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Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



SPECIAL REPORT:
New Research On Fresh & Easy
The Spin Is Over-The-Top…
…The Data More Sobering

Spread Sheets Run Amok:
Data Provides No Basis For
Future Store-Count Conclusions

Jim Prevor’s Perishable Pundit, May 19, 2008

There are many different ways to do this type of research. A common one might be to do random-digit telephone dialing to identify a statistically valid cross section of the population. Very often you have to “over interview” in certain segments — say Jewish consumer or, perhaps, Fresh & Easy shoppers — to get enough consumers to produce statistically valid results for these smaller groups. You may have to do some mall intercepts to reach people who do not have reachable phone numbers.

Then, you either do the research on the phone or you bring them into a neutral place.

The nature of the questions asked never reveals the subject of the study.

As a result of this methodology, you…

  1. Do not have to tell a retailer you are even doing the study. Thus you remove the risk that its executives or store level employees will take actions to affect the results.
  2. You allow consumers to speak freely without fear of hurting anyone’s feelings or being rude while at a particular firm’s place of business.
  3. You speak to people who are current shoppers, people who have tried the store but quit shopping there and people who have never tried the store — and are thus in a position to identify demographic and psychographic indicators that differentiate these consumers.

Instead, with the methodology actually used, we are left with absurdities such as assuming it makes no difference whether the consumers who are NOT shopping at Fresh & Easy have never tried the store or if they have tried it and disliked it.

Of course, we’ve studied much research good and bad on the subject of Fresh & Easy and even a survey with imperfect methodology may still have some useful lessons to teach us Unfortunately, the researchers didn’t bring in American retailing experts to help analyze the data and advise on the competitive situation.

Some of the report is just a spread sheet run amuck:

“In summary we estimate that F&E will grow to over 1,000 stores and $12bn of sales by 2013, and to nearly 4,000 stores and $55bn of sales by 2018 (i.e., within a decade).”

There is no support in the research for these conclusions. In fact, you can’t possibly calculate such things without assessing the competitive reaction — and the authors tell us that this is not their expertise.

In addition the researchers show a lack of understanding of US regional dynamics. Even if every data point presented in this study was 100% accurate and meaningful, it still wouldn’t tell you anything about 4,000 stores in 2018. Why? Those stores will not all be opened in Las Vegas, Los Angeles and Phoenix — the cities incorporated in this study. There is no assurance that consumers in Chicago, or Denver, or San Francisco, or Birmingham, Alabama will react the same way.

Warren Buffet, the famed investor, has often noted the inability of his See’s Candies, so popular out west, to sell almost anything in New York. One can’t extrapolate to 4,000 stores in America without identifying specific markets and researching those specific places and the people who live in those places.

There is also really no assessment of how the stores will become profitable other than the assertion that sales will somehow reach $20 a foot in 2011, $25 a foot in 2012 and $30 a foot in 2015. This would be an exceptional achievement under any circumstances but considering that the report also projects that 600 new stores will open in 2015 after 300 open in 2014 and thus the store base would be very immature, it is astounding.

We’ve written previously of how store sales densities typically develop in America:

When a new store opens, sales commonly drop, not increase, by 20 or 30% within the first four weeks.

Then, they can start to grow, but rarely by leaps and bounds. If these stores have stabilized at $50,000 a week after being open a month or two, you would expect to see sales at $60,000 a week a year later, $69,000 two years later, $80,000 after three years and, say $90,000 after four years.

Now if the concept really takes off and gains wide acceptance, instead of a gain of 20% and then 15% each year, you could get a gain of, initially, 35% and then 25% after that. Still that would only mean $67,500 per week per store a year from now.

Now because Tesco decided to, as we discussed here, backtrack on its commitment to provide audited financials for Fresh & Easy earlier this year, we have no sales baseline. But based on most estimates, Fresh & Easy will have to grow far faster, far longer than other concepts to reach the projections Execution makes in this report.

We actually think Fresh & Easy will have a problem obtaining even the customary rates of growth for two reasons: First, the competitive response in the form of new small store concepts is coming and second, current sales are being goosed by promotions unlikely to be continued such as the $5 off $20-in-purchase coupon.

It also should be noted that stores typically mature in, say, four years. So stores that opened in, say, 2007 will, inflation excepted, be where they are going to be by 2011. Soon enough Tesco will have to start looking at capital expenditures for remodels if we are to deal with more modern competitors.

Without a doubt, the stores are maturing and so sales will grow. But if sales are between $6 and $7.50 per square foot per week, we have little experience in America with food formats that double, triple, quadruple and quintuple in inflation-adjusted sales. The researchers seem to assume that consumers will take a long time to understand the concept.

For ourselves, we don’t think it is so difficult. It is not like we are trying to introduce consumers to intergalactic travel; it is just a grocery store. We think people figure it out right away.

The problem is not that everyone doesn’t like it; as we have mentioned in pieces such as this, many people do. In fact, we assume all the customers of Fresh & Easy like the concept in the very meaningful sense that, given all the options, that is where they choose to spend their money.

Unfortunately, because this research didn’t talk to anyone who has rejected the concept, it just doesn’t tell us that much about the prospects for attracting consumers who are not shopping at Fresh & Easy to the fold.

Even when the research indicates survey findings that, in abstract, might be helpful to analyzing the chain performance, we find ourselves wishing the questions were asked in a neutral environment so we could give the answers some credence. That "…69% of consumers could find nothing at all to criticise about the store…" or that "F&E’s net promoter score (‘NPS’)…if we ask only F&E’s primary grocery shoppers…rises to a near perfect 96%" — might be important, but it might be meaningless. We are left wondering if being asked questions underneath the Fresh & Easy sign, by Fresh & Easy authorized questioners, after a shopping experience employees knew would be evaluated — doesn’t corrupt all these inputs.

Seems to us as if someone leaked this report to the Financial Times in hope of running up the stock and giving some support to a beleaguered Tesco management.

In case the analysts ever plan on writing about HEB, we can let them know that the report reminds of a phrase well known in Texas: “All hat, no cattle.”

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