the pronouncements of retailers that have been here more than a year,” Mr. Mason said. “Starbucks and Costco, to pick but two, have said that California, Arizona and Nevada are among the most difficult places that they operating in. Tesco has stores all over the world and there have been one or two weeks where customers everywhere wake up on a Monday morning and say: ‘Oh dear.' Times are quite tough.”

However, Mr Mason insisted that critics doubting the potential of Fresh & Easy would be proved wrong, adding that to go from no stores to 100 in a year was an “exceptional” achievement.

“We are absolutely thrilled with the customer response from those loyalists that have got it, and really loved what we do,” he said. “What retailer has better staff, better product quality and delighted customers and doesn't make it?”

Fresh & Easy Buzz Analysis: It could be much fresher, it could be much easier:

First, we must say the fact Tesco Fresh & Easy Neighborhood Market CEO Tim Mason chose to give his exclusive interview about a U.S. grocery chain, Tesco's Fresh & Easy, to a United Kingdom newspaper, demonstrates once again one of our arguments -- that he just doesn't get it.

We mean no offense by this; it happens to the best of us. We think it's more of a cultural thing -- just like if an American went to the UK and used his obvious extensive experience in U.S. food and grocery retailing to launch a British grocery chain.

It's difficult for any good grocer steeped in one nation's (even one with lots of similarities) ways of food retailing to move to another country and not impose his country's model of supermarket retailing in that new country across the water. This is especially true when that new country and global market for Tesco is the U.S., which is a far more mature market, including being regional and local in nature, than Tesco's other international markets are.

It's even more difficult to do food retailing American style if that grocer doesn't at least have the majority of his key executives steeped in that country's (the Western U.S. specifically) food retailing tradition. If those key executives, like the CEO, also are steeped in the retailing practices of their native country (the UK), there's nobody around at the top to tell him or her different. As a result, group think becomes the norm. 'That's how we do it in the UK, so that's how we will do it in the U.S.' Sainsbury's and Marks & Spencer, great British retailers both, learned this the hard way -- by failing in their respective U.S. ventures.

Since starting up Fresh & Easy in Southern California, Mason and his executive team have tried to force a British food and grocery retailing model on headquarters employees and Western United States consumers.

Food and grocery retailing in America is regional and local. That's why the U.S., unlike Europe, has so many big, medium-sized and smaller successful regional and sub-regional chains, and thousands of successful multi and single-store independent grocers. Imposing a British model, let alone even a U.S. national retailing model, on a regional market like the Western U.S. is a sure prescription for failure, as we've argued in Fresh & Easy Buzz since the publication was started.

We believe this is what is at the heart of Fresh & Easy Neighborhood Market's real problems. Sure the financial crisis and recession are bad for business; for other grocery chains not just Fresh & Easy. But our analysis is that it is a symptom of Tesco's problem with Fresh & Easy and its need to retrench, rather than the cause.

Choosing to give an exclusive interview to an overseas newspaper even though Tesco is based in the UK, just further demonstrates the British-centric food and grocery retailing model Mason and company have imposed on what is supposed to be a grocery chain, Fresh & Easy, designed specifically for American consumers.

Tesco even went to great pains to leave Tesco out of both the corporate title of the company and from the store name. Nowhere is Tesco used in Fresh & Easy Neighborhood Market. The idea was to make it an American company. But it is that in name (or omission) only thus far. [Note: We aren't criticizing The Times for doing the interview. Our comments focus on Mr. mason's choice of a non-U.S. paper in which to do the interview, thereby continuing to reinforce the ethnocentric model of Fresh & Easy.)

This imposition of the British model onto Fresh & Easy Neighborhood Market USA is one of the reasons the grocery chain has lost at least 12 category managers and buyers in less than two years.

A number of those former employees, most with extensive experience in U.S. food retailing, have told Fresh & Easy Buzz sources and suppliers to Fresh & Easy they left because they felt Tim Mason and his top executives, all from the UK, just didn't get it -- that imposing a British food retailing model not only hasn't worked but has caused Fresh & Easy to miss opportunity after opportunity in the regional markets where its 100 stores are located.

Northern California

Regarding postponing going into Northern California, Fresh & Easy Buzz has talked with a number of Northern California commercial real estate agents and developers who've been dealing with the grocery chain for some time regarding its store sites in the region. Last week a number of these sources told us they believed such a move might be in the works because they've been receiving lots of questions from company officials about lease-related issues. We've also learned the retailer stopped negotiations on a number of new locations it had been close to closing on.

We've written often about how difficult Northern California will be for Tesco to crack, particularly because it's been unable to crack the three markets it's already in -- Southern California, Metropolitan Las Vegas, Nevada and the Phoenix, Arizona Metro region.

Northern California is a much more unique and multi-competitive market (chains, independents, alternative formats) than all three of these other regional food and grocery retailing markets are.

For example, Northern California, particularly the San Francisco Bay Area, is one of the most vibrant multi and single-store independent grocer markets in the United States. The region also is headquarters to Safeway Stores, Inc., which with about 250 supermarkets in the market is the market share leader. Safeway is strong, especially in the Bay Area, and plans to do all it can to prevent Tesco from being successful on its home turf, as we've written about before.

Wal-Mart also is making a major push into Central and Northern California. Then there's Save Mart, Inc.'s Lucky chain (number two in market share), Raley's and many others. And on the specialty side Whole Foods, Trader Joe's and numerous regional players are strong, as is Costco on the deep discount side, along with numerous other discount grocers. And that's just for starters.

Postponing its move, or putting it on the shelf completely, into Northern California -- which we define in terms of Tesco's Fresh & Easy as from the Northern San Joaquin Valley (Modesto-Stockton) into the Sacramento/Vacaville Market, San Francisco Bay Area and Monterey Coastal area -- will be expensive for Tesco.

We've identified 45 planned (locked and loaded)Fresh & Easy locations in Northern California to date. Of these, the retailer has confirmed 37 locations -- 19 in the Sacramento/Vacaville region and 18 in the Bay Area, for a total of 37.

The other eight locations we've confirmed through our reporting, which includes documenting that Fresh & Easy has applied for off sale beer and wine permits for those 11 stores, along with documenting agreements or signed leases for the buildings or done deals for empty lots in those cases where the stores are new buildings rather than the remodeling of vacant buildings.

Those additional eight stores are in Modesto (two stores), the Sacramento/Vacaville region -- one store in Suisun and one store in Fairfield -- the San Francisco Bay Area -- two stores in Vallejo and one in Pacifica -- and one store in Seaside, which is located near Monterey on Northern California's central coast.

Tesco holds leases on most if not all of these 45 Northern California locations, as well as being in various states of remodeling and building on many of them. Even if the retailer postpones opening these stores in 2009, until say 2010, it's likely it will have to continue paying the monthly rent on nearly all of them, since according to a number of commercial real estate agents involved with Tesco we've talked with there doesn't appear to be escape clauses in most of the leases.

Additionally, with many of these 45 stores in various stages of being remodeled or built, there are contractor fees to pay and such even if Tesco ultimately decides to not move into the Northern California market. In other words, either postponing or pulling out completely will be costly.

Of course, based on what CEO Tim Mason told The Times, the grocery chain doesn't appear to have the confidence to move forward into Northern California. So based on that lack of confidence, pulling out would be much cheaper than going in, since doing so with less than 100% confidence is no way to enter a market as tough and competitive as Northern California.

But one would then have to ask, if not Northern California, where else? Certainly going into the Chicago Metropolitan market, Florida and New York, all strategic U.S. markets Tesco has identified as potentials, would be a big mistake if conditions are such that the grocery chain would not move into Northern California at all, the market it identified through what it has said was extensive research the next most logical market after Southern California, Nevada and Arizona.

Postponing or putting Northern California completely on the shelf also changes Tesco's sales forecasts and profit targets for Fresh & Easy completely. Merely opening more new Fresh & Easy stores in its three current markets isn't going to get Tesco to those sales and profit targets because they are based on entering a new market, with all the criteria doing so implies.

A part of Tesco's strategy with Fresh and easy has been to literally grown the chain to profitability by rapidly opening new stores and entering new markets like Northern California. By postponing its march into Northern California -- or killing it completely -- Tesco will now have to dramatically increase sales at its existing stores in order to stem its losses. Without 40-plus new stores opening starting in early 2009 in Northern California, existing store sales will be much more important to Tesco's Fresh & Easy and Tesco plc.

We believe, as we've written about previously, that moving into Northern California now would be a financial disaster for Tesco's Fresh & Easy. But not for the reasons given by CEO Tim Mason -- the financial crisis and recession.

We first wrote many months ago that Fresh & Easy was ill prepared to enter the highly-competitive Northern California market. That it needed to prove itself in Southern California, Nevada and Arizona first, if for no other reason than for the sake of Tesco plc stockholders and Fresh & Easy store employees.

This argument was essentially laughed off though in interviews by CEO Mason and other Fresh & Easy executives. We leave it for you to decide.

We also wrote about how much stronger of a union region Northern California, particularly the San Francisco Bay Area, is compared to Southern California -- and particularly compared to Nevada and Arizona. This includes unionization of Tesco's Fresh & Easy distribution center proposed for Stockton, as well as the stores.

Every supermarket chain-owned distribution center in Northern California, as well as the region's two major grocery wholesale companies, Unified Grocers and C&S Wholesale Grocers, Inc., is union, even the Winco supermarketdistrbution chain facility in Modesto, California, despite the fact Winco is a non-union supermarket chain.

All of the supermarket chains and nearly every independent grocer of note, even most of the larger single-store independents, are union shops in Northern California.

Wal-Mart, Costco, Whole Foods Market and Trader Joe's are non-union -- but they aren't supermarket chains. They are classified as specialty grocers (Whole Foods and Trader Joe's) and mass merchandisers (Wal-Mart and Costco.) And in the case of Wal-Mart and Costco, food and grocery retailing is only a portion of their merchandising format. Fresh & Easy on the other hand is 100% food and grocery retailing. And since it is not positioned like a specialty grocer like Trader Joe's and Whole Foods are, that makes it easier for the UFCw union to classify it as a supermarket.

Winco, as we mentioned, is a non-union supermarket chain. But its the exception. And to date only has a handfulful of supermarkets in Northern California. The Idaho-based chain also is employee-owned, which makes it a further exception to the union norm for supermarket chains in the region.

Fresh & Easy (theoretically) should be strong in a recession

It's ironic Tesco is choosing to scale back it expansion of Fresh & Easy Neighborhood Market at this time actually. After all, based on the Fresh & Easy format (at least as stated by Tesco), -- which is a neighborhood food and grocery store offering basic groceries and fresh foods at the lowest available prices, the stores should be doing well in a recessionary economy. Tesco also claims its everyday prices at Fresh & Easy are 15% -to- 20% lower than the everyday prices of its supermarket competitors. Isn't that what shoppers are looking for in a recession -- savings?

For example, discount food and grocery retailers like Wal-Mart and Aldi are doing well in the down economy, taking business away from conventional supermarket chains in particular.

Costco also is doing well, although it had a 1% earnings loss reported this week. But that's in large part because of a significant drop in consumer spending across the board on non essential food and grocery items. A major portion of Costco store revenue comes from selling household goods, electronics, books and other general merchandise items. In fact were it not for Costco's strong food and grocery category sales in the quarter just ended, that loss would have been much greater, according to analysts.

But the problem with Fresh & Easy is that its been merchandising and marketing its stores more like they are specialty markets rather than as low overhead, small-format discount food and grocery stores.

Look at Fresh & Easy's last promotion, for example, for election day 2008. Instead of promoting basics and essentials like milk, eggs, bread, fresh chicken, hamburger, lettuce, laundry detergent, bathroom tissue and other core food and grocery items at super low prices befitting a recessionary economy (a potential theme: "Basic grocery items at basic prices for basic Americans on election day") and consumers' pinched pocketbooks, Fresh & Easy promoted specialty foods like fancy cheeses and smoothie drinks. Such a promotion is one a grocer would run to target yuppies in an up economy rather than average consumers who across the board are having a tough time making ends meet.

These types of promotions, which the grocery chain seems to do more often than value-based ones on food and grocery essentials, also cretes an impression the Fresh & Easy store brand (and format) is a specialty one rather than an everyday neighborhood grocery market format and store.

If you don't believe our analysis do a simple research experiment which we've done many times, asking at least 200 Fresh & Easy customers to date outside of various markets. Ask this simple questioin of them: Is Fresh & Easy a specialty grocery store more like Trader Joe's or is it more of a basic supermarket, one where people do most of their shopping, like Vons, Ralphs, Bashas or Stater Bros.?

About 65% of those we've asked thus far said it's a specialty store similar to Trader Joe's. Close to 25% said they had no idea. Five percent just walked away. Only five percent said they thought Fresh & Easy was a basic supermarket where people do most of their food and grocery shopping.

While we don't suggest this is a scientific survey, although it actually is in part, nor is it a perfect sample size, it is very illustrative -- especially when combined with other research we've conducted -- of consumer perception of what the Fresh & Easy stores are, and who they are for.

In other words, either Fresh & Easy has done a great job positioning its stores as specialty markets similar to Trader Joe's -- which they aren't according to the Tesco Fresh & Easy -- or they have failed thus far to position Fresh & Easy as what they say it is: A combination basic grocery and fresh foods store, with a convenience-orientation, that's for everybody -- a store to do ones primary food and grocery shopping at.

When we saw the Fresh & Easy election day promotion the week of November 4, we collectively scratched our heads. It's not that the promotion was bad. Not at all. It was a good promotion for a specialty grocery chain. But that isn't what Tesco's Fresh & Easy is. Further, based on what Tesco says Fresh & Easy is, a low-price food and grocery store for the masses, any election day promotion for such a retailer should have taken advantage of the occassion to tout its value proposition big time, as we suggested earlier more specifically.

In our analysis about 70% the time Fresh & Easy's corporate merchandising and marketing looks more like Whole Foods Market or Trader Joe's than what it says it is, a neighborhood food and grocery market offering basic groceries and fresh foods at everyday low prices; a store for everybody.

Maybe Fresh & Easy should go all the way, become a fully and clearly stated specialty grocer like Trader Joe's and refocus the business on a selective market, national retailing strategy like Trader Joe's does.

After all, Trader Joe's has about 312 stores in the U.S., just slightly 200 more than Fresh & Easy currently has, and has annual sales of about $6.5 billion. Tesco's Fresh & Easy on the another hand has 100 stores and current sales of about $400 million. You can do the math. But at its currrent sales rate, with 212 more stores (equal to Trader Joe's current 312) Fresh & Easy would theoretically have annual sales of $1.2 billion, compared to Trader Joe's $6.5 billion with 312 stores.

Could Fresh & Easy really grow its way organically to $6.5 billion with 312 stores in five years, ten years, 15 years? You be the judge.

Of course Trader Joe's has been around for about two decades now -- but for only about 10 years outside of the Western U.S. That obviously gives it an advantage.

On the other hand, Trader Joe's only sells specialty and natural products; niche products. This means it isn't even the primary shopping venue for the majority of consumers. Grossing $6.5 billion a year for 312 stores, 10,000 -to- 13,000 square foot stores at that, would be considered excellent even for a similar chain that sold everyday items along with the natural and specialty products.

But unlike Trader Joe's, Tesco's Fresh & Easy has the benefit of having a merchandising mix that includes at least a 50% or 60% ratio of basic, essential food and grocery items -- conventional packaged goods and perishables, household items like basic laundry detergents and paper towels and the like -- which means its sales per square foot should be much higher on average than currently is the case. It also means it should be more of a primary shopping venue than Trader Joe's is -- but it isn't in the markets where Fresh & Easy stores and Trader Joe's stores are located.

We suggest the major difference between Trader Joe's and Fresh & Easy though is Trader Joe's positioning as a specialty grocer is clear -- and thus in part its merchandising and marketing, based on that clear identity and positioning is excellent.

Tesco's Fresh & Easy though is a format muddle, a chain with an identity crisis self imposed. Its part basic grocery store, part upscale retailer, part specialty food store and part prepared foods market. The retailer has thus far failed to make the sum of all its parts equal a whole. In fact it's parts are greater than its whole.

And its merchandising and marketing reflects this identity crisis. However, from that perspective its positioned itself far more as a specilty grocer chain than as a neighborhood grocer for everybody -- its stated positioning. As a result, the merchandising and marketing to date has communicated this identity crisis. Until Tesco developes a clear format concept for Fresh & Easy, and then positions and brands the stores to that format, it will not find success, in our analysis.

Fresh & Easy also has done such a poor marketing and merchandising job by using it deep discount coupons so regularly (chronically is a better term) since the first store opened last October that it has virtually trained shoppers to believe that without the $5 off purchases of $20 or more coupons or $6 off purchases of $30 or more (the current coupon version) coupons the stores are expensive. What happened to the everyday low price premise and positioning? The answer: it was never executed. Fresh & Easy has literally created a new consumer species with those coupons: "Couponous Freshneasynous" -- The Fresh & Easy deep discount coupon addict.

We've talked to scores of shoppers, received dozens of emails from readers, and read scores more comments on Blogs and Web sites (including comments on Fresh & Easy Neighborhood Marketing marketing director Simon Uwins' own corporate marketing Blog) in which shoppers said without the coupons, which the grocer has unsuccessfully trying to limit, there weren't likely to buy much if anything at Fresh & Easy stores.

Deep discount coupons should be used for two primary reasons: (1) to generate new customer trail in the stores and (2) to increase shopper market basket (overall total purchase dollar amount per shopping trip) sizes. Its also commonly called "average ring" in U.S. food retailing.

Fresh & Easy has failed on both counts by the way its chronically used the deep discount coupons in our analysis. In order to be successful, the coupons need to be used infrequently (that's what you do with promotional tools) and have higher minimum purchase requirements. For example, a $10 off purchases of $50 or more and a $25 off purchases of $100 or more coupon set would be a good idea. Used promotionally though, not chronically.

The current deep disount coupons have become a part of everyday business and shopping at Fresh & Easy stores because they've been always available. It's very difficult for "Couponous Freshneasyous" to stop using the coupons cold turkey after all.

Coupons in this value range -- the $10 off $50 and $25 off $100 -- do the job of generating new customer trail as well as motivating and increasing shopper market basket size.

Fresh & Easy's current $6 off purchases of $30 or more coupon for example demonstrates to us the grocer is having a big problem increasing its average market basket above $30, for example. If not, why would a retailer reward a shopper with a 20% discount for spending merely $30 at a grocery store? A $30 purchase might be good at a traditional convenience store but its poor for a supermarket.

Consumer-centric, not retailer-centric

In terms of our argument that Tesco Fresh & Easy CEO Tim Mason and his top executives just don't get it, that imposing the British food retailing model is failing, we suggest you read this quote from his interview with The Times' reporter:

"We are absolutely thrilled with the customer response from those loyalists that have got it, and really loved what we do,” he said. “What retailer has better staff, better product quality and delighted customers and doesn't make it?"

It isn't the job of consumers to "get" a food and grocery retailer's format, positioning and way of selling groceries. Rather, it's the retailer's job to design a retailing format and merchandising and marketing program, and position and operate in such a way that it creates as many regular customers as it can, which means success. It's called "consumer-centric" retailing; it's what grocers do if they want to be successful. Mr. Mason's comment suggests what we call "retailer-centric" retailing. In other words, if you build it, they will come. Doesn't work.

We also find the loyalist comment interesting. And there are a number of Fresh & Easy loyalist customers out there, without a doubt. And for some good reasons. However, there aren't enough loyalists to make a business.

We also can't help remembering what happened to the British military a couple hundred and thirty two or so years ago when it relied on what it called British loyalists, British nationals living in the then colony of Britain called America, to help it win the war of independence waged by a rag tag bunch of Americans, many of whom were former British nationals who fled their country for the new world. The so called loyalists stop being loyal to Queen and country once they thought the Americans, which they finally figured out they too were, had a chance of winning the war. And as they say -- the rest is now history.

Supermarket loyalists can do the very same thing. After all, weren't today's Fresh & Easy loyalist likely loyalists of another grocery chain a little over a year ago, before the first Fresh & Easy store opened, and even less than a year ago in many cases, before the current Fresh & Easy store in their respective neighborhood opened.

Also ask Whole Foods Market about loyalists. No food retailer in the U.S. has had a more loyal following over the last 15 or so years than Whole Foods has. A cult of loyalists even. But beginning earlier this year, as the economy starting getting really bad and food prices began to soar, many of those Whole Foods loyalists shed their pledges of loyalty and went searching for grocers offering lower prices. And even more loyalists have fled Whole Foods over the last three months as the economy has worsened, so much so that Whole Foods reported a 40% drop in earnings for last quarter and its common stock is as of today 70% lower than it was just one year ago.

We've heard many versions of Mr. Mason's comment in the quote from The Times: "Shoppers who get it" (what Fresh & Easy is), numerous times in the last year from Tim Mason and a number of his top executives. So many times in fact it sounds more like they are conducting a treasure hunt rather than positioning a supermarket chain. Frankly it also comes off as a self-congradulating pat on the back. 'See, we must be on to something because there's a core group of loyalists that get it.' We can't help but wondering how that would go over say in a meeting with Tesco plc's ten largest shareholders.

It is a comment that's completely foreign to successful American grocers. They see their job as constantly coming up with ways to appeal to consumers rather than hoping a certain segment "gets" what they are doing, and being appreciative of it And when not enough consumers "get" what those retailers are doing, which is the case with Fresh & Easy, those retailer's change, adapt. That's what Mr. Mason and company should be focusing on, along with dropping that "those who get it" language. It makes them look like they...well, don't get it. Notice not one mention in the published interview about what Fresh & Easy plans to do better?

We do agree with Tim Mason's comment about Fresh & Easy store-level employees though. In our observation they are the grocery chain's number one asset.

In fact it is to a large extent because of these excellent store level employees, and their being able to keep their jobs if they want them, we suggest Tesco plc CEO Sir Terry Leahy, who we think is one of the most talented food and grocery retailing executives around, needs to take a very close look at Fresh & Easy Neighborhood Market and how it is being run. Sir Terry, Fresh & Easy looks nothing like you said it would be. After a year of operations, aren't you concerned why that is the case?

For example, in this recessionary economy, Fresh & Easy should daily be hammering home its value proposition. Something like this: "Fresh & Easy markets are basic, smaller neighborhood discount grocery stores (a minimalistic and even nostalgic message). This allows us to keep our prices low. In tough times, when you (consumers) are having to cut back and live a simplier life, isn't it good to know you have a simplier, lower priced alternative, Fresh & Easy." This message then has to be constantly and consistantly hammered home with integrated merchandising, marketing and communications. Walking the talk as well as talking it.

Instead of promoting berry flavored gourmet cheese and Spanish sparkling wines, Fresh & Easy needs to focus on the basics: Essential food and grocery items at the lowest possible prices. We have just three words for it: value proposition, value proposition, value proposition. All other merchandising, marketing and promotion -- specialty, envoronmental and the like -- should be secondary and tertiary to the value message focus and positioning.

This is something Fresh & Easy should have starting doing at the first signs of a recession -- say in March-April, 2008. But its November, 2008, the economy is in the tank, and Fresh & Easy has yet to create a solid value proposition-based marketing and merchandising program. Wal-Mart has. Safeway has. Kroger has.

Is it time for Sir Terry to sit in the front seat instead of the back?

Tesco's problems with Fresh & Easy go far beyond postponing or even killing completely its plans to enter the Northern California market. We've discussed a number of those problems in this piece.

Our suggestion to Tesco plc CEO Sir Terry Leahy is, if you want to succeed with Fresh & Easy in America, its probably time to get out of the back seat, jump in the front seat, and even put your hands on the steering wheel a bit. Do a complete evaluation of the operation, from the top on down, in terms of apprach, strategy implementation and headquarters operations. Changes geared to success are needed.

It's been a year since the first Fresh & Easy store opened and well over two years since Tim Mason and his top executives began what amounts to attempting to run a British grocery chain, using British food retailing systems, in the Western U.S. states of California, Nevada and Arizona, which just happen to be among the most "American" of American food and grocery retailing markets. You know, the wild west and all that.

We don't argue the current financial crisis and recession make it difficult for any grocery chain to launch a major expansion such as Fresh & Easy's into Northern California. Others are cutting back as well. But they aren't start ups who've said all along plans called for investing lots of capital.

But we do argue that despite the serious economic mess the U.S. is in -- it is far from the only or even primary cause of the current state of Fresh & Easy.

Things could be far fresher and far more easier though for Tesco with its Fresh & Easy Neighborhood Market USA.

But until it stops trying to impose a British food and grocery retailing model and strategy at Fresh & Easy and changes to a Western U.S. regional retailing focus and strategy -- along with implementing a localized merchandising, marketing and operational approach in its current three market regions -- and couples this new model with a focus on the value proposition -- it's our analysis Tesco's small-format, convenience-oriented Fresh & Easy Neighborhood Market food and grocery retailing venture has little chance of suceeding beyond mere survival, if that, despite the fact it has the potential to be successful.

The opportunity still exists for Tesco's Fresh & Easy to be a success in America. Of course CEO Mason argues in the interview, as well as elsewhere publicly, the only problem facing the grocer is external -- the current financial crisis and recession. We respecfully disagree.

It's our analysis that in order for Fresh & Easy Neighborhood Market to succeed, especially on the terms Tesco has set for its success, Tesco will have to make serious changes, including the ones we've outlined in this piece. We will explore more of those potential changes in upcoming pieces in Fresh & Easy Buzz.