Our extensive coverage of Tesco’s Journey to America began to attract substantial press coverage in the United Kingdom when, in pieces such as Tesco Intelligence Report: Slow Start, we pointed out facts such as these:
Here at the Pundit … we have our own unique intelligence network, and what happens is that virtually every day we receive calls and e-mails from around the industry on topics of current concern. With Tesco being of great industry concern, we receive a lot of messages regarding Tesco. In fact, we are well in excess of 200 comments, most saying nothing more than that a given industry member — a wholesaler, a grower-shipper, a broker, a consultant, another retailer — was just in a Fresh & Easy and was reporting his or her perceptions.
The vast majority of these comments contain a line similar to this: “It may just be the time of day or day of the week or perhaps just this particular store — but, there were practically no customers in the store.”
One comment, two comments, ten comments — and it could be the time of the day, the day of the week or the particular store. But so many reports, from many stores on every day of the week and from a diverse mix of times of day, seem likely to indicate that sales are not strong.
Several suppliers have also told us that orders are well below their expectations and at least some primary suppliers have thought the business not worth the trouble and stepped back into secondary supplier roles.
Although we were early, gradually other confirming information has been seeping out. We ran a piece entitled, Pundit Analysis Buttressed: Tesco’s Fresh & Easy Sales Only 25% Of Plan, Says Willard Bishop Report, in which the prominent consultancy came to roughly the same assessment we had:
The money quote:
Current performance doesn’t appear to meet initial sales projections of $200,000/store/week. Our very rough estimate is that a typical store is achieving about $50,000/week, or only 25% of initial projections.
Another prominent consultant wrote us about his assessment, and we published the letter as part of a piece entitled, Fresh & Easy Reaches Out To Shoppers As Competitors Work To Block Its Growth. This consultant included this nugget:
A source at a local Fresh & Easy who I knew in a prior position told me that the Fresh & Easy store he works at is doing $50,000 per week and not growing. Bill Bishop and the team at Willard Bishop are right on it with their sales estimate.
Then an analyst at Piper Jaffray issued a report, widely misunderstood, which basically said that it was not necessary for sales to be at such a low level for Fresh & Easy to be a big problem for Tesco. Even sales of as much as $170,000 per week would make the stores bad investments.
We analyzed the matter and press reports about Piper Jaffray’s report in a piece entitled, In London, Pessimism Spreads Over Fresh & Easy, which included this snippet:
‘The overall indication seems to be negative,’ he said. ‘This begs the questions of how bad it could be for Tesco’s Fresh & Easy stores across California, Arizona, Nevada and what it would mean to Tesco’s long-term growth rates and international strategy in the US.’
City analysts seem aware Tesco may be having teething problems. One said he had already begun referring to Fresh & Easy as ‘Ambient and Quite Difficult’. Tim Mason, who moved to the US with his family to run Fresh & Easy, recently sold £1.3 million of Tesco shares.
Said Dennis: ‘Maybe he knows what the impact of a poor US sales performance could do to Tesco’s shares in 2008, but any official explanation is probably not going to give clarity.’
Safeway’s CEO Steve Burd gave us some insight into the impact Fresh & Easy was having — or was not having — on nearby Safeway stores thus reinforcing our sales estimates. We called the piece Safeway’s Steve Burd’s Comments Buttress Pundit’s Fresh & Easy Analysis:
The “evidence” of Tesco’s volume can be deduced from a statement by Safeway CEO Steve Burd. In a piece in the East Bay Business Times, focused on a plan by Safeway to move toward “better everyday value” pricing, Steve Burd says this about Tesco:
Burd also said he’s not particularly worried about the entry of Tesco PLC, the British supermarket giant, into its home turf of California, where Safeway operates nearly 600 stores under the names Safeway, Vons and Pavilions. He said that each one of Tesco’s Fresh & Easy Neighborhood Market stores that open within 1.5 miles of a Safeway has only 10 percent of the impact of the opening of another conventional supermarket.
… Steve Burd says that the opening of a Fresh & Easy only affects a nearby Safeway by 10% of the effect that a supermarket opening has. If the square footage is 20% of the size of a supermarket, you can only get to that 10% number if sales at Fresh & Easy are half the typical sales per square foot of an American supermarket or, roughly, $50,000 per store, per week.
Now we have three things going on — all courtesy of the Times of London indicating that the rest of the world is also coming to the conclusion that there is a real problem with Fresh & Easy:
Sales at Fresh & Easy, Tesco’s first foray into the American grocery market, are 70 per cent below expectations as customers have failed to warm to the business, an analyst claimed yesterday.
As Goldman Sachs downgraded the supermarket giant’s shares on the basis of stuttering UK sales, Mike Dennis, a senior research analyst at Piper Jaffray, said that the company’s fledgeling US operation was experiencing a “substantial shortfall”.
“Fresh & Easy, Tesco’s US West Coast convenience concept is, we believe, based on our checks with suppliers in the US, running 70 per cent below budget on US sales,” Mr Dennis wrote.
Citing sources close to the company, he said that the supermarket had hoped to achieve first-year average sales of $200,000 a week per store but was averaging only about $60,000. Mr Dennis wrote that this would indicate that sales would be about $30 million in the second half, “a substantial shortfall from our initial estimate of $100 million-plus. The issue is very weak footfall.”
Translated into American English from British English, “weak footfall” means low customer count. Or exactly what we defined the problem as when we said the Pundit Intelligence Network told us that there were practically no customers in the stores.
This $60,000 number is indistinguishable from the $50,000 number we have been using. The Piper Jaffray estimate includes sales during grand opening periods — we have been using sales after the grand opening hoopla dies down.
Although the Goldman Sachs downgrade was based on problems in the UK, those problems are not unrelated to Fresh & Easy. As we mentioned in a piece we entitled British Intelligence On Tesco: Three Areas Of Concern:
Tesco’s stock is down almost 20% over the last couple of months. Wall Street will say that has nothing really to do with Fresh & Easy and, in a direct sense this is true. But indirectly, a focus on a new launch often drains talent and distracts management from its core business.
With Fresh & Easy having been launched by a dream team drawn from other Tesco operations, the implication is obvious: You can’t both put your best and brightest on a new launch and keep them at home.
And the leverage works in a crazy way. Tim Mason, who Tesco sent over to run its US division, is generally recognized as a truly extraordinary executive and a marketing genius. So let us assume he is so terrific that sales of the US stores are fully 10% higher than they would have been in his absence — what an achievement! Yet, if he was back home in the UK and his marketing savvy boosted Tesco’s UK sales by only 1% — that would be many multiples of what he is accomplishing in America — at least by measure of the company financials for the next several years.
As a leader in the UK, Tesco is always subject to a brain drain. Very possibly, by internally draining talent from Tesco’s core operation, Fresh & Easy may also be hurting UK performance.
The Times of London piece echoes these concerns:
Tesco’s investment in the United States is believed to be one of the reasons why it is struggling to match the sales growth of Morrisons and Asda in Britain.
One industry insider said that about a third of its chilled foods team has gone to America to help to develop the fresh food lines sold in Fresh & Easy.
And points to a change indicating that Tesco is starting to realize that it is in serious trouble:
The Times reported this week that Tesco had moved Jeff Adams, the American-born chief executive of the company’s Lotus business in Thailand, to the US to work under Tim Mason, Fresh & Easy’s chief executive.
Mr Dennis said that Mr. Adams is “tasked with understanding what’s gone wrong with the concept and how they are to recover, if at all, their $700 million-plus investment so far”.
Though we have never had the pleasure of meeting the man, we mentioned Jeff Adams, an ex-Wal-Mart executive, here. More curious is that none of the five current and former Wal-Mart executives we spoke with ever heard of him. So we are not actually sure what he did at Wal-Mart, but he has a good reputation as CEO of Tesco’s Lotus division in Thailand.
In press reports, Tesco is denying that Jeff Adams is being sent to do anything but support the growth of Fresh & Easy, but that seems unlikely. Either Piper Jaffray is correct and Adams is being sent in to survey the wreckage or, more optimistically, Tesco hopes another American set of eyes in a key position will help the chain.
Our take is that for such a large multi-national, Tesco seems remarkably afraid of outsiders. If it needed an American, there are plenty of competent industry executives right in the California/Nevada/Arizona area.
We never understood why Tesco sent so many top executives from other Tesco operations to begin with, thinking it created an insular culture. Bringing an American in may help — but why select one who has been living in Thailand running a Thai operation?
If the goal is operational and concept improvements, Tesco would be better off with an executive rich with knowledge of the consumer and the trade in its region. Tesco seems to value executives it trusts over executives who are experts in the American market. That is a recipe for trouble, which Fresh & Easy has plenty of.
Over three months ago, our piece, Tesco Observations From A Retail Pro, included an observation on Fresh & Easy from one of America’s premier experts on produce retailing:
I would have included as big negatives the fact that Fresh & Easy is 100% self checkout, will not take checks, will not accept manufacturers’ coupons, and will not accept American Express.
We elaborated on this observation by pointing out how this translated into less competitive pricing for some customers:
Pricing is going to be a problem. The ongoing PRODUCE BUSINESS Wal-Mart Pricing Report typically finds that supermarket chains are 20% over Wal-Mart on prices. So a pledge to beat supermarkets by around 20% is a pledge to get into Wal-Mart’s pricing levels — and we simply didn’t see that as our correspondent did not. Add to this pricing level that we can’t use manufacturer’s coupons or get 2% cash back with our AMEX Plum Card and there is no bargain here.
Well it looks like someone is starting to pay attention. Fresh & Easy and American Express have issued a joint release:
FRESH & EASY NEIGHBORHOOD MARKET STORES
ACCEPT AMERICAN EXPRESS
American Express® Cardmembers Enjoy Convenient Cashless Payment at All
Fresh & Easy Neighborhood Market Locations
Fresh & Easy Neighborhood Market today announced all stores will now accept American Express cards.
Fresh & Easy currently has 59 stores throughout Southern California, Arizona and Nevada and focuses on providing fresh, wholesome foods at affordable prices to all types of neighborhoods. Fresh & Easy customers will be able to enjoy the speed and convenience of payment with the American Express® Card, and will also have the opportunity to earn a variety of types of rewards with every purchase.
“We developed the Fresh & Easy concept by listening to what Americans wanted in a grocery market,” said Fresh & Easy CMO Simon Uwins. “Our customers asked us to accept the American Express Card in our stores and we listened.”
“The acceptance of the American Express Card at Fresh & Easy Neighborhood Market stores means convenience for our many mutual customers and is another great way to have a chance to earn valuable rewards every single day — even while shopping for groceries,” said Tom Pojero, senior vice president and general manager, merchant acquisition, American Express Merchant Services. “We believe that acceptance of the American Express Card will be welcome news to our Cardmembers.”
The most interesting line in the release is this: “We developed the Fresh & Easy concept by listening to what Americans wanted in a grocery market,” said Fresh & Easy CMO Simon Uwins. “Our customers asked us to accept the American Express Card in our stores and we listened.”
There are only two choices: Either Tesco’s much vaunted consumer research efforts were a bust and it didn’t pick this up before opening or Tesco’s consumer research efforts did pick it up before opening and Tesco intentionally chose to disregard the will of the consumer until now.
To us it seems like an act of arrogance. American Express is commonly accepted by competitors in the region so, as with so much of what Fresh & Easy does, not accepting the card early on was an attempt to force consumers into doing things the Fresh & Easy way.
In 2008 though, you don’t get to force consumers to do anything. You just get to decide which consumers you are willing to lose as customers. Among other things, Tesco thought it was okay to lose customers who…
… like branded product,
… like bulk produce,
… like service deli,
… like hot rotisserie chicken,
… want someone to check them out, and
… like to pay with their American Express card.
When they realized not enough customers were left to sustain the store, Fresh & Easy started backtracking. Now Fresh & Easy offers to check you out and will take AMEX. We can expect more changes to come.
Tesco may be experiencing trouble with its US Fresh & Easy division, but back in the UK its punctilious service is getting headlines:
BRUSSELS SPROUT AUCTIONED FOR CHARITY
A BRUSSELS sprout fetched 750 times its retail value when it was auctioned online for charity. The sprout acquired cult status in Stockport when Tesco sent it to an online shopper — Howard Cooper — who inadvertently typed in a request for 0.01kg of Brussels instead of 0.1kg
Cooper duly received one tiny sprout, neatly bagged and priced at 1p, reports Charity News Alert (March 11). News of Tesco’s ultra-efficiency sprouted far and wide, prompting Cooper to sell the vegetable on eBay, where it fetched £7.50 for Wellspring, a Stockport homelessness charity.
This followed the news late last year that authorities in the UK found consumption of Brussels sprouts had become a Christmas-only phenomenon, leading Brussels sprouts to be removed from the official market basket used to gauge inflation and replaced by broccoli:
BRUSSELS SPROUTS MAKE WAY FOR BROCCOLI IN NEW INFLATION BASKET
Broccoli, deemed to be the ultimate “superfood” for its healthy properties, has replaced Brussels sprouts, which are shunned by shoppers in all months bar December, government statisticians say.
The future doesn’t seem bright for the Brussels sprout, but at least it is getting some publicity.
We’ve focused heavily on issues surrounding sustainability, including running pieces such as these:
Michael Pollan’s Sustainability Arguments Unsustainable In Context Of Economics
A Call For An Industrywide Sustainability and Social Responsibility Initiative:
Sustainability Being Steamrolled — Does A Sustainable Vision Encompass only Organics
Pundit’s Mailbag — Organic Icon DiMatteo Weighs In On Sustainability Standard
Pundit’s Mailbag — SCS Takes Exception To Analysis of Sustainability Standard
An important contributor to this industry discussion has been Tim York of Markon Cooperative. A sometimes lonely voice in the wilderness, Tim has been pushing the industry toward the development of the industry standards for sustainability, with the goal of keeping costs out of the system by avoiding a situation whereby each buyer needs to conduct its own sustainability audit.
Now Tim makes another important contribution, this time speaking jointly with Jeff Dlott of SureHarvest:
We’ve appreciated your continued dialogue on sustainability and would like to weigh in with additional thoughts.
Sustainability is more than just consumer perceptions about organic. It’s about changing business operations and performance with regard to our impact on society, the environment and economics.
Our industry can be part of (and help drive) the dialogue on what sustainability can and should be, or be forced to play catch-up. The race is accelerating for companies worldwide seeking sustainable approaches and green products to meet growing consumer demand. We can deny that it’s going on or debate definitions until we’re blue in the face; meanwhile companies like Wal-Mart and Safeway are moving ahead with initiatives that balance the needs of people, planet, and profits, expecting suppliers to follow.
As Tim York suggested in his earlier letter to the Pundit — if we let this phenomenon play out on its own — with no common definition or measure — we’re likely to see the same kind of proliferation of standards for sustainability that we see in food safety. It only makes sense to get engaged with this trend early on and lead the process of defining credible sustainability standards and measurement tools that make sense to all stakeholders. This can mean a common set of foundational sustainable metrics — specific, measurable, and verifiable, that can be used to align business goals with performance outcomes — tailored by commodity as needed.
Best practices are important but they are a means to an end. Best practices programs are well suited for educational purposes — but they miss the mark as an approach for establishing standards by focusing on practices and not measuring performance outcomes. Best practices alone don’t align fundamental business process improvements that better position companies to be more economically competitive and achieve desired environmental and social performance goals.
Emphasizing sustainability outcomes creates a playing field for companies to innovate and develop their own internal business processes to drive improved performance that can, and should, be a competitive differentiator. Sustainability standards built around best practices stifles innovation and misdirects businesses away from the true end game — improved performance.
The California Sustainable Winegrowing Program is ahead of most when it comes to sustainable practices, and an example for the produce industry to monitor. Made up of more than 1,200 wine grower and vintner enterprises, the program is looking at quantitative performance measures including water use, energy use, water quality, air quality and greenhouse gases. The goal is to enhance competitiveness and sustainability of individual companies and the California wine sector as a whole.
A pilot program was created more than one year ago between Markon Cooperative and SureHarvest, the company that developed the program for the wine industry, with several California grower-shippers is showing interesting and promising results. It’s looking at well beyond one business practice and focusing on an entire operation.
We’re identifying industry benchmarks for the likes of water use, pesticide use, energy use and others, and measuring the growers against these standards. What we’re learning is that in some respects, the growers are ahead of the game; in others, improvements need to be made. The promising side of this is that other players in the industry — growers, packers, shippers, etc. — are also likely ahead of the game and also need to make improvements.
Is it the ends to a means? Not yet. It’s a learning process, and adjustments need to be made.
And that’s the beauty of looking at sustainability in terms of what’s specific, verifiable and measurable. We can make continuous improvements along the way and demonstrate to stakeholders — consumers being at the top of the food chain — actual results and progress. It’s greater than best practices — it’s moving beyond talk to accountability.
This is an important letter because there are different ways that the industry can pursue sustainability. The “best practices” model tends to be negative and heavily focused on environmental issues — “let’s do less of the terrible stuff we do to the environment” — and usually it includes an apocalyptic vision — “if we don’t act today, woe and gloom shall confront the world.”
Yet, properly considered, sustainability in a business context should be about a positive approach to the world, a process by which businesses harvest the collective wisdom and enthusiasm of stakeholders to help an organization — or an industry — achieve its vision and its mission while developing and sustaining the environmental, social and economic resources that will be necessary for success in the future.
Sustainability is more than just consumer perceptions about organic. It’s about changing business operations and performance with regard to our impact on society, the environment and economics.
You have to give credit to many individuals involved in the organic movement for stressing the ancient admonition of the importance of sustainability in agriculture. But the connection between organic agriculture and sustainability is thin. Today the certification “organic” is really a marketing strategy; so things such as irradiation or GMO’s are prevented from being certified as organic because, in a kind of circular reasoning, consumers who want organic don’t want their food irradiated or grown from a seed spliced with a gene.
If we presume that the organic leaders know their market, this strategy makes perfect sense but it tells us nothing about what is more sustainable, just what will satisfy consumers searching for product certified as organic.
Best practices are important but they are a means to an end. Best practices programs are well suited for educational purposes — but they miss the mark as an approach for establishing standards by focusing on practices and not measuring performance outcomes.
There are two basic approaches for creating an operational program of sustainability in an organization. One approach tends to be top-down and typically focuses on various initiatives that derive from benchmarking against best practices. The alternative is a more bottom-up approach that focuses on involving stakeholders, especially employees.
The goal is to integrate a sustainability “consciousness” in an organization and bias the organization’s existing management system in a sustainable direction. It is this second approach that is much more likely to produce stakeholder buy-in and continuous improvement.
What we’re learning is that in some respects, the growers are ahead of the game; in others, improvements need to be made.
There is no organization on earth known to accurately say that it has reached a state of sustainable development. Sustainability is a journey of continuous improvement; you never actually get there.
We can make continuous improvements along the way and demonstrate to stakeholders — consumers being at the top of the food chain — actual results and progress. It’s greater than best practices — it’s moving beyond talk to accountability.
Accountability is crucial, and much modern thought on sustainable development is integrated with quality management principles and business excellence programs. Part of a sustainability program involves individual organizations and the broader industry making promises. These promises may involve many things, such as compliance with laws, regulations or voluntary codes; they may involve a commitment to avoid impacts on certain individuals or groups, and they always include a pledge of continuous improvement.
Any sustainability program must include acceptable procedures for both evaluating compliance with these commitments as well as a procedure for corrective action when things are not as promised.
Typically called “Monitoring, Measuring and Evaluating,” these activities let us know if progress is being made.
Then we go off on two paths. Compliance systems — such as laws — offer a strictly compliant or non-complaint option. The penalty can be jail or a fine. Conformance systems — for example ISO 14001 which deals with environmental matters — require that we correct the wrong and then improve from there.
One reason retailers in the UK seized on sustainability as a business initiative is they were certain that legislation was coming down the road — particularly related to carbon output. They wisely saw the benefit of getting ahead of the curve so the issues could be dealt with via conformance rather than compliance systems.
Many thanks to both Tim and Jeff for helping the industry to advance its thinking on this important subject.