Tesco Reports Respectable Q-3 International Sales Growth; Weakest UK Sales in 15 Years; Fresh & Easy USA Not One of the International Bright Spots

Analysis - With a special look at Fresh & Easy USA

United Kingdom-based global retailer Tesco, which owns and operates Fresh & Easy Neighborhood Market in the Western United States, reported its weakest same store quarterly sales growth for the UK, the retailer's top market, in 15 years. UK same store sales, excluding gasoline sales, rose by only 2% for the third quarter, Tesco's worse performance at home in 15 years.

Total UK sales grew by 5.9% in the quarter, with like-for-like (same store) sales up by 3.2%, including petrol. Excluding petrol, like-for-like sales rose by 2.0%. The last number, the 2.0%, is what analysts and investors focus on.

However, Tesco's overall or total global sales were up a respectable 11.7% for the third quarter.
Tesco doesn't break out its quarterly sales reporting by specific international region.

Tesco currently operates 3,956 stores internationally in 14 countries, including its Fresh & Easy Neighborhood Market small-format, convenience-oriented grocery and fresh foods markets in the Western U.S. states of California, Nevada and Arizona. Nearly half of its 3,956 stores are in the United Kingdom.

Overall "International sales were up 28.1% at actual exchange rates and by 14.6% at constant rates. This included a particularly strong performance in Asia, where sales grew by 29.4%, helped by the Homever acquisition and in spite of the depreciation of the Korean Won against Sterling," Tesco said in a statement today.

"We have seen strong growth in all our European markets, although favourable exchange rate movements have contributed significantly to this - and growth at constant rates slowed to 6%. Despite the economic slowdown in some of our markets, our businesses have done well, particularly in food and grocery categories, and we have seen good market share gains." Tesco said about its overall international operations.

Fresh & Easy Neighborhood Market USA isn't one of Tesco's global retailing bright spots however. About Tesco's Fresh & Easy USA, Tesco CEO Leahy said today:

"The U.S. is in recession," he said on the Tesco Web site in a company produced, public relations-style question and answer session on the company’s third quarter interim results. "The Western United States, where we’re opening, is in severe recession at the moment, so it makes sense to maintain our rate of opening rather than the planned acceleration in the rate of opening because you can’t just buck a downtown of that magnitude. [Fresh & Easy] is very popular. It is well received by customers. The U.S. will bounce back, the Western United States will bounce back. We’ll be able to step up our rate of growth when that happens.

"Our prudent decision to maintain, rather than accelerate our current rate of new store expansion in the United States, given the severity of the economic slowdown in some geographic markets there, will mean that we will open 0.5 million (500,000 square feet or about 45-50 Fresh & Easy stores, which average about 10,000 -to- 13,000 square feet each) square feet for Fresh & Easy during the second half. Our early US stores have now moved strongly into like-for-like growth and the performance of Fresh & Easy overall continues to be pleasing."

CEO Leahy is referring to Tesco's decision, which we've reported on, to slow its new store opening pace with Fresh & Easy, including postponing the grocery chain's opening of its first stores in the Northern California market region, where thus far Fresh & Easy Buzz has identified about 46 locations in the San Francisco Bay Area, the Sacramento/Vacaville Metro region, the Northern San Joaquin Valley and the Monterey coast region where Tesco has locked-in leases for its Fresh & Easy markets.

Initially, as we've reported, the Northern California stores were set to begin opening early this year. Tesco then changed that to the end of 2008, then again to early 2009. It is unsure when the first stores in Northern California will start opening now. But based on our sources it's not likely the first Fresh & Easy store in Northern California will open until the middle of 2009, at the earliest.

Further, based on CEO Leahy's quote above, that Tesco will open 0.5 million square feet (or 500,000 total square feet) worth of new stores in the second half, that means opening only 45-50 new Fresh & Easy markets, which average 10,000 -to- 13,000 square feet in size, during this period.

Since we've already identified 46 Fresh & Easy Northern California locations, and since we know additional Fresh & Easy markets are planned to open in Southern California, Nevada and Arizona (the three existing markets) in the second half (plus up to 13 stores in Bakersfield and Fresno), just doing the math suggests that its rather possible Tesco may not open any Fresh & Easy stores at all in Northern California (Bay Area, Sacramento/Vacaville region, Northern San Joaquin Valley) in 2009. And if it does open any Fresh & Easy stores in Northern California, the number of stores opened would be nowhere near even the 46 locations we've already identified, since opening all 46 would take up nearly all of that total 0.5 million of new square footage Sir Terry Leahy says the retailer will open in the U.S. in 2009.

Tesco plans to open five stores in the Bakersfield region in the far-southern Central Valley of California and eight stores in the Fresno Metropolitan region in the mid-Central Valley.

The first two stores in Bakersfield open tomorrow, December 3. They will be the first Fresh & Easy markets to open in California outside of the Southern California region. These regions are in Central rather than Northern California.

We expect the retailer to go forward with opening these stores. Do note though that they take up at least 130,000 of that 500,000 new store square footage. Therefore putting even more doubt in a 2009 Northern California launch.

Tesco currently operates 102 Fresh & Easy markets in Southern California, the Las Vegas, Nevada Metropolitan region and in the Phoenix Metro area in Arizona.

What Sir Terry Leahy didn't mention today in his Q&A (notice his emphasis on external factors only regarding Fresh & Easy -- the recession, ect.) is that Fresh & Easy's problems existed long before the Western U.S. economy turned demonstrably sour. In fact, up until just a month ago Fresh & Easy Neighborhood Market CEO Tim Mason said the chain was doing remarkable. And, ironically, we learned yesterday from the official board that calls recessions in the U.S., that the country is in a recession, and has been since December, 2007. The first batch of Fresh & Easy stores opened in November-December of 2007.

The fact is the format and stores haven't yet caught on in any significant way in either Southern California, Metro Las Vegas, Nevada and in Arizona. They have a niche customer base more similar to what a conventional convenience store chain or a specialty foods format chain would have. That's not what Tesco has planned for Fresh & Easy. The stores are supposed to be neighborhood grocery stores that shoppers use as primary and to a limited degree secondary shopping venues. Fresh & Easy is nowhere close to achieving that objective, neither in sales or in consumer behavior and shopping patterns.

Notice the part of the quote (in italics) above we have in bold from Sir Terry Leahy, where he says: "Our early US stores have now moved strongly into like-for-like growth and the performance of Fresh & Easy overall continues to be pleasing."

That's what's called a nuanced statement. It is true some of the early (opened in late 2007 and early 2008) Fresh & Easy stores are doing well in like-for-like (called same store sales in the U.S.) sales. But it is equally true an equal number of those early stores are doing poorly in like-for-like sales. For example, two months ago we were told by a source in a very good position to know, that the very first Fresh & Easy store opened, which was opened the last week in October, 2007, in Hemet, California, is not yet even averaging $100,000 in weekly sales; averaging instead about $90,000 -to- $100,00o per week at best.

So, even though Tesco is attributing any and all struggles for Fresh & Easy to strictly external variables like the severe economic recession, that's far from true. In fact, since Fresh & Easy is positioned as a no frills, discount grocery and fresh foods market with prices claimed by Tesco to be 15-20% lower everyday than its competition, one has to ask, as we have in previous pieces, why Fresh & Easy Neighborhood Market isn't doing well in a recession based on that model? After all, there is a mass flight by U.S. grocery shoppers to discount supermarkets and other stores like Wal-Mart and the small-format Aldi hard discount markets in the U.S.

The reason is far more internal than it is external -- a failure by Tesco to properly define the Fresh & Easy format, create a strategy to communicate that positioning, and then execute the marketing and merchandising in a comprehensive, clear and quality manner. For example, in the midst of what is a severe economic recession, and even a worse recession in California, Nevada and Arizona, Tesco's Fresh & Easy is promoting the chain and stores more like its an upscale specialty foods format rather than a discount format perfect for today's difficult economic times.

Fresh & Easy Neighborhood Market USA's primary problem isn't external -- the recession -- nor is it a public relations problem, which is an activity the grocery chain spends way to much time on. Rather it is a basic one -- Tesco's Fresh & Easy has yet to become a good merchant, plain and simple.

Tesco's stock shares jumped by 6.6% today following the release of its third quarter sales figures, a sign of confidence in the retailer from investors. However, Tesco's stock value is down about 40% from this time last year, so that confidence has a way to go in terms of gaining back that value.

"We are pleased with our progress (today's third quarter overall sales), but we are also realistic," Tesco CEO Sir Terry Leahy said today in a statement, citing the current economic climate.

In September, Tesco launched its new "Discounter" range of mid-range branded products like pasta and tea bags, for which it had knocked prices lower. That segment now makes up 5.0% of the company's food and drink sales. The retailer is hoping this product range, along with other discounting measures it is taking, will help improve its UK sales, which account for a significant portion of overall sales as Tesco's top trading region.

At home in the UK Tesco is losing business to deep discounters like small-format, no frills grocers Aldi and Lidl. Additionally, Wal-Mart-owned Asda has been engaged in an aggressive discounting program since the first of this year, which has garnered the retailer some new business in the UK at Tesco's expense.

Tesco still has about 31% of the UK food and grocery sales market share however, which is about as much as the country's number two, Asda, and number three, Sainsbury's, have in combined market share percentage. It's estimated that one of every seven pounds spent at retail in the UK is spent at a Tesco-owned store.

Like the U.S., the UK's economy is racked by recession and its own financial and credit crisis. It's important to note that Tesco, especially at home in the UK, is a general merchandise as well as food and grocery retailer. Many of its stores sell everything from clothing and consumer electronics to gifts and household goods, along with food and grocery items. It is these non-essential, durable goods type items that consumers can't afford to purchase in the UK, just as is the case in the U.S. and most other places throughout the world.

Obviously lack of sales across the board in these durable goods categories is an important factor in Tesco having its weakest sales growth (the 2%) in the UK in 15 years. In other words, its important to realize the same store sales aren't based exclusively on sales in the consumables categories, although food and groceries do make up the largest percentage of overall sales for Tesco.

[You can read and view an interview (the company produced public relations-style Q&A) with Tesco CEO Sir Terry Leahy about Tesco's third at www.tesco.com/investorcentre.]

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

Arizona's Bashas' Family of Stores, a multi-format supermarket retailer that operates about 159 stores in every county of the state (including few stores in New Mexico and one in Needles, in Southern California) was named yesterday as "one of the best places to work in Arizona" in an annual statewide employee survey conducted by the Phoenix Business Journal and Best CompaniesAZ, an Arizona-based human resources consulting firm.

It was the second year in a row the family-owned and operated supermarket chain was named one of the best places to work at in the Southwestern U.S. state. Bashas' also was the only retail grocery company to make the "best places to work" list this year.

Bashas' was founded 76 years ago in 1932 by brothers Ike and Eddy Basha Sr. That was a tough year to start a company of any kind in Arizona, or any place in America for that matter, since in 1932 the United States was in the midst of the Great Depression.

In part, the Arizona supermarket chain's depression era founding--and not only survival but ability to thrive for 76 years in one of the most competitive grocery markets in the nation--set the foundation for today's Bashas'.

Despite trying their best, U.S. national supermarket chains like Safeway Stores, Inc. and Albertsons (now part of SuperValu, Inc.) haven't been able to use their much larger size, capitalization and greater resources to diminish Bashas' position and reputation as the state's top grocer, neck-in-neck with Safeway for market share supremacy.

The Arizona best places to work list winners get named to the list as a result of votes by company employees who work for the companies that are nominated. In other words, its Bashas' employees who named the grocery chain one of the "best places to work" in Arizona.

Here's how it works: A firm called Quantum Market Research, Inc. conducts surveys of employees of Arizona-based companies, asking employees questions about the various companies' work environments, the workers' opportunities for personal growth and development, corporate human resources practices, and how the company values their (employee)personal contributions and embraces new ideas and innovations. The employees don't reveal their names on the survey questionnaires to help ensure truthfulness and protect the workers' privacy.

Quantum Market Research then independently analyzes and tabulates the employer survey questionnaires. In order to be named "one of the best places to work in Arizona," a company must receive a total score of 80% (out of 100%) from the employee survey results.

"The real honor (of being on the "best" list) is that our employees had the ultimate say in this award," says Mike Gantt, Phoenix-based Bashas' corporate senior vice president of human resources.

"It's wonderful to know they are satisfied with a well-balanced work environment that addresses both their professional and personal needs. Everyone benefits from this type of environment--our employees, our customers, and the communities we serve," Gantt added.

Bashas', the region's competitive environment, and Tesco's Fresh & Easy

Arizona's Phoenix Metropolitan and East Valley region is one of the three target markets (the others being Southern California and Metro Las Vegas, Nevada) where Tesco's Fresh & Easy Neighborhood Market has thus far opened a total of 61 stores. Currently there are 17 of the small-format (10,000 -to- 13,000 square feet), convenience-oriented combination basic grocery and fresh foods grocery markets in the Phoenix Metro/East Valley region. Tesco plans on opening at least 15 more of the Fresh & Easy stores in the market area before the end of this year.

Since Arizona, including the Phoenix Metro/Easy Valley region, is Bashas' home turf, it's been watching Tesco's Fresh & Easy closely. Thus far, in off-the-record conversations we've had with two Bashas' executives, we've been told the family-owned locally-based supermarket chain has yet to see "any appreciable" "Fresh & Easy effect" in terms of diminished sales in its stores.

These comments from the Bashas' people seem legitimate as we've also had conversations with numerous members of the Arizona Retailers Association (the state's trade group for grocery retailers of all sizes), local food brokers and grocery industry regional sales managers, and others who live and work in the region, and none of them have told us they've observed any significant shift in business as of yet as a result of the 17 Fresh & Easy grocery markets being in the market.

The Arizona grocery company is a multi-format supermarket chain. In addition to its flagship Bashas' banner stores, which are conventional, multi-category supermarkets and superstores, the retailer also operates: AJ Fine Foods, which is an upscale, premium and specialty supermarket format; Ike's Farmers' Market, a natural and health foods-oriented format; Food City, which is an ethnic supermarket geared-towards and targeting Hispanics or Latinos; and Sportsman's Wines, an upscale wine, beer, spirits and specialty foods' chain which Bashas' recently acquired from its owners.

Bashas' multi-format Arizona strategy has been very savvy. For example, it acquired AJ's Fine Foods--which was the state's leading privately-held, multi-store independent specialty, gourmet and natural foods grocer--as a way to establish a position in upscale food retailing. Since acquiring the small grocery chain a few year's ago, Bashas' has continued to add stores, primarily in the Metro Phoenix area.

Additionally, located on the border with Mexico, Arizona has on of the highest per-capita Hispanic-American populations in the U.S. Latinos also are the fastest growing ethnic group in the U.S., and are growing at an even faster-rate in Arizona than in all other U.S. states except California.

Bashas' creation of its Food City format, designed and positioned directly at Hispanics, was a smart move in capturing the substantial (and growing) Latino consumer food dollar in Arizona. Further, since Hispanic Americans on average spend far more of their income on food and groceries than any other ethnic group in the U.S., the Food City format offers excellent growth opportunities for the grocery chain corporately.

The grocery retailer's newest format, the Ike's Farmers Market natural foods stores, also positions the grocer to cash-in on the growing movement towards natural foods in the Arizona Market, as well as protect itself from Whole Foods Market, Sunflower Farmers Market and Sprouts Farmers Market, three natural and organic foods grocers who've built numerous stores in Arizona in the last few years.

Lastly, like AJ's Fine Foods, Sportsman's Wines, which is a recent acquisition for Bashas', is a long time popular beverage (with some specialty foods) retailer in the state. It's considered to be the premiere retailer of fine wines, micro-brewed beers and spirits in Arizona.

In addition to providing obvious synergies with upscale grocery chain AJ's, the Sportsman's Wines' addition allows the grocery chain to diversify into the category-killer beverage segment, while using the category expertise of the Sportsman's team, which the supermarket chain kept on, for all of its stores, regardless of format.

One of the primary reasons Bashas' is so successful in Arizona despite strong competition from the Safeway's and Albertsons' of the U.S. grocery retailing world, who are 10 to- 12 times its size, is because it permeates everything it does--from operations and merchandising, to employment practices and marketing--with "localism."

An intense focus on local history, culture, practices and demographics, regardless if a chain is from another country, is a national U.S. chain with stores in the region but headquartered thousands of miles away, or is a hometown-based one, is a key element in U.S. grocery retailing.

For example, it's no accident many of the market share leading supermarket chains in the western U.S. regions where Tesco has its Fresh & Easy stores aren't the U.S. mega-grocers like Kroger, SuperValu and Safeway (all which have major operations in Arizona, California and Nevada) and do practice a degree of local marketing everywhere they have stores) but the smaller, privately-held regional grocery chains like Bashas' in Arizona, Stater Bros. in Southern California, Raleys in Northern California's Sacramento region and Northern Nevada, and Save Mart in Northern California's Central Valley.

Each of the four regional chains mentioned above is the number one or two market share leader in its respective region. Take Southern California as an example. Safeway's Vons and Kroger's Ralphs Grocery Co. are the number one and two market share leaders in all of Southern California. However, in the huge Inland Empire region (which is bigger geographically than many European countries) regional Stater Bros. controls the grocery sales market share.

Northern California is a similar case. San Francisco Bay Area-based Safeway Stores, Inc. is clearly the 7-million resident-strong Bay Area's number one grocery chain (Save Mart's Lucky banner is second).

However, in the nearby Sacramento region (about 2.5 million people) local chain Raleys, with 130 stores and sales of about $3.5 billion, is number one. Further, just down the road in the Northern San Joaquin Valley counties of San Joaquin, Stanislaus and Merced (about 1.5 million residents total) Modesto-based (Stanislaus County) Save Mart, Inc., which has over 400 stores and about $6.3 billion in annual sales, is the number one supermarket chain in market share.

Bashas tells us it has no plans to rest on its "one of the best places to work in Arizona" laurels, nor that it's slowing up its multi-format growth plans.

The Arizona grocery chain plans to open a number of new Bashas' banner supermarkets before the year is out, along with another new upscale AJ's, at least one and likely two Ike's Farmers' Markets, and more Hispanic consumer targeted Food City supermarkets, along with at least one new Sportsman's Wines shop.

This is in a market--Arizona generally and specifically the Phoenix Metro and East Valley region--that's among the top-five most competitive in the U.S. In addition to Bashas', Safeway has nearly 200 stores in the state, Wal-Mart has a number of its Supercenters in Arizona and about 20 of its 43,000 square foot Neighborhood Market supermarkets, and plans to open the first four -to- five of its brand new small-format Marketside grocery stores in the Phoenix area this summer.

Let's not forget Albertsons either, which is a major player in Arizona. Then there's Trader Joe's, the earlier mentioned Sprouts Farmers Markets and Sunflower Farmers Markets--both of which have recently launched major new store opening programs in the state--along with numerous independents who are very competitive.

Lastly--but far from least--is Costco Wholesale, which continues to take a bigger share of the grocery sales market from retailers of all formats in Arizona and elsewhere in the western U.S. Of course--there's also mass merchandisers Target and Kmart, a few drug chains which sell lots of grocery products in their scores of stores, more ethnic supermarkets...very competitive.

This is the competitive environment Fresh & Easy is up against currently in Arizona. As a start up and the retail child of an overseas company, Fresh & Easy is going to have to really step it up on all fronts to succeed in Arizona, home of local guy Bashas' and all the other retailers who are trying to make a success of grocery retailing in this supercharged grocery market.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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