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

In somewhat of a reversal of its position up until now on the single-use plastic carrier bag issue in the United Kingdom (UK), Tesco, parent company of Fresh & Easy Neighborhood Market USA, plans to require customers in all of its UK stores to only receive the plastic grocery bags if they specifically ask for them, Fresh & Easy Buzz has learned

Tesco customers will be required to ask the checkout clerks at all of the retailer's stores in the UK specifically for a single-use plastic carrier bag to package their purchases in. Additionally, the Tesco stores will keep the plastic bags under the checkout counters rather than in a visible site as they currently are.

Tesco shoppers also will be encouraged to bring bags from home to the stores as a way to reduce the volume of the free single-use plastic carrier bags given out in the Tesco UK stores as a part of the retailer's new program.

The single-use plastic bags will still be given free to shoppers if they request them. Tesco stores in Ireland have had to charge shoppers for each plastic bag they request for a number of years because of a national law requiring a plastic bag charge on the Island.

As we reported in a series of stores earlier this year, the British government and the nation's retailers have agreed to a voluntary commitment by those retailers to reduce the number of single-use plastic carrier bags the stores use by 70% by the spring of 2009.

Thus far, plastic bag use by retailers has only been reduced by a few percentage points towards meeting that ambitious 70% goal.

Earlier this year, British Prime Minister Gordon Brown warned UK retailers that if the 70% goal isn't achieved by next spring, he would back the passage of a law that will levy a per-bag fee on each free single-use plastic carrier bag used in a retail store, similar to the bag-fee law that's been in effect in Ireland for a number of years, along with numerous other nation's, states and cities throughout the world.

According to polls in the UK, such a law seems to have widespread voter and consumer support. One recent independent poll said support for such a law is running as high as 70% among UK residents. In fact, numerous cities and towns in the nation are moving forward with their own plastic bag fee and ban legislation measures.

Single-use plastic bag ban and fee laws are being enacted throughout the world, including in the United States.

Just last month the city of Manhattan Beach, (Southern) California, where Tesco opened a Fresh & Easy grocery store on July 2, passed a complete ban on the use of plastic bags for every retail store in the city regardless of format or size, for example. Other U.S. cities that have passed either bag bans or laws thus far include San Francisco (a ban), Seattle, Washington (a fee) Palo Alto, California (a fee), Mailbu, California (a ban) and a number of others. Scores more are considering ban of bag fee legislation.

Further, a bill that if passed would require retailers to charge customers 25-cents per single-use plastic carrier bag is making its way through the California State Assembly. Other U.S. states are considering similar legislation as well.

On February 28, 2008 the London Daily Mail newspaper launched what it calls its "Banish the (plastic) Bag" campaign in the UK. Shortly after the newspaper launched its high profile campaign, a number of retailers in the country announced various measures they would take in order to reduce the number of single-use plastic carrier bags they give out to shoppers in their respective stores.

Among these retailers, the Marks & Spencer food, grocery and general merchandise retailing chain has started charging customers 5-pence for each single-use plastic carrier bag they request at one of the retailer's stores.

Additionally, general merchandise retailer Debenham's, along with the UK National Trust stores, also have enacted 5-pence per plastic bag charges to shoppers in their respective UK stores, as has the Woolworth's general merchandise/drug chain. [For additional details on UK retailers charging for single-use plastic bags, read this March 8 piece from Fresh & Easy Buzz: More UK Retailers Jump On The 'Banish The (Plastic) Bag' Campaign.]

The UK's second-largest food and grocery retailer, Wal-Mart-owned Asda, said in March it would remove the single-use plastic carrier bags from outside its checkout counters and put them behind the counters, along with only offering the plastic bags if a customer specifically requests them. It appears number one Tesco is following number two Asda's lead by now planning to do the same.

Number three supermarket UK chain Sainsbury's and number four Morrisons also responded to the "Banish the Bag" campaign less than a month after it was started in February. Neither chain has yet to say it will charge for plastic bags or that it will make shoppers specifically request them like Asda has done and Tesco now plans to do. Rather, both chains have announced a series of moves, consisting primarily of giving away thousands of free reusable shopping bags and encouraging shoppers to bring their own bags to the store.

Sainsbury's recently launched a multi-front public relations campaign--both in its stores and through the media--designed to get shoppers to bring reusable bags to the stores. We also know Sainsbury's has for some months now been considering putting the plastic grocery bags behind the counters and requiring customers to specifically request them like Asda did and Tesco now plans to do. Sainsbury's decided however to go with the massive reusable shopping bag giveaway and "bring your own bag" public relations campaign instead.

We predict Sainsbury's will soon announce it will join Adsa and now Tesco and put the single-use plastic carrier bags behind the checkout counters and require shoppers to specifically request them. Sainsbury's didn't want to do this in part because it was worried doing so would give already number one Tesco a competitive advantage. However, Tesco has now opened the door--like Asda did before it--for Sainsbury's to follow suit.

We expect Morrisons to follow Asda and Tesco's lead as well. After all, if they don't follow suit, not doing so could actually now be an environmental retailing competitive disadvantage for the UK's number three and four supermarket chains, since number one Tesco and number two Asda are going to an "ask only" single-use plastic carrier bag policy in their respective stores.

Perhaps ironically, Tesco was the only one of the "big four" UK supermarket chains--Tesco, Asda, Sanisbury's and Morrisons--that had no response in terms of making any policy changes to the Daily Mail's "Banish the Bag" campaign from February when the cmapaing started, until now, previously saying it has and is taking internal measures to reduce the number of free, single-use plastic bags it's using in its stores.

Tesco CEO Sir Terry Leahy said earlier this year, and again recently, the retailer does not plan on charging customers a per-bag fee in its stores, like Marks & Spencer and the other UK retailers are now doing.

CEO Leahy has said publicly Tesco believes in consumer choice when it comes to the plastic bag issue, and that the retailer therefore had nor has no plans to take any major choice limiting measures to restrict that consumer choice in its stores.

It's arguable and open to debate whether or not requiring customers to request a plastic grocery bag is choice-limiting or not, we believe. The choice is still there after all--a shopper just has to exercise that choice verbally, which many already do when offered the choice of paper or plastic bags at the checkout counter.

Requiring customers to have to ask for the plastic bags though is a considerable reversal from Tesco's previous position, in that it said it wasn't for any sort of restrictions at all. But change of position often shows a learning organization at work, so we certainly don't fault Tesco for doing so.

In a story on March 4, 2008 titled: "Message From Across the Pond: Tesco is Right Square in the Middle of the 'Banish the (Plastic) Bags' Campaign in the United Kingdom,"we predicted Tesco would eventually modify its single-use plastic carrier bag policy in some way in order to reduce the volume of the bags it gives out annually in its UK stores, along with needing to do so in order to help meet the 70% reduction goal agreed on by the nation's retailers and the British government. It appears it is doing so now.

Tesco and the other top UK grocery chains don't want a law requiring them to charge customers for the single-use plastic carrier bags at store-level to be passed by Parliament. Therefore, seeing spring 2009 just around the corner, and with the UK's food retailing industry being nowhere near that 70% reduction level, flexibility in terms of internal corporate plastic bag policy change is in the air.

The new policy by Tesco to only give out the plastic bags when specifically requested by shoppers allows the retailer to for now stick to its pledge to not charge for or eliminate the bags, but to still attempt to reduce its usage without denying the plastic bag option to its customers. This is essentially the same logic Asda used in adopting its "ask only" plastic bag policy earlier this year.

Tesco's Fresh & Easy USA stores offer only free plastic bags--no paper

Meanwhile, Tesco's decision to give customers single-use plastic carrier bags in its UK stores if only specifically requested, raises a very important question for its Fresh & Easy Neighborhood Market grocery chain in the U.S. states of California, Nevada and Arizona, which offer only free plastic single-use carrier bags to shoppers and not the choice of paper or plastic bags.

That question is, since Tesco PLC is on the record as saying Tesco will not eliminate or charge customers for the plastic bags in the UK because it believes in customer choice on the issue, why does it not believe American shoppers should have the choice of either plastic or paper grocery bags in its U.S. Fresh & Easy grocery stores?

Is consumer choice only a UK priority when it comes to paper or plastic bags? Why the double standard and the two radically different policies?

We think Tesco PLC and Tesco's Fresh & Easy Neighborhood Market USA need to address this issue, particularly in light of the fact the international retailer now will require UK shoppers to only receive free plastic bags in its stores if they ask for them, when in it's U.S. Fresh & Easy grocery stores shoppers don't even have the choice of requesting paper bags, but rather must except plastic or buy one of the retailer's Fresh & Easy reusable "bags for life" for 20-cents each, purchase one of its canvas shopping bags, or bring their own bags from home. At Fresh & Easy USA stores the choice when it comes to free carrier bags is plastic or plastic.

We are surprised offering only single-use plastic carrier bags has not become a major negative public relations issue thus far for Tesco's Fresh & Easy in the U.S., where the plastic grocery bag issue is getting close to if not already becoming as much of a hot button environmental issue as it currently is in the UK.

In fact, in this July 23, 2008 piece: "Plastic or Plastic: Single-Use Plastic Carrier Bag Bans in California Cities Threatening Tesco Fresh & Easy's Free 'Plastic Bag-Only' Policy,"we suggested that in our analysis Tesco's Fresh & Easy Neighborhood Market USA is just one environmental or union group away from finding itself the target of a campaign against the grocery chain for offering only single-use plastic carrier bags in its Fresh & Easy grocery markets, thus threatening the retailer's "green" or environmental image, which it has been working hard to cultivate in the media and in consumers' minds.

We believe unless Tesco's Fresh & Easy starts offering customers the choice of free paper as well as free single-use plastic grocery bags in its stores very soon that it's now even closer to having such a negative public relations campaign launched against it because of Tesco's new policy of offering single-use plastic carrier bags in its UK stores only if customers specifically request the bags.

In fact, we think Tesco's new plastic bag policy in the UK actually ups the anti on the issue for the retailer to follow suit in the U.S. and do the same at its Tesco Fresh and Easy Neighborhood Market USA grocery stores, adding the paper grocery bags at its stores in California, Nevada and Arizona, and offering the single-use plastic grocery bags only if a customer requests them.

We have no vested interest in Tesco's Fresh & Easy doing this. Rather, it's merely our analysis that if the retailer doesn't do so, it's headed for a potentially negative campaign against its plastic bag-only policy, which likely will lead to the retailer doing what we suggest anyway--but only after much damage is done.

We also believe it's anti-customer choice to not offer the paper grocery bag option along with plastic. Further, we think it's an anti-"green" retailing practice to offer plastic-only. Our preference is for reusable shopping bags, and we congratulate Tesco's Fresh & Easy Neighborhood Market USA for making available its inexpensive (20-cents each) reusable "bags for life," which the retailer offers to replace for free when they wear out, in its stores. However, until using reusable bags becomes common in the U.S.--and probably even after--we suggest that any retailer that doesn't offer the choice of paper or plastic has a serious "green" retailing problem.

It's also a very hard to understand the plastic bag-only policy if one has any knowledge of U.S. food and grocery retailing, since many consumers just plain hate plastic grocery bags enough to not shop at a store at all because they don't offer the paper bag option. Why would a start up food retailer like Fresh & Easy in need of as big of a potential customer base as it can attract exclude a potential portion of that customer base by not offering a choice between paper and plastic grocery bags?

Why Tesco already doesn't offer the paper grocery bag option in its Fresh & Easy Neighborhood Market grocery stores in America, the land of choice, is rather a mystery, since every supermarket and grocery store of note in the U.S. offers free paper and plastic grocery bags to consumers.

The only significant exception is Whole Foods Market, Inc. which stopped offering plastic bags completely in April, 2008 in its U.S., Canada and UK stores as part of its environmental retailing program. Trader Joe's, which in a number of ways Tesco modeled Fresh & Easy after, has for years used paper grocery sacks as the "default bag" in its stores, only giving shoppers single-use plastic carrier bags if they ask for them.

One key reason we believe Tesco decided not to offer paper grocery bags in its Fresh & Easy grocery stores is because the self-service checkout stands it uses in its stores (Fresh & Easy only offers self-checkout. Store clerks will assist customers to checkout if the shoppers request help)
aren't designed with slots to hold the various sizes of paper grocery sacks like traditional full-service checkout stands are.

Not offering paper carrier bags, which cost more per-bag than single-use plastic carrier bags do, also offers Tesco's Fresh & Easy a cost savings. Saving money at every possible turn--from putting Fresh & Easy stores into empty retail buildings and hiring all part-time store employees except for the store manager, to lowering overhead and expenses across the board--is a major aspect of Tesco's model with Fresh & Easy, allowing the retailer to then offer basic groceries and fresh foods in its stores at everyday prices designed to be lower than competing, larger supermarkets' everyday retail prices are.

However, we are reminded of that old television commercial about Fram brand automobile oil filters. In the ad, the spokesman, who is an automobile mechanic, holds up a Fram oil filter, looks into the television camera and says to viewers: "Use Fram oil filters. After all, you can Pay me now...or Pay me later."

In other words, the Fram oil filters cost a bit more than other brands (pay the mechanic now) but they also prevent consumers from later having to spend lots more money (pay me later) at the mechanic's shop for repairs caused by failing to use the "superior" brand of oil filter. It's a takeoff of the prevention concept as it applies to getting regular health check ups, maintaining your home...and of course taking regular care of your car so as to avoid costly repairs in the future.

Our analysis is that Tesco's cost savings by offering only the cheaper single-use plastic carrier bags rather than also offering the higher costing paper grocery bag option like nearly 100% of U.S. grocers do, is a "pay me now or pay me later" scenario.

The retailer may be saving some money at present by only offering the less-expensive plastic bags, but it could end up paying much more later in lost sales (not offering the paper carrier bag option could already be doing that), damaged brand reputation, and expensive public relations fees should one or more environmental group decide to launch a campaign against the retailer for offering only single-use plastic carrier bags in its Fresh & Easy grocery stores.

Here's a positive suggestion for Tesco's Fresh & Easy: If it doesn't want to add the paper carrier bag option in its stores, just bag all customer grocery purchases in the inexpensive "bags for life," providing them to customers for free with a reminder to bring them back and use them over and over, and get rid of the single-use plastic bags completely

The short -to- medium term overhead cost of doing so would be considerably higher than it is currently for the single-use plastic carrier bag-only policy, and even a bit higher than offering both single-use plastic and paper carrier bags.

However, over time it should end up being more economical for the retailer because at least theoretically since the "bags for life" are reusable, at some point one should see a statistical curve in which more shoppers are reusing more of the bags (bringing them back with them to the Fresh & Easy grocery stores) than the stores are giving out for free. A comprehensive in-store consumer education program could help make this behavior happen sooner rather than later as well.

In addition, imagine the public relations bonanza and potential marketing advantage such a policy could bring Tesco's Fresh & Easy Neighborhood Market USA, even "one-upping" Whole Foods Market, Inc. and it's free paper carrier bag-only policy, and Trader Joe's with its "ask only" single-use plastic bag and default paper carrier bag policy, in the green retailing battle.

Tesco will have to address its single-use plastic carrier bag-only policy at its Manhattan Beach, California store before December of this year when that city's plastic bag ban is enacted, requiring all retail stores in the city to stop offering the bags to customers.

Additionally, Tesco plans to open at least two Fresh & Easy stores in San Francisco early next year. Those stores won't be able to offer shoppers single-use plastic carrier bags either because of the city's ban on them.

Further, cities throughout California, along with a couple in Arizona, are currently debating enacting single-use plastic carrier bag bans of fee laws. These include cities where Tesco already has eisting Fresh & Easy stores and others where it has new stores planned for.

With the change in policy by Tesco in the UK, in which it will now only offer single-use plastic carrier bags to customers who ask for them, it makes sense for the retailer to do the same in its U.S. Fresh & Easy grocery stores, including at a minimum adding paper carrier bags to the mix and logically only offering the free plastic bags upon customer request. If not, it then should bag all customer orders in its inexpensive reusable "bags for life," using those bags and eliminating single-use plastic all together and not adding the paper carrier bags in its grocery stores, for the reasons we've suggested in our analysis above.

Reader Resources:

Click here for a selection of past posts in Fresh & Easy Buzz about the single-use plastic carrier bag issue in the U.S., the UK and elsewhere internationally.

Arizona Region Market Report: Which Food Retailer Will Seize the Opportunity Offered by the Lack of a Grocery Store in Downtown Tempe, Arizona?

An urban food desert: Downtown Tempe--An Inconvenient (Shopping) Truth

There isn't a supermarket or grocery store offering fresh foods and basic groceries within 2.5 miles of downtown Tempe, Arizona (pictured above. Click on the photo to enlarge it). Therefore, its residents have to drive or take public transportation for a minimum 5 -to- 6 mile round-trip each time they need to shop for groceries.

Tesco has one of its small-format Fresh & Easy Neighborhood Market combination fresh foods and basic grocery markets at Baseline and Kyrene roads, about 2.5 -to- 3 miles south of downtown Tempe. Tempe, located in the Phoenix Metropolitan region, is Arizona's eighth-largest city, with about 170,000 residents.

This fall, Wal-Mart, Inc. will open one of the four of its new small-format (15,000 -to- 20,000) square foot combination Marketside fresh foods and grocery stores just down the street from that Fresh & Easy grocery market, also about 3 miles from downtown Tempe.

Two years ago, natural foods supermarket retailer Whole Foods Market, Inc. announced to much fanfare in the city that it would build a 55,000 square foot, two-level food emporium near the downtown and the campus of Arizona State University (which is right near the downtown core) as part of a new mixed-use retail and residential condominium development called the Mosaic project.

However, with the poor U.S. economy hitting Arizona and its commercial and residential development community so hard, that development is on hold, and many observers in Tempe say it isn't likely to be built anytime soon.

In addition, just last week Whole Foods Market, Inc. announced it was cutting in half the number of new stores it planned to open this year because of its poor quarterly sales and profit results announced last week. It's likely that even if downtown Tempe's Mosaic development were to go forward anytime soon, the Whole Foods store might not be a part of it.

According to a story in today's East Valley Tribune, a daily newspaper based in the Phoenix Metropolitan region, downtown Tempe hasn't had a full-service supermarket or food store since 2000, when Arizona State University bought and closed the IGA Stabler independent supermarket at Mill and University near the campus in the city's downtown area because it wanted to use the space for a campus building expansion.

Additionally, there was a food cooperative grocery market in the downtown for many years. However, that store closed its doors in 2006.

Statistics supplied by the city of Tempe say there are about 3,900 households in the downtown area west of Mill Road, and between Broadway Road and Rio Salado Parkway. Based on an average household size of three persons, that would constitute a neighborhood population base of nearly 12,000 people. additionally, it's estimated the daytime population of downtown Tempe is many more thousands of people on top of that 12,000 base population.

Despite that population base and the fact there currently isn't a supermarket in the downtown area, Tempe city officials and local real estate experts say they have found little if any interest from grocers of any kind in locating a retail food store in the area.

Tesco's Fresh & Easy is mentioned as one of the top candidates by more than one city official and developer because of the fact it already has a store in Tempe, along with the Phoenix Metro region being one of the grocery chain's three market regions in the Western U.S. Besides the Phoenix and valley region, Tesco has Fresh & Easy grocery stores in Southern California and in the Metropolitan Las Vegas region.

A Fresh & Easy grocery store also seems like a good fit for downtown Tempe as well because a small-format market like Fresh & Easy makes more sense than a 55,000 square foot, two-level supermarket like Whole Foods has been planning because of the smaller population base, along with much of the shoppers in the downtown area being Arizona State University students.

In fact, it seems to us that Fresh & Easy's focus on fresh, prepared foods and its limited assortment, reasonably priced basic grocery selection--along with its organic and specialty foods offerings--would be a good fit for the student population, as well as the non-student population in the downtown neighborhoods.

Additionally, downtown residents won't be able to buy basic grocery products, only natural and organic ingredient-based products, at the Whole Foods store it it ever does open downtown. Many shoppers want their Tide, Pampers, Nabisco Oreo Cookies and Coca-Cola available at the same store where they can also buy organic produce and grocery products. That's not the case at Whole Foods stores. This is even more important when there is only one (potential) grocery store in a neighborhood, such as would be the case in downtown Tempe.

Grocery store-less downtowns

Downtowns such as Tempe and numerous others (Phoenix, Los Angeles, Detroit and Oakland to name just four among the many) across the United States have a shortage of food and grocery stores, particularly those offering a decent selection of fresh foods and basic groceries at affordable prices, as we've written about extensively in Fresh & Easy Buzz. This phenomenon and these places are referred to as "food deserts."

However, as we've also written about frequently, there's a movement among cities to lure such food stores to both downtown areas, as well as to lower income inner city neighborhoods.

Tesco has even stated that part of its strategy with its Fresh & Easy Neighborhood Market USA small-format store grocery chain is to locate Fresh & Easy stores in such underserved neighborhoods.

Thus far, Tesco has opened two of its 68 Fresh & Easy grocery stores in urban neighborhoods underserved by food stores. Both of those stores are in Southern California. One is in the Eagle Rock neighborhood in Los Angeles, which is rapidly undergoing gentrification, and the other is in the low-income city of Compton in Los Angeles County.

Additionally, Tesco is building a store in another low-income inner city neighborhood in South Los Angeles which should open next year.

Further, the retailer has three stores on the drawing board for "food desert" cities in Northern California. One store is in San Francisco's Bayview-Hunters Point neighborhood, the second store in inner city Oakland, and the third store in Sacramento's low-income but rapidly gentrifying Oak Park neighborhood.

All three of these stores are scheduled to open next year as part of Tesco Fresh & Easy's push into Northern California and the Golden State's Central Valley. Thus far, Tesco plans to start opening next year 21 Fresh & Easy stores in the San Francisco Bay Area, 19 in the Sacramento Metropolitan region (in Northern California); five stores in the Bakersfield Metropolitan region, five units in the Fresno area (in the southern Central Valley), and one store in Modesto (in the Northern San Joaquin Valley), with many more being planned.

Downtown Tempe offers opportunity

Ironically, downtown Tempe, Arizona isn't a low-income area, although it lacks a supermarket. Rather, it's considered a moderate -to- middle income area. Additionally, because of its proximity to the Arizona State University (ASU) campus, it's an area with a higher than average percentage of residents who have college degrees, or in the case of the ASU students, residents who are in the process of obtaining a degree. Numerous campus professors and other employees, in addition to students, live near the campus and thus near the downtown core.

This fact is why Whole Foods Market, Inc. decided to locate a store in the downtown Tempe Mosaic development, which now has an uncertain future. Whole Foods' number one demographic criteria for where it builds and opens new stores isn't neighborhood income, although that plays a part.

Rather, the natural foods grocer's key demographic consideration is education level, specifically the percentage of residents in a given neighborhood who have a bachelors degree and post graduate professional and academic degrees. The higher the percentage of such college graduates, the more likely Whole Foods is interested in opening a store in that neighborhood, taking into consideration other criteria like there being a big enough population of people in the neighborhood as well of course.

The Lincoln, Nebraska example

The downtown Tempe area, with its close proximity to the ASU campus, reminds us of the University of Nebraska neighborhood where the Hy-Vee supermarket chain opened its first small-format grocery store in March of this year. Like downtown Tempe, the neighborhood in which the University of Nebraska, Lincoln campus is located was without a full-service grocery store. Hy-Vee decided it was a good location for the first of its small-format stores, as we wrote about here: The Small-Format Grocery Store Revolution in the U.S.: Hy-Vee, Inc. to Open it's First Small-Format Grocery Store in Lincoln, Nebraska.

We think downtown Tempe would be best served, like the Lincoln, Nebraska neighborhood, by a small-format grocery store like Tesco's Fresh & Easy or one of Wal-Mart's new Marketside stores, rather than a 55,000 square foot natural foods supermarket such as Whole Foods.

Locating a retail food store in downtown Tempe

However, in the case of Wal-Mart, we doubt it would consider locating one of its Marketside stores downtown, since it has one set to open this fall just 3 miles away.

The reason this is likely the case is that unlike Tesco, which is building its Fresh & Easy grocery stores about 2 -to- 3 miles away from each other in select market regions like the Phoenix Metro area, Wal-Mart is following more of a "fill-in," multi-format strategy with its Marketside format stores, in conjunction with its Supercenters, Wal-Mart (45,000 square foot) Neighborhood Market supermarkets and Sam's Club wholesale club stores in the market. [Read more about that strategy here: Wal-Mart's Small-Format Marketside Strategy is Currently Neither A 1,500 Store, $10 Billion A Year Mega Plan, Nor A Mere Four Store Test.]

In Tesco's case, it might be a better candidate to put a Fresh & Easy store in downtown Tempe, since its Tempe store at Baseline and Kyrene roads is itself three miles from downtown, which is within the retailer's "critical mass" store location range. Tesco currently has 20 Fresh & Easy stores in the Phoenix Metropolitan and East-West Valley region.

However, we're doubtful Tesco would locate a Fresh & Easy store in downtown Tempe for two primary reasons. First, we think the retailer, as would any grocer, is counting on residents who live in downtown Tempe, which is without a grocery store but 2.5 -to- 3 miles from the Fresh & Easy market, to provide a part of the shopper base for the Baseline and Kyrene store. Locating a Fresh & Easy grocery store downtown could cannibalize sales, or potential sales, at that Fresh & Easy location.

Of course, with a Wal-Mart Marketside store moving in right near the Baseline and Kyrene roads store, and which like Fresh & Easy will be counting on foot traffic from downtown Tempe in addition to in residents in the immediate neighborhood, this development might make it a good counter strategy for Tesco to go ahead and locate a Fresh & Easy store downtown, thereby cutting off some potential foot traffic to the Wal-Mart Marketside store. The 2.5 -to- 3 mile distance between downtown Tempe and the Baseline and Kyrene road Fresh & Easy store is within Tesco's range for locating Fresh & Easy stores after all.

Downtown Tempe: A perfect opportunity for Safeway's 'The Market'

The downtown Tempe site also presents a perfect opportunity for Safeway Stores, Inc. in terms of being a good potential site to locate its first small-format "The Market" format grocery store at in Arizona.

As we've reported, Safeway opened its first small-format grocery store, "the market by Vons" in Long Beach, California in May and is looking for other sites in California, including downtown Los Angeles and downtown San Jose in the San Francisco Bay Area.

Additionally, Safeway has said "The Market" format is a national strategy for the supermarket chain; that it could put the small-format stores in markets wherever Safeway has supermarkets, which would include Arizona, where it has well over 100 Safeway banner full-service supermarkets.

Like Wal-Mart, Safeway's strategy with its 15,000 -to- 20,000 square foot "The Market" format grocery stores--which are a semi-upscale combination grocery and fresh foods stores--is to use them as "fill-in" stores in conjunction with its full-size Lifestyle format supermarkets which operate under various banners.

In Arizona that banner is Safeway. In Southern California and Nevada the banner is Vons. The small-format stores will be named based on the supermarket banner Safeway operates in a given market. In Arizona the stores will be called "the market by Safeway. In Southern California, like the Long Beach store, it's "the market by Vons."

Locating its first "The Market" format store in downtown Tempe would allow Safeway to test the concept in Arizona against Tesco's Fresh & Easy and Wal-Mart's Marketside, which would be extremely interesting, especially to analysts like those at Fresh & Easy Buzz.

But doing so also would be a good test for Safeway in the market. Downtown Tempe is growing, and that growth is coming from urban professionals, along with baby boomer retirees with high incomes who want to change their lifestyles and move from suburbia into the city core for a variety of reasons.

Since Safeway is looking to "The market" format to be as much of an urban strategy as it will be a suburban one--evidenced by the potential store sites in downtown Los Angeles and downtown San Jose we've reported on and written about--downtown Tempe fits that strategy well. The relatively upscale "The Market" format stores also would likely be a hit with the ASU students and campus employees who live in and around the downtown area, as would a Fresh & Easy or Trader Joe's we believe.

AJ's Fine Foods and downtown Tempe

Another potential for downtown Tempe is AJ's Fine Foods, the upscale format of Arizona-based Bashas Family of Fine Foods, which operates 160 supermarkets under the Bashas, AJ's Fine Foods and other banners.

On August 6 we reported in this piece (scroll down at the link until you see the Phoenix Metro Market heading) that Bashas plans to locate a 9,000 square foot small-format version of its upscale AJ's Fine Foods market in downtown Phoenix, which like downtown Tempe is in need of a grocery store.

The typical AJ's Fine Foods store averages about 20,000 -to- 40,000 square feet (older stores smaller being at the smaller end of the range, newer stores generally at the bigger end). The stores sell an assortment of basic groceries but have an upscale positioning to them, offering lots of specialty and natural-organic products, in-store fresh, prepared foods, organic fresh produce and meats, along with conventional, and other premium food features.

The 9,000 square foot smaller-format version to go in downtown Phoenix will retain this merchandising philosophy but offer a limited assortment of items across all categories. It seems to us that this could be a perfect urban model for Bashas-owned AJ's Fine foods in its home state. It also seems downtown Tempe might just be the logical place for Bashas to locate its second smaller-format AJ's store after downtown Phoenix.

Downtowns are increasingly the place to be

There is a migration of young professionals and baby boomer retirees from the suburbs to the cities going on in much of the U.S. There's also a growing recognition by many food retailers that city downtowns and inner city neighborhoods present a new opportunity for growth.

These two combined developments lead us to believe downtown Tempe will soon find itself with more than one grocer wanting to locate a store in the downtown area near the university campus.

In fact, with commercial real estate prices much lower in the downtown area compared to just a year or two ago, now would be the perfect time for a grocery chain or independent to lock-up a site in downtown Tempe, which has attracted numerous upscale businesses like the Gordon Biersch brew pub-restaurant pictured in the photograph at the top of this story.

It's just a question of which grocery chain or independent that will be, in our analysis and opinion. If not, it should be the case. We named four potential grocers in this piece alone. Rather than seeing it as a public service for a grocer to locate a store in downtown Tempe, we see it as a real competitive opportunity.

Wal-Mart's Small-Format Marketside Strategy is Currently Neither A 1,500 Store, $10 Billion A Year Mega Plan, Nor A Mere Four Store Test

The supermarket industry trade publication Supermarket News reports in a brief item this morning that a Wal-Mart, Inc. spokesperson told the publication on Friday that its initial four Marketside small-format communtiy grocery stores set to open this fall in the Phoenix, Arizona Metropolitan region are part of "a small-scale pilot, and we have no plans [for the format] beyond a handful of stores."

The comment from the Wal-Mart spokesperson came in response to a report published in the Financial Times that quoted the Marketside website as saying the company expected to start with 10 stores and evolve to between 1,000 and 1,500 locations with more than $10 billion in annual sales," according to the Supermarket News report this morning.

As we've written all along since first reporting last year on Wal-Mart Inc.'s development of the 15,000 -to 20,000 square foot Marketside format stores--which will feature in-store fresh, prepared foods, fresh produce, fresh meats and a selection of basic, specialty and natural food and grocery products--Wal-Mart plans are to open an initial handful of the Marketside stores, see how they perform, and then move forward with additional stores slowly and carefully, unike Tesco with its Fresh & Easy grocery markets, which is taking a rapid new store opening approach, having thus far opened 68 of the combination fresh foods and basic grocery markets in Southern California, Nevada and Arizona in a 10 month period, with many more new stores on the way.

This strategy is for what to us are obvious reasons. First, Wal-Mart already is the number one food and grocery retailer in the U.S., with thousands of stores under four formats--Supercenters, Sam's Club warehouse-style club stores, Wal-Mart Neighborhood Market supermarkets and Wal-Mart general merchandise discount stores.

The discount stores, which sell a limited assortment of perishable and dry grocery products (but no fresh meats or produce) are the only one of these four Wal-Mart formats that don't feature a combination of both fresh foods and grocery items in them. Therefore, for Wal-Mart, Marketside is merely a fifth format in its multi-format U.S. strategy, albeit a very different one, and one that like its 45,000 square foot Neighborhood Market supermarkets focuses esclusively on food and grocery sales.

A tale of two (different) strategies: Tesco and Wal-Mart

On the other hand, Tesco's current strategy in the U.S. is a single small-format food and grocery retailing one, with its 10,000 -to- 13,000 square foot Fresh & Easy Neighborhood Market combination basic grocery, fresh, prepared and specialty foods convenience-oriented grocery stores. As such, Tesco's plans is to open hundreds of the Fresh & Easy markets over the next few years, primarily in the Western U.S. but also potentially elsewhere in the country, in order to create a "critical mass" of neighborhood grocery stores primarily in suburban but also in urban neighborhoods.

Additionally, except for the similarity of the Fresh & Easy and Marketside stores (small-format, combination fresh foods and groceries and the like) the strategies of the two mega-international retailers couldn't be more different in terms of format-focus, strategy and tactics in the U.S.

Marketside: More than a test

However, we also know Wal-Mart's strategy and plans for Marketside are far more ambitious than merely opening the four Arizona stores and then sitting back for some time and evaluating their performance before looking for other store sites in other states and market regions.

For example, we've reported that Wal-Mart is taking to a commercial developer in Reno, Nevada about putting a Marketside in a new urban mixed-use retail and residential development in that city. [Read the story: Is A Wal-Mart 'Marketside' Small-Format Grocery and Fresh Foods Store Coming to Reno, Nevada?]

We've also reported (May 18, 2008) Wal-Mart has been talking to commercial real estate people about various potential Marketside store locations throughout California. [See that story here: Wal-Mart Looking For Sites in California For it's Small-Format 'Marketside' Grocery Stores.]

In fact, Fresh & Easy Buzz was told long ago by a source who was in a position to know first hand about Wal-Mart's Marketside plans, that as early as late last year the marketside development team led by David Wild, who recently left Wal-Mart, Inc. to take the CEO position at British car parts and bicycle company Helfords PLC, that strategic plans called for locating Marketside stores in the San Francisco Bay Area, including more than one location in the city of San Francisco.

Wal-Mart only has a few Supercenters in the nine-county San Francisco Bay Area, which has a population of nearly 7 million people, and is one of the most food-oriented regions in America. Wal-Mart has wanted a stronger food and grocery retailing presence in the Bay Area for years, but has been unable to get approvals for most of the Supercenters its proposed in the region's city's because of opposition by many of the citys and numerous consumer and neighborhood groups to having the mega-Supercenters in their communities.

Our source told us Wal-Mart was looking to Marketside as a way to increase its food and grocery sales market share in the Bay Area by locating the small-format, more upscale stores in city's throughout the region. The argument goes that it would be rather difficult for city's and community groups to use the same arguments they've used in opposition to the Supercenters--too big, bad for the environment, ect.--against Wal-Mart's proposals to build and open the small-format Marketside stores in the region. Wal-Mart also isn't calling the stores "Wal-Mart" Marketside in part for that very reason.

The Marketside development team led by David Wild did its work in fact out of the San Francisco Bay Area, where Wal-Mart operates its Wal-Mart.com online business from. Wild also lived in the San Francisco area even though he had the title of corporate vice president for new business development. Nearly all Wal-mart corporate officers work out of headquarters in Bentonville, Arkansas.

Commercial real estate sources in the Bay Area also have told Fresh & Easy Buzz about conversations they've had with members of the Marketside development team in the past regarding store locations in the Bay Area, including in the city of San Francisco, as we've reported previously.

The emphasis on in-store fresh, prepared foods for Marketside in fact was greatly influenced by David Wild's touring numerous San Francisco Bay Area grocers that are famous for quality in-store fresh, prepared foods merchandising, including Draeger's (3 stores), Andronicos (8 stores), Mollie Stone (9 stores), Whole Foods Market (about 25 Bay Area stores), and a number of others.

Southern California also is on Wal-Mart's radar for Marketside. based on source information we know that Wal-Mart representatives have had discussions with real estate agents and developers about numerous potential sites in Southern California, including a site in downtown San Diego's popular Gaslamp district which the retailer may be close to signing a lease on.

Therefore, based on our reporting and source information, we suggest Wal-Mart's strategy and plans for Marketside are neither the ambitious 1,500 stores and $10 billion in annual sales scenario reported in the Financial Times, although such long range plans have been discussed by the Marketside development team when it was headed up by David Wild, nor the tiny mere four store test the Wal-Mart sopkesperson told Supermarket News is the case in its report this morning. (We aren't criticizing Supermarket News. It is reporting what it was told by the spokesperson.)

At a June 6, 2008 press conference held by Wal-Mart's CEO for U.S. operations (in conjunctions with the company's annual meeting) Eduardo Castro Wright, a Fresh & Easy Buzz correspondent asked Mr. Wright about the retailer's expansion plans, including in California, for Marketside. He neither confirmed such plans nor denied them.

However, he made it clear in a number of ways during the press conference, and when he spoke earlier about Marketside at Wal-Mart's annual meeting prior to the press conference, that the retailer's plans for Marketside went far beyond a mere four store test. [Read the June 6 report, "Wal-Mart USA Chief Eduardo Castro-Wright Confirms Fresh & Easy Buzz Reportage on 'Marketside,' Adds Information From the WM Corporate Side.]

Further, Fresh & Easy Buzz has talked with a person who interviewed for a position at Wal-Mart's new Marketside corporate offices in the Phoenix, Arizona region. That person was told by a Wal-Mart executive that the retailer has plans to open Marketside stores far beyond the Arizona market, including in California and numerous other U.S. states. The strategy was described to this person as a combination "fill-in" and upscale retailing (with a fresh, prepared foods emphasis) focus for the company.

In the piece linked above, Eduardo Castro Wright uses this same term, "fill-in," meaning the retailer is positioning the Marketside stores in markets like Arizona for "fill-in" rather than primary food and grocery shopping, meaning it hopes consumers shop its Arizona Wal-Mart Supercenters for major purchases and Neighborhood Market supermarkets and Marketside stores to "fill-in" their shopping after doing the primary at the Supercenters.

The upscale focus refers to using the Marketside stores as a way of attracting higher income and more quality food-oriented shoppers, which is a market Wal-Mart hasn't tapped into with any of its formats. These are shoppers who primarily shop Whole Foods Market and other more upscale regional food retailers' stores. In Arizona this includes Bashas-owned AJ's Fine Foods, Sprouts Farmers Market, Safeway's Lifestyle format stores, Tesco's Fresh & Easy (its fresh, prepared foods and organic groceries sides of the business) and Trader Joe's, for example.

Based on all of our reporting and sources, we can say Wal-Mart's plans at present for Marketside aren't to open 100 or more stores a year to achieve that 1,500 store, $10 billion a year sales number anytime soon, like the report in the Financial Times suggests is the case. But, such a strategy (those figures) wasn't put on the Marketside website as a joke by a hacker either.

Conversly, Wal-Part's strategic plans for Marketside also aren't the mere test-oriented strategy the Wal-Mart spokesperson told Supermarket News is the case.

Lowering expectations almost always best

Unlike Tesco's Fresh & Easy, which used a public relations strategy to create a huge buzz about its Fresh & Easy stores prior to the first store opening, Wal-Mart is taking the complete opposite approach, playing down the Marketside development as a test in order to keep expectations low. It takes digging and reporting to learn what we have thus far about Marketside.

As all political and corporate image masters know (well, should know), managing media and consumer (or voter) expectations is key. And creating lowered expectations, especially for something or someone new to the scene like a small-format groery store from a retailer known for big boxes, almost always is the smartest strategy in business as well as in politics.

Tesco set the bar too high with its pre Fresh & Easy PR campaign. As a result, the mainstream media played it up like it was the second coming of food and groery retailing in America. Once this expectation was set, it has resulted in every negative aspect of Tesco's Fresh & Easy's operations being focused on more so than had Tesco set expectations lower with its public relations efforts like Wal-Mart is doing with Marketside.

Sometimes a retailer, business or politician can be the victim of its own publicity blitz, ezpecially when the expectations game isn't properly maanged or not managed at all. Our analysis is that Tesco did this with its Fresh & Easy campaign (the British Invasion headlines and such). Wal-Mart is making sure to avoid this with Marketside.

By doing so, Wal-Mart is giving the company more room to fail and then course correct with Marketside. This is a good idea since the retailer's culture isn't historically one that is known for either small-format, specialty-oriented or in-store fresh, prepared foods merchandising, despite the fact its done lots of preparation for its Marketside format launch.

Wal-Mart has zero reasons to play-up Marketside--and many reasons to low-key the small-format development. But don't mistake the brawny big-box (and soon to be small-box too) retailer's low-key approach to Marketside for a mere four store test, that if it doesn't work Wal-Mart plans to just close the stores and move on to something else.

The retailer has put lots of research and development into Marketside, including bringing in executives like David Wild--who spent many years working for Tesco in the UK and elsewhere in Europe, and was involved in its initial small-format Tesco Express store development--along with the hiring Jack Sinclair in January of this year as executive vice president of grocery merchandise for Wal-Mart USA. Wild has left but was ready to move onto other new business development tasks before leaving anyway.

Mr. Sinclair spent his entire food retailing career before joining Wal-Mart this year in the United Kingdom (UK), first for many years with Tesco PLC, and then for 14 years before that with the former British Safeway chain, which was acquired last year by Morrisons, the UK's fourth largest supermarket chain. To paraphrase the popular culture saying: 'Jack' (Sinclair) knows small-format food and grocery retailing, along with knowing Tesco and it's brands of small-format, convenience-oriented food retailing, according to those who've worked with him or know him.

He has been involved in the Marketside small-format store process along with his other duties since joining Wal-Mart in January, especially since the new business development team formerly headed by David Wild turned over Marketside to the Wal-Mart operations and grocery merchandising team a couple months ago as the retailer prepares to open the first four stores this fall in the Phoenix, Arizona Metropolitan region.

Wal-Mart may be being low-key with Marketside, but it's a top corporate priority. Similar to what the retailer has done with its Neighborhood Market supermarket format, which has undergone slow but steady expansion, and the expansion of which Wal-Mart has recently been kicking up a couple notches, so too does it plan to grow and evolve Marketside rather than look at it as a mere hit or miss test.

Again, the key fact to remember is that for Wal-Mart, Marketside is a part of its national multi-format food and grocery retailing strategy with its Supercenters, Sam' Club stores and Wal-Mart Neighborhood Market supermarket format. Understanding that fact is central to observing and understanding Marketside as it developes after the first four stores open in Arizona this fall.

Proximity Matters: More On the Upcoming Tesco Fresh & Easy-Wal-Mart Face Off in the Metro Phoenix, Arizona Market

From the Fresh & Easy Buzz Editor's Desk: Yesterday we wrote and published this analysis and commentary piece,"Analysis & Commentary: Wal-Mart's Marketside As Part Of it's Multi-Format Category-Killer Strategy Spells Trouble For Tesco's Fresh & Easy," about the threat Wal-Mart, Inc. poses to Tesco's Fresh & Easy Neighborhood Market by adding it's new Wal-Mart Marketside small-format food stores to its already three-format (Supercenters, Sam's Club, Neighborhood Market supermarkets) food and grocery retailing strategic and tactical arsenal in Arizona.

David Woodfill, a staff writer for the Tribune, a daily newspaper in Metropolitan Phoenix, Arizona's East Valley region, has a story today about the four Wal-Mart Marketside small-format combination fresh foods and grocery stores being built in the market. All four of the stores are located very close to Tesco Fresh & Easy stores, as we mentioned in our piece yesterday.

Since the Tribune's piece today touches on many of the themes we explored in our analysis yesterday, along with providing some local market feel, we wanted to bring it to our readers. Below is the story:

New Wal-Mart concept competes with Fresh & Easy
David Woodfill, East Valley (Arizona) Tribune
August 9, 2008

Construction continues at the site of Wal-Mart's new grocery store concept, Marketside, at the southwest corner of Ray Road and McQueen Road in Chandler. Photo: Thomas Boggan, Tribune.

The three-mile stretch of Elliot Road in Gilbert and Chandler may look like any other suburban thoroughfare in the Valley. But the street's a battlefield where two global grocers are about to pick a fight.

In one corner, at Elliot and Cooper Road in Gilbert, is the world's No. 1 grocery retailer, Wal-Mart Stores, which is about to unveil its newest grocery store concept - Marketside. Click to view the locations of the new stores.

Company leaders plan to open the store in the fall, along with three other locations in Chandler, Tempe and Mesa. The stores are a pilot for the United States.

In the other corner, at Alma School Road and Elliot in Chandler, is United Kingdom-based Tesco's Fresh & Easy Neighborhood Market. The retailer debuted in the Valley late last year and just celebrated the opening of its 20th Arizona store.

Marketside and Fresh & Easy are roughly comparable in size, about the same as two Circle K stores. Both aim to provide fast in-and-out service, and both will be selling fresh, low-priced groceries. The outcome of the face-off may decide which will dominate the growing neighborhood-centric grocery store market in the area, and eventually the nation, experts say.

"Supermarket (companies) all over the country are watching Arizona with bated breath," said Jim Prevor, an industry analyst and editor of the PerishablePundit.com, an online forum for analysis and discussion of grocery industry issues.

Also reportedly soon joining the small-market fracas is Safeway, which operates a similar test store in California called the Market by Vons.

"What Safeway and Wal-Mart and Tesco and many other people are really experimenting with is whether this small-store concept can work," Prevor said. "There's really a question about whether (they are) able to provide the kind of assortment that consumers want."

Representatives of Fresh & Easy and Marketside are reluctant to discuss the competition and play down any rivalry between them.

"Obviously we watch the market regardless of who's entering it," said Brendan Wonnacott, Fresh & Easy spokesman.

Amy Wyatt-Moore, Marketside spokeswoman, said, "We'll leave comparisons to you when the stores open this fall."

The companies have a history of butting heads in the United Kingdom, where Wal-Mart's subsidiary, ASDA, is No. 2 behind Tesco, said Mark Barratt, a native of England and an assistant professor of supply chain management at Arizona State University's W.P. Carey School of Business.

"Tesco has probably been more successful with its international acquisitions and growth than Wal-Mart has," he said. "Tesco has probably taken more time to actually understand and evaluate the local culture. Wal-Mart has tended to be a bit more bullish."

Despite the official line, experts say both companies are likely watching each other closely in Arizona.

"I can't imagine going into business and not having any idea what other people offer," said Lorri Griffith, editor of a Gainesville, Ga.-based industry publication called The Shelby Journal. "I think you have to know what you're up against."

Fresh & Easy paves the way

In late 2006, Tesco began acquiring property in the Valley after the company conducted extensive consumer-polling research using a secret prototype store in California.

A year later, the firm opened its first locations, introducing local consumers, as well as those in Las Vegas and parts of California, to its idea of convenience-based miniature grocery stores, to which Europeans have been accustomed for years.

With great fanfare, the company's CEO told the public of his plans to roll out 20 stores - each about 10,000 to 15,000 square feet - across the Phoenix area by the end of 2007.

But it was overambitious, and the company didn't reached the goal until last month. The reaction to Fresh & Easy among industry observers is mixed, and some analysts say stores are running far behind the firm's original $200,000-a-week per store sales projections.

"Initially, we found that their sales were actually running around $50,000 a week," Prevor said.

Prevor noted, however, that the company has since pulled the number up by offering discounts on select items. Unfortunately, they've cut prices so much, they're losing more money than ever, he said.

Wonnacott dismissed criticism about tepid sales as "pure speculation."

"Each week we're seeing an increase of customers, we're seeing larger baskets, we're seeing more repeat customers and more new customers, and that's across the board at all of our stores," he said.

Few deny that Fresh & Easy has a shot at a successful future. For example, the London-based research and analysis firm, TNS Retail Forward, predicted that the chain will become one of the top 10 supermarkets in the nation with $10 billion in sales by 2015.

New kid on the block

Wal-Mart is pursuing a different strategy than Tesco to gauge consumers' response to its stores.

While Fresh & Easy tested its concept and products under a veil of secrecy, Wal-Mart is jumping headfirst in the East Valley with four locations.

"Marketside is a smaller neighborhood market, providing customers convenient access to fresh, high-quality food," said Wyatt-Moore in a written statement. "The stores will range in size from 10,000 to 15,000 square feet and carry everyday favorites, fresh ingredients and a wide selection of affordable meal solutions."

Prevor said he's eager to see what the company will do with the concept.

"Wal-Mart is going to have a very intriguing product that I think is more likely to be successful with Americans because they know Americans better," he said.

"However, Tesco has a more dying need to succeed than Wal-Mart does. They really would like to diversify their sales into the largest market in the world. It would help their stock price a great deal. It's quite likely that even if there are big obstacles, they'll keep investing and keep trying to transform ... and not give up."

Wal-Mart, on the other hand, doesn't have as much at risk, Prevor added.

"I don't know that it matters as much to Wal-Mart," he said, noting that the company already has a similar, but larger, neighborhood stores called Wal-Mart Neighborhood Markets.

"They've opened a few of those and are gradually growing the chain, but basically Wal-Mart found that they can earn a higher return on investment by building more super centers," he said. "They may just find bigger fish to fry."

Consumers appear willing

Industry watchers don't know how long it will take to determine if the small-store concept will become an entrenched part of American consumers' shopping habits.

However, a recent report by TNS Retail showed that two-thirds of consumers polled are ready and willing to try out small food stores.

Wal-Mart and Tesco both have access to massive amounts of capital. Those war chests will be handy, allowing the retailers to keep doors open while bleeding revenue, experts say.

"The most likely result ... is that it will turn out that Americans, in fact, like all their existing retailers and this will be a tiny niche that will wind up being 2 or 3 percent of the (market)," Prevor said.

Whatever happens, both companies have their work cut out because they both face hurdles, Barratt said.

For example, Wal-Mart is accustomed to competing on price alone, whereas Tesco ranks higher in peoples' opinions for service and product quality.

"It's not just about price," he said. "You can go and buy convenience food and it's pretty disgusting. Fresh & Easy's idea is good value, good quality products ... in a service-friendly environment."

Fresh & Easy's greatest challenge is that it's an unfamiliar brand owned by a foreign company.

"When they find out it's British, there's negative connotations" from consumers who don't want to support foreign companies, Barratt said.

Analysis & Commentary: Wal-Mart's Marketside As Part Of it's Multi-Format Category-Killer Strategy Spells Trouble For Tesco's Fresh & Easy

Yesterday we ran this story from the Financial Times newspaper (along with links to numerous previous Fresh & Easy Buzz original pieces about Wal-Mart's new Marketside format fresh foods and grocery stores) about a posting on Wal-Mart's small-format Marketside.com website that mentioned the mega-retailer's eventual goal with Marketside was to have a division of about 1,000 -to- 1,500 stores in the U.S., doing about $10 billion in annual sales.

Today, most of the supermarket industry trade publications, along with numerous newspaper business sections, ran brief stories quoting the Financial Times' report.

There's also been some discussion today in a number of blogs and on a couple industry websites like retailwire.com about Wal-Mart's possible big "Small-Mart" growth plans for its Marketside division. All of course writing about it, including us, before the first store even has opened. Sounds much like to the run up to Tesco's Fresh & Easy Neighborhood Market chain in fact, doesn't it?

Much of the reaction today has had an exclamation point after it--meaning there are many media perceptions of amazement that Wal-Mart might be thinking so "big" about its small format store Marketside division, the first four stores of which are scheduled to open this fall in the Phoenix, Arizona Metropolitan region.

A few first facts

Unlike Tesco with its small-format Fresh & Easy Neighborhood Market grocery stores, which are Tesco's single-format strategy in the U.S., Wal-Mart's Marketside is merely the newest development of the mega-retailer's multi-format food and grocery retailing strategy in the U.S.

For Wal-Mart, that strategy centers on its huge combination food and general merchandise Supercenters as its primary food and grocery retailing format nationally in the U.S., followed by its 45,000 square foot supermarket-only Wal-Mart Neighborhood Market stores, it's Sam's Club warehouse stores--which sell a very extensive selection of fresh food and grocery items--and even its Wal-Mart general merchandise discount stores, which have grocery product aisles, sell perishable and frozen foods, and stock extensive selections of household cleaning and related items.

And, of course, now there will be Marketside, which are 15,000 -to-20,000 square food combination fresh foods, basic and specialty grocery markets. At the center (literally and figuratively) of the Marketside format is its in-store, fresh prepared foods category or feature.

The Marketside "Small-Mart" stores will have kitchens in them, along with a seating area where shoppers who choose can eat-in. Take-out purchasing of the fresh, prepared foods will be the mainstay of the category's sales however.

A few more facts

Tesco's single-format strategy with its average 13,000 square foot Fresh & Easy grocery markets, which are combination fresh foods and basic grocery stores that also feature a selection of organic products and specialty wines, is to concentrate for the first two or three years on three U.S. states--California, Nevada and Arizona--opening numerous (probably 300 -to-400 by the end of 2010) stores in selected markets in these states within a couple of miles of each other to achieve what we've termed a "critical mass" strategy. (Think Walgreens drug stores and Starbucks cafes in terms of stores in close proximity to each other in a market.)

As part of this single-format strategy, Tesco tried to create small-format grocery stores (Fresh & Easy) that would appeal to everybody in its analysis. In fact, when asked what the target consumer market is for its Fresh & Easy stores, Tesco executives will even use that word. They are for "everybody," is the answer you're likely to get from a "Fresh & Easier."

That's easier said than done of course. As anybody who has spend some years in the U.S. food and grocery industry knows, appealing to "everybody" with a 65,000 square foot supermarket, let alone a 13,000 square foot grocery store, isn't an easy task, assuming a retailer even wants to try it.

It's no accident the three leading small-format food and grocery retailers in the U.S.--SuperValue, Inc.'s Sav-A-Lot (about 1,600 stores in the U.S.), Aldi USA (about 900 stores) and Trader Joe's (about 300 stores)--are tightly focused and positioned small-formats. Sav-A-Lot and Aldi are price-focused, no frills discount grocery stores. Trader Joe's is a specialty grocery store with a focus on selling specialty and natural-organic products (primarily under its own brands) at discount prices.

In other words, the positioning of all three of these small-format grocers is well defined. Sav-A-Lot and Aldi are focusing on the price-conscious shopper and Trader Joe's on the specialty consumer who wants unique specialty products for a reasonable price. None of the three are trying to get "everybody" to shop in their respective stores. If "everybody" shops them, they will be pleased. But its not the positioning.

Back to Wal-Mart

Wal-Mart didn't get to be the largest corporation and retailer in the world, along with recently becoming the number one seller of food and grocery products in the U.S. passing Kroger Co. for the honor, by not understanding format development, and particularly the power of a multi-format strategy. The same can be said for Tesco, the third largest retailer in the world. Tesco operates numerous formats, ranging from hypermarkets to small-format Tesco Express hybrid grocery and convenience stores at home in the UK, for example.

Wal-Mart didn't even start out as a seller of food and groceries. Rather, Sam Walton founded the company--and operated it for many years--strictly as a general merchandise discount chain with a single format--Wal-Mart discount stores. Those stores sold a limited assortment of shelf-stable food and grocery products, but it was an afterthought rather than a focus.

It was with the Sam's Club warehouse format stores and then the Supercenters (which at first were called hypermarts under the European model) that Wal-Mart starting getting into food and grocery retailing. Later, it developed its Neighborhood Market supermarkets as the third leg of its multi-format food retailing strategy.

Now along comes Marketside, which will be Wal-Mart's fifth format and its fourth one with a focus on food and groceries.

Instead of merely doing a smaller version of its 45,000 square foot Wal-Mart Neighborhood Market supermarket format Wal-Mart understood that wouldn't be smart and came up with the proposition of centering the stores around in-store, fresh prepared foods, including having an "eat-in" area, which is really more for atmosphere than profit, and then building a fresh foods (produce, meats, perishables) and grocery (dry grocery and specialties) store around the prepared foods proposition.

Tesco's Fresh & Easy stores have a focus on fresh, prepared foods as well. However, its prepared foods are made at a kitchen facility in Southern California and then shipped to its California, Nevada and Arizona stores. Some say Wal-Mart's fresh, prepared foods focus is copied from Tesco's Fresh & Easy. Wal-Mart says it isn't.

In the U.S., consumers (and the industry) have generally perceived fresh, prepared foods made in-store to be fresher and better tasting than those prepared off-site and delivered to the stores. In fact, in the late 1980's/early 1990's a very well-funded company in the San Francisco Bay Area launched a company in which using the European sous-vide cooking method, its professional chefs created an extensive line of fresh, prepared foods.

The company created an extensive DSD delivery system and supply chain with the millions of dollars it raised and launched the premium quality prepared foods, starting in a number of Bay Area supermarkets the expanding nationally. The prepared foods were tasty and of a high quality, but the company failed after about five years because consumers prefered shopping at stores featuring in-store prepared foods items.

Wal-Mart's multi-format strategy

What many analysts, writers and others fail to realize when comparing Tesco's Fresh & Easy to Wal-Mart or even Safeway Stores, Inc.'s (with its "The Market" stores) entry into small-format food and grocery retailing is just this fact--that for Wal-Mart and Safeway, Marketside and "The Market" are just parts of a multi-format national food retailing strategy. Conversely, for Tesco--at least until it makes a U.S. acquisition--Fresh & Easy is the whole enchilada. And its a regional whole enchilada at that.

Geographically, the United States is a big country. Add in Canada and you have an even bigger North American canvas. Eventually opening 1,500 small-format (15,000 -to- 20,000 square foot) Marketside stores in the U.S. and Canada, where Wal-Mart is becoming a major player, is a very reasonable proposition. Especially if you remember that Marketside is a national format and concept, just like Wal-Mart's Supercenters, discount stores and Sam's club are--and the Wal-Mart Neighborhood Market supermarkets are becoming.

Wal-Mart has far more than 1,500 of its huge (average 180,000 square feet) Supercenters in the U.S., and has been and is opening as many new ones as it can throughout the country.

Unlike the huge Supercenters--which not only have finding enough room (real estate) to put them as a limiting factor, along with all the political challenges Wal-Mart has even getting one approved, not to mention how long the mega-stores take to build once approved--the small-format Marketside stores can be built nearly anywhere the retailer wants to place them. This includes in urban downtowns and city neighborhoods as well as in suburbs.

For example, Wal-Mart can't open a Supercenter in the city of San Francisco for space and political reasons, but it likely can open five or six (or more) Marketside stores in that city of residential neighborhoods. The same is the case in big cities throughout the U.S., such as Los Angeles, downtown Phoenix, New York City, Boston, Chicago and many others where lack of available space and political issues make locating Supercenters impossible.

Thinking about it that way--that Marketside is an urban, suburban and even in some cases a small town adaptable format--makes the thought of 1,500 of the stores in the U.S. and Canada actually sound perhaps to few over the long term.

For example, 100 -to- 125 Marketside stores a year for ten years is an attainable goal for Wal-Mart, especially when an urban strategy is a significant part of the new store development. (Wal-Mart will open about 100 mega-Supercenters in the U.S. this year. That's the equivalent of over one thousand 15,000 square foot Marketside stores in terms of total square footage.) City's throughout the U.S. are understored, so this opens up a real opportunity for Wal-Mart with Marketside. It also just so happens that city's are where the fewest--and in many cases where they have none--Wal-Mart Supercenters are located, for the reasons detailed earlier.

Wal-Mart Marketside in Arizona

It's no accident that the first four Wal-Mart Marketside small-format fresh food and grocery stores to open will be in the Phoenix, Arizona Metropolitan region.

There are two primary reasons the Phoenix Metro market is first up.

Yes, one of those reasons is because that is where Tesco has chosen to focus its Fresh & Easy Neighborhood Market business, along with in Southern California and in the Las Vegas, Nevada Metro region.

But that is the secondary reason. Primary reason number one that the first four Marketside stores will open in the Phoenix Metro market in Arizona is because Wal-Mart has staked a claim strategically to become the food and grocery sales market share leader in Arizona, eventually beating out Safeway Stores, Inc. and Arizona-based Bashas, the top two sellers of food and groceries in the state.

It's no accident Arizona has been and is one of the top three states in terms of Wal-Mart's opening new Supercenters and its 45,000 square foot Neighborhood Market supermarkets, as well as adding Sam's Club stores. Now comes Marketside.

As we said, Wal-Mart's goal in Arizona is to become the state's, which is one of the fastest growing in the U.S., number one retailer of food and grocery products--and to do so by crushing the competition with four formats: Supercenters, Neighborhood Markets, Sam's Club and Marketside. Each format has its primary customer base. Each format is designed to eat into the specialties of its competitors.

For example, Wal-Mart doesn't expect to sell more basic groceries in the Marketside stores than say even a Tesco Fresh & Easy will. It wants to. But that's not the primary goal. It doesn't need to. It has Supercenters, Neigborhood Market supermarkets and Sam's Club stores all nearby that can achieve that task.

What Wal-Mart does plan to do is to eat into most of Fresh & Easy's fresh, prepared foods sales with its Marketside in-store, fresh prepared foods offering. In turn, Wal-Mart then believes the other three formats will eat into most of the basic grocery sales at Fresh & Easy, thereby crushing the stores from all sides with its four different food and grocery retailing formats.

Wal-Mart hopes to do the same to Safeway and Bashas as well. But with hundreds of supermarkets each in Arizona already, these two retailers are far less vulnerable to the Wal-Mart multi-format machine than Tesco's Fresh & Easy is.

If you look at where Wal-Mart is opening its first four Marketside stores in the Phoenix Metro market, you will find they are very close to Tesco Fresh & Easy Neighborhood Market stores. All four Marketside stores also have Wal-Mart Supercenters and Neighborhood Market supermarkets nearby. Wonder why that is? Each format has a primary purpose. Each format serves a primary need. That's why. All that is secondary from each format is gravy in Wal-Mart thinking.

General George Washington, who later became America's first President, finally defeated the British in the war of independence by figuring out that his best strategy, which took him losing thousands of men and numerous battles to finally arrive at, was to concentrate a critical mass of soldiers in fewer battles, thereby inflicting maximum damage, and then retreating. Sort of the cuts by a thousand knives strategy. He lost lots of battles but ultimately won the war.

In many ways that's the strategy Wal-Mart is conducting in Arizona with its current three food and grocery retailing formats--Supercenters, Neighborhood Market supermarkets and Sam's Club warehouse stores--and soon to be fourth format: Marketside. Toss in the Wal-Mart discount stores as well as gravy.

It goes something like this: If the Wal-Mart Supercenters and Sam's Club warehouse stores don't kill you (a grocer) all by themselves in terms of siphoning off lots of you're primary shoppers, there's a Wal-Mart Neighborhood Market supermarket to absorb you're remaining primary as well as secondary shoppers.

And like this: Sell in-store fresh, prepared foods Mr. grocer? That's your niche? You say let consumers buy most of their basic groceries at the Supercenter and Sam's? That you want consumers' fresh, prepared and specialty/natural foods dollars mainly anyway? After all, it brings you higher margins anyway, right?

But wait: along comes Marketside this fall to start siphoning some of those valued fresh, prepared and specialty/natural foods sales dollars you are counting on so much away from your stores. And, those shoppers have now become significant primary and secondary shoppers in your grocery markets. What to do? Perhaps go out an get another format of your own? Good idea. But doing so does take some time.

Of course that's the theory and the strategy in Wal-Mart world seen through our analytical lenses. However, American supermarket chains and independents have a history of beating back the Wal-Mart's of the world when it comes to competing. Wal-Mart's competitors like Bashas and Safeway may lose lots of share in Arizona, but that doesn't mean the competitors are going away. After all, they've been right where they are for a very long time, growing, evolving and changing all the while generally. Nor does it not mean they won't innovate to counter Wal-Mart's multi-format machine.

What we don't know is if Tesco can do what these American supermarket chains and independents have done in fighting back against the Wal-Mart's of the world since day one in the U.S., which is to largely survive and often even to thrive against the giants.

You see, Tesco is a world class food and grocery retailer. It controls 31% of the market in its home country of the United Kingdom. Wal-Mart has about a 20% share nationally in the U.S. as America's leading retailer of food and groceries.

Tesco also has done very well internationally in Eastern Europe, parts of Asia and elsewhere.

But Tesco has never played in a market as big in dollar terms or as competitive as the U.S. The state of California all by itself has nearly the total annual grocery sales volume as the entire United Kingdom, for example.

The U.S. also is a regional food and grocery retailing market, with giant regional supermarket chains in addition to the national chains. In just California alone you have Save Mart, Inc., which does about $6.5 billion annually with stores in just Northern and Central California. You have Raley's, which does nearly $4 billion with stores only in roughly the same part of the state as Save Mart.

In Southern California, regional chain Stater Bros does nearly $4 billion a year having stores only in the Southern California region. Bashas in Arizona has sales of about $3 billion with 160 stores, all but a handful of them being in its home state. There are scores more regional chains and multi-store independent operations on top of that, in addition to a few thousand single store independents.

It's like that throughout the U.S.--north to south and in between. Scores of regional mega-chains doing billions annually in sales, along with hundreds more doing in the hundreds of millions, and even more multi and single-store independents doing in the tens of millions annually.

In the UK, there are five grocery chains that control about 80% of the total food and grocery sales in the nation. Tesco is number one, Wal-Mart-owned Asda is number three, right behind number two Sainsbury's.

In the U.S. its these regional mega-chains that usually are the market share regions throughout the country, with just a few exceptions.

America is a whole new ballgame for Tesco. It has never done business in a nation that even approaches the competition offered in the U.S. in the food retailing industry. We aren't sure the folks running Tesco's Fresh & Easy Neighborhood Market USA division have an appreciation for that fact, based on our observations. They should.

But Tesco is a learning corporation, so anybody that counts the retailer out in the U.S. does so at their own peril, in our analysis.

For some reason Tesco's Fresh & Easy senior executives haven't felt the need to do much learning about the U.S. food retailing culture and industry though, based on what we've been told by more than one former Fresh & Easy corporate headquarters employee, as well as numerous suppiers. The concept of hubris and trying to fit British food retailing methods and systems into the American market comes up again and again in conversations with these sources. It's not our opinion--it's what we've been told again and again.

Raising (and learning from) Arizona

From a strictly learning perspective, Arizona, and especially the Phoenix Metropolitan region market, will be a great classroom for the next couple years, as Wal-Mart opens more and more Supercenters, Sam's Club stores, Neighborhood Market supermarkets and its new small-format Marketside food and groery stores, as part of its strategy to become that state's number one multi-format food and grocery retailing market share leader.

From a competitive perspective it could be rough--and expensive. Wal Mart has the buying and supply chain machine, along with the marketing and merchandising system, that if it wants, it can make things very difficult and extremely expensive for its international retailing rival Tesco in Arizona.

Sort of a death by a thousand knives (four Wal-Mart formats, each aimed at killing Fresh & Easy's two key categories, basic groceries and fresh, prepared foods) strategy.

Pie in the Sky or Pie in the Face to Tesco's Fresh & Easy: Does Wal-Mart, Inc. Plan to Build A $10 Billion A Year 'Small-Mart' Empire?

Wal-Mart sees Marketside as $10bn chain

From the: Financial Times
By Jonathan Birchall in New York
August 7, 2008

Wal-Mart, the world’s largest retailer, says the new small Marketside grocery stores it is to launch this autumn could expand to a chain of more than 1,000 stores, delivering $10bn-plus in annual sales.

The retailer plans to open 10 of the 15,000 sq ft Marketside stores initially, including four in the Phoenix area, where they will be competing directly with Tesco’s recently launched US Fresh & Easy store concept.

Wal-Mart’s executives have described the Marketside stores as a pilot project, although it is the first new store format to be launched by the company in a decade. But a job advertisement for the retailer indicates the scale of its ambitions for Marketside, saying the format “is expected to start with 10 stores and evolve to between 1,000-1,500 stores with over $10bn annual sales."

At less than a 10th of the size of the average Wal-Mart superstore, Wal-Mart said the new stores would be aimed at “the needs of a time-starved, higher-income consumer that is interested in convenience and premium fresh, natural and organic offerings.”

The approach contrasts with Wal-Mart’s experience with the Wal-Mart Neighborhood Market stores it launched 10 years ago, which are about the size of a traditional US supermarket.

In response to an inquiry from the Financial Times, Wal-Mart stressed the Arizona stores were a pilot project. The retailer subsequently removed from its website the job advert that included the more ambitious targets.

Wal-Mart’s superstores are built around high volume and low cost, and the group has faced challenges in adapting to the supermarket-sized Neighborhood Market stores it launched in 1998, opening more than 140 outlets. The Marketside stores will require a fast turnover of stock, which could be a difficult fit with Wal-Mart’s distribution system.

Tesco has opened more than 60 Fresh & Easy stores in California, Arizona and Nevada since November and plans to have several hundred operating during the next two years.

Wal-Mart, the largest US grocer with more than 20 per cent of the market, is developing the Marketside format as growth slows at its 2,500-plus superstores.

The Marketside format is also expected to spearhead a broader drive by the retailer to improve its overall grocery offering.

Safeway and SuperValu, two of the largest US supermarket chains, are also experimenting with small, local formats.

Fresh & Easy Buzz Editor's Note: Below is a selection of original reporting news stories, features and analysis about Wal-Mart's Marketside format stores from Fresh & Easy Buzz:

August 7, 2008: Food Retailing & Labor Unions: Canada's Supreme Court to Hear Case that Could Change Wal-Mart's, and Others, Non-Union Status in North America

June 24, 2008: Competitor News: Wal Mart Launches New 'Marketside' Website; Announces First Four Stores in Arizona to Open in the Fall Rather Than Summer

June 23, 2008: Competitor News: Wal-Mart's Marketside On A Hiring Tear; Getting Closer to Opening Small-Format Fresh Food & Grocery Stores in the Phoenix, AZ Region

June 20, 2008: Competitor News: Wal-Mart Executive in Charge of Small-Format 'Marketside' Format Development Leaving to Join UK Bicycle Retailer Halfords Group PLC

June 16, 2008: Wal-Mart and Tesco: The Cross-Atlantic Competition Continues to Heat Up; Almost Hot Enough to Make Uber-Cool British Secret Agent James Bond Flinch

June 9, 2008: Breaking News and Analysis: German Small-Format Discount Grocery Chain Lidl is 'Coming to America' By 2012 Says Chief Executive Klaus Gehrig

June 8, 2008: Arizona Region Market Report: First Signs of A Weakening Might Be Starting to Show in the 'White-Hot,' 'Super-Competitive' Arizona Market

June 6, 2008: Is A Wal-Mart 'Marketside' Small-Format Grocery and Fresh Foods Store Coming to Reno, Nevada?

June 6, 2008: Wal-Mart USA Chief Eduardo Castro-Wright Confirms Fresh & Easy Buzz Reportage on 'Marketside,' Adds Information From the WM Corporate Side

May 18, 2008: Wal-Mart Looking For Sites in California For it's Small-Format 'Marketside' Grocery Stores

April 11, 2008: Wal-Mart to Open Two More New 'Neighborhood Market' Stores in the Phoenix Metro Region; Still On-Track to Open New Marketside Stores This Summer

February 22, 2008: Wal-Mart and Tesco Locked in Heated Cross-Atlantic Competitive Battle in the USA and UK

February 12, 2008: Wal-Mart's New Logo For It's 'Marketside' Small-Format Grocery Stores Unveiled

January 18, 2008: Wal-Mart and Safeway vs. Fresh & Easy

January 16, 2008: Wal-Mart and Safeway Stores Could 'Box' Tesco in With New Small Format Stores

January 14, 2008: Citigroup Supermarket Industry Analyst Confirms Wal-Mart Small Marts in Arizona

January 14, 2008: Wal-Mart Confirms it Will Test New Small Store Format Later This Year

January 13, 2008: The Battle of the Retail Titans Begins: Wal-Mart to Open Small Format Stores in Arizona