Q: Is it possible to get a copy of the consumer research your company conducted on Tesco’s Fresh & Easy stores in the U.S.?
A: I work on the food team that compiled the note. The research is proprietary.
Q: In that case, do you have an executive summary of the findings?
A: No, we couldn’t provide that to you.
Q: But the news is already out. I learned of the Execution research in the Financial Times, which reported that it had seen the research. There is also another article that appears in the Evening Standard.
A: I’m familiar with the FT article but didn’t know about the other one. If the article is in the Evening Standard, it was picked up by Associated Press. The Financial Times has looked at our reports in the past; I wouldn’t know if they’ve seen this one. We don’t actively seek press. It compromises the integrity.
You would need to speak with Martin Dolan, head of equity research, if indeed there was some kind of public relations campaign, but I wouldn’t know. Why would we give out the report to the media when our clients pay for the information?
Q: Was the Fresh & Easy research sponsored by a client, a competitor, a vendor of Tesco, a financial investor, or did Execution do the research on its own?
A: We are an independent stock broker for institutional investors — those are our clients. Our reports go out to investors. We commissioned the research on Fresh & Easy ourselves. We do a lot of survey-based work. It wouldn’t be of service to our clients if it were sponsored.
Q: The FT reported generalities, but did not delineate the details of the research, the methodology of the survey, how and what questions were asked, etc., which would be critical to assessing the validity and importance of the findings. It is unclear from the FT piece how the firm came to its sweeping conclusions.
A: I would not be able to comment on what was written in the FT or answer these questions for you. You would need to speak with Martin Dolan.
Q: Robert Evans kindly referred me to you. We are interested to learn more about the research Execution conducted on Tesco’s Fresh & Easy stores in the U.S., and in a macro sense, the scope of services your company provides… I had inquired about getting a copy of the survey report. In cases where information is proprietary, companies often provide us with executive summaries, or allow us to paraphrase results or pull selective quotes…
A: Thank you for your interest in our latest research report on Tesco’s Fresh & Easy expansion in the U.S. I am aware of your website and think the online publication does a fantastic job of keeping its clients/readers up to speed with the latest developments in the U.S. retail industry.
I am head of equity research here at Execution, which is one of Europe’s leading institutional stockbrokers. In line with most stock brokers, we provide equity research on most of the large companies and industry groupings in the European index. Unfortunately we have a general policy not to issue our research reports to anyone other than our clients.
One of our greatest bugbears is our perception that the value of research has been denigrated over the years because too many of our competition (including the large investment banks) give their research away for free to anyone and everyone who requests it. We believe part, and who knows exactly what part, of the value of our research is the exclusive nature of its distribution coupled with the direct access our clients can get to our equity analysts.
Q: I understand and respect your policy not to issue your research reports to anyone other than your clients. The article in the Financial Times gives the impression you were making the report available to at least some media. FT reports that it has seen the research.
A: I can’t answer how the Financial Times got its information.
Q: Now that this is off the table, we would be remiss not to write about it because the publication in the Financial Times made it an item of public interest. We will use publicly available sources as well as our private sources, but we would like to represent your research fairly.
A: In a perfect world, I would love to have a sit down with you, but it is not beneficial to share our research and analysis in an open forum. I know you’d like to delve deeper, but I don’t want to compromise our relationships with Tesco and our clients.
Q: I’m hoping you might feel comfortable answering a few background questions regarding the interview process.
A: What would you like to know?
Q: Did Execution have permission from Fresh & Easy to do the interviews?
A: Yes. We had Tesco’s permission to participate.
Q: Were the interviews done in the store, in the parking lot after people shopped, or before they shopped?
A: Our retail analyst was responsible for that. I don’t know if the interviews were done in the store, before or after.
Q: Were shoppers given any incentives to answer questions, money, gift card, etc.?
A: No. There were no incentives to participate.
Q: How were shoppers approached? Were they told, “We are collecting information about Fresh & Easy?” or “We are in various supermarket parking lots today trying to get information about shopping patterns?
A: I wouldn’t know the exact questions.
Q: The types of questions and the way they are phrased can influence the answers. Would it be possible to get a copy of the questionnaire to validate your findings?
A: That would definitely not be possible. We do a lot of consumer surveys in the UK, Europe and the U.S. and utilize various techniques, which differentiates us from other analysts. This research is done for our clients, and it would be a disadvantage to share our methods with everyone.
Q: The FT article does not provide details of the report or the methodology, but quotes Execution’s conclusions, which seem beyond the scope of what could be learned through surveys. For example: “Fresh & Easy is the new cult retailer,” Execution wrote. “At the risk of doing the job of Tesco’s public relations department, F&E is already an incredible success story.” And later on in the FT article: “Execution said that it expected shopper numbers — the stores they were monitoring had only 20 to 30 customers through the door every hour — to increase as the brand grew.”
How did Execution come to these conclusion? Did it interview other consumers in the market area, or shoppers at neighboring competitors that expressed interest in Fresh & Easy, for example? Did Execution assess the competitive landscape in projecting this outcome?
A: We do a lot of analysis based on the surveys, but also from research studies conducted at the store, including traffic assessment, and from other means to come to our conclusions. The press likes to focus on the dramatic statements.
Q: The statements stand out because they come to conclusions in stark contrast to what many other reputable sources and reports indicate.
A: Actually, that’s not true if you see the whole report, but that is privileged information that we would only discuss with our clients.
Although they didn’t add very much to what was reported, we appreciate the time Mr. Evans and Mr. Dolan spent speaking with us.
We have worked with consumer and trade research — qualitative and quantitative — for a long time. We have found that shocking, counter-intuitive results almost always have their findings rooted in either a PR spin used to get press coverage or methodologies that distort more than clarify. We have obtained several copies of the report, read it thoroughly, and can confirm that there is a bit of both in this piece of research and the way it is being publicized.
To start with, the over-the-top rhetoric is all related to opinion, projections or spin. As Mr. Dolan mentioned, the actual data collected leads to a far more sober assessment.
|Income of Household Total|
|$2,500 to $4,999|
|$5,000 to $7,499|
|$7,500 to $9,999..|
|$10,000 to $12,499|
|$12,500 to $14,999|
|$15,000 to $17,499|
|$17,500 to $19,999|
|$20,000 to $22,499|
|$22,500 to $24,999|
|$25,000 to $27,499|
|$27,500 to $29,999|
|$30,000 to $32,499|
|$32,500 to $34,999|
|$35,000 to $37,499|
|$37,500 to $39,999|
|$40,000 to $42,499|
|$42,500 to $44,999|
|$45,000 to $47,499|
|$47,500 to $49,999|
|$50,000 to $52,499|
|$52,500 to $54,999|
|$55,000 to $57,499|
|$57,500 to $59,999|
|$60,000 to $62,499|
|$62,500 to $64,999|
|$65,000 to $67,499|
|$67,500 to $69,999|
|$70,000 to $72,499|
|$72,500 to $74,999|
|$75,000 to $77,499|
|$77,500 to $79,999|
|$80,000 to $82,499|
|$82,500 to $84,999|
|$85,000 to $87,499|
|$87,500 to $89,999|
|$90,000 to $92,499|
|$92,500 to $94,999|
|$95,000 to $97,499|
|$97,500 to $99,999|
|$100,000 to $149,999|
|$150,000 to $199,999|
|$200,000 to $249,999|
|$250,000 and above|
On the graph above we have highlighted the income cohorts that roughly corresponding to those that Execution finds to be the core for those who shop at the Fresh & Easy stores.
Note that households with incomes ranging from $67,500 to $99,999.99 account for only 15.7563% of US Households.
In other words, despite all the spin and the PR, the actual data in this Execution report is wildly negative for Fresh & Easy. It indicates it is a concept with narrow appeal. It neither appeals to the half of American households that earn below the median household income, nor does it appeal to the elite that earn in the top 20% of households.
We’ve studied Fresh & Easy from all aspects. One observation about the current report is that it includes a fair amount of circular reasoning. For example, look at how the report deals with what consumers want:
The premise for the Fresh & Easy format is that customers want good quality fresh food at low prices in a local and easy format. Indeed the brand name was the result of one of Tesco’s initial focus group sessions; and so it is. Our own survey confirms that. When asked what’s important, consumers rate 6 attributes as absolutely key:
While we are thrilled to see fresh produce right up there, we were also a little perplexed by this data. Having done many of these studies over a long period of time, we were surprised for a moment to not see things such as a service deli, a butcher at the meat counter, a hot rotisserie or an in-store bakery showing up on this list as part of what good quality fresh food is all about.
Then we realized this reasoning is purely circular.
You offer a store concept that doesn’t have, say, a butcher, so consumers who value butchers don’t shop with your store. Then you survey the customers of the butcherless store who reconfirm that you are doing everything right and butchers are not high priorities!
Frankly these are things that should have been caught, but as Execution admits in the report: “We’re not US food retail analysts and so our expertise of the likely competitive situation really stops here.” Of course, if one is writing a report on a US supermarket chain, it might be helpful to hire an expert to sit in.
Of course, if you went to a store that focuses on its fresh made-to-order sandwiches, the customers will self-select to value that trait; if surveyed those customers might tell you it is the most important attribute of freshness in a supermarket.
Surveying only Fresh & Easy shoppers also wildly distorts evaluations of other retailers. Here is the kind of result these researchers report regarding quality and freshness:
“The first chart shows how each store’s primary grocery shoppers rate their store for quality and freshness of fresh produce. F&E leads with an average score of 9.3 out of 10 (the same score given by both all interviewees and primary shoppers at F&E).Tesco’s benchmark, Whole Foods, comes fourth with an average score of 8.8…”
Here is the kind of result these researchers report regarding price and quality:
“…F&E also leads the competition for low prices and overall value for money. F&E received an average score of 8.8 / 10 for low prices and 9.0 / 10 for value for money. As you might expect those doing the majority of their shop at F&E were even more positive, giving average scores of 9.2 for low prices and 9.4 for value for money. As a result F&E convincingly beat Wal-Mart for price and only Costco came close on overall value for money.”
This is, however, not a survey of a statistically valid sample of Whole Foods, Wal-Mart or Costco shoppers. This is a survey solely of consumers who shop at Fresh & Easy and who claim to be primarily shoppers with Whole Foods, Wal-Mart or Costco. Nothing in the methodology of this study confirms either that these people are, in fact, actually primarily shoppers of these other chains or how representative of those other chains’ consumers these Fresh & Easy shoppers actually are.
One also wonders, since this statistic only includes results from consumers who identify each banner as their primary shopping venue, how many consumers are included in the survey for each retailer.
Any good researcher would reveal the number of respondents for each chain and give the margin of error for the study. The failure to do so leaves one wondering if they just don’t know better or if they are more interested in publishing hyped-up conclusions than supporting them with rigorous analysis.
We view this report as something of a missed opportunity. We work hard to understand Fresh & Easy and so value every contribution. It cost real money to do this research, and spending just a little more and being a little more transparent with its own clients in explaining the study would have provided a much more valuable and actionable piece of research. Instead we are left with questions and some real limitations.
Mr. Dolan is focused on us purely as journalists. In that capacity, we would have probably argued that any document so widely distributed and highly publicized would ultimately fall into our hands, as this one did, and so he should have had that “sit down” with us so that he could at least attempt to influence how the report was positioned in our coverage. But when we read the report, we read it as if we were one of Mr. Dolan’s investors, and we look for the things that we need to properly analyze the claims and conclusions the research provides.
On the question side, there is a real lack of transparency in the report that makes one wonder if there is more here than meets the eye. The Financial Times made a big point of saying that Execution Research has “no corporate relationship with Tesco.” That is an awkward circumlocution — why qualify the phrase with the word corporate? Does it mean that the principals, board members or executives have such connections personally? Could someone important, perhaps a big client of Execution Research, own a big chunk of Tesco stock and have an interest in touting it a bit? We just don’t know.
It does seem rather odd that an investment bank in London would have discovered a fantastic success that has eluded virtually all US retail experts who have studied the matter.
Now we actually wouldn’t care if the report was paid for completely by Tesco. Funding does not change the answers of consumers; however, it does give the sponsor a chance to stilt the questions, select the audience, etc. So, whether Tesco or a big investor urged Execution to do this research or if Execution did it all on its own volition, we are more concerned with seeing the methodology, with reading the survey, etc., than we are with who wrote the check.
If, however, the researcher is not going to disclose its survey and other details of its methodology, one is going to focus on the motivations of the sponsors. To do this, one has to go far beyond whether Tesco is paying for it — many people have an incentive to want Tesco’s stock price up, other than Tesco management.
The Financial Times was quite generous to call Execution Research a “boutique research house.” That is like calling the analysts who work for Goldman Sachs, JP Morgan or Citi “large research houses.”
Execution Research is part of Execution Limited, which is not a research company at all, but an institutional stockbroker. It does research papers, such as this one on Tesco, and makes them available to its clients. So, in effect, the clients pay for the research by giving Execution Limited trades to conduct.
In addition, they will do bespoke — or proprietary custom — research when a client asks and pays.
Note that Mr. Dolan specifically is concerned because he doesn’t want to “…compromise our relationships with Tesco…” and the obvious point, the very fact that Tesco gave permission to bother its customers in the stores, raises the question of whether Tesco was seriously worried about a negative outcome to this research.
If you work with investment bankers, you quickly learn that although they often claim independence, most feel a desperate need to maintain access to top corporate management. Of course, there are exceptions. But few and far between are those that have the ability to come up with earnings projections from the outside; they rely, instead, on “guidance” from the corporations. If management stops talking to them, they are in big trouble.
Even in this example, we are told that Execution does a lot of survey work, but the methodology it uses in this case is dependent on Tesco’s permission. If this report had been labeled “Catastrophe for Tesco,” and its publication caused a 20% drop in Tesco share price, would Tesco give permission for the next survey? Would another corporate CEO allow Execution’s researchers on its property?
Now we hasten to add that this doesn’t mean anyone is producing fraudulent research. There are many things that can be done short of that step. For example, the decision to survey only Fresh & Easy shoppers as opposed to the total market, including those who have rejected Fresh & Easy, guarantees a more favorable report than if one surveys the total market.
It is also possible to just not publish a report if it is going to be too negative.
In any case, this awkward denial of a “corporate” relationship with Tesco makes us wonder about personal relationships. And the fact that, as Mr. Dolan acknowledged in our interview, Execution is concerned to “…compromise our relationships with Tesco…” makes us concerned that the whole project was not designed solely to uncover the truth but, rather, was designed in a way more likely to generate a positive spin.
We’ve studied many reports on many retailers including Fresh & Easy. If a report tries to predict future profitability, the speed of store rollouts, etc. as this report does it is essential to assess the prospects for competitive reaction. Yet the report acknowledges a lack of expertise in this area: "We’re not US food retail analysts…" and makes no mention at all of well known competitive responses such as the development of small footprint stores by Wal-Mart and Safeway. The use, as we mentioned here, of loyalty card data to target Fresh & Easy consumers for special offers is also ignored as is renovation and new store location activity.
Instead, apparently knowing little of the market, the researchers rely on consumer perception of competitive response. Yet dominant market leaders are unlikely to mention Fresh & Easy by name. They just will send consumers discount coupons for organics or crusty bread or whatever they think Fresh & Easy is strong in. So consumers are unlikely to note a competitive response and, in fact, have not:
“The main obstacle to Tesco’s US success as we see it is the competition. So far only 11% of consumers have noticed a competitive response to F&E’s market entry, with no one competitor standing out as having made a big response. However as competitors start to lose sales we doubt they will remain passive for long. In F&E’s favour is its wide consumer appeal, meaning that it will attract market share from a broad variety of sources.
To understand the competitive dynamic better, we asked customers where they intended to shop less as a result of spending more at F&E. The chart below shows that Albertsons has the most to lose, with 21% of interviewees saying they would spend less there, followed by the local supermarket chains: Vons (in Los Angeles and Las Vegas); Ralphs (in Los Angeles) and Smith’s (in Las Vegas). F&E is not as developed in Phoenix, Arizona, yet, but local retailer Fry’s will also suffer. Wal-Mart and Trader Joe’s are not immune either.”
Beyond the obvious that if a new competitor takes big market share the local chains will suffer, the only way one can really make heads or tails of this assessment would be to know the exact locations of the stores surveyed and then plot out the competitors. Some of it may just be semantics. Albertsons, for example, is called Albertsons in Los Angeles, Phoenix and Las Vegas. Kroger, however, is called Ralphs in Los Angeles and Fry’s in Phoenix and Smith’s in Las Vegas.
The report gives no hints that the authors of the report have any such knowledge. So they never think to explain that, although the study says Albertsons has the most to lose, this assessment is only by banner. According to this research, Kroger really has the most to lose, with 31% of the Fresh & Easy shoppers saying they will spend less at a Kroger banner to shop at Fresh & Easy.
This is not an insignificant omission. Clients of an investment bank who read a research report may be doing it to assess competitors. Perhaps they are considering acquiring a stake in Kroger? To not clarify issues such as banner ownership leaves a lot of loose ends for clients to figure out themselves.
To differentiate between hype and reality, and better understand if Tesco could build a business from scratch in the US and take market share from the likes of Wal-Mart, we decided to ask customers what they thought. So, with Tesco’s permission, Execution commissioned an independent market research firm to interview customers as they left Fresh & Easy stores. We interviewed 680 customers over 6 days, both during the week and at the weekend (Wed 26 — Mon 31 March), in shifts ranging from 10am to 9pm. We interviewed at nine different F&E stores: three in Los Angeles, California, three in Las Vegas, Nevada, and finally three stores in Phoenix, Arizona. The oldest store in our group had been open for nearly 5 months (since 14 November) and the newest store had opened just 7 weeks earlier on the 7 February. Finally, our sample included converted stores and a purpose built store.
Yet upon analysis, the methodology can’t support the claims ultimately made for the research. Here are some of the things that make it problematic:
1. The study is of Fresh & Easy customers only — not a total market analysis.
There is nothing wrong with studying the customers of one particular chain. In fact, it is the only thing to do if the research question you are asking is related to whether, for example, Kroger customers might prefer a Prime Beef Program or a Sushi bar. The thing to do would be to survey Kroger customers and ask them.
However, you cannot deduce the opinions or behavior of non-customers by surveying customers. In other words, it may be that the people who are attracted to the Fresh & Easy concept shop there and those not attracted to the concept shop elsewhere.
Execution is aware of this research problem and tries to head it off:
Critics of F&E may already be dismissing the usefulness of our study precisely because it is a study of F&E customers and not the whole US population. Perhaps they are already writing F&E off as a niche business with no widespread consumer appeal. We disagree; we found that F&E is attracting a wide variety of consumers. While 70% of our sample were women, all age groups over 25 were well represented, as were singles (27%), couples without children (34%) and families with children (35%). The average gross household income of all shoppers was quite high at $82,500 (versus $70k US average), but it ranged from $68k to $100k depending on a store’s location and matched each store’s local demographic. If there is a group that is not yet particularly shopping at F&E, it would potentially be 18-24 year olds on lower incomes, and possibly very large families on lower incomes. Otherwise we think it’s fair to say F&E has a broad appeal.
We don’t think this is an issue of praising or being critical of Fresh & Easy. We see this as a matter of reflecting on the limits of different research methodologies. The bottom line is that if you don’t survey the people in range of the stores who are NOT customers, you can’t say anything about them. Maybe they have tried it and hated it. Maybe they heard about it but found the concept unappealing. You just can’t say.
Sometimes the researchers make the mistake of assuming that demographic differences — sex, age, marital status, child status and income — are all there is. They assume, without any supporting research, that because some Fresh & Easy shoppers are, say, female, this means that a broader female shopping base can be attracted.
This may be so. But it may not be — and the research does not support or deny the supposition.
Other times, the researchers just ignore the clear results of Execution’s own survey. As we mentioned here, their own data clearly indicates that the consumers whose household income is below the US median — that is half the households in America — don’t shop the concept. Yet the researchers keep concluding that Fresh & Easy has "broad appeal." This is very odd.
If the real distinction between a Fresh & Easy shopper and a conventional US supermarket shopper is not sex, income, marital or child status, but rather, say, an attitude toward fresh deli that requires or does not require a service deli counter, this study will not and cannot — because it does not study non-shoppers — capture the problem.
In effect, the researchers simply assume that whatever they have surveyed are the key variables. There is simply no support for this assessment. Very often, it is a psychographic trait — say, the way one values a fresh, cooked-on-premises hot rotisserie chicken vs. a cold cooked-yesterday-in-commissary rotisserie chicken that can determine shopping patterns. But because Execution did not survey anyone who was not a current Fresh & Easy shopper, it is in no position to say whether these types of consumer attitudes are or are not going to serve as obstacles to expanding the Fresh & Easy customer base.
In order for this research to be useful at making comparisons between shoppers and non-shoppers, you need to survey both. The failure to do so makes all the “conclusions” that relate to non-Fresh & Easy shoppers simply the opinions of the authors of the study. These specific conclusions have no grounding in the research study conducted.
2. Doing this type of research at the store biases respondents.
There is no problem with doing research at retail stores. If a manufacturer, for example, is interested in knowing why some consumers put its product in the basket, then it can watch shoppers and interview them as they leave the store.
But interviewing shoppers about the shopping venue when the shopping venue is the focus of the study biases the results. Consumers tend to want to please the interviewer and give the “correct” answer — or the answer the interviewer would prefer to hear. In addition, interviews such as these, conducted after a shopper finished shopping, intercept the shoppers with frozen foods, prepared foods and cool foods rapidly melting, spoiling and warming, respectively, sitting in their baskets. Consumers often "yes the researcher to death" to get finished and in their cars.
That is why it is important that the interviews be done on “neutral ground” without groceries spoiling and that the questioner ask sufficient questions so that the respondent cannot know what the real focus of interest is in the survey. In other words, even though all we may care about is, say, Fresh & Easy, we have to ask lots of questions about Wal-Mart, Vons, Ralphs, etc.
The consumers were interviewed on Fresh & Easy turf, and it would seem ungraceful of the shoppers to criticize the store excessively — it would be like criticizing people in their own homes. Second, even if Tesco executives did nothing to distort the research, certainly the store manager and his employees will be aware of this activity. They will have every incentive to do everything in their power to get good survey marks. That can range from providing great service to calling Cousin Lucy to come down and try and be selected for interviewing.
So the location of the interviews and the fact that this implies endorsement of the survey by Fresh & Easy biases the results in two ways: It makes consumers speak more favorably of their host and it encourages the employees to change the reality of the store and the customer base.
3. Telling Tesco About The Survey Can Corrupt the Process
Getting permission from a retailer to do a study is fine if a retailer doesn’t care about the results. So a frozen lasagna manufacturer might get permission to survey customers about purchase behavior around its lasagna.
In this case, though, Tesco has deep interest in the study results. They know that, at very least, these results will go to important investors who could influence the Tesco stock price. In all probability, the results will also be leaked to the press and become public knowledge.
So letting the subject — Tesco — know it was being studied opens the possibility to an interruption in the integrity of the project in ways great and small.
A retailer can spruce up the store on the day the interviews will take place, make sure there are no out-of-stocks, and beef up the staffing. The store can mark down things liberally, do extra sampling and give out plentiful discount coupons so that the consumers are very happy that day.
All this can be done without moving into the range of clearly unethical behavior such as having employees or spouses pose as satisfied consumers, which can happen as well.
Now, let us be clear: We have no reason to believe Tesco executives did any of these things. We also have no knowledge that they did not.
The best research design precludes the possibility that these types of things could happen by conducting the research in a neutral venue that precludes the necessity of telling the retailer it is being studied.
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…
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.”