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Perishable Pundit
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Produce Business

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American Food & Ag Exporter

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December 28, 2007 —
Perishable Pundit Overview:

Tesco’s Success Course Far From Easy

Tesco In America:
Foodservice vs. Prepared Foods

Tesco vs. Costco

Tesco vs. Target

Tesco In America: Real Estate

Tesco’s US/Japan Small-Store Strategy Contrasts With Wal-Mart’s Big-Store Plan

Ten Reasons Why U.S. Chains Should Be Concerned About Tesco And Target

Is Tesco Sending A Message
To U.S. Competitors?

A Look At Tesco’s Stores

Snapshots Of Tesco’s Vegas
And California Stores

Working With Wal-Mart May Not Be As Bad As You Think — Tesco Could Be Tougher!

Pundit’s Mailbag — Tesco’s Behavior

Kroger And Tesco Approach Store Acquisitions Differently

Tesco’s Price-Hike Strategy

Tesco Expands Plans For
More Openings In California

Is Publix’s Ownership In Crispers A Future Strategy Against Tesco?

Tesco Marks November Eighth As Launch Date For Six Stores

Tesco’s Biggest Challenge: Prepared Foods

Tesco Intelligence From Pessimistic Vendors And Anxious Competitors

Tesco, Disney and Dunnhumby

Tesco May Face Opposition Not Only From Unions But Also Animal Rights Activists

Will Meijer Be In Tesco’s Sights If It Succeeds With Fresh & Easy Format?

With Its Stance On Trans Fats, Tesco May Be Hip But Not Healthy

Tesco Teases With Video Of New Store

Confirmation Of Tesco In SFO

Tesco Finally Opens Doors… British Press And Protesters Unimpressed

Pundit’s Mailbag —
Tesco Gets Reviews From Industry Members

Tesco Takes Heat For Not Supporting Underserved

Tesco, Polar Bears And Social Irresponsibility

Tesco’s Secret Expansion Plan?

Will Tesco Regret Operating Its Own Commissary?

Trip To Tesco’s Fresh & Easy Store Reveals The Good, The Bad and The Ugly

Tesco Observations From A Retail Pro

Will Tesco Keep Its Promises?

Was Tesco’s Real Estate Decision A Result Of Hubris Or Humility?




Tesco’s Success Course Far From Easy

Jim Prevor’s Perishable Pundit, February 23, 2007

It May be fresh, but it won’t be easy.

We’ve dealt with Tesco and its plans in America both here and here. Wall Street has also gotten into the game, and some clever analysts at Credit Suisse entitled their report: It May Be Fresh, But It Won’t Be Easy.

The research analysts at Credit Suisse are by the names of Michael Exstein, Edward J. Kelly, Andrew Kasoulis, Jay Carlington, Matthew Gardner and Tom Roller, and the highlight points of the report are as follows:

TESCO COMES TO AMERICA

  • Tesco’s pending entry into the U.S. could represent one of the major structural changes to face the retail industry in some time. We estimate that Fresh & Easy, Tesco’s upcoming U.S. format, could generate $1 billion in sales within three years and capture 2-6% of the local market share in five years, potentially making it one of the few retailers to ever achieve that type of volume growth so quickly.
  • But it is important to keep in mind that the U.S. retail market is ultracompetitive and Tesco will need to navigate the complexities of the market while at the same time ensuring it can build an economically feasible and scalable model that offers a truly differentiated offering relative to existing formats. As our title suggests, while Tesco May introduce a fresh format/concept, executing on its strategy will not be easy
  • Mass market format tying fresh food and convenience with low prices. We believe Fresh & Easy will be a hybrid model which tries to bridge the gap between traditional (Kroger, Safeway) and specialty supermarkets (Whole Foods, Trader Joe’s) with mass market appeal (Costco, Target, Wal-Mart).
  • Initial implications for U.S. retailers will likely be minimal, as it will take time for Tesco to test and perfect its model before it expands into geographies beyond its initial targets (Southern California, Phoenix, and Las Vegas). However, we believe retail competitors and investors need to consider the ramifications now as Tesco’s growth will likely accelerate after year two and could include acquisitions in order to gain control of real estate. In addition, we believe some retailers are already working on potential competitive responses including new box formats and/or upgrades to existing formats.
  • It’s too early to short supermarket stocks. Near-term supermarket earnings should remain solid, Tesco will not have meaningful scale for at least two years, and success is by no means guaranteed. That being said, investors with a longer term time horizon should not overlook this potentially large negative catalyst.
  • Costco has the most exposure in mass merchant space. While Fresh & Easy May not be viewed as a direct competitor to the mass merchants, Costco’s large store base on the West Coast and high food penetration creates large overlap. Target and Wal-Mart’s growing food presence in these areas should also not be overlooked. Fresh & Easy will ultimately compete for fill-in grocery trips which the mass merchants are already having a difficult time holding onto.

The report also identifies the key executive team:

  • CEO, Tim Mason. Mason is very well known to most observers. He has been a Tesco main board director for 12 years and, as well as his US role, retains responsibility for group marketing. He has 25 years’ service at Tesco and has a wide range of experience at all levels — buying, marketing and retail operations. We think he has particular strengths in marketing, and specifically areas relating to understanding customers (for example, along with Terry Leahy, we think he deserves a lot of credit for the huge success of Tesco Clubcard). We also think he has strong diplomacy skills and gravitas (we regard him currently as a natural Number 2 to Leahy), which are likely to prove invaluable in navigating the various issues that Tesco is bound to face in the US.

  • CFO, Remko Waller. Waller is not a Tesco ‘lifer’ as far as we know. However, his recent experience as CFO of Tesco South Korea makes him well qualified in our view. We think South Korea is the only Tesco market outside the UK/Ireland that has very similar attributes to the US — high GDP per head, a relatively ‘modern’ economy/consumer, high real estate prices (so, very capital intensive), and high concentrations of urban population. Importantly, Korea has also been a hugely successful market for Tesco, and one where it has competed very well with Wal- Mart and Carrefour (both of which exited Korea in recent months). Over recent years, Tesco has proved adept at managing very rapid growth while generating high/increasing returns in Korea. As such, Waller’s track record in managing that growth should prove invaluable in the US.
  • Retail operations, Brian Pugh. Pugh joined Tesco in 1998 when it bought its entry-vehicle (13 Lotus hypermarkets) in Thailand. He is a US national and originally worked for Wal-Mart, which he left to set up the Lotus business with one other ex-Wal-Mart executive (Jeff Adams, now CEO of Tesco’s Thai business). After the Tesco acquisition, Pugh stayed on in Thailand where he became COO. We think the combination of his US nationality and Wal-Mart/International/operations experience make him ideally qualified for his new role.
  • Marketing, Simon Uwins. Uwin’s has been at Tesco for 23 years, during which time he has held various buying and marketing positions, latterly as director of marketing for Tesco’s UK business. He joined Tesco from market research agency AC Nielsen and, in his recent UK marketing role, represented Tesco on Dunnhumby’s Board (Tesco’s Clubcard data partner). We regard him as one of Tesco’s best qualified marketing executives. He is obviously very well placed to bring Clubcard and Tesco’s other marketing expertise to the US.
  • Commercial (Buying), John Burry. Although only around 40, Burry already has around 20 years’ experience at Tesco and has a similar buying/commercial background as Mason/Uwins. Most recently he was head of prepared fresh foods in the UK, which we think will be particularly appropriate for the likely offer in the US stores. He also has international experience — he was the Commercial Director of Tesco’s Czech business. We regard him as one of Tesco’s strongest up-and-coming commercial executives.
  • Property, Tony Eggs. Eggs too has vast experience at Tesco. He has for many years been a prominent senior member of Tesco’s highly successful UK property team, latterly as Property Director. Property is likely to be a key challenge/opportunity in the US, and Eggs will bring with him the knowledge and know-how that Tesco has developed in the UK over the last two decades. With the UK planning regime relatively tight and Tesco omnipresent, we suspect the more liberal US laws and ‘greenfield’ opportunity present Eggs with the chance to almost start again with another Tesco expansion plan.

It is a long report and not in the public domain but we’ve read it and, between the report and what else we have seen, what we notice is five key things:

  1. Tesco May have misidentified convenience in America’s car-based culture. Although local stores are nearby, if they add an extra stop to a shopping expedition, they are not that convenient. In this sense, a Wal-Mart or Target supercenter May be a little further away, yet still be very convenient as consumers can get everything on one trip.
  2. The decision to not sell gasoline has condemned the concept to secondary locations. The stores will have to be draws themselves and that is not easy for a 10,000-square-foot food concept.
  3. The high prepared foods component depends on very high volume. Neither the population density nor the secondary locations in the launch markets are likely to sustain that volume.
  4. The concept does not seem to have strong barriers to entry. If it is successful, it is not clear why Safeway or Kroger couldn’t duplicate it, much less why HEB, Publix, etc., couldn’t duplicate it in their markets before Tesco gets there.
  5. In a rush to open a critical mass of stores, Tesco seems to have signed leases for marginal locations. This won’t make its job easier.

The problem May be that Tesco desperately wants a place in the US market, but any concept that requires prime real estate requires a very slow rollout.

So Tesco has convinced itself that small stores in neighborhoods will, if merchandised the Tesco way, be a big success.

If Tesco is correct, they will steal the crucial fill-in business from supermarkets, and with warehouse clubs and supercenters doing the big shopping trips and Tesco or Tesco-like concepts doing the fill ins, supermarkets will be in real trouble.

But the Tesco concept seems to depend on a revolutionary change in consumer shopping habits. If that revolution doesn’t occur, we May have to add Tesco to Marks & Spencer and Sainsbury’s on the list of British retailers whose plan to retake the colonies didn’t pan out as hoped.




Tesco In America:
Foodservice vs. Prepared Foods

Jim Prevor’s Perishable Pundit, February 27, 2007

In our piece, Tesco’s Success Course Far From Easy, we referenced a research report from Credit Suisse entitled, It May Be Fresh, But It Won’t Be Easy. One of the more intriguing comments in the report deals with Tesco’s supposed plans to sell a lot of prepared foods:

“… grocers’ fresh food offers have not developed as quickly in the US as, say, the UK. True, the ‘eat-out’ market takes a higher proportion of food expenditure in the US, so customers are perhaps less inclined to buy fresh ‘centre of plate’ products at a US grocery store (although this in itself is an interesting debate — i.e., has the strength of the US eat-out market contributed to the relative weakness of US grocers’ fresh food offers, or is it the grocers’ relatively weak fresh offer that has assisted the move to eat-out?). Whatever the reason, the fact remains that mainstream grocers’ food offers are undeveloped compared with those of leading international peers.”

The comment is insightful because so much commentary looks at competitive differences in a vacuum. It is easy to see that the UK supermarket industry has a more developed prepared food industry than U.S. supermarkets.

Whether this is a competitive opportunity in the U.S. is another question entirely.

We see the same type of simple-minded comparisons domestically. Wegmans has a great pizza program and, in many of the towns it operates in, Wegmans offers the best pizza around. Which doesn’t mean that every D’Agostino’s store in Manhattan, where there is a specialized pizzeria on every corner, ought to copy the Wegmans program.

The answer to the chicken-or-egg question posed by the Credit Suisse analysts is probably that America’s more diverse ethnic population led to the development of more diverse foodservice options. Partly this is because each ethnic group has its own cuisine, partly because these immigrants worked harder and cheaper than the more mainstream and, often, unionized supermarket labor.

This meant restaurants produced food both better and less expensively than supermarkets were generally able to. Often the restaurants are more convenient as well, since many offer delivery or curbside pick-up.

In any case, it May not matter. Habits once developed are difficult to break, and it is unlikely that the prepared foods offerings of Tesco, whatever its merits, will significantly shift the retail/foodservice split of business.

The way for Tesco to really create a more convenient store is to recognize that Americans don’t want to get out of their cars. The revolution Americans want is not what is inside the store, nor it being close to the house. It is not having to go inside. Drive-throughs, curbside-pickup, convenient delivery.

For all the talk of being consumer-centered, most proposals to do these things are met with resistance because, after all, how are you going to sell consumers impulse buys if they can just call in or e-mail their lists and when they pull up, you’ll just put it in their trunk?

To our British friends from Tesco, that would be a boot and if they want to be truly convenient in the American context, they should look at all the restaurants that offer curbside service. No reason a retailer that is consumer focused can’t do that as well.




Tesco vs. Costco

Jim Prevor’s Perishable Pundit, February 28, 2007

We’ve run several pieces regarding Tesco’s move into the American market. In the last few days we’ve been studying a research report on Tesco done by Credit Suisse, first with a piece entitled, Tesco’s Success Course Far From Easy, and then with a piece entitled, Tesco In America: Foodservice vs. Prepared Foods. This report also analyzes the implication of Tesco opening in America for Costco:

With 20% of its store base in Tesco’s proposed U.S. markets (Southern California, Phoenix and Las Vegas), Costco is more exposed than any other mass merchant in our coverage. On a state wide basis, Costco operates 37% of its warehouse clubs in California, Arizona and Nevada.

While Costco’s warehouse club model differs dramatically from Tesco’s planned Fresh and Easy stores, there are similarities between the two retailers’ food offerings, especially in fresh and prepared foods. Food accounts for over 50% of Costco’s sales volume. Fresh food, including meat, dairy and bakery contributes up to 11% of its total sales volume. With an average ticket of $120-$130 for U.S. customers, Costco is certainly not centered around convenience. However, on a quick trip during the week or when buying in bulk on weekends, Costco customers often include a rotisserie chicken, fresh pizza or a meal ready to eat as well as a carton of milk or bunch of bananas with their purchase.

In our view, Tesco’s U.S. entrance May compel Costco to revisit its food-only concept store as a competitive response. Costco first tried to open a smaller format focused on high-end groceries in Manhattan in 2000, but the plan was derailed due to escalating construction costs and neighborhood opposition. In 2003, COST purchased a former 106,000 square foot Kmart with plans to open a food only location in Bellevue, Washington to develop and test new concepts for its existing warehouses. However, management decided to put the project on hold and instead focus solely on its existing warehouse club format.

Costco is open to new formats, as evidenced by its two specialty home/furniture stores and plans for a third this year. Costco was looking for sales of $40 million annually from its pilot furniture store in Kirkland, WA. According to Furniture Today, Costco’s two furniture stores brought in over $100 million in 2005.

Although generally the report has been insightful, on this point the analysts May be jumping the gun. If Tesco opens this concept and if it is successful, then Costco and every other retailer will respond.

In fact the biggest vulnerability for Tesco is how easily this concept can be duplicated. Because Tesco seems to have focused on a concept for which real estate is available, we would expect every supermarket and supercenter and warehouse club to look at the possibility of aping the concept — including players in the Arizona, Nevada and Southern California.

In contrast when Wal-Mart rolled out its supercenters, supermarkets couldn’t easily duplicate the concept: their distribution centers and buying operations couldn’t handle all the non-food items. It is not easy to find space and build from scratch 200,000 square foot stores.

Costco will react — it is a big market. But so will Safeway and Kroger and others — if Tesco’s stores are successful. And that “if” is a big one.




Tesco vs. Target

Jim Prevor’s Perishable Pundit, March 1, 2007

We’ve been running a series analyzing a Credit Suisse report on Tesco’s new American venture. We started out with Tesco’s Success Course Far From Easy, and then ran a piece entitled, Tesco In America: Foodservice vs. Prepared Foods. Yesterday we looked at Tesco vs. Costco, and today we look at what the report had to say about Target:

Approximately 11% of Target’s store base overlaps with Tesco’s planned U.S. markets — Southern California, Phoenix and Las Vegas. On a state wide basis, Target operates 19% of its stores in California, Arizona and Nevada. With an estimated 1,500 locations yet to build, management feels no urgency to seriously explore new formats at this time. Depending on Tesco’s success and the development of the U.S. retail landscape.

Whether or not partially in response to Tesco’s U.S. entrance, we believe Target is increasingly focusing on driving incremental traffic by adding more food and consumables to its mix. The company remains committed to its core discount store format, but Super Target (which includes a full grocery assortment) will make up a larger percentage of new/relocated stores in the future.

In addition, TGT is dedicating more square footage to food in existing discount stores. The company just announced the construction of its first food distribution center in Lake City, Florida. We foresee more company-owned food distribution centers being added in the future.

Target hopes to grow private label food, now 15% of sales, to 25% over the next 5 years. In our view, Target’s Archer Farms is already “Tesco-like” in terms of quality and recognition and could eventually become the centerpiece of a food-only store.

We’ve always felt that the Archer Farms branding was suitable for a spin-off. Indeed Target’s slow roll-out of Super Centers often made us doubt its commitment to food. And the separate branding would have made it easy to do a spin-off to shareholders of the food section.

Now, with Target’s investment in a food distribution facility, which we talked about here, its commitment seems stronger. However, Target continues to have problems figuring out how to apply their “cheap chic” concept to food.

We think the Credit Suisse folks are straining on this one. We doubt Target has done anything because of Tesco and, even if Tesco is successful, Target’s dilemma would be the same as Wal-Mart’s dilemma on Neighborhood Market’s: Why spend money to build successful stores such as Neighborhood Markets when it can get a higher return on investment building supercenters.

Among the things Tesco needs to worry about, Target’s new concepts should be way down on their list.




Tesco In America: Real Estate

Jim Prevor’s Perishable Pundit, March 2, 2007

It May be Fresh, But it Won’t be Easy is the name of a new Credit Suisse report on Tesco’s American venture that we’ve been studying lately. We started out with Tesco’s Success Course Far From Easy, and then ran a piece entitled, Tesco In America: . We looked at Tesco vs. Costco, and then at Tesco vs. Target.

One of the key issues the report deals with is real estate and it puts up several examples of sites the Credit Suisse people believe are possible Tesco locations. Take a look at these pictures:

Possible Phoenix store site

Possible Phoenix store site

Possible Phoenix store site

If Credit Suisse is correct, we are obviously not talking about an upscale concept. And frankly, it is hard to perceive anything in these locations as the giant killer Tesco is reputed to be.

Yet, in the end, these types of locations have one great advantage: they are available. You couldn’t duplicate the store structure of Safeway or Kroger for any amount of money because there just aren’t enough prime locations available. These sites are available.

That matters a lot. When Marks & Spencer bought Kings in New Jersey, there were all kinds of grandiloquent plans to expand. But they never could get the locations and if they got the locations, they couldn’t get the staff. So this concept seems better thought out than that expansion plan.

However, this advantage of being doable can swiftly turn into a vulnerability if other retailers choose to respond with competitive formats. It means they can roll out quickly too. One doubts that Kroger (Ralph’s) and Safeway (Von’s) are going to just allow their market shares to shrink without fighting back if this concept takes off.




Tesco’s US/Japan Small-Store Strategy Contrasts With Wal-Mart’s Big-Store Plan

Jim Prevor’s Perishable Pundit, April 24, 2007

With Tesco’s announcement that it would open a chain of small food stores in Japan and its previously announced plans to open a series of small supermarkets in the U.S., while Wal-Mart remains focused on its supercenter format, the battle between Wal-Mart and Tesco seems to resemble that between Boeing and Airbus.

Airbus has been in the news as it prepares for the much delayed launch of its Airbus A380, a superjumbo plane larger than a 747. Depending on configuration, the plane can carry as many as 840 passengers in an all-coach configuration as opposed to 568 in an all coach configuration of the Boeing 747.

Boeing, in contrast, is focusing on its Boeing 787, aka the Boeing Dreamliner. This is the first airliner to be made mostly of light-weight carbon fiber instead of aluminum. Crucially its range will be over 8,000 nautical miles, roughly enough to travel non-stop a third of the way around the world, making possible city pairs that had not been possible before. It is much smaller than the A380.

Obviously each plane has its distinct characteristics, and the ultimate success of any business is heavily influenced by effective implementation. But, at its core, the two planes are expressions of the two companies’ differing visions of the future of aviation.

Airbus looks at the world and notes that it is almost impossible to build a new airport today what with environmental activists and political outcry over noise and development. Even building additional runways can take decades. With the population growing, affluence in nations such as China and India opening air travel to many people, and increased international trade, the demand will surely be there for more air travel.

With restricted supply of take-off and landing slots, plus increased demand, Airbus would say that the only way to meet that demand will be for larger aircraft that can use the limited take-off and landing capacity more fully.

Boeing looks at the world and says that the old hub-and-spoke system is going to be deemphasized. It notes that in the U.S., deregulation led airlines such as Southwest to serve more destinations on a point-to-point basis, without funneling people through hubs.

So instead of two massive hubs, say Los Angeles and Tokyo, between which North American and Asian traffic will be funneled, Boeing sees direct flights of smaller capacity but more fuel efficient and longer range aircraft. So instead of a trip from say Salt Lake City to Bangkok involving a trip from Salt Lake City to Los Angeles then from Los Angeles to Tokyo, then Tokyo to Bangkok — Boeing’s vision is a direct flight from Salt Lake to Tokyo, Maybe even a direct flight from Salt Lake to Bangkok.

This means that large capacity planes aren’t desirable because there isn’t the traffic to support large planes on these point-to-point routes.

So far the market says Boeing is winning the battle. The company has already sold enough 787s to be profitable if it can produce the plane it promises. Airbus has had more cancellations than orders lately for the A380. Although technically a marvel, and the plane May yet come into common use, the high cost of delays means that it will be difficult for Airbus to ever earn a reasonable return on its investment.

One wonders if Tesco’s decision in both the U.S. and Japan to launch a small scale concept isn’t influenced by the British real estate situation in which launching large Greenfield stores, such as the typical American Wal-Mart Supercenter, is increasingly difficult.

Perhaps Wal-Mart’s lack of urgency in responding to the Tesco invasion in the Southwest is influenced by its experience in which it is still possible, even if difficult, to build large stores. And Wal-Mart has found it so much more profitable to build the large stores that it neglects smaller opportunities.

Everyone always says that their overseas activities are driven by local management but, in the end, it is the home team that has to approve capital allocations in the hundreds of millions of dollars. It would be surprising if these top executives could always transcend their own experiences.




Ten Reasons Why U.S. Chains Should Be Concerned About Tesco And Target

Jim Prevor’s Perishable Pundit, May 3, 2007

There is a new research report out authored by analysts at JP Morgan entitled Supermarket Industry Review and Outlook: Is There Room for Two More Giants? It is unusually insightful and brings to the fore crucial points that are often overlooked.

First, it points out that consolidation May be advanced in supermarket retailing but that hasn’t stopped two deep-pocketed giants from entering the market:

Just when the supermarket industry seemed to be settling down, two powerful outsiders are coming to shake things up once more. The likely result: the bitter competition that has marked food retailing since Wal-Mart forced its way onto the stage in the mid 1990s will likely not be abating soon.

These new contenders come with deep pockets and a thorough understanding of the US market.One is Tesco plc, Britain’s leading grocer and one of the very few food retailers anywhere with a record of strong international performance. The other is Target Stores, the old-line department-store company that has transformed itself into America’s most profitable discount retailer and is now pushing hard to build its presence in food retailing.

Alone, we think either one of these companies has the muscle to occupy a meaningful position in the grocery market. Together, they should start to take market share just when the traditional supermarket retailers thought they had mastered the techniques of competing against Wal-Mart.

In our piece The End Of Supermarkets? we explained why the new Tesco concept merited so much attention:

…the underlying point is that we are really talking about the end of the supermarket.

We have already reached the place where it is widely accepted that supermarkets need to emphasize perishables and prepared foods because it is the only way to make a little money as the competition on selling packaged goods from warehouse clubs and supercenters is simply too fierce.

But if Tesco is right and some new concept of small stores is the way to sell perishables and prepared foods, well there is then nothing left.

The supermarket will be finished.

In a sense, the JP Morgan analysts are pointing out the same thing, but adding the impact of a Target newly dedicated to food.

Just as most large and successful supermarket chains seemed to have reached a stasis with Wal-Mart, in which they — a la Safeway’s Lifestyle stores — go a little upscale and emphasize organics and fresh foods, two behemoths start roll-outs that will undercut that positioning.

How will a supermarket compete that has a Wal-Mart Supercenter nearby serving the paycheck-to-paycheck crowd, a Target supercenter attracting a more upscale clientele, 10 Tesco’s Fresh & Easy Neighborhood Market stores stealing the “top-off” shoppers with their convenient neighborhood locations and generous assortment of perishables and prepared foods? Add in some specialty operations such as a Whole Foods, a Costco and a Trader Joe’s and one sees the battle supermarkets will have to come up with a reasonable positioning.

Second, the JP Morgan report reminds us that Tesco must be viewed as a long term strategic competitor and not evaluated solely on its Fresh & Easy concept:

Tesco is a multi-format operator. As it learns more about the US market, we would not be surprised if it looks to add larger supermarket formats, or even hypermarkets. This flexibility has worked well in other markets and lets Tesco avoid a “one size fits all” mentality.

Third, if successful, Tesco will probably drive some competitors out of certain markets:

Based on its initial choice of markets, Kroger, Safeway, SuperValu, Stater Bros., and the privately held Basha’s chain all are exposed to market-share loss from Tesco’s entry. All of these markets already have more large competitors than the average US metropolitan area. If Tesco succeeds in gaining significant share in any market over the next few years, we would anticipate that another retailer would be forced to exit due to the competitive pressure.

Fourth, Target is now becoming a real player in food retailing in certain local markets:

Target is finally beginning to command noteworthy shares of local food retail markets. We consider local market share a vital element of success in broadline food retailing, as critical economies of scale in distribution and advertising can be obtained only with high store density. In previous years, Target’s local market shares have been quite small. In 2006, however, Target took 8% of supermarket sales in its home market, Minneapolis-St. Paul, and had shares in the 5% range in Denver, Omaha, and Cedar Rapids. It also held a 4% share in the large Dallas-Fort Worth market. While these positions are small in comparison with

Wal-Mart, they are enough to affect the competitive balance and weaken the pricing power of established supermarket operators.

Although Target is weaker than this in perishables (the JP Morgan numbers include substantial food sales through its conventional Target stores which sell few perishables as compared to its SuperTarget stores), Target is building the infrastructure for substantial growth in perishables, as we mentioned in our piece Target Builds First Food Distribution Center.

Fifth, Target’s expansion, JP Morgan explains, is a problem for conventional supermarkets:

we anticipate that Target will continue to increase its shares in local markets in a cautious, steady way. Unlike Wal-Mart, it will likely not trail independent grocers’ bankruptcies in its wake. But we believe its expansion will almost inevitably erode the market shares of incumbent supermarkets, and May increasingly constrain their pricing power.

Sixth, despite the popular perception that Wal-Mart is in trouble, its operations continue to garner more and more of the food industry:

Wal-Mart extended its domination of the US food retail market last year. Wal-Mart’s supercenters now account for more than 50% of supermarket sales (excluding warehouse-club sales) in seven of the 100 most populous markets, and for at least 40% of supermarket sales in 20 of the top 100 markets. Wal-Mart SuperCenters lost share in only one market last year.

Seventh, JP Morgan believes that Wal-Mart’s gains in market share seem highly likely to continue:

In 2007 the company plans to open 265-270 supercenters, most of them conversions of or replacements for traditional discount stores. This is all but certain to bring substantial further gains in sales and market share.

Eighth, although Kroger posted strong sales in 2006, it is not opening enough new stores to increase market share:

Kroger fared poorly in the market-share wars last year, losing share in 26 of the 36 major metropolitan areas in which it holds at least 10% of the market. This share loss appears to be due to Kroger’s extreme caution about opening new stores. The company’s store count fell by 39, and square footage remained unchanged.

Ninth, Safeway is also seeing total store count drop and has not been able to capitalize on opportunities to increase market share:

Safeway’s store count declined in 2006, for the second consecutive year, due principally to store closures in its troubled Texas markets… It gained only 1 share point in San Francisco, despite the closures of 36 stores by Albertson’s LLC and 10 stores by Kroger.

Tenth, JP Morgan’s report emphasizes that while supermarkets reshuffle assets and, in some cases, such as Supervalu, this May really benefit individual companies, the supermarket industry as a whole is changing in ways that will be further evidenced by Tesco’s new offer and a Target focused on food:

Wal-Mart Stores strengthened its position as the largest US food retailer in 2006. JPMorgan estimates that Wal-Mart sold $106 billion of supermarket items through its supercenter division and another $25 billion at its Sam’s Club warehouse stores. The total of $131 billion gives Wal-Mart nearly twice the sales of supermarket items of Kroger, the largest traditional supermarket operator. Costco advanced one place in our ranking due to the break-up of Albertson’s Inc., and Target Stores has emerged as an industry leader due to its increased emphasis on food sales — and to its willingness to disclose sales in the relevant categories. Thus, four of the top 10 food retailers are not traditional supermarket operators.

This point is crucial, we made the same point fourteen years ago in our piece “Death By A Thousand Cuts,” which ran in PRODUCE BUSINESS, the Pundit’s sister publication is crucial. We don’t know what market share Tesco needs to make a good return on its investment or how much fresh foods Target needs to sell to justify building new distribution centers, but only a small market share is necessary to affect the competitive balance, to constrain the pricing decisions of competitors and to force a weak competitor out of a market.

Contributors to this excellent report are the following:

Marc Levinson, Economic Research, Carla Casella, CFA, North America High Grade Credit Research, Virginia Chambless, CFA, US Equity Food & Drug Retail Research, Stephen C. Chick, CFA, US Equity Broadlines Retail Research, Charles Grom, CFA, CPA, European Equity Retail Research, Jaime Vazquez and Alastair Johnston, European Credit Retail Research, Katie Ruci, J.P. Morgan Securities Inc.

The report includes specific credit opinions and much else of great value. We appreciate JP Morgan’s willingness to allow us to share their insights with the broader industry.




Is Tesco Sending A Message
To U.S. Competitors?

Jim Prevor’s Perishable Pundit, May 16, 2007

It is hard to know if it is bluster — like Muhammad Ali unnerving his opponents with his bragging and strong claims — or if it is a strategic mistake that will telegraph to competitors what needs to be done — as George W. Bush would say about efforts to delineate precisely what has to happen to take US forces out of Iraq — but Andrew Higginson, Tesco’s Finance and Strategy Director, gave a rather odd interview with The Business, a U.K.-based business publication.

Tesco is renowned for its secrecy. When the Pundit wants to know the name of Tesco’s new carrot supplier in America, he has to practically put on his trench coat and meet his Tesco employed friend in a darkened alley — so fearful are these people about company policy.

So it is strange to see someone as high up as Mr. Higgenson chatting away. Still, he made several key points:

“This is a launch, not a trial. The way we see this is it is an investment — if we create a success it will be something we can roll out that will create billions of pounds in value. But if not, the business [Tesco] can sustain a loss of £1.5bn in terms of failure; our careers might not, but the business would.”

This is kind of shocking. It is hard to know if he is challenging Kroger, Safeway, Wal-Mart and others by signaling to them that Tesco is prepared to lose £1.5 billion or roughly $3 billion.

Remember that because of the large market share of the incumbent retailers, a decision to compete aggressively with Tesco and prevent them from getting a toe-hold in America is likely to cost these players many times what it will cost Tesco.

Presumably Tesco thinks it could sell its capital investment in warehouses and stores for something around what it paid for them. So the “loss” being referred to is probably an operating loss. Some would be a normal ramp up as stores mature after an opening but if, say, $2 billion of this loss might be what Kroger’s CEO used to refer to as “investments in lower gross margins” — attempts by U.S. retailers to remain competitive could easily cost the U.S. industry $20 billion.

Of course, with a “neighborhood” format, price reduction would be much less if U.S. supermarket chains could confine price reductions to stores serving the same neighborhoods.

Perhaps Mr. Higgenson spoke intentionally, but he was directing his message to the financial community, concerned about the £65 million start-up cost (roughly $130 million U.S.) designated to the U.S. venture. The City, London’s version of Wall Street, gets nervous about Tesco’s management possibly falling in love with an unproven business concept. By publicly capping the losses, Mr. Higgenson May be limiting the damage to Tesco’s share price.

Whatever the motivations, Tesco is giving its competitors a clear message: Make this too difficult or expensive and we will give up. That is a little like dangling a red flag before a bull..

Mr. Higgenson does show awareness of the vulnerable nature of the Fresh & Easy concept:

“The concept will catch the green wave — there is a lot of fresh high quality produce and meal solutions — there is not a big ready meal market in America so we will have to see whether they like that.”

It is a rather shocking statement. Who opens 200 stores “to see whether they like that”? They must feel that their concept can be easily duplicated. Otherwise why not open a few to test it out before rolling out such an effort and incurring such expense?

Sometimes the interview comes across as if the concept is a blur:

“In America we are positioning it in between America’s Whole Foods Market, which does fabulous food unbelievably expensively, and Wal-Mart, which is as you would expect. We want great quality and price.”

It is hard to know what this means. Isn’t this the standard positioning for Kroger, Safeway and most U.S. supermarkets — more prepared foods and fresh items than Wal-Mart but less than Whole Foods, priced better than Whole Foods but more expensive than Wal-Mart? Wanting great quality and price sounds more like a slogan than a business model.

“Tesco has retained its fake store, hidden within a warehouse, where it has been trying out different concepts on consumers. Higginson says he has been pleasantly surprised by the reaction of consumers and also noted that Tesco’s American shareholder base has almost doubled, leaping from 17% to 28%.”

This fake store has been talked about so much it might be worth remembering that consumer research becomes very difficult once consumers know they are being studied. Especially in a concept such as this that, as Mr. Higgenson explained, is going to attempt to “…catch the green wave…” One wonders if in the surrealistic environment of a test store, people aren’t free to express their noble “green” aspirations.

Of course the important questions — Will they consider a limited assortment neighborhood market convenient or an inconvenience as Kroger CEO Dave Dillon explained here? What will consumers pay to be green? And other such questions can only be answered in the context of a life actually being lived.

Considering that only a tiny fraction of the U.S. population had ever heard of Tesco before its launch in America led to news coverage — well, it is not surprising to see greater awareness result in increased shareholding.

Besides, it is Warren Buffet’s Berkshire Hathaway alone that accounts for over 10% of the U.S. holdings.

We also think Tesco is making one big mistake:

Fresh & Easy will not have any reference points to its parent’s heritage. Higginson explains: “Tesco means nothing in California. We are about local business for local people. There is no point in being some quirky British thing landing in California.”

Don’t they know that Americans are mostly anglophiles? And love a great entrepreneurial story: Jack Cohen, the son of a Polish tailor, spends the £30 he received from serving as a soldier for our American ally, Britain, in World War I and invests it in food to sell at a stall on the east end of London and from that grows a retailer that spans the globe.

Most Americans upon hearing that story would react as Yogi Berra did upon learning that a Jew had been elected Lord Mayor of Dublin, by saying: “Only in America.” Tesco should test that on its fake store wall.

You can read our coverage of Tesco’s voyage to America right here. And The Business piece right here.




A Look At Tesco’s Stores

Jim Prevor’s Perishable Pundit, May 24, 2007

We’ve been dealing with Tesco’s arrival in America for some time. Now we have some additional information. Here is what the stores will look like:

Here is a map of where the initial stores will be in the Phoenix area:

Here is a list of the Phoenix area locations:

Fresh & Easy Neighborhood Market

Greater Phoenix locations

  • Dysart & Greenway — El Mirage
  • Avondale & Van Buren — Avondale
  • 107th & Thomas — Avondale
  • 35th & Greenway — Phoenix
  • 32nd & Greenway — Phoenix
  • 12th & Northern — Phoenix
  • 19th & Glendale — Phoenix
  • 7th & Indian School — Phoenix
  • 19th & Baseline — Phoenix
  • Kyrene & Ray — Chandle
  • Dobson & Queen Creek — Chandle
  • Arizona & Chandler Heights — Chandle
  • McQueen & Chandler — Chandle
  • Greenfield & Warner — Gilbert
  • Higley & Ray — Gilbert
  • Gantzel & Ocotillo — Queen Creek general area
  • Crimson & Guadalupe — Mesa
  • Sossaman & Southern — Mesa
  • Apache & Ellsworth — Apache Junction
  • Stapley & McKellips — Mesa

The stores look attractive, though one wonders if all that glass in the hot Phoenix sun is really the green thing to do?

Fresh & Easy is trying to burnish its green credentials though. It made an announcement:

Fresh & Easy Neighborhood Market Reveals First ‘Green’ Fleet Trailer

EL SEGUNDO, Calif., May 22 Fresh & Easy Neighborhood Market today announced the arrival of the first in its fleet of distribution trailers that, like its store locations, will showcase the company’s goal to be a good steward of the environment.

“Fresh & Easy Neighborhood Market is in a unique position to deliver fresh, affordable, high quality food into the neighborhoods in which we operate and to do so safely and in the best interest of the environment,” said Tim Mason, Fresh & Easy Neighborhood Market CEO. “As a new company in the U.S., we have had the opportunity to work with leaders in ‘green technology’ to create, from the ground up, an entire fleet of aerodynamic, fuel efficient and neighborhood-conscious trailers in our first round of manufacturing.”

A highlight of the trailer includes a hybrid refrigeration vector unit which minimizes the amount of diesel used to safely cool and transport store products. All Fresh & Easy trailers will include automatic refrigeration shut-off when optimum temperature is reached inside the cooling chamber as well as a complete engine shut-off once parked at the stores. Electrical stand-by technology will also minimize the impact on the environment by using no diesel fuel to run refrigeration units on the trailers while parked at the distribution center.

In addition to maximizing fuel efficiency and reducing their CO2 footprint, the trailers are designed to reduce audible noise by 66 percent. For example, Fresh & Easy Neighborhood Market trailers will contain roll up doors rather than lift gate trailers to minimize noise. Drivers will also be committed to a zero-noise policy in the truck cabs while unloading at stores.

Specific site "route mapping" will ensure community safety by limiting deliveries during school hours and/or along major pedestrian traffic areas. Fresh & Easy Neighborhood Market is also regulating distribution times in accordance with its good neighbor standards.

The trailers are bright white and contain the company’s green Fresh & Easy logo. The website address (http://www.freshandeasy.com) lies across the back of each trailer.

ABOUT THE COMPANY

Tesco is the UK’s largest retailer and one of the world’s leading international retailers, operating over 2,800 stores across 12 countries and employing over 370,000 people.

Tesco has grown from a market stall, set up by Jack Cohen in 1919. The name Tesco first appeared above a shop in London in 1929. There have been several phases of growth for Tesco and during the 1990s Tesco was successful in the UK by investing for customers and pioneering many new innovations. For example, the company launched the Clubcard loyalty scheme and Tesco.com, now the world’s leading Internet grocery store. In 1995 Tesco started to expand overseas and now operates in Ireland, the Czech Republic, Hungary, Poland, Slovakia, Turkey, China, Japan, Malaysia, South Korea and Thailand. Last month the first Tesco-branded store opened in China.

Tesco’s success is due in part to delivering a consistently strong customer offering on every visit and every transaction and by focusing on the company’s core purpose: to create value for customers to earn their lifetime loyalty.

Some of this is just the advantage that comes from being able to buy everything new and modern. But some of it is the product of a lot of hard work, thought and investment.

Lifetime loyalty is an ambitious goal but this project is nothing if not ambitious. One thing you have to say about the executive team, they are willing to take a risk.




Snapshots Of Tesco’s Vegas
And California Stores

Jim Prevor’s Perishable Pundit, May 30, 2007

As part of our coverage of Tesco’s arrival in America, we ran some nice elevations of Tesco’s new concept as well as maps and addresses of all their first 20 stores that will open in the Phoenix area. You can see all three right here.

Here is a map of the initial 15 Fresh & Easy Neighborhood Market locations in Las Vegas:

This is a list of the actual locations:

Fresh & Easy Neighborhood Market

  • Las Vegas area locations
  • Tropicana Ave & Durango D
  • Tropicana Ave & Jones Blvd
  • Horizon Ridge Pkwy & Green Valley Pkwy
  • Centennial Pkwy & Simmons St
  • Nellis Blvd & Desert Inn Rd
  • Bermuda Rd & Silverado Ranch Blvd
  • Lake Mead Blvd & Del Webb Blvd
  • Eastern Ave & Warm Springs Rd
  • Stewart Ave & Nellis Blvd
  • Sunset Rd & Arroyo Grande Blvd
  • Boulder Hwy & Race Track Rd
  • Cheyenne Ave & Martin Luther King Blvd
  • Cheyenne Ave & Jones Blvd
  • Ann Rd & Decatur Blvd
  • Fort Apache Rd & Desert Inn Rd

Previously, we ran this elevation of a prototypical new construction, free-standing Fresh & Easy Neighborhood Market store:

But many of the locations are not freestanding or are renovations of existing facilities.

For example, here is an elevation on a little strip center that will have a Noah’s Bagels restaurant, a burger place, the Fresh & Easy Neighborhood Market and still has 6,000 square feet for rent. The center is located at 635 E. Bonita Ave, San Dimas, CA 91773:

And here is the elevation on a small strip center that, in addition to the Tesco concept, will have a Longs Drug and other stores. It is located at 25050 Alessandro Blvd., Moreno Valley, CA 92553:

The real estate Tesco has been renting is an unusual assortment — some in very nice areas and some in very marginal neighborhoods. It is hard to believe that the same concept would work in all these locations. Unless Tesco intends to do a lot of micro-marketing?




Working With Wal-Mart May Not Be As Bad As You Think — Tesco Could Be Tougher!

Jim Prevor’s Perishable Pundit, June 15, 2007

All our focus on changes in Wal-Mart’s buying practices has highlighted how unhappy many vendors are with Wal-Mart, to the point that they have strategic initiatives established to diversify their business away from Wal-Mart.

This, in fact, is what has made many U.S. vendors so excited about Tesco’s arrival in America, as it opens up the possibility of a new client that will be large, rapidly growing and financially responsible.

At the same time, U.S. produce vendors who have been selected by Tesco as suppliers report that they are already exasperated with the company. Several report having walked in on their boss and — only half jokingly — asked permission to give the Tesco account to their biggest competitor. The reason? The incessant demands of Tesco employees will bankrupt their competitors, especially considering that, so far, Tesco hasn’t spent a dime on produce.

Tesco’s method of selecting vendors has been mysterious. After wooing a British partner — Wild Rocket Foods — over to the US, they traveled around the country trying to get produce companies to invest millions with them. Most laughed. A deal was ultimately struck at unknown terms with Bonipak.

Other vendors reported receiving Fedex packages anointing them as vendors — complete with the opportunity to buy a ticket to a vendor meeting.

Yet other perfectly reputable producers are irate. They report calling the U.K., leaving many messages and no one even giving them the courtesy of a response. Reputable people call the receptionist at the Tesco US headquarters, and she is very nice, offers to accept literature etc., but she won’t tell perfectly reputable people the name of a person to contact. Not surprisingly, many are disgusted with the company.

Perhaps Tesco doesn’t care; it assumes that in the end it will get the suppliers it needs. But in the U.K., a whole industry has sprung up with web sites like Tescopoly: An Alliance of organizations concerned with the negative impacts of supermarket power. They focus on getting the government involved in getting a better deal for farmers:

Farmers have to bear the burden of unfair trading practices imposed by supermarkets.

In 2001, Tony Blair claimed that British supermarkets had farmers in an ‘armlock’. Supermarkets control nearly 80% of the British grocery market and as the most powerful players along most food supply chains are able to dictate terms, conditions and prices to suppliers. If suppliers complain, supermarkets can simply move their business elsewhere, and their dominance of the food retail sector is such that there May simply be no one else for farmers to sell their produce to.

In 2000, the UK Competition Commission (CC) reported on many of the supermarkets’ unfair practices, which were considered anti-competitive. It found 52 kinds of abusive trading practicies See the CC report). The response by the Office of Fair Trading (OFT) was to introduce a voluntary code of practice, to be entered into by the large four supermarkets. Many of the 12 original provisions recommended by the Competition Commission were weakened. A later review by the OFT revealed that many practices identified in 2000 were still occurring, and a survey of farmers conducted by Friends of the Earth in 2003 showed that many farmers were ‘being asked to pay a rebate on an agreed price, waiting over 30 days for an invoice to be paid, incurring additional transport or packaging costs due to changes in supermarket specifications and meeting the costs of unsold or wasted products where quality of the product was not an issue’.

Actually, despite the half-hearted complaints from people already doing business with them and the whole-hearted complaints from people who are left in the cold, Tesco is being unusually cooperative. Here in the US, they are choosing most suppliers without asking who else they sell. In fact, since they want top producers, they actually favor vendors who supply leading retailers.

Yet this is almost certainly just a question of scale. In the U.K., if you sell Tesco, you probably are not selling its competitors. Tesco wouldn’t stand for it. One wonders how understanding they will be of US vendors selling to — say — Wal-Mart once they have the scale to start making those types of demands.

Vendors May yet yearn to deal again with Wal-Mart.




Pundit’s Mailbag — Tesco’s Behavior

Jim Prevor’s Perishable Pundit, June 19, 2007

In response to our overall coverage of Tescos’ Voyage to America and, specifically, to our piece, Working With Wal-Mart May Not Be As Bad As You Think — Tesco Could Be Tougher, we received this thoughtful letter:

I think people are going to find that the grass is not greener on the other side.

I feel people are quick to complain about Wal-Mart because it is the popular thing to do. Many vendors who May seem satisfied use the fact that so many people are harping on Wal-Mart to try and better their situation by jumping on the bandwagon.

If Tesco is able to make a serious presence in the U.S., it will be interesting to see if vendors who end up dealing with both companies have better views of Wal-Mart in the end.

I think in the world of big companies like this, vendors have to deal with the demands or lose the business as plenty of other people are nipping at their heals.

It is surprising to me that Tesco chose Bonipak as a vendor. I wonder myself if this is a situation where Tesco could not find anyone else to take its deal or if the two companies mutually struck up a deal. From my dealings, Bonipak is a great vendor who treats its customers well with high quality product and customer service.

It will be interesting to see how their relationship with Tesco impacts the long term goals of Bonipak.

But give them credit for taking a chance. If Tesco succeeds, it could be huge for growth with Bonipak long term.

— Matt Roy
Produce Director
Lincoln Poultry

For those who don’t know, Lincoln Poultry is one of those companies that has long outgrown its name. Though it started as a poultry and egg distributor, it is now a full line foodservice distributor. We find something appealing in a company that must have been advised by everyone and their brother to change their name, yet sticks steadfastly to its roots.

Matt’s letter brings us to the heart of the dilemma. For all the problems in dealing with big buyers, for big vendors, there is no alternative.

Dealing with Tesco probably is tougher than dealing with Wal-Mart for the simple reason that Tesco operates in an even more consolidated market than the U.S., so if vendors bellyache, so what? Where are they going to go?

Of course, just because one can get away with something, doesn’t mean one should do it. So when we told of perfectly reputable produce vendors being treated rudely, with unreturned phone calls from the U.K. and an unwillingness to disclose the name of produce personnel here in the U.S., we weren’t reporting any crimes — but we were questioning why.

Sure Tesco could take the position that it has its vendors and doesn’t care about anyone else. But what is the upside to that strategy? They save some staffing cost? This is a multi-billion dollar effort to establish a base in North America.

Who knows where the next new idea will come from? One of the guys whose phone call Tesco never returned owns shopping centers on the side — a lot of them. He called about his produce business but, Maybe, if they were in communication, he would offer them a good location — or a few of them.

There is no question that other, larger, players were offered the deal that Bonipak has and turned it down. Which just means that it is more of an opportunity for Bonipak. It gives them a chance to be a strategic partner with one of the largest retailers in the world. They are smart people and are hoping to ride on the wings of this expansion. More power to them.

We are sure many of the individuals who work for Tesco both in the U.K. and the U.S. are perfectly good people. But for all the talk of deep research they did on the American consumer, there are behavioral patterns that indicate they did not do comparable research on the trade.

Because they are alienating good people for no reason. That is not nice, and it is not good business.

What should they do? Well, PMA is coming up… why don’t they call PMA, ask to rent some spare rooms in the convention center and explain that they will offer a 5-minute appointment — gratis — to any PMA or United Fresh member who wants to meet with someone from Tesco.

They can bring some people from the U.K. to add staff for the three days of the exhibition. It would make the industry feel better, support the industry trade associations and be good for Tesco to let in some new ideas and meet some new people.




Kroger And Tesco Approach Store Acquisitions Differently

Jim Prevor’s Perishable Pundit, June 22, 2007

A&P had put up for sale all of its 66 Farmer Jack stores in Michigan. Now Kroger is buying 20 of the best locations all over southeast Michigan, including prime locations in places such as Bloomfield Township, Dearborn and Troy. A Wisconsin consultant got to the point:

“I figured Kroger’s would pick all the cherries,” said David J. Livingston, managing partner of DJL Research, a supermarket consultant in Pewaukee, Wis. “That’s what happens when you have a lot of money. You end up getting the best stores.”

The disposition of the remaining 46 stores, most in metro Detroit, is uncertain. Hiller’s, Hollywood, Spartan Stores and various independent grocers have all been mentioned as possible buyers. Many of the stores are likely to be shuttered or converted to non-food uses.

As part of its plan to open in America, Tesco came to San Diego and announced its plans to open seven stores in and around the city. These are the locations:

Fresh & Easy Market locations — San Diego

  • Campo Rd. and Kenwood Dr., Casa de Oro
  • Catalina Blvd. and Canon St., Point Loma
  • East Vista Way and Vale Terrace Dr., Vista
  • East H St. and Tierra Del Rey, Chula Vista
  • Lake Murray Blvd. and Navajo Rd., San Carlos
  • Main Ave. and Ammunition Rd., Fallbrook
  • Valley Parkway and Ash St., Escondido

Tesco executives also elaborated on the concept:

Tim Mason, CEO of Fresh & Easy, said the company has extensively researched the American market and found that consumers go to a variety of different stores to get their groceries and are now clamoring for a one-stop shop.

Because different stores cater to different needs, consumers go to one store to find the lowest prices and other places to get better produce and meat and still other places to find specialty items, said Simon Uwins, chief marketing officer for Fresh & Easy.

“To bring that back together is what we are trying to do,” he said.

However some are skeptical:

Whether Fresh & Easy will deliver that experience is another question, said David Livingston, a supermarket consultant based in Wisconsin.

“It sounds a little far-fetched to me,” he said. “How can they be small stores that offer high quality and low costs. Somewhere in there something doesn’t fit.”

It is hard enough indeed to operate a small store with high quality and low costs. To make the quality and value proposition so great that consumers will change habits and stop the practice of going “to one store to find the lowest prices and other places to get better produce and meat and still other places to find specialty items…” seems very difficult to pull off.

Kroger’s acquisition and Tesco’s announcement illustrate a profound difference between the companies.

The obvious one is that Kroger declined to take over the inner city stores of Farmer Jack, while many of the Tesco locations are in very marginal neighborhoods. And this seems to be part of the plan:

Mason stressed that Fresh & Easy markets would be located in various types of neighborhoods, from affluent areas to places that have often been underserved by traditional supermarkets.

Well, aside from Pathmark, not many substantial chains have wanted to open in these marginal neighborhoods, so it is good that Tesco will try. They will have the advantage of lessened competition, but our experience is that urban markets are tough for large chains.

It is not that the business isn’t there; it is that it is difficult to operate within the law. One urban operator we know, for example, found he got robbed blind every time he ran a night shift to clean and stock the store. The solution? The night crew is locked in the store and the night manager is given instructions to immediately break the glass if there is a fire or other calamity. It has worked like a charm — but is against every law and fire code, and Tesco could never do it.

Another urban store we know brings shoplifters down to the basement to extract some “rough justice” all of their own. Many pay homage to mob-run garbage pick-up services. There is some question if Tesco has a real plan to operate in these kinds of environments.

We’ve been writing in this space for months that despite Tesco’s vaunted consumer research, this was a concept driven by real estate realities and now Tesco is pointing that out as well:

Mason said Fresh & Easy’s smaller store size was dictated not only by consumers’ preferences but also by the realities of the real estate market.

In San Diego, for instance, only one of the seven stores — the Escondido location — is being built new. All the other locations are existing structures, such as a former Albertsons store in Point Loma. “If we had turned up here in California to open up seven big-box stores, we wouldn’t be celebrating the opening of seven new stores — we’d be celebrating seven new lawsuits,” Mason said.

Real estate-driven retail strategies often fail. First there is usually a good reason all this real estate is available — it is mostly subpar. Second, if by some miracle you find a strategy that can utilize it, competitors can quickly compete because of the easy availability of this type of location

Finally, people in a mad dash to add stores often take lots of poor locations. Boston Market failed, in no small sense, because it was so hell bent on growth; it took marginal locations just to expand.

Too many of the locations smell of a desperate attempt to build critical mass and thus utilize the massive warehouse and procurement operation Tesco committed to build. One suspects they would have been better off working with Supervalu or other wholesalers as Tesco acquired excellent locations in a disciplined way over longer periods of time. Then when they reached that mass they could build distribution centers. Note that Target is just now building its first perishables distribution center and that will still be operated by Supervalu.

Contrast this mad dash for locations with the highly disciplined approach The Kroger Company took to expanding in Michigan. A&P preferred to sell all the stores as a group — Kroger had no interest. It wanted what it wanted.

As we mentioned previously, Kroger’s Chairman and CEO David Dillon also questioned the convenience of such a small store — pointing out that a store that doesn’t sell what you want is not convenient. In light of that, re-reading the quote of Fresh & Easy’s Chief Marketing Officer still startles when you realize he is talking about a store a third or fourth or fifth the size of modern supermarkets:

Because different stores cater to different needs, consumers go to one store to find the lowest prices and other places to get better produce and meat and still other places to find specialty items, said Simon Uwins, chief marketing officer for Fresh & Easy.

“To bring that back together is what we are trying to do,” he said.

Kroger, owning Ralph’s, is doubtless watching every move Tesco makes. But being the disciplined operation it is, Kroger also is not going to rush to open an unproven concept, in unproven locations. Maybe Tesco wants to make A&P an offer for those 46 other stores?




Tesco’s Price-Hike Strategy

Jim Prevor’s Perishable Pundit, September 6, 2007

In late June we ran a piece, Tesco Launches Price War In The U.K., but now there are reports coming out of the U.K. that Tesco has a new strategy:

GOING UP: THE NEW TESCO PRICE STRATEGY

Retail giant signals an end to the cost-cutting war as concern grows over the quality of cheap food.

It was the £2 chicken that finally ended the war. When ASDA slashed the price of its birds by almost a quarter last month and began selling poultry for less than a tin of cat food, the supermarket dared its most bitter rival to match the price. But instead of accepting the challenge, Tesco has surprised the industry by claiming the moral high ground. In what has been hailed as an end to loss-leading cheap food, Tesco is going to put up its prices.

‘For decades, food has been a falling proportion of total consumer spending and as a business we have contributed to this by cutting prices to help people spend less,’ Sir Terry Leahy, Tesco’s chief executive, said in previously unreported comments at a company meeting. ‘That won’t change, but the long-term trend of declining spend on food has stopped.’

When ASDA slashed the price of its 1.55kg chickens by 22 per cent, the market was both appalled and attracted, with customers clearing shelves of the birds while farmers warned that they could not produce safe, healthy chickens at such low prices.

Tesco will now sell the same size bird for £3.39, a rise of 4 per cent. It is, hopes Leahy, a price increase that will draw the shoppers through the doors by reassuring them of the quality of produce and humane farming methods, combined with a fair deal for producers.

‘I believe we’re seeing a fundamental shift in the priority that consumers place on food,’ said Leahy. ‘The link between diet and health, interest in cooking, provenance — including local and fair trade — is also not only about affluent customers. The growth in the proportion of our customers buying organics is fastest among less affluent customers. This could be a big long-term positive for the industry.’

His comments represent a volte-face in the long-running and increasingly vicious price war between Britain’s two largest supermarkets. In June, Tesco and ASDA announced they were going to step up the battle to protect and preserve their market share. They were, they said, going to go head-to-head on price.

ASDA, recently named Britain’s cheapest supermarket for the 10th year running by the trade magazine The Grocer, immediately instituted price cuts worth £250 million on 10,000 items. It launched a complete school uniform for less than £10 and sparked a Harry Potter price war by selling JK Rowling’s final adventure for £5 — almost £13 less than the publisher Bloomsbury’s recommended retail price.

Tesco hit back, claiming that an independent price-checker proved it was winning on low prices. A week after ASDA’s price cuts, it followed suit, with £270 million worth of reductions on more than 3,000 products.

Tesco’s decision to pull back from this skirmish and concentrate on making a virtue of higher prices May also be the result of an announcement earlier this month by the Competition Commission that it is investigating Tesco and ASDA for threatening suppliers into granting discounts that the supermarkets could use to undercut rivals. Preliminary findings are expected this month.

But the rise in prices is, say experts, not entirely the result of altruism in Tesco’s boardroom. Soaring wheat prices will soon force all supermarkets to raise prices to cover the rise of nearly 100 per cent in livestock feed.

‘The cost of wheat has hit an all-time high owing to poor harvests and rising global demand,’ said Richard Crane of the accountants Deloitte. ‘The price of wheat is likely to prompt hikes in the cost of bread and meat. These price hikes are a global issue and cannot be absorbed by the food producers.’ Foot and mouth has also added to pressure on British meat producers, he added.

The farming industry, however, has been taken by surprise by Tesco’s announcement. It praises the supermarket for alleviating some of the pressure on farmers. ‘This price hike is the first sign that we’re finally coming to an end of cheap food. Tesco has been the first to move and that needs singing from the rooftop,’ said Charles Bourns, chairman of the National Farmers’ Union poultry board. ‘It has resisted the move towards the £2 chicken and is now going the other way. Other retailers will have to follow suit. There are people out there who will always buy £2 chickens, but we can’t go on selling chicken for less than the cost of cat and dog food,’ he added.

Tesco is refusing to say whether it will increase prices on other produce, but industry experts say that it is significant it has chosen poultry as its first shot across the bows.

Between them, the big four supermarkets sell more than 235 chicken products, from chicken chargrills and thighs to chicken pies and curries, chicken soups and breaded birds. Until now, the wide-spread popularity of the meat has encouraged supermarkets to use it as a loss leader — selling it at heavily discounted prices to lure customers into their stores.

Alex Waugh, director of the National Association of British and Irish Millers, says that it remains to be seen whether Tesco’s gamble will pay off, but he said he shares Leahy’s belief that the public is beginning to mistrust ever-decreasing food prices.

‘This is a sign that supermarkets are finally beginning to understand that persistent below-cost selling is not a sustainable practice,’ he said. ‘It is not even what customers want any more: the market for the cheapest lines has declined for bread by about half in recent years. There is a growing market for quality and fairness where price is not predominant.’

Other supermarkets are already giving hints that they are considering following Tesco’s lead. ‘We believe that consumers do need to understand that true value is always going to be a balance between quality, price, and fair prices to farmers,’ said a spokeswoman for Waitrose.

ASDA, however, is standing firm: ‘At the moment we have no plans to react,’ said a spokeswoman. ‘We’ll try to keep prices as low as possible for as long as we can, working with our suppliers to ensure that customers get the best possible deal. While the rising cost of commodities does provide both suppliers and retailers with an ongoing challenge, we owe it to our customers to try to give them the best possible price for their shop.’

It is a fascinating subject. Although some of it is surely PR, Tesco also has its finger on an insight into consumer perceptions: Price is part of what influences consumers as to the value of things.

Although some people who value organic are thoughtful people who have studied the issues and have come to a personal conclusion, many people who intentionally buy organic are in search of the “best.” And what makes something the “best”? Many attributes, of course, but price is high among them. Whole Foods is both a natural/organic store and an upscale shopping experience. If organics were always cheaper than conventional, it would reduce the allure considerably.

It is interesting to note that although reference is made to “…a price increase that will draw the shoppers through the doors by reassuring them of the quality of produce and humane farming methods, combined with a fair deal for producers…” at no point does Sir Terry Leahy, Tesco’s Chief Executive, say that Tesco’s chicken or other specific foods are superior to ASDA’s in any of these specific aspects.

It will be a fascinating thing to watch whether simply raising prices, while asserting these values, will be sufficient to make the public believe that Tesco’s perishables are worth paying more for.

It is also interesting to note farmers applauding retailers increasing the price level on their products. As far as we can see, this is because the producers have allowed retailers to brainwash them that, somehow, retailers have to make money on everything they sell.

The truth is that the very definition of a “loss leader” is a product the retailer loses money on in order to woo customers into the store and sell them more profitable things.

Perishable products happen to be the ideal loss leaders because they are the products that consumers need most frequently.

In fact, people forget, but the great fear of supermarket executives when Wal-Mart launched its supercenter concept was that Wal-Mart would run the entire food business as a loss-leader in order to draw consumers, who would then buy highly profitable general merchandise.

There are really three separate points to come out of this:

  1. Farmers need to not get caught up in retail price points. Retailers price individual items differently depending on their pricing philosophy and merchandising emphasis. Retailers have to make a profit — overall — not on every item. Retailers also have an opportunity to make up losses on one item over another; few growers have that opportunity. If a retailer wants to sell your item below cost, that is the retailer’s merchandising and marketing decision. A farmer can cooperate because he will get higher volume, but no farmer should take it as an imperative to drop his price or lose money just because a retailer wants to focus its promotion on one item.
  2. ASDA and other low price leaders need to realize that in an era when sustainability and related green and social responsibility is all the rage, low prices are sometimes viewed with suspicion. Low price promotions thus should always be partnered with copious information going to the quality, safety and sustainability of the product. In this case, ASDA better make clear that these chickens aren’t “cheaper;” they are the same or better chickens that Tesco sells, sold less expensively.
  3. The real complaint Tesco could typically make against another operator that promotes low prices on individual items is that unless a customer only buys that item, the customer will likely overpay for some other item as the retailer tries to “average up” its margins. In this particular case, that is a more difficult case to make as ASDA — as the article mentions — was just named as the cheapest grocer for the 10th year running.

Our hunch is that Tesco is making a virtue out of a necessity. It is counting on its U.K. division to perform while it proceeds to invest heavily in the U.S., and it sounds better to position a price increase as part of a commitment to sustainability than it does to whine about the need for margins.

It is, however, a technique that all discounters should expect to encounter, a vague whisper that, because the price is good, ipso facto, shortcuts must have been taken.




Tesco Expands Plans For
More Openings In California

Jim Prevor’s Perishable Pundit, September 26, 2007

Preparations are apace for Tesco’s rollout. The Pundit is on his way to the U.K. Wednesday night so will check out some Tesco stores there and see if we can discern anything that might be relevant to the U.S. launch.

Previously we gave Tesco’s initial locations in Nevada, Arizona and Los Angeles. Now Tesco gives us its locations in California’s Inland Empire:

FRESH & EASY NEIGHBORHOOD MARKET

ANNOUNCES PLANS TO OPEN 48 STORES

THROUGHOUT CALIFORNIA’S INLAND EMPIRE

Grocer Seeks to Provide Fresh, Wholesome Food at Affordable Prices

RIVERSIDE, Calif. — Tesco, one of the top three retailers in the world, announced plans for its U.S. venture, Fresh & Easy Neighborhood Market, to open grocery stores throughout California’s Inland Empire and discussed plans to offer fresh, wholesome food consumers can trust at prices they can afford.

Fresh & Easy identified 48 store locations in the Inland Empire with some sites already under consideration. At roughly 10,000 square feet, these neighborhood markets will be smaller than the typical supermarket to give customers a faster, easier shopping experience. In addition to the Inland Empire, Fresh & Easy will open stores throughout Southern California, Phoenix and Las Vegas starting in November.

Fresh & Easy will bring a significant number of jobs to the Inland Empire. The company’s Riverside distribution center is projected to employ approximately 1,500 to 2,000 employees over the next 5 years, and the 48 stores announced today will bring nearly 1,400 additional jobs to the area. The number of Fresh & Easy jobs will increase as the company continues to secure sites in Riverside and San Bernardino counties.

”The fast-growing Inland Empire is an ideal location for our neighborhood markets,” said Tim Mason, Fresh & Easy Neighborhood Market’s CEO. “Everyone wants fresh, wholesome food at affordable prices. When our stores begin opening later this year, our customers will see this is exactly what we are providing to the neighborhood.”

Before committing to build stores in the U.S., Fresh & Easy conducted extensive consumer research to develop a grocery store for American consumers. One of the key insights was almost everyone wants a wide range of fresh and wholesome food they can trust at reasonable prices. It was with that in mind that the concept for Fresh & Easy Neighborhood Market was born.

”We take the promise of providing great food our customers can trust very seriously. For us, the centerpiece of this concept is freshness,” said John Burry, Chief Commercial Officer. “In order to ensure freshness is paramount, we’ve put our distribution center in Riverside, central to the areas we are building stores, and we’re making daily deliveries to each of our stores. We also aim to source as much as possible from local suppliers. For example, about 60% of our produce comes from California and all of our chicken is raised here too.”

To underscore its commitment to bring great food customers can trust, Fresh & Easy announced it will be making its own prepared foods in a kitchen facility located in Riverside. The company has gone to great lengths to ensure all its private label Fresh & Easy products are as fresh as possible and contain no added trans-fats or artificial colors or flavors and has restricted the amount of preservatives. In addition to carrying fresh, wholesome food, the company will also offer customers’ favorite brands to provide a one-stop shopping experience.

About Fresh & Easy Neighborhood Market

Fresh & Easy Neighborhood Market is a local, neighborhood store committed to providing customers with fresh, wholesome food. Fresh & Easy will open stores in Southern California, Nevada and Arizona starting in November.

Fresh & Easy is a company of Tesco, the UK’s largest retailer and one of the world’s leading international retailers. Tesco operates over 3,200 stores across 12 countries and employing more than 400,000 people.

Tesco’s success is due in part to delivering a consistently strong customer offering on every visit and every transaction, and by focusing on the company’s core purpose: to create value for customers to earn their lifetime loyalty.

More information regarding Fresh & Easy Neighborhood Market can be found at www.freshandeasy.com.

RIVERSIDE LOCATIONS:

Beaumont

Oak Valley Blvd & Beaumont Ave

Calimesa

Calimesa & Myrtlewood

Cathedral City

Date Palm & 30th

Coachella

50th & Van Buren

Corona

Ontario & Rimpau

Hemet

Florida Ave & Lyon Ave

Indio

42nd & Jackson

La Quinta

Calle Tampico & Desert Club Dr

Fred Waring Dr & Jefferson St

Lake Elsinore

Lake & Mountain

Menifee

Newport & Menifee

Mira Loma

Archibald & Cloverdale

Hamner & Schleisman

Moreno Valley

Perris & Iris

Perris & Alessandro

Iris & Oliver

Frederick & Cottonwood

Murrieta

Margarita & Murietta Hot Springs

Newport & Murietta

Nutmeg & Jackson

Norco

River & 2nd

Palm Desert

Monterey & Hwy 111

Palm Springs

Sunrise & Tahquitz

Pedley

Limonite & Clay

Riverside

Van Buren Blvd & Colorado Ave

Trautwein & Bountiful

Arlington & Madison

San Jacinto

Esplanade Ave & Sanderson Ave

Temecula

Margarita & Deportola

Rancho California & Cosmic

SAN BERNARDINO LOCATIONS:

Apple Valley

Apple Valley & Yucca Loma

Chino Hills

Chino & Eucalyptus

Soquel Canyon & Hwy 71

Fontana

Baseline & Citrus

Grand Terrace

Barton & Mt Vernon

Hesperia

Main & Topaz

Loma Linda

Mountain View & Redlands

Ontario

Haven & 4th

Euclid & Philadelphia

Rancho Cucamonga

Haven & Town Center — Rancho Cucamonga

Rialto

210 Fwy & Riverside

Foothill & Cedar

Foothill & Pepper

San Bernardino

Highland & Del Rosa

Upland

8th Street & Mountain Avenue

Foothill & San Antonio

Yucaipa

Oak Glen & Yucaipa

Victorville

El Evado Rd & Palmdale Rd (Hwy 18)

The amazing thing with the Fresh & Easy Neighborhood Market locations is there is quite a bit of economic and ethnic diversity in where they intend to serve. It is neither an upscale nor a downscale concept — if it succeeds on these terms, Tesco will need over 15,000 stores to cover America.

You have to give them credit for thinking big.




Is Publix’s Ownership In Crispers A Future Strategy Against Tesco?

Jim Prevor’s Perishable Pundit, October 9, 2007

As Tesco prepares for its US rollout and is expected to rely heavily on a prepared foods offering, one of the obstacles it will encounter is that Americans tend to get much of their take-out at restaurants. Restaurants have better food, more convenient, often offering delivery or curbside pickup service.

Publix has been showing off its strategy for fighting Whole Foods with its GreenWise concept. Yet it May also have a strategy for dealing with the prepared food offer should Tesco’s Fresh & Easy Neighborhood Market come east:

PUBLIX SEEKS NEW LOCATIONS FOR ITS RESTAURANT CHAIN

South Florida grocery dominator Publix Super Markets is quietly running a restaurant business.

The Lakeland-based company is the owner of Crispers restaurants, a quick-casual chain that offers a variety of salads, sandwiches and soups at its 43 locations in Florida.

Publix bought an interest in Crispers in 2002 and increased its initial investment in 2005 to become a majority owner. This year, the company bought the privately held restaurant chain outright for an undisclosed amount and is planning to develop new locations in Florida, some of them alongside Publix grocery stores. In South Florida, there are Crispers in Coconut Creek, Davie, Royal Palm Beach and West Palm Beach.

Consumers today are buying almost half of their food at restaurants and takeout establishments, according to the Washington, D.C.-based Food Marketing Institute, which represents about 1,500 food retailers and wholesalers in the United States and around the world.

Increasingly, supermarkets are crossing the food industry’s competitive lines and joining the restaurant ranks to win back customers and capture a higher-margin business, said Darren Tristano, an analyst for Technomic, a Chicago-based food research firm. Each Crispers restaurant averages about $1.1 million in annual sales, according to the firm’s 2006 research.

”There isn’t a huge difference between what a supermarket does and what a restaurant does,” Tristano said. Both channels are trying to meet the growing demands of busy consumers who prefer tasty, ready-made meals to go, whether from the gourmet prepared foods section of the supermarket or a restaurant that offers carryout services, he said.

Heidi Chibnick, 29, of Sunrise, doesn’t have much time to cook. She and her husband work full-time and have two children, ages 4 and 18 months.

“We go out to eat often,” Chibnick said, while grabbing a quick Crispers lunch in Davie on Wednesday. “Sometimes you can eat out and it’s cheaper than cooking, if you have a coupon or something. To me, it’s a no-brainer.”

The ongoing battle for consumer dollars is what prompted Publix to expand the prepared food offerings in its grocery stores and to invest in Crispers restaurants, which are operated independently of the supermarket chain, said David Haas, spokesman for Crispers.

The company found ways to leverage the synergies between both brands, Haas said. For example, there are Crispers menu options available in the deli departments of several Publix grocery stores and some of the supermarkets issue coupons for a free dessert at Crispers or a meal discount. And the restaurant chain is able to capitalize on Publix’s buying power and distribution channels.

Crispers describes its most distinctive offering as the gourmet salad, or spring mix greens prepared with vegetables, fruits and meats. The restaurant carries its fresh, healthy approach over to its “stacked” sandwiches and wraps, which are made to order with a choice of signature dressings.

Food industry experts compare the Crispers chain to Panera Bread Co., and say its ability to generate significant sales for Publix depends on expansion outside of Florida.

But the company doesn’t want to bite off more than it can chew.

”Right now, we’re at a point where we’re digesting our growth,” Haas said, noting the company will selectively expand in Florida before it considers going out of state.

Although there is some cross-marketing between the restaurant and the stores, and there are some logistics and procurement efficiencies and even a few cross-merchandising opportunities whereby some of the restaurant’s items are for sale in the stores — for the most part, one is a restaurant and one is a supermarket. Maybe Publix knows something Tesco does not?




Tesco Marks November Eighth As Launch Date For Six Stores

Jim Prevor’s Perishable Pundit, October 20, 2007

The countdown begins::

FRESH & EASY NEIGHBORHOOD MARKET
ANNOUNCES DATE FOR FIRST STORE OPENINGS

Grocer set to open first six stores in Southern California

EL SEGUNDO, Calif. — Tesco, one of the top three retailers in the world, announced the grand opening date for its U.S. venture, Fresh & Easy Neighborhood Market. Six grocery stores in Los Angeles, Orange, Riverside and San Bernardino counties are scheduled to open on Thursday, November 8, 2007.

The store openings mark a major milestone for the company, which has spent years researching and planning the Fresh & Easy Neighborhood Market format. This innovative format is the result of extensive customer research in local U.S. markets where Fresh & Easy researchers spent time in the homes of consumers looking at shopping and cooking patterns.

“After great anticipation, we are thrilled to open our doors to neighborhoods in Southern California and offer them fresh, wholesome food at affordable prices,” said Tim Mason, Fresh & Easy’s CEO. “We are also excited to demonstrate our strong commitment to being a good neighbor and a great place to work.”

At roughly 10,000 square feet, these neighborhood markets will be smaller than the typical supermarket to give customers a faster, easier shopping experience. In addition to offering a range of Fresh & Easy private label and national brand name products at low prices, Fresh & Easy will also offer customers a selection of fresh, prepared meals..

Fresh & Easy has gone to great lengths to ensure all its private label products contain no added trans fats, artificial colors or flavors, and have limited amounts of preservatives. Deliveries will be made daily to each store to ensure all products are as fresh as possible.

Each Fresh & Easy store will employ approximately 20 to 30 people. The company interviews on-site at each store location, aiming to hire from the local neighborhood. Fresh & Easy intends all store employees will work 20 hours a week or more, and be eligible for comprehensive health care and other benefits. Entry-level positions will pay well over the minimum wage, starting at $10 an hour in California, and offer a potential bonus of up to 10% on top.

As part of the company’s promise to be a good neighbor and steward of the environment, Fresh & Easy has committed to build LEED (Leadership in Energy and Environmental Design) certified buildings, recycle or reuse all shipping and display materials and use environmentally friendly trailers to transport food. The company also invested in California’s largest solar roof installation on its distribution center in Riverside.

In addition to these six locations, Fresh & Easy will also open stores in San Diego, Phoenix and Las Vegas by the end of the year.

Note the focus on “social responsibility” — healthy private label products, giving jobs to many people, making benefits, including health insurance, available, wages over the minimum wage, LEED-certified buildings, recycled shipping and display materials, environmentally friendly transport and solar power.

Some of this May backfire when, for example, word gets out on what percentage of a 20-hour-per-week employee’s wages would be used to purchase that “comprehensive health insurance.” Critics will start following the logic of the arguments and ask, “Why doesn’t Tesco provide full-time employment instead of 20 hours a week and, if Tesco can start at $10, surely it could start at $12 per hour.”

The Pundit just came back from doing focus groups in both the UK and the US on Social Responsibility, and the impact of the criticism will depend heavily on two things: The level of income of the customer and the degree to which the store experience is satisfactory to begin with.

If you are attending PMA, stop by our workshop on Friday at 2:45 PM, What Do Consumers Really Think About Corporate Social Responsibility?We’ll be discussing what social responsibility means and how it influences purchasing on both the trade and consumer level.




Tesco’s Biggest Challenge: Prepared Foods

Jim Prevor’s Perishable Pundit, October 10, 2007

Tesco has a big disadvantage as it enters the U.S. market: Its executives speak English.

That May sound counter-intuitive but have no doubt — it is good to have a customer just like yourself, it is OK to understand that your customer is totally different than you, but the worst possible situation is to think you are similar to your customer, yet your customer turns out to be very different.

Intellectually, top Tesco executives know this. That is why they have made a point of how much consumer research they have done in America, including sending executives to live in the homes of Americans with American families.

Yet the similarities in culture and language are such that many a Tesco executive is likely to have made, and to still make, decisions based on his gut, a problem no where near as likely in, say, Thailand. Thailand is where Tesco operates its Lotus stores, and its success there is often pointed to as evidence that Tesco knows how to adapt to local markets.

If the concept is at all like what we’ve been led to believe, much will depend on how the prepared foods section goes over.

Prepared foods have a history of failing in America. General Foods tried Culinova, Kraft had Chillery, Nestle freshNes and a hundred more.

Some upscale retailers, such as Wegmans, Whole Foods or HEB’s Central Market, do a great job with prepared foods but they have a particular clientele and a particular price point.

Most prepared foods operations fail for a simple reason: Sales are too slow to support the production and frequent delivery of a diverse range of prepared foods offerings.

The choice then becomes continuing to offer a broad range and having unacceptable shrink or cutting the range, which makes the whole offer less appealing and tends to decrease sales while the distribution cost is close to fixed.

There are successful prepared foods retail programs in every major city, but these serve mostly apartment-dwellers who have small homes and high disposable income. So they shop frequently and will pay a premium for fresh, convenient food.

In most of the country, suburban dwellers have ample homes and like to stock up, which enables them to not have to shop so much — which is another definition of convenient. So they are often dissatisfied with fresh prepared food offerings because they don’t want to buy just for tonight. They May pick up four or five meals, then plans change and they get invited to barbeques, a friend from out of town flies in, they get called on a business trip, etc. — by the time they go to eat it, the food looks a little uncertain or is past its code date.

And increasing the shelf life turns out to be counter-productive. Nobody wants fresh food that has a 28-day shelf life. The lengthy code date means they won’t buy it to begin with.

So the big competitor winds up being frozen meals. In fact, typically the fresh meals tend to look frozen. The best sellers are typically hard-to-cook dishes with sauces — by the way, these also typically have the shortest shelf life and require most frequent delivery — and if they leave a clear top on the food, the sauce rolls around in transport and in store and it looks unappetizing. So they usually put a sleeve on it that makes it look very much like a frozen dinner.

These, of course, can be put away and are available even if you don’t eat them for a week or two or three months.

Thus Tesco’s success with its Fresh & Easy Neighborhood Market concept May well depend on the concept’s ability to get Americans to dramatically increase the frequency of food shopping. This May seem very easy to UK-based executives that sell loads of prepared foods in the UK every day.

There was a time, though, when Marks & Spencer was the premiere prepared foods retailer in the U.K. When the company bought Kings in New Jersey and tried to introduce its prepared food concepts to the U.S., the effort failed miserably.

Now Tesco, of course, can learn from the M&S experience — but have they?




Tesco Intelligence From Pessimistic Vendors And Anxious Competitors

Jim Prevor’s Perishable Pundit, October 19, 2007

At PMA, we were pulled aside by many Tesco vendors and competitors to exchange intelligence.

There seems to be less optimism on the success of Tesco in the United States than six months ago. Basic issues:

  • Arrogance
    There is a notion that Tesco has just stopped listening.
  • Unrealistic
    Tesco is demanding certain product sizes and standards of uniformity that simply cannot be obtained without enormous waste of product. Whether Tesco realizes it or not, insisting on these standards will involve paying for a lot of product its customers won’t get value from.
  • Restrictive Contracts
    The contract with Wild Rocket Foods seems to restrict Tesco from utilizing its vendors’ capabilities to reduce logistics and distribution costs.
  • Margin Evaporation
    Efforts to come in below discounters such as Trader Joe’s on price make no sense in the context of the cost structure Tesco has built.
  • Scale
    The facilities that have been built are so out of scale to the initial store count that Tesco will bleed red for years.
  • Too Many Test Sites
    Many of the stores are located in areas where they can’t possibly succeed. Tesco justifies this as a form of “market research,” but vendors doubt the budget has been set up that way.

Ironically, the biggest problem for Tesco May come if they have an instant success. We also saw sketches or heard descriptions from several retailers of their “Tesco Killers” — although “Tesco Blockers” are more accurate.

Many competitors in the areas where Tesco intends to operate have already spiffed up stores near Tesco locations. But retailers across the country are looking at small format stores. If Tesco hits a win, count on a roll-out all across the country of small format stores by retailers with the distribution already set.

When Wal-Mart rolled out its supercenters across America, supermarkets didn’t feel they could roll out comparable concepts. They didn’t have the expertise or distribution in general merchandise. But the Tesco concept is only a sub-set of what supermarkets already sell with perhaps an augmented prepared foods offer.

Kroger, Safeway, Supervalu, Ahold, Delhaize, Publix, H.E. Butt and more are not going to wait for Tesco to decide it is ready to roll into Cincinnati or Boston.

So many vendors are pessimistic about the chance for success, and many competitors are prepared to pounce if it works. It is hard to imagine the concept being worthy of the build up.




Tesco, Disney and Dunnhumby

Jim Prevor’s Perishable Pundit, October 24, 2007

It was over a year ago that Tesco signed a deal with the Walt Disney Company to license Disney Characters for use on fresh fruit. Now, without reference to that deal, the headline is that Tesco and Disney Partner on Branded Foods:

Tesco, Britain’s biggest retail supermarket, and Disney are merging to launch and increase production of a range of co-branded food products.

The two are set to start with the production of fresh fruits and later expand to include a variety of products ranging from yogurt to breakfast cereals, milk and bakery goods.

”Production of the first items, the fruits and fruit products, is set to go on sale early next month,” said Tesco’s director of chilled foods, Kari Daniels. He added that Tesco is determined to help its customers make healthier choices for their family and that the company’s relationship with Disney will offer parents an easy way to make healthier eating fun.

”The merger between Tesco and Disney has marked an important milestone for Disney’s growing UK food business, and Disney consumer products is committed to giving parents food choices they can approve of while at the same time exciting their kids,” said Dan Dossa, director of Disney consumer products, food, health and beauty UK.

The use of the word "merger" must be a British usage because this is clearly not a merger in the legal sense. The announcement sounds like a program similar to what Disney has with Kroger in the U.S., an independent Disney tie-in that pre-exists the Imagination Farms project.

All of this is interesting because Dunnhumby, a consumer data consultancy, majority owned by Tesco, works with both Tesco — where it was instrumental in the development of the Tesco’s Clubcard, a loyalty card that many perceive as instrumental in Tesco’s success in the United Kingdom — and with Kroger.

Forty percent of American households have a Kroger banner loyalty card. The percentage is much higher in areas where Kroger has stores. And Kroger CEO Dave Dillon sings Dunnhumby’s praises:

In a conference call with analysts in September 2005, Kroger Chairman and CEO David Dillon said, “dunnhumby has helped me reset my understanding of what the customer is after, and it helps replace intuition with actual data and actual facts. And it’s those facts that are driving our decision-making.”

He added that “our commitment is to make sure that every decision we make positively influences the way our customers feel about Kroger. This emphasis on placing the ’customer first’ generated increased customer traffic and higher average transaction size.”

One suspects that someone at Dunnhumby is partial to a certain mouse named Mickey or, more accurately, the research says that a lot of consumers like the mouse.




Tesco May Face Opposition Not Only From Unions But Also Animal Rights Activists

Jim Prevor’s Perishable Pundit, October 26, 2007

Tesco has to no small extent staked its claim in the American market based on a reputational appeal. It wants to be seen as the company that always does the right thing. Thus it promotes its solar panels on the roof of the distribution center and promises to locate stores in underserved areas. It promises to provide ‘good jobs’ with health insurance and to keep its private label offerings free of transfats.

As Tesco prepares to open in the U.S.A., it can expect, of course, vigorous competition from U.S. competitors. It also can expect opposition from labor unions as Tesco is expected to fight unionization efforts.

Yet Tesco May wind up with opposition from an unexpected corner: animal rights activists and normal Americans simply horrified by practices that are acceptable in other countries.

Just this week in the United Kingdom, Care for the Wild International, handed out leaflets outside a lecture theater where Tesco’s CEO Sir Terry Leahy gave a speech. They were protesting the sales of live turtles in Tesco stores in China.

The protests are all over the web at sites such as this, which often contain gruesome videos that can make a western stomach turn.

Direct appeals have been made to the Tesco Board of Directors:

We write on behalf of our 3,500 UK members who will be shocked and sickened to learn that your Chinese operation is actively involved in inflicting some of the most extreme forms of animal cruelty imaginable. The level of suffering caused to turtles and frogs in Chinese markets is well documented. These animals are shipped and handled with no regard to their welfare and without any attempt to minimize their suffering.

They are maintained in-store under totally unacceptable conditions, and are killed in a grossly inhumane and barbaric fashion. These animals are essentially dissected alive. They have highly developed sensory capabilities, and without question suffer the most extreme pain and distress over an extended period.

It is frankly revolting that any UK company should be promoting this kind of thing.

Should such actions be repeated in the UK it would be a serious criminal offence for which you would undoubtedly be prosecuted. We can only presume that because you are committing these offences in China, you believe that it will escape the notice of your UK customers. We are determined to ensure that this is not the case. We are writing to all of our members to inform them of your direct involvement in this vile trade and to urge them to shop elsewhere….

Your company has sought to present a “green” image to UK consumers. You have also sought to promote a range of “ethical” and vegetarian products. Your corporate website states: “We will continue to promote high standards of animal welfare” and “We demand high standards of animal welfare”.

Your activities in China reveal these statements to be completely false. You are not promoting animal welfare; you are actively promoting the most obscene levels of cruelty. I would venture to suggest that no vegetarian or consumer who cares at all about the environment or about humane issues could with any conscience set one foot in your stores while you continue to be involved in this particularly horrific and destructive trade.

Tesco has tried to respond to these pleadings, and those responses have generally not been sufficient to satisfy the complaints.

To us the whole matter demonstrates the problematic nature of operating a global company. These companies will, almost inevitably, come to be seen as evil because their ethics, inevitably, will be situational.

In China, people seem to enjoy eating turtle. They like to see the live turtles and then have them decapitated. In the U.S. or the U.K., you could probably go to jail for violating cruelty to animal laws if you did the same thing.

So, Tesco or any other multinational is faced with a choice: Remain true to one’s homeland values, which means that one will be somewhat irrelevant in some markets, or adopt the views of every local market, which means the company doesn’t have values at all.

It is interesting to note that Wal-Mart, with its own Chinese operation, seems to have mostly avoided the controversy. It has been attacked for similar reasons but, perhaps because the animal rights movement is so strong in the UK, it doesn’t seem to have reached the same fevered pitch.

Still, between the unions and the animal rights activists, there are plenty of forces conspiring to attack the virtuous reputation that Tesco has attempted to build for its Fresh & Easy format.

We suspect the stores will be quite fresh, but we doubt this rollout will be particularly easy.




Will Meijer Be In Tesco’s Sights If It Succeeds With Fresh & Easy Format?

Jim Prevor’s Perishable Pundit, November 2, 2007

As Tesco prepares to enter the US market, if it finds some success, a logical question to ask is: “What will Tesco do next?”Well, without a doubt, Tesco will continue to expand its small footprint concept. We know it has already signed several leases in the San Francisco Bay area and needs to build many more stores within range of its distribution center to efficiently utilize its enormous size.

We also suspect it will have to open many new stores because we think it will likely close some. Anyone who opens this many stores this quickly is not waiting around for primo real estate, so it has taken some marginal sites. Some won’t make it.

It also has taken a diverse set of sites in various ethnic and demographic areas and will learn that its concept won’t work with some of these areas.

Still if it has success, Tesco will certainly try to roll out its Fresh & Easy Neighborhood Market concept as fast as it can.

But it will find itself blocked as other supermarkets roll out their own versions of Tesco’s stores.

Tesco, though, is big, with enormous ambition and, in other markets it typically operates a range of concepts. We suspect if it has the slightest success it will want to quickly move into other concepts.

Most especially, it will want to compete with its arch-rival Wal-Mart in the supercenter arena. Yet because of the difficulty of getting zoning approval to open these stores, it will want to do an acquisition and, in the supercenter business, the only independent option left is Meijer.

So we will issue a Pundit prediction that Tesco will offer to acquire Meijer.

There have been discussions of this in years past. Especially when Meijer’s one-time President Larry Zigerelli resigned suddenly.

This time, however, things May be different. On Tesco’s side, its move to America is now a certainty, not an aspiration. It May make them willing to pay up for this opportunity.

On the Meijer side, the company has felt the increased burden of competing with Wal-Mart and realizes that every penny made will now be paid for with very hard work. Without outside capital, this family-owned business — Forbes ranked it as #10 in America in 2006 — will have difficulty expanding. They May see this as an opportunity to cash out while also being the best thing for the business.

Of course, others May also have interest in Meijer. Kroger owns the Northwest-based supercenter chain, Fred Meyer. If Kroger acquired Meijer, it could have a supercenter concept strong in both the Northwest and Midwest and be in a real position to roll out a more competitive threat to Wal-Mart.

But the Meijer family has competed against Kroger and not against Tesco. Meijer is an old Dutch family and the Dutch and British have been allies before. Maybe one more time.




With Its Stance On Trans Fats, Tesco May Be Hip But Not Healthy

Jim Prevor’s Perishable Pundit, November 7, 2007

One of Tesco’s oft-repeated claims is that its private label products will be made without trans fat. This sounds like a good thing. The very word ”fat” strikes most people as a bad thing, and there have been studies indicating that trans fat — which is just what you get when you add hydrogen to vegetable oil — does raise the “bad” cholesterol while suppressing the “good” cholesterol.

Of course, this alone tells us nothing — whether getting rid of trans fat is a good thing depends entirely on two things:

What will trans fat be replaced with?

How will consumers react to trans-fat-free items?

A piece in the “Health Journal” column of The Wall Street Journal explains that health experts have concerns:

Food companies are scrambling to replace trans fat in everything from french fries to cookies, but health experts worry that what’s good for the nation’s heart might be bad for its waistline….

….what’s going in food instead of trans fat? Some food makers are going back to ingredients high in cholesterol-raising saturated fat, such as palm oil, palm kernel oil and coconut oil. In Kellogg’s Eggo blueberry waffles, for example, trans fats have been replaced with palm oil and palm kernel oil, while Oreos now contain “palm oil and/or canola oil.”

….Other products are achieving trans-fat-free status through interesterification, a process in which fatty acids are redistributed on a fat molecule to make liquid fats behave more like solid fats. Products made with interesterified fat include Promise Buttery Spread and Enova cooking oil. Unilever, the maker of Promise, conducted its own study 10 years ago that found no adverse effects from food made with interesterified fat, says Doug Balentine, Unilever’s director of nutrition sciences for the Americas.

But other nutrition experts say not enough is known about the safety of interesterified fat. There was little interest in researching the ingredient until the recent push for trans-fat alternatives. David Baer, a research physiologist at the U.S. Department of Agriculture’s Beltsville Human Nutrition Research Center, says his own research has studied only blended fats, and offers no insights on interesterified fats specifically. “We’re interested in trying to figure out the health effects,” he says. “The nutrition community is puzzled by what might be the most healthful alternative to trans fat.”

K.C. Hayes, director of the Foster Biomedical Research Lab at Brandeis University, says that while the ingredient is in relatively few products now, its use May grow before the health-care community fully understands its impact. Dr. Hayes, who conducted a small study funded by the palm-oil industry that did find negative health effects from interesterified fats, says, “The point is, we should know more before we go off trans fat and onto something else.”

…The biggest danger of the trans-fat swap-out could be that consumers will eat more junk food because they think it’s healthier. For one thing, zero doesn’t necessarily mean zero. Products can still have up to half a gram of trans fat and carry a “zero trans fat per serving” label. So if someone eats more than a serving of cookies, they could still be consuming a few grams of trans fat.

The irony here is that very few of these products contained trans fat in their original formulations. It wasn’t until the same groups that are agitating for its removal from products and pushed successfully for a federal labeling requirement previously pushed to eliminate saturated fats.

We also think the last point of the article — that people tend to eat more of things they are told are “healthy” is very telling — many a consumer is going to think trans- fat-free means fat-free or calorie-free and is likely to over indulge. Perhaps an extra inch on the waistline is worse that some trans fat?

Tesco is certainly showing itself to be hip. It will be many years before we know if it actually is healthy.




Tesco Teases With Video Of New Store

Here is a little one-minute video that Tesco released to get some buzz going among consumers before the launch of its Fresh & Easy Neighborhood Market concept. Difficult to say much definitively from a little clip, but these things stand out:

  • Products they choose to emphasize in the video, such as Gelato and Atlantic Salmon, seem decidedly upscale — too upscale for many of the locations.
  • The prepared foods offerings look very similar to what you see in the U.K. with similar packaging.
  • An awful lot of the produce looks covered in plastic — uncertain how this will go over. Not the typical presentation Americans are used to.
  • A lot of emphasis on how great they are — good neighbor — great place to work — no trans fat, etc. — Pundit’s Mom taught him you can break your arm patting yourself on the back. If they really are a great place to work, word will get around really fast — if not, all the signs in the world won’t help.
  • Biggest problem — store doesn’t look fresh. Too much stuff behind glass doors, too many grocery items, too much stuff in plastic wrap or trays. Décor lacks the visual cues that mean warmth and freshness to Americans — wood floors, cascading waterfall displays into bushel baskets. It comes across like an overgrow gas station mini-mart.

Here is the video.




Confirmation Of Tesco In SFO

Jim Prevor’s Perishable Pundit, November 7, 2007

We received many inquiries when we disclosed that Tesco has been signing leases outside of Nevada, Arizona and southern California, as we wrote:

We know it has already signed several leases in the San Francisco Bay area and needs to build many more stores within range of its distribution center to efficiently utilize its enormous size.

Although Tesco still isn’t talking, things are now starting to leak out in the local press. For example, the Danville Times, a local Bay area paper, confirms that Fresh & Easy is coming to the Bay area:

Floating rumors about a new grocery store and anchor tenant in Green Valley Center — where the old Albertsons once stood on Diablo road by the freeway — are now confirmed.

Owners of the property have signed a lease that could have the United Kingdom-based Fresh and Easy Neighborhood Market up and running by summer 2008.

This is a direct assault on Safeway’s homeland. If the Southern California launch goes well, how many weeks can it be before Safeway unveils a small store format?

You can read the whole story here.




Tesco Finally Opens Doors… British Press And Protesters Unimpressed

Jim Prevor’s Perishable Pundit, November 9, 2007

The build up to the Tesco opening in America is now over. The Times of London’s Los Angeles correspondent hasn’t exactly been enthusiastic. In fact, he titled his column Tesco in the US? It’ll never work:

…Now, to me, the idea of the British selling ready-meals to Californians makes as much sense as the Iranians selling Second World War text books to the Israelis. There’s a culture problem. A big one. I get the feeling that Sir Terry already knows this: nothing else could explain the almost military secrecy that has surrounded the Fresh & Easy project since its inception. You would think they were developing a tactical nuclear weapon, not a selection of microwavable dinners.

You can’t fault Tesco for not doing its homework…

Which makes Fresh & Easy’s debut “dinner made easy” promotion all the more inexplicable. This is what they are offering: “A 25oz beef lasagna, Caesar salad, ciabatta loaf, and bottle of wine, all for under $12.” Yes, Sir Terry is trying to sell the residents of the most diet-fixated, calorie-paranoid, carbohydrate-obsessed city on Earth a combination of red meat, pasta, bread, cheese and booze. A round of applause, please, for the Fresh & Easy marketing department. Incidentally, if someone offered you a beef lasagna and bread at an LA dinner party, you’d sue them. A three-cheese lentil and tofu lasagna you might get away with — but you’d still be unpopular.

The bigger problem here is that ready meals just don’t appeal to Californians — as much as Britons cannot understand it. You can see why by visiting a Gelson’s, a Whole Foods or a Bristol Farms. These LA superluxurymarkets hire their own chefs to prepare gourmet food daily and sell it piled high at deli counters so it looks like a king’s feast. Even boxed sushi is prepared in-house, by a resident sushi chef. Of course, Tesco hopes there’s a middle ground — a refrigerated, prepackaged niche somewhere above Wal-Mart and below Whole Foods. But I’m not at all convinced….

We are not convinced either. In the column, Tesco’s Prepared Foods Challenge that the Pundit wrote in Pundit sister publication, DELI BUSINESS, we pointed out that this product line is 1) Not in line with the way Americans shop, 2) Likely to produce high shrink levels, and 3) Very expensive to deliver.

Regardless of the suitability of the concept, Tesco had its troubles at the opening. Although its stores have generally been busy, it is hard to know who is a journalist, who is a competitor, who is a supplier, who is a tourist… and who is actually a customer. Britain’s The Independent reported on protesters:

…the company’s plans for a joyous celebration of spicy blue tortilla crackers and organic crunchy peanut butter were also marred by the — metaphorical — stench of a few rotten eggs.

Shoppers who lined up for more than an hour to be among the first to patronize Tesco’s new mid-sized Fresh & Easy stores — 200 of which will spring up across California and the American Southwest over the next few months — were greeted by a giant banner on Eagle Rock Boulevard reading: “Shame on Fresh & Easy!”

On their way in, they were handed leaflets by a group called the Alliance for Healthy and Responsible Grocery Stores — a coalition of community activists, church leaders and union organizers who do not trust Tesco’s promises of a living wage for its workers, of plentiful health and other benefits, of environmental sensitivity and a commitment to serve poor neighborhoods with little or no access to fresh, high quality food.

As the ribbon was cut at exactly 10am, and shoppers filed in with a very British sense of orderly queuing, many of them read a flyer detailing the alliance’s demands for a community benefits agreement making Tesco’s promises both real and explicit.

… The 30-40 activists leafleting outside are not to be underestimated, however. The alliance was responsible for keeping Wal-Mart, the world’s largest retailer, out of an inner-city neighborhood and now wants Tesco to put its money where its mouth is when it says it will serve the most blighted parts of the city like South LA.

“We’re not trying to boycott,” the Alliance’s spokesman, Greg Good, said. “But the world’s third largest retailer has at least a moral obligation to sit down with the local community. To say people shouldn’t worry and just trust them is a lot to ask.”

Part of the problem is that Tesco raised expectations so high. Promising, for example, to serve underserved neighborhoods — this promise as well as others to provide “good jobs” and “health insurance” — will eventually be subjected to verification and it will be shocking if the various advocacy groups are satisfied with Tesco’s behavior. The Independent continues:

A study by researchers at LA’s Occidental College over the summer found that of the first 98 Fresh & Easy sites announced by Tesco, just 10 were in low-income, high-poverty areas, and only one was in an area without a full-service grocery. The first six are all in relatively comfortable suburbs.

The Occidental researchers also found that Tesco intended to employ large numbers of part-time workers, raising questions about the company’s commitment to health and other benefits.

On Wednesday, about 100 alliance activists attempted to picket a company party at the Glassell Park store but were kept off the premises by security guards. A rabbi and the head of the county labor federation tried to deliver a message to the chief executive of Tesco’s US operation, Tim Mason, but were turned away. “That was disrespectful, and disappointing,” Mr. Good said.

Yesterday, they were joined by carpenters’ union members upset at the behavior of a Tesco subcontractor at a branch in Upland in the eastern LA suburbs. “Fresh & Easy has an obligation to the community to see that area labor standards are met,” the carpenters’ flyer said..

Maybe all this won’t matter. Many consumers surely buy what they want where they want to buy it — regardless of protestors. But Tesco has worked hard on reputational marketing, and those who live by the sword can easily die by the sword.

One thing that will either be a big win or a big problem is Tesco’s decision to rely on UK suppliers transplanting themselves to the USA. The Financial Times called its piece, Tesco stakes US success on its British Suppliers:

As Tesco, the UK supermarket group, officially opens its first Fresh & Easy stores in southern California today, it is bringing with it a group of British companies who are gambling that its US venture will prove a success.

Fresh & Easy’s own-label Big Kahuna Australian wine, for instance, is imported by Cornerstone, a new US subsidiary of Copestick Murray, a wine company based in Wiltshire, England.

Its fresh poultry and meat is prepared locally by 2 Sisters Food Group, part of a private company based in the English Midlands that supplies leading UK and European supermarkets.

Fresh & Easy’s own-label bags of sugar snap peas, washed salad, fresh fruit and fresh juices are prepared by Wild Rocket Foods, a US subsidiary of the Langmead Group, a Sussex lettuce grower that built a UK-wide business from its relationship with Tesco.

Tesco’s decision to bring in partners, rather than work with local suppliers, underlines how much of a radical shift its operating model is from the conventional US grocery business..

Yet some of Tesco’s plans seem contradictory. The Financial Times continues:

By selling only pre-packed salads, it will also cut down on overheads by reducing the need for energy-consuming cold cabinets that are regularly used for lettuce and salads by its US rivals.

Perhaps, but how does selling “only pre-packed salads” comport with a desire to be “fresh”? Here is how the Financial Times describes Tesco’s current product operation in America:

Nature’s Way has set up a US company, Wild Rocket Foods, and is working with Betteravia Farms, a grower with farms in California and Arizona that is part of the Bonipak group and with Jacobs Farm/Del Cabo, an organic producer that imports from a cooperative in Mexico’s Baja peninsula. In March, Wild Rocket announced it was abandoning a plan to build a facility next to Tesco’s distribution centre, citing unexpectedly high water-supply costs, but said it would use a site elsewhere in Riverside County.

The initial feedback is that the stores are pretty much what was promised — a Trader Joe’s-like offering but with more standard assortment items. The décor has put off some people — too institutional and cold — not warm and fresh.

The real question is how big is this market? Even with opening specials, we are not hearing about them out-pricing Wal-Mart and Trader Joe’s. At the same time, we are not hearing of them being fresher and more beautiful than Whole Foods. So Tesco seems to be aiming for a mid-market that is popularly believed to be shrinking.

In fact the new Whole Foods in Pasadena seems to be stealing some media thunder from Tesco’s debut.

Tesco has invested hundreds of millions in this concept; many produce vendors are deeply invested as well. Now we have to wait for the hullabaloo to die down so we can see how consumers will really react to the concept.

Of course, that May not tell us how Tesco will ultimately do — since a wild success will surely elicit a strong competitive response.




Pundit’s Mailbag —
Tesco Gets Reviews From Industry Members

Jim Prevor’s Perishable Pundit, November 13, 2007

Our piece, Tesco Finally Opens Doors…British Press and Protesters Unimpressed, brought several pieces that thought well of the new Tesco Fresh & Easy concept:

I would have to disagree with you on Tesco. I lived in London for 6 years when Marks & Spencer and Tesco were just getting started in the “Ready Meals”; they were terrific.

And Americans talk a good story about calories and diet, but LOVE a good serving of Lasagna!

— George Urda
Cal-Mark Beverage Inc.
Novato California

Cal-Mark does private label beverages and so would have special interest in a concept such as Fresh & Easy, which is heavy to private label. In fact, one suspects that if Tesco is successful in building equity in the Fresh & Easy brand, it will try to go as close to 100% private label as possible.

Brands give producers control over retailers. If they can do it, retailers prefer to have control over producers.

The Pundit loves a good serving of lasagna as well and suspects that the particular comment about the lentil and tofu lasagna referenced in the Los Angeles correspondent’s report for The Times of London speaks to a particular demographic. In any case, as long as they eat, that is as easy problem to solve as Fresh & Easy would sell tofu lasagnas if that is where the demand is.

The US, however, has a different way of eating. On the one hand, our larger homes and freezers allow for easy “stock ups” on frozen foods. On the other hand, our vibrant restaurant culture encourages take-out.

So in many a household, you might find a “Lean Cuisine” lasagna in the freezer as a contingency. On a good week, you might find pieces of lasagna that were made using Grandma’s secret recipe and cut into pieces and frozen for future use or the family might pick up Italian food, including lasagna, from their local Italian place.

Perhaps if they are in a Whole Foods or Publix’s new GreenWise, a Central Market or a Fresh Market — they all have beautiful displays of fresh food — the family might be enticed to buy some.

This doesn’t mean that Fresh & Easy won’t sell plenty of prepared foods. The issue is that most of the items in the store do not require daily delivery. So if they properly charge the transportation costs of more frequent delivery to the products necessitating that delivery, it will be hard to sell enough to cover the cost.

How big a market there is for this type of fresh prepared food is unclear. The Los Angeles correspondent for The Times of London put it this way:

The bigger problem here is that ready meals just don’t appeal to Californians — as much as Britons cannot understand it. You can see why by visiting a Gelson’s, a Whole Foods or a Bristol Farms. These LA superluxurymarkets hire their own chefs to prepare gourmet food daily and sell it piled high at deli counters so it looks like a king’s feast. Even boxed sushi is prepared in-house, by a resident sushi chef. Of course, Tesco hopes there’s a middle ground — a refrigerated, prepackaged niche somewhere above Wal-Mart and below Whole Foods. But I’m not at all convinced….

Put another way, the affluent in America don’t want their food pre-packaged in trays, and the paycheck-to-paycheck demographic doesn’t buy many fresh prepared foods — and, of course, every other article one reads is about the “shrinking middle class” — so who will be the customer?

It is also worth noting that this has been tried before. When Marks & Spencer took over Kings in New Jersey, the company tried a range of ready meals that flopped. Now it is true that the technology is better today, the store concept is different, and we are on the West Coast, not the East Coast. So it might work out better — but it clearly is an unknown.

Yes, they are very popular in the U.K., but that information does not give us a definitive answer as to how Americans will like the products. Time will tell.

We also received a letter from an executive on the packaging and logistics side of the business:

The US grocery industry is no doubt the best in the world, but I observed the new Fresh & Easy stores first hand this past week and, in my opinion, Tesco delivered what they promised to the American consumer.

1) Fresh Food

2) Convenient

3) Great Produce

4) Excellent looking meat

5) Great valued wine

6) Bright innovative stores

7) Completely Green, reusable packaging on all perishable items not just produce.

8) Easy to shop

I have read your articles. They appear not to be fact-based. Hopefully you will visit a Fresh & Easy and see if you agree.

— James A Vangelos
CEO
Polymer Logistics US Inc
Arroyo Grande, California

Since the Pundit goes back a long way with our writer’s father, Al Vangelos, who we worked with closely when he was Chairman of United and the CEO of Calavo, we’ll cut him some slack on that “not to be fact based” comment — since, of course, agree or disagree, the “fact” of the matter is we were quoting an important reference.

It matters a lot to Tesco, much more than to US-based Pundit readers, that the Los Angeles correspondent for The Times of London writes a piece and it is entitled Tesco in the US? It’ll Never Work.

As far as the substance of our letter-writer’s remarks, we wouldn’t disagree that Tesco has delivered on the promises he identifies.

We wouldn’t have expected anything less. Tesco isn’t some upstart; it is the third largest retailer in the world and successfully owns and operates many concepts and stores in many countries.

We would think Tesco could handle opening six little stores that, all together, would fit inside one Wal-Mart supercenter with plenty of room to spare.

Execution May become an issue if they open thousands of stores or try to go beyond the reach of the distribution center. At this point, it is more a question of the viability of the concept.

We’ve called it a “brilliant or bankrupt” strategy because most retailers would open one or two prototypes to test the concept. Our basic business critique of Tesco’s Fresh & Easy approach is that all this secrecy has indicated a weak concept. A strong concept doesn’t need it.

Warren Buffet, whose investment in Tesco has been trumpeted as an endorsement, is famous for looking for businesses with a sustainable business advantage or deep “moat” around them. We suspect that Tesco’s large real estate holdings in the U.K. May serve as such a moat. Yet we are uncertain what Tesco’s competitive advantage will be in America.

Look at the eight-point list in the letter and ask yourself if any of this is beyond the capability of Kroger, Safeway, Supervalu, HEB, Publix, Ahold, Delhaize and many others.

The reports are of long lines at the initial Fresh & Easy stores. That means little. Tesco gets a lot of news. There are very few stores and they are very small — so very few people account for big crowds. Many in the crowd are journalists, competitors or suppliers checking them out. We know of at least two retailers who have ordered staff to purchase one each of every prepared food and private label item. There are many others.

To us, the business challenge presented encapsulates three basic possibilities:

1) Consumers will not like the concept. They won’t go for the prepared foods, they won’t find the brands they want, they will find too many items not available or not available in the size or package they prefer. As Kroger’s CEO explained, they May find the concept “not convenient” because it adds an extra store to visit but doesn’t replace any current shopping visit. If this is the case, Tesco will be left with a chain of outdated grocery stores, such as A&P operated 50 years ago, plus an enormous distribution center with nothing to distribute.

2) The return on capital will not be sufficient. Consumers might like the concept just fine. But if these stores require this enormous infrastructure and ultra-frequent deliveries, great success May not generate the profit necessary to support this structure. Wal-Mart continues a very slow rollout of Wal-Mart’s Neighborhood Market concept not because it is a failure but because Wal-Mart is better off investing its capital in supercenters.

3) The concept will be loved by consumers and will produce an excellent return on capital. In this case, every competitor will roll out these small format stores, and it is unclear why Tesco will be any more successful at this than anyone else. At very least, the competition for real estate will raise rents and thus reduce profits. Most likely Tesco will never open in most of the country because Kroger will have done Cincinnati, Stop & Shop will do Boston, Acme will do Philadelphia, Publix will do Miami, etc., etc. — all before Tesco gets there. In effect, Tesco will have duplicated the problem Marks & Spencer had with Kings — a little operation in a confined geographic area with little way to expand.

We will add to this that many of things Tesco has promised go beyond the list in our correspondent’s letter and are not so much going to be directly noted by consumers but by “advocates,” and there, we suspect, that Tesco has set itself up for a fall. When Tesco promises to offer “good jobs,” we have no doubt it will do that. We only mean, however, that everyone who takes a job at a Fresh & Easy store will think that the job is a better option than anything else the world provides.

The professional advocates — and the unions that will finance them — will have a completely different standard. To meet their definition of a “good job,” the pay and benefits must exceed that of Tesco’s unionized competitors and even then, won’t cut the mustard unless one person can support a family in middle-class fashion.

As a giant multinational corporation, Tesco will be held to Wal-Mart-like standards. This means every error will be magnified. The company is likely to be better known for its mistakes than its successes. In the UK, it has plenty of problems and critics — but it gets a pass on some things because it is also a British business icon and a great symbol of British overseas expansion to a country whose recent history has been more about the receding of Empire. In America, though, we doubt anyone will feel a need to cut them a break.

Our letter-writer has good reason to be particularly interested in the Fresh & Easy concept. If you check out the Polymer Logistics website here, you see they talk about “Retail Ready” packaging and Fresh & Easy uses a great deal of that. In fact, Polymer Logistics and Tesco have a very close relationship:

Polymer Logistics’ most significant relationship is with Tesco, for the supply of potato merchandising units, beverages and ambient foods. Direct and indirect revenues related to supplies of the Company’s 15 products and services to Tesco represented approximately 52 per cent and 39 per cent of Group revenues for the year ended 31 December 2005 and for the six months ended 30 June 2006, respectively.

In fact, Tesco is among the pioneers of the whole Retail-Ready concept:

Background to Retail Ready Packaging (“RRP”)

The transportation of products from the supplier to the retail outlet has traditionally involved the packaging of the product in cardboard boxes which are loaded onto wooden pallets and transported to the retail outlet by lorry. Typically, the product is then moved to a storage facility at the rear of the retail outlet where it is unpacked by hand and either housed in the storage facility or moved directly onto the shelves ready for sale to the consumer..

This labour-intensive process has proved to be costly and inefficient compared to more modern methods, with retailers having to subsidise the attendant labour costs as well as the damage caused to certain products due to the delivery process involving extra handling. In addition, this process has often led to lost sales due to the non-availability of stock at the point of sale, where a significant proportion of goods are often on-site in the storage facility but have not been put on the shelves.

In order to address these problems, the retail industry has sought a more efficient delivery process and leading UK supermarket retailers, such as Tesco, Sainsbury and ASDA, are now promoting the use of RRP as a solution to the issues referred to above. The Group’s RRP is designed to be ‘display ready’ from factory to the point of sale. Consumers purchase directly from RRP units in-store, with no requirement for retailers to unpack goods from the RRP units onto the shelves. The Directors believe that the Group’s RRP provides a significant number of benefits to retailers and suppliers, as described in more detail below.

It is a very brilliant idea. Whether it is best used in produce is a question mark. We don’t question the efficiency, but we question whether it doesn’t make the product look too institutional and sterile. Maybe it is suitable for an Aldi but not something focused on the image of “fresh.” Of course, perception can change, so we don’t want to rule it out.

In fact, even if Fresh & Easy fails and Tesco beats a retreat as did Marks and Spencer and Sainsbury’s before it, it will probably leave permanent changes on the industry. Many vendors have upped their food safety standards to get the Tesco business. Many have started to focus more on the consumer, and a whole store of retail-ready packaging has introduced many to the concept. Those are all wins for the industry whatever the future holds for Fresh & Easy..

A scion of one of the most prominent names in produce sent this report:

I drove to the Fresh & Easy store in Hemet on Sunday. There are a lot of things I like about it, and I’m looking for a spot near my home where they could put one. It is a smaller grocery store, with a good assortment of products, many in private label.

Cross between Smart and Final and Trader Joe’s? That guy’s on drugs.

Think of it as a well-stocked limited assortment grocery store with some good ready to eat foods, sort of a high end Sav-a-Lot. There’s sandwiches, salads, juices, desserts and warm up meals, but a little more than you might find in a really good truck stop.

It absolutely reminds me of the little old neighborhood grocery store on the way to work where I buy coffee and lottery tickets, but Fresh & Easy doesn’t have coffee or lottery tickets. It’s exactly what it says on the receipt; it’s a “Fresh and Easy Neighborhood Market!” ;

A word to the Tesco protesters: On Saturday night after the USC game, I left the stadium en route to my favorite 24-hour chili burger stand, and not far from the Armenian-Russian-Latino chain, I passed a competing Latino supermarket with a neon sign “Live Chickens”. So the demonstrators can go protest the live chicken sellers, if they can get past the MS-13 gang security detail.

Meanwhile both Pundit sister publication DELI BUSINESS and I want to know how they pull off this live chicken trick.

Sorry Mr. Pundit, but I was not going to stop with my family at night in that neighborhood for a store check.

I needed a burger, extra chili, way too bad.

But I digress. The point is there are some real interesting business models in play in Southern California.

School’s out on whether the overall Tesco supplier set up is optimal or not, but Fresh & Easy has found a great commercial test site in the alternative lifestyle capital of the world.

There is much to recommend about Fresh & Easy’s merchandising approach and I, for one, am glad to see them mixing it up in the retail arena.

— John Pandol
Vice President, Special Projects
Pandol Bros., Inc.

So is the Pundit. We need innovative ideas and we need to try new things. A new neighborhood small store concept holds out the possibility of thousands of stores all across the nation making the lives of consumers easier and creating opportunities for vendors.

We appreciate John’s letter and relate to the “little old neighborhood grocery store” but do note that though people find charm in the neighborhood hardware store, they mostly buy at Home Depot and Lowe’s… the neighborhood bookstore resonates with many, but the sales are at Border’s, Barnes & Noble and Amazon.com.

It is said that Tesco did an enormous amount of consumer research before launching its Fresh & Easy Neighborhood Market concept. We hope it didn’t misread consumer nostalgia for a bygone way as reflecting likely consumer behavior.

We wish Tesco luck and thank George, James and John for their letters.




Tesco Takes Heat For Not Supporting Underserved

Jim Prevor’s Perishable Pundit, November 21, 2007

Vendor reports are that sales at the newly opened Fresh & Easy stores are brisk with the chain easily exceeding its plans to sell twice per square foot what a conventional supermarket does.

The same vendors, though, believe the initial price points are not sustainable and wonder if “grand opening specials” aren’t driving a lot of the business.

Of course, the novelty of the concept also makes predictions difficult to evaluate.

In the meantime the Los Angeles Times has blasted Tesco for not “walking the walk” when it comes to locating stores in underserved areas:

Where is South L.A.’s Fresh & Easy?

Tesco has opened its first markets, but not in South L.A. Is the grocer’s commitment to ‘food deserts’ firm?

When British grocery chain Tesco announced that it would expand into Southern California with its new line of Fresh & Easy Neighborhood Markets, shoppers and local officials took heart. They were particularly excited about the company’s stated commitment to doing business in underserved neighborhoods, including South Los Angeles — where affordable, fresh groceries have been hard to come by since the 1992 riots.

The first Fresh & Easy locations opened last week in Glassell Park, Anaheim, Arcadia, Hemet, West Covina and Upland. The much-heralded store in South Los Angeles was not among them.

Tesco offers an explanation for the delay: That store will be part of a development at Adams Boulevard and Central Avenue that also will include affordable housing, and the residential portion of the project hasn’t yet secured all of its funding.

Still, a coalition of labor activists and community groups has loudly questioned Tesco’s commitment to serving so-called food deserts, and their frustration is understandable. Researchers from Occidental College’s Urban and Environmental Policy Institute used liquor license applications to analyze 121 prospective locations for Fresh & Easy markets and found that less than 10% were in census tracts with significantly high poverty rates. Most were near existing supermarkets.

Fresh & Easy stores offer a modest mix of fresh foods, prepared foods and staples in an easy-to-navigate, clean and modern format. They provide a pleasant shopping experience for those of us lucky enough to have many shopping options. For shoppers in underserved areas, convenient access to a Fresh & Easy could be life-changing.

If, in the end, Tesco doesn’t follow through with its stated plans, it will join a long list of market chains that have flirted with and ultimately abandoned South Los Angeles. But we remain hopeful that the Fresh & Easy romance won’t come to that. Tesco officials say they still intend to open stores in South L.A. and several other food deserts. The company says it will open a store in Compton next year.

In the meantime, if Tesco wants to continue tooting its socially conscious horn, it must show — not just tell — Los Angeles that it is serious about bringing groceries to the city’s underserved neighborhoods. And labor, for its part, might consider moderating its demands for a neighborhood benefits agreement to allow Tesco to get its Los Angeles-area operations off the ground. The residents of South Los Angeles are still waiting for affordable, fresh food.

For all the research that Tesco did in coming to America, there is a certain sense in which it was tone deaf. After all, it was completely predictable that the media would be looking to see if Tesco kept its promises. If it had played its cards right, it could be getting glowing accolades; instead, with long drawn out explanations about why it hasn’t opened in South LA and doubt about any specific location coming through, people will start to feel that Tesco was playing them for a song.

Having emphasized this promise, Tesco would be wise to sign a lease very quickly so it can announce a location and show it is the real deal.




Tesco, Polar Bears And Social Irresponsibility

Jim Prevor’s Perishable Pundit, November 30, 2007

Simon Uwins is the Chief Marketing Officer for Tesco’s Fresh & Easy chain, and for almost three months now he has kept posted on its web site a piece he wrote declaring that every Fresh & Easy store that opens will have a photo of polar bears in the back room and every new employee will receive a card from the CEO with the same polar bear picture on the card.

What is with polar bears and Tesco? Here is how they explain it:

POLAR BEARS AT FRESH & EASY?

This picture means a lot to us. Every store we open will have it in the back area, every new fresh&easy employee will receive a card from our CEO, with this picture on the front.

Why?

My 9-year-old son got it first time: “Daddy, the polar bears are drowning because global warming is melting the ice. We have to do something.”

The picture is a reminder for us to be careful about our impact on the environment. That’s why we’ve invested in California’s largest solar roof installation, to help power our distribution center. Why we’ve partnered with RMG, a San Diego-based recycling and waste services company, so that we can reuse or recycle all our shipping and display materials.

And why we’ve built energy saving features into our store design, such as the use of LED lighting in our freezers, cooler doors and outside signage. Indeed, we think we’ve reduced the energy usage of the stores we’re building by [approximately] 30%. We’ve joined the Leadership in Energy and Environmental Design (LEED) volume certification pilot program, to get them LEED-rated (check it out…)

But the picture also reminds us to take a much more thoughtful approach to everything we do.

To be thoughtful about how food is produced. We’ve gone to great lengths, for example, to work with our suppliers to ensure our private label products contain no artificial colors and flavors, no added transfats, and only use artificial preservatives when absolutely necessary. Indeed, several suppliers have commented that no one has ever asked them so many questions about this before.

To be thoughtful about the work environment we create. Our approach to working shoulder to shoulder that I talked about last week is an example of that.

And to bring the benefits of fresh, wholesome and affordable food to all types of neighborhoods, including those traditionally underserved by modern grocery stores.

Does this mean we’re perfect?

Of course not, there’s always trade-offs, and we already have a long list of things we want to do, but haven’t yet been able to achieve.

But having talked to many people in many different ways about their ideal grocery store, their ideal workplace, and their ideal neighborhood, we’re convinced there’s an appetite for thoughtful consumption, as long as it’s affordable and convenient.

As ever, we’ll only find out if we’ve got it right when we open our first stores, later this year.

If we have, it should be good for customers, employees, neighborhoods, and shareholders alike…..and also, in some very small way, for those polar bears…..alright son?

— posted by Simon Uwins

Tesco has chosen to present itself to the American public as something different than Kroger, Safeway or Wal-Mart, not only in store concept but in social responsibility.

Yet, there is some sense in which the success or failure of the Tesco effort in the U.S. May well depend on whether consumers consider Tesco to be sincere in these representations. This is why attacks from the editorial page of the Los Angeles Times for not locating stores in poorer areas as promised, which we discussed in our piece Tesco Takes Heat For Not Supporting Underserved, really can matter.

Simon Uwins’ piece, with its reliance on his nine-year-old son as the source of authority on the impact of global warming on polar bears, reminds one of the famous “Amy Carter” debate in which President Carter was ridiculed after he pointed out that he turned to his 13-year-old daughter, Amy, to help him prioritize different national policy interests:

The debate was sponsored by the League of Women Voters. Held on October 28, 1980, it was a debate between then President Carter and Ronald Reagan. Howard K. Smith of ABC News was the moderator.

MR. SMITH: President Carter, you have the last word on this question.

MR. CARTER: I think, to close out this discussion, it would be better to put into perspective what we’re talking about. I had a discussion with my daughter, Amy, the other day, before I came here, to ask her what the most important issue was. She said she thought nuclear weaponry — and the control of nuclear arms. This is a formidable force. Some of these weapons have 10 megatons of explosion. If you put 50 tons of TNT in each one of railroad cars, you would have a carload of TNT — a trainload of TNT stretching across this nation. That’s one major war explosion in a warhead. We have thousands, equivalent of megaton, or million tons, of TNT warheads. The control of these weapons is the single major responsibility of a President, and to cast out this commitment of all Presidents, because of some slight technicalities that can be corrected, is a very dangerous approach.

President Carter, of course, lost the election and if Tesco is relying on the authority of a nine-year-old, it May not do much better. Because it is pretty clear that this business of polar bears drowning due to melting ice is unsupported by any facts.

In the United Kingdom itself — Tesco’s home turf — a judge was recently analyzing the veracity of similar claims made by Al Gore in his movie, “An Inconvenient Truth”. The judge, Sir Michael Burton, is from the left-leaning British Labour party so, if anything, might be sympathetic to Al Gore. Yet, on this issue he was clearr:

The judge also said there was no proof to support a claim that polar bears were drowning while searching for icy habitats melted by global warming. The only drowned polar bears the court was aware of were four that died following a storm.

Besides, even if the polar bear population was threatened, it is far from clear that reducing energy use makes any sense at all as a strategy to combat such a problem.

Bjorn Lomborg, who has a new book “Cool It: The Skeptical Environmentalist’s Guide to Global Warming,” which we discussed here, put it this way in a Washington Post piece:

Of course, it’s not just humans we care about. Environmentalists point out that magnificent creatures such as polar bears will be decimated by global warming as their icy habitat melts. Kyoto would save just one bear a year. Yet every year, hunters kill 300 to 500 polar bears, according to the World Conservation Union. Outlawing this slaughter would be cheap and easy — and much more effective than a worldwide pact on carbon emissions.

Tesco is a giant corporation with extensive resources. One would think it would carefully vet any claims before it starts posting them in every back room and putting them on postcards sent out by the CEO.

That they didn’t… that they elected to use as the centerpiece of such a campaign a sort of pop-culture environmentalism, where Tesco mindlessly repeats claims popularized by movies and parroted by nine-year-olds, rather than engage in serious scholarship on such important issues, makes one suspect that it is all a marketing game.

It is as if at Tesco they believe in things not because they know them to be true or because they represent deeply held values but because they see a marketing advantage to positioning themselves in one particular way.

So if a movie makes a falsehood widely believed, instead of helping its employees and customers understand the truth, Tesco tries to ride the wave.

It is hard to imagine anything less socially responsible than that.




Tesco’s Secret Expansion Plan?

Jim Prevor’s Perishable Pundit, December 4, 2007

The Times of London ran a piece entitled, Tesco Begins its American Dream By Seeking Gold In California, which reports that although the operation is not yet a month old, Tesco is planning a major expansion, including building a twin of its Riverside facility in Stockton:

Only three weeks after opening its first American stores, near Los Angeles, Tesco is looking at dozens of sites in Northern California as it seeks to extend its Fresh & Easy convenience chain. It is part of the supermarket’s expansion drive in the United States to give it 1,000 stores generating nearly $10 billion (£4.9 billion) of annual sales.

The group is also in talks about taking on a second distribution centre — in Stockton, 60 miles east of San Francisco — that could service up to 500 Fresh & Easy stores around the San Francisco Bay Area, Fresno and Sacramento.

Tim Mason, Fresh & Easy’s chief executive, said that Tesco planned to open another distribution depot further north to serve Seattle and Portland. Such a move would give Tesco the potential for its biggest overseas chain of Tesco Express-style convenience stores, stretching the length of the Western Seaboard. It operates in 12 countries outside the UK, including South Korea and Thailand.

Mr Mason said: “If you look at the scale of opportunity here, it could be transformational for Tesco. If Fresh & Easy is successful, it will be the most exciting thing in retail, bar none.”

Tesco has 15 Fresh & Easy stores around Los Angeles, Las Vegas and San Diego. It will open stores in Phoenix, Arizona, this week, backed by the company’s first marketing campaign in the US. All the existing stores are supplied by a huge distribution centre at Riverside, near Los Angeles, which has the capacity to serve a network of 500 sites.

Publicly, Tesco has committed itself to opening only 200 stores in Southern California and Arizona by February 2009, but the Stockton depot is likely to be a replica of Riverside.

At the 600,000 sq ft Riverside site, the supermarket makes its own salads and ready meals, rather than sourcing them from an American food group. Two privately owned British suppliers, 2 Sisters and Wild Rocket Foods, have set up at Riverside to help Tesco to source meat, poultry and fresh fruit and vegetables. The integration has helped to generate savings that are allowing the group to compete with Wal-Mart on price.

Fresh & Easy claims to be up to 25 per cent cheaper than its main supermarket competition. Average sales are expected to settle at up to $200,000 per store per week.

Tesco’s optimism over the American market comes despite an increasingly bitter dispute with union leaders. Like Wal-Mart, Tesco is non-unionized and industry insiders believe that the unions are worried that other retailers could follow their lead.

The United Food and Commercial Workers Union is thought to be behind Health First, a lobby group locked in a legal battle with the developers of the Riverside site. A court ruled last week that the depot did not comply with environmental law, despite having one of the largest solar panel installations in America. Health First argues that the site, on a former military air base, should have been subject to a full environmental review and public consultation. The ruling could force closure of the depot, but Tesco believes that it will be made simply to carry out more monitoring work. Mr Mason said that all necessary state approvals for the site were in place.

Tesco’s plans are still largely secret. TNS, the retail consultant, believes that the group could achieve annual sales of $10 billion in the United States by 2015. Tesco has considered launching in Denver and is expected to move to the East Coast.

We think Tesco is too smart to be this dumb. It seems highly unlikely it is going to bet everything on this small-store concept that remains completely unproven.

Tesco claims it wants stores every two miles, to be less expensive than supermarkets by 25%, to locate private label stores in poor neighborhoods that typically value branding, to pay employees more than others. And small stores are difficult from a capital investment standpoint — multiply the cost of anything you want to buy by a thousand relatively low-volume stores.

So the real question is what else is Tesco going to do with this procurement and distribution network it is setting up? Tesco has to be thinking in terms of other concepts. We already suggested acquisitions of Meijer and A&P, but if Tesco does decide to launch everything from scratch, one has to believe that designs for a Tesco supercenter are already underway.




Will Tesco Regret Operating Its Own Commissary?

Jim Prevor’s Perishable Pundit, December 4, 2007

The Financial Times ran a piece entitled, Tesco Adopts a New Business Recipe, which points out that Tesco in the US is operating its own central commissary, as opposed to operations in the UK and elsewhere, where it relies on outside firms to produce its prepared meals:

Tesco has become a food manufacturer for the first time as part of its efforts to win over US shoppers.

The UK food chain, which has more than a 30 per cent share of supermarket shopping in its home market, has built an 80,000 sq ft food preparation facility — dubbed the Fresh & Easy kitchen — at its central distribution centre in Riverside county, east of Los Angeles.

Tesco wants its prepared meals, such as chicken curry, sushi rolls and Caesar salads, to be an important part of the appeal of its Fresh & Easy neighborhood stores. But it decided to set up its own kitchen rather than use third-party suppliers because of concerns over prevailing US standards in the sector.

“The reason for doing it ourselves was that there was no one here that could do it to the same standards,” said Tim Mason, head of Tesco’s US operations.

Forty per cent of the ingredients for the kitchen — including meat, poultry and fruit and vegetables — are provided by Wild Rocket Foods and 2 Sisters Food Group. The two UK suppliers have each invested $100m in setting up food processing plants adjacent to Tesco’s Riverside distribution “campus”.

“It’s all about getting the supply chain as short as possible,” said John Burry, Fresh & Easy’s chief commercial officer of centralized planning at the warehouse complex, which ships about 95 per cent of the items sold at the stores.

Tesco says its buyers will source food from the kitchen at commercial margins, to benchmark the performance of its operations.

None of Tesco’s US competitors operate similar kitchen facilities, and Tesco has never before tried to make the food it sells. In its home market — and around its 12 other business in Asia and Europe — Tesco always uses third-party suppliers. Bakkavor, Kerry Foods and Greencore are its biggest suppliers in the UK.

But the discount operating model of its US business increases the attraction of the higher-profit margins yielded by making its own food, rather than using a third-party provider.

“We could have asked one of our suppliers to come over and they would have jumped at it, but we felt we could do it ourselves,” said Mr Burry, who has worked at Tesco for nearly two decades, on a tour of the facility last week. “We have lots of experience in this, and the margin is much better. Why pay someone else to do this?”

The kitchen, with its giant cookers, stirring vats and the pasta-making machine imported from Italy, produces 120 different product lines from ready meals to fresh sushi and sandwiches.

Mr. Burry said he expected to expand that to about 150 lines and the existing kitchen site can be doubled in size to serve up to 500 stores. Tesco is considering building a second kitchen, or smaller “kitchenette” at its planned North California distribution centre in Stockton.

Orders from the stores are placed with the kitchen at 2am — this means Tesco can incorporate all the previous day’s sales — for next-day delivery.

Wild Rocket and 2 Sisters — which also supply pre-packed fresh products for the Fresh & Easy stores — chop and prepare the required amounts of vegetables and meat for the kitchen to be made into meals later that day. For fresh salads, Wild Rocket will take leaves picked by their suppliers in northern California and then wash, prepare and ship them to the kitchen at the distribution centre.

The proximity of the suppliers and the kitchen to the warehouse means that the lettuce can go from the soil to the shelves in three days.

Mr Burry says that the prepared food is going down well with shoppers — so much so that Tesco had availability problems in the first couple of weeks of opening its first stores.

We have been told that the shortages in the stores are actually due to a computer software problem — not wild demand beyond expectations.

We suspect Tesco will regret this decision. We’ve written about the pros and cons of company owned commissaries for years in Pundit sister publication, DELI BUSINESS.

Although, right now, Tesco says its buyers will source from the commissary at commercial margins — meaning the commissary will be a profit-center — what typically happens is that because it has a guaranteed client, it gets less sharp, its expenses get bloated, it becomes less service-oriented, etc.

Ironically just a couple of days ago, the Financial Times had a piece entitled Legal Setback for Tesco’s U.S. Plans, which determined that its main U.S. facility did not comply with California’s environmental laws:

Tesco has suffered a legal setback in its ambitious expansion plans in the US, after a California court ruled that its main warehouse did not comply with environmental planning law.

Tesco executives acknowledged that the ruling could, in theory, lead to the closure of the depot, the logistical backbone of its US operation. But they said this was highly unlikely and that similar disputes had been settled without such radical measures.

“We will review the ruling to understand what further compliance might be necessary but there is nothing in the ruling handed down that we believe will affect the operation or further roll-out of the business,” Tesco said in a statement.

Simon Uwins, marketing director of Tesco’s US Fresh & Easy subsidiary, said: “It is just the latest round in an ongoing court case”. But he said Tesco had contingency planning in place to deal with any potential distribution difficulties.

The ruling came as Tesco announced it was drawing up plans for a second warehouse complex at Stockton in northern California..

Tesco has opened 15 stores in the US and plans to bring the total to 50 by the end of the year and 200 by the end of next year. Its first 10,000 sq ft US Fresh & Easy store was opened this month. The company has said it will spend £250m a year over five years on its US expansion.

The case was brought in Riverside County Court by Health First, a previously unheard-of group established with the support of the United Food and Commercial Workers union.

The UFCW, which represents workers at the big three traditional supermarkets, has sought unsuccessfully to negotiate with Tesco over union representation. The union has used tactics like those employed to block the expansion of Wal-Mart in California.

Health First argues that the distribution centre should have been subject to a full environmental review, including a public consultation. It says it is particularly concerned about increased traffic from truck volumes..

Tesco says the distribution centre, on the site of a former military base, is covered by the environmental approvals secured for the base redevelopment.

One of Tesco’s UK suppliers, 2 Sisters Food Group, faces a similar lawsuit.

The only reason Wild Rocket Foods isn’t also subject to the lawsuit is that it moved “off campus” when it learned how expensive water would be on site.

The irony is this: The lawsuit was brought by a front group for the unions. You can bet that the very first group those unions will work on organizing is the commissary crew.

Retail store workers are hard to unionize; they are scattered, mostly short-term and unskilled. But the commissary workers all will work in one place and gain some specialized skills. The union will see this as a choke point. Unionize those workers and they can bring Tesco to heal — it will be the union’s weapon to get Tesco to open negotiations on the store employees.

One would have thought Tesco would have learned from Wal-Mart on this one. Case-ready beef May always have made sense for Wal-Mart’s approach, but it made a lot more sense after the butchers at a Wal-Mart supercenter in Texas voted to join the United Food and Commercial Workers — the same union funding the lawsuit against Tesco.

If Tesco is smart, it will lease out that facility to a private operator.




Trip To Tesco’s Fresh & Easy Store Reveals The Good, The Bad and The Ugly

Jim Prevor’s Perishable Pundit, December 14, 2007

On a quick trip to California, the Pundit and Mrs. Pundit visited one of Tesco’s Fresh & Easy stores “up close and personal”.

For those familiar with the Los Angeles area, we went to the store at 4211 Eagle Rock Blvd., a mixed community not too far from Occidental College. We visited the store Wednesday at lunch time.

Although we enjoy visiting stores, we rarely write about those visits. The problem is that with a large chain, it is difficult to know if what we notice is an aberration or is representative of the whole chain.

With a new chain such as Fresh & Easy you run the double burden of trying to distinguish what might be considered part of an expected “shake-down” period and what are fundamental issues in the concept.

Still, for better or worse, these were our initial thoughts:

The Good:

  1. Plenty of staff… all with excellent attitudes, very anxious to help. Although the store was rather empty, thus giving the staff plenty of time to help, they were asking customers, “Do you want me to show you how to work the self-checkout or do you want me to do it for you?” Question: Staff looked heavy for the volume of business being done. Will staff hours be cut and the friendly staff be less so?
  2. A number of very interesting products; for example, a series of items being positioned to compete with Oscar Mayer’s Lunchables — but with healthier food and at a bit higher price point.
  3. The fact that almost every produce item was in a clamshell, bag or wrapped made us feel that the product was safer — since it couldn’t easily be touched by store employees or fellow customers.
  4. Excellent range of baked goods.
  5. Many interesting sauces and whatnot to try — in that sense reminded us of Trader Joe’s.
  6. The Spartan décor and fact that everything was displayed in a shipper gave it a warehouse feel and engendered the hope we would be getting a good deal.
  7. Nice lady sampling the house brand of tiramisu, chocolate chip cookies, stuffed olives and a few other grocery items.
  8. Plenty of parking.

The Bad:

  1. The store was dead; there were more employees than customers when we were there.
  2. There is an obvious problem in all the fresh foods areas with out-of-stocks. For example, no chicken tenders in the meat and poultry department, no sliced roast beef in the self-serve deli. You could get rice but they were out of the refried beans in the prepared foods section. In produce, they were out of bagged spinach and strawberries. In Grab-and-Go, they were out of tuna salad sandwiches.
  3. When an item was still in stock, the display was often half empty, so the consumer would see several big black tubs with a lonely bag of tangerines in each one.
  4. Bananas, priced oddly at 18 cents per banana, were one of the few produce items stocked to the brim. Lots of overripe bananas — Bonita brand — plus newer bananas. Impression is the fruit hasn’t been selling and the staff doesn’t know how to properly cull the bananas.
  5. It is impossible to know the cause of the out-of-stocks. We have been told, confidentially, about a computer glitch that has caused improper orders to be sent out. It May be as simple as getting some historical data in the computer and adjusting certain assumptions. For example, although the store was out of pre-made tuna salad sandwiches, its rack overflowed with pre-made chicken salad sandwiches.
  6. It seems as if they are allowing store-level staff zero flexibility on merchandising. When the store is out of stock, nobody seems to be thinking in terms of filling up the space with anything else. If the planogram says two feet for bagged spinach and the store is out, they just keep an empty shelf there with the spinach sign.
  7. The sampling program was limited and odd. Although the sampling lady explained that the purpose was to reassure us of the taste of the Fresh & Easy branded items, we didn’t feel we needed a sample of, say, a jarred stuffed olive. We would have liked to sample some of the prepared foods and the meat and poultry items that are being sold pre-basted. We are OK with gambling with a stuffed olives, but if we are having a dinner party and are thinking of serving the nice looking chicken in their special sauce, we would like to taste that first.
  8. We found the taste of the private label products being sampled to be mediocre. The tiramisu and the chocolate chip cookie were fine — but just fine. Nothing to make us feel we must shop at Fresh & Easy to get these great items.
  9. We found the overall appearance of the store dour and cold. It didn’t really make us happy to be there. Costco is institutional looking too, but somehow the buzz, the serendipitous appearance of new products, the demos and sampling, all make Costco feel much more fun.
  10. The produce packaging was frustrating as it de facto created minimum purchase requirements. Maybe we don’t want six apricots, we only want two?
  11. The store is a little too preachy for our taste. We know our values and don’t want to be sold on a retailer’s values. The various references to sustainable, recyclable and reusable made us feel like we were being lectured to.
  12. Especially with kids, we want the brands we are accustomed to and so couldn’t see making Fresh & Easy our regular shopping haunt. The Jr. Pundit Segundo, aka Matthew, age four, likes his yogurt with Blues Clues on it, and the Jr. Pundit Primo, aka William, age six, likes his fresh-cut apple slices with Mickey Mouse. There is no upside for us in taking these little joys away from our children. The branded selection is just too small to work for us.
  13. We like a service deli. We like to tell the guy that the roast beef isn’t rare enough, please open another. We like to get a sample slice and ask the guy to make it thinner. To us, a product is fresher if we see it cut before our eyes.
  14. In some ways, Fresh & Easy is a step backward. At our supermarket in Florida, we often buy both rotisserie and fried chicken — in most cases, it is for immediate consumption and we buy it hot. We saw no fried chicken and the rotisserie chicken is sold cold and pre-packaged. Didn’t strike us as fresh or easy.
  15. The produce assortment left us having to go elsewhere. For example, the kids love Grapple apples — Fresh & Easy didn’t have them. We have another trip to make.

The Ugly:

  1. Many of the prepared items simply looked horrible. This is because curry-like items have flipped over and smeared all over the top of the plastic prepared food packages. Although we appreciate the desire to let shoppers see the food, if Fresh & Easy doesn’t have a solution to this problem, it should design a sleeve to put over the items so consumers are spared unattractive views.

It is certainly a professional store, but in the end we draw these conclusions:

  • One big advantage of the store can be the small footprint. In certain areas, this small footprint will enable Tesco to open many stores that will be conveniently located to consumers. However, the small footprint won’t help in most suburban markets as zoning restricts where stores can be built. The small stores will thus be on the same streets as supermarkets.
  • It will take time to see how pricing settles down both at Fresh & Easy and competitors, but the bare-bones interior seems likely to appeal to bargain hunters. Yet pricing does not appear to pose much of a threat to Wal-Mart, deep discounters such as Aldi, Sav-a-lot or dollar stores. There seems a little disconnect between the appeal of the store and its pricing structure.
  • As with Trader Joe’s, the success of the store will depend on the private label product. If consumers fall in love with Fresh & Easy sauces, its tiramisu or refrigerated lasagna, then the store will attract a passionate clientele for those items who will buy other items. If not, then the concept May not survive.




Tesco Observations From A Retail Pro

Jim Prevor’s Perishable Pundit, December 18, 2007

Our piece, Trip To Tesco’s Fresh & Easy Store Reveals The Good, The Bad and The Ugly, brought a response from one of America’s premier experts on produce retailing:

I read with interest your article on your Fresh & Easy store visit. I have been monitoring that Eagle Rock store and several other Fresh & Easy locations on a weekly basis. This includes actually purchasing product to test systems and sample product.

I know you choose to be cautious with what you say based on a one-time visit, so let me help you out with your observations. I’ve placed your comments in yellow highlights below my own observations:

The Good:

You are right on with the comments on the staff.

Plenty of staff… all with excellent attitudes, very anxious to help. Although the store was rather empty, thus giving the staff plenty of time to help, they were asking customers, “Do you want me to show you how to work the self-checkout or do you want me to do it for you?” Question: Staff looked heavy for the volume of business being done. Will staff hours be cut and the friendly staff be less so?

That is one of the Good Items that I also have on my list.

A number of very interesting products; for example, a series of items being positioned to compete with Oscar Mayer’s Lunchables — but with healthier food and at a bit higher price point.

Packaging May give the impression of safer, but for a company that is environmentally and socially very responsible, this is significantly over-packaging. Both a tray and a bag on some items.

The fact that almost every produce item was in a clamshell, bag or wrapped made us feel that the product was safer — since it couldn’t easily be touched by store employees or fellow customers.

On comparing Fresh & Easy with Trader Joe’s, I give Fresh & Easy higher grades on bakery, prepared foods and fresh meat. However, that is the only three that I favor Fresh & Easy on as Trader Joe’s has a better fresh feel, better produce and a lot more organic items, better floral, better wine, better cheeses and better checkout.

The Trader Joes’s sampling is far superior on the selection of products to be sampled. At Fresh & Easy they sample their private label cookies, cheese, etc. there is no uniqueness to these products. Trader Joes’s samples their own soups, salads, prepared foods, and frozen foods.

Excellent range of baked goods. Many interesting sauces and whatnot to try — in that sense reminded us of Trader Joe’s…

Nice lady sampling the house brand of tiramisu, chocolate chip cookies, stuffed olives and a few other grocery items.

The sampling program was limited and odd. Although the sampling lady explained that the purpose was to reassure us of the taste of the Fresh & Easy branded items, we didn’t feel we needed a sample of, say, a jarred stuffed olive. We would have liked to sample some of the prepared foods and the meat and poultry items that are being sold pre-basted. We are OK with gambling with a stuffed olives, but if we are having a dinner party and are thinking of serving the nice looking chicken in their special sauce, we would like to taste that first.

No doubt the store is set for labor efficiencies, but it also tends to be very sterile.

The Spartan décor and fact that everything was displayed in a shipper gave it a warehouse feel and engendered the hope we would be getting a good deal.

Plenty of parking because there is no one in the stores!

Plenty of parking.

The Bad:

The most customers I have counted in the stores at any one time is 8.

The store was dead; there were more employees than customers when we were there.

Out-of-stocks have been haunting them. Executives at the company say they are plagued with dumping raw product, warehouse mis-picks, poor store ordering, and IT problems. Executives do claim that they are over projection on sales. If true, they must have budgeted the store to open at a low sales level and grow from there.

There is an obvious problem in all the fresh foods areas with out-of-stocks. For example, no chicken tenders in the meat and poultry department, no sliced roast beef in the self-serve deli. You could get rice but they were out of the refried beans in the prepared foods section. In produce, they were out of bagged spinach and strawberries. In Grab-and-Go, they were out of tuna salad sandwiches.

Bananas are the only item without a pull date on it, and the store personnel do not know when to pull them.

Bananas, priced oddly at 18 cents per banana, were one of the few produce items stocked to the brim. Lots of overripe bananas — Bonita brand — plus newer bananas. Impression is the fruit hasn’t been selling and the staff doesn’t know how to properly cull the bananas.

It looks like they are told to turn the RPC over when out and hold the spot for the next day. This May be so they do not lose their schematic.

When an item was still in stock, the display was often half empty, so the consumer would see several big black tubs with a lonely bag of tangerines in each one.

It seems as if they are allowing store-level staff zero flexibility on merchandising. When the store is out of stock, nobody seems to be thinking in terms of filling up the space with anything else. If the planogram says two feet for bagged spinach and the store is out, they just keep an empty shelf there with the spinach sign.

I have been buying the Fresh & Easy private label products and find them to be 80% good or outstanding. Their frozen pizza is better than anyone else’s; some of their sandwiches are excellent but some are soggy.

We found the taste of the private label products being sampled to be mediocre. The tiramisu and the chocolate chip cookie were fine — but just fine. Nothing to make us feel we must shop at Fresh & Easy to get these great items.

Everyone has the same impression [about the appearance of the stores].

We found the overall appearance of the store dour and cold. It didn’t really make us happy to be there. Costco is institutional looking too, but somehow the buzz, the serendipitous appearance of new products, the demos and sampling, all make Costco feel much more fun.

They said they would stock the top 200 produce items but about 20 of the 155 items that they stock would not be in anyone’s top 200.

Fresh & Easy has a lot more commodities than Trader Joe’s, but Trader Joe’s is deeper in the right commodities.

Example — Fresh & Easy has 4 apples — Trader Joe’s has 10 (both conventional and organic), Fresh & Easy has 4 tomatoes — Trader Joe’s has 12 (both conventional and organic), Fresh & Easy has 8 value-added salads — Trader Joe’s has 28, and Fresh & Easy has 4 mushrooms — Trader Joe’s has 6.

Of the 8 valued-added salads, 2 are to the tastes of the British as they are basically a watercress salad. None of the U.S.-based value-added companies offer even one watercress salad, nor do they use watercress as an ingredient.

Fresh & Easy has a lot of Hispanic items in all the stores I am monitoring, yet Eagle Rock would be the only store with 25%+ Hispanic population. They stock prickly pears (wrong variety — white versus red), jalapenos, tomatillos, poblano, anaheim, limes, mangos, cactus leaves and jicama. However, all of these items are packaged in too small of a quantity for a Hispanic household. Trader Joe’s doesn’t stock any of these items.

The produce assortment left us having to go elsewhere. For example, the kids love Grapple apples — Fresh & Easy didn’t have them. We have another trip to make.

The Ugly:

I have tried some of the prepared items and they certainly are fairly priced. Some were good and some were really bad.

Many of the prepared items simply looked horrible. This is because curry-like items have flipped over and smeared all over the top of the plastic prepared food packages. Although we appreciate the desire to let shoppers see the food, if Fresh & Easy doesn’t have a solution to this problem, it should design a sleeve to put over the items so consumers are spared unattractive views.

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.

As you would expect, in order to make a real estate impact Tesco took every dark site available. Many of these sites are dark because someone else could not operate them profitably. No matter what the square footage of the site is, Fresh & Easy only takes 10,000 sq. ft. plus backroom and sub-leases the rest. In the stores that I have visited, they have been unsuccessful in leasing out this space so they are paying rent on space they are not using.

Fresh & Easy executives claim to be 20% lower in price than Vons, Albertsons and Ralphs. I did a produce price check with the following results. If I bought one package of everything stocked in a Fresh & Easy and bought the same amount in a Pavilions (Vons upscale store), I would have spent $114.59 at Fresh & Easy and $119.17 at the Pavilions for a difference of 5%.

Naturally some of the Pavilions items were on the chain’s ad for the week, but if you are an Every Day Low Price (EDLP) retailer, you should be able to be cheaper.

Fresh & Easy has a section called “Fresh Ideas” at the end of the left side of the produce department. This is an area to do some price promotion or highlight unique items. However, thus far they have displayed the following: 2-pack prickly pears, 3-pack persimmons, 2-pack comice pears, 4-pack gala apples, 4-pack red Anjou pears, 2 orange and 2 yellow tomatoes on a vine,

I have talked to a couple of their “Category Champions,” and they say the produce is doing about 18-20% of the stores’ business. From my observations I would agree with that. They are giving the out-of-code produce to a local food bank and the out-of-code flowers away to their customers.

The stores don’t appear to be doing any business, and I would guess they are under $100,000 per week.

Fresh & Easy executives say they only need $15-25 per sq. ft. or $150 to $250,000 per store per week. This is low but if you take that $150,000 and multiply that by 5 for a 50,000 sq ft store, that would be a $750,000 a week and every chain would love to have that as their low end sales. After they get the bugs out, I would guess they would operate the stores with a very low payroll (non-union) with little shrink. In the produce area you could buy everything on display for probably $1,500.

Many thanks to our correspondent for his tour d’force. We find in visiting stores that many attributes have a flip side. For example, Mrs. Pundit said she thought the Fresh & Easy store we visited to be the cleanest food market she had ever been in, including the ladies room. Some of that May be a consequence of everything coming in packaged, but a lot of it May be that the customer count is so low, things aren’t getting soiled.

As we have reflected on our visit, we think Tesco is trying hard to avoid Wal-Mart’s store-level execution issues. By keeping everything in a package with a pull-by date, by declaring that they would rather have unused sales space than mess up the schematic, by eliminating service in deli, bakery and seafood, the perishables operation at Fresh & Easy is designed to run smoothly even if operated by employees completely ignorant of fresh food and floral. In fact, the one time the system breaks this rule — bananas have no pull-by date — the result is a disaster because nobody at store level knows anything about produce.

Ironically, however, unlike Wal-Mart, the issues in perishables at Fresh & Easy — particularly the out-of-stocks — stem from headquarters decisions, not store level.

To us several points resonate from this letter and reflections after our visit:

1) 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.

2) Fresh & Easy has been pushing itself as the socially responsible store; it is trying hard to attract consumers who value the fact that it put solar panels on the roof of its distribution center. Yet covering every fruit and vegetable in plastic is certain to offend the sensibilities of the exact same people. There is a real contradiction here.

3) In order for private label to be the draw Fresh & Easy needs it to be, it has to not only be great product but great on the right items. Trader Joe’s has strength here because of its more gourmet approach. The people who will go out of their way to buy a special sauce or dressing are often “foodies” — people who care deeply about food. It is unclear that superior frozen pizza will drive the same form of customer loyalty that Trader Joe’s enjoys.

4) The whole concept depends on maintaining an advantage on labor costs over competitors from local supermarkets. In non-union areas, this will be difficult to achieve, and even in union areas one can expect Tesco to be attacked for pay policies incompatible with its claims to social responsibility.

5) There is a lot of learning for Tesco to do in terms of assortment and out-of-stocks, but we assume they will eventually get that right.

6) We would dismiss any meaning behind the claims of the stores out-performing sales projections, even if true. This project is the baby of Tesco’s CEO, so there was no need to promise aggressively to get him to sign off. Every incentive was to lowball expectations so that Tesco could proclaim to the financial community that it is operating above expectations.

7) Real estate often is the Achilles heel of retailers that seek to grow rapidly and it just might kill this concept. As we wrote back in August of 2006:

…although Tesco hasn’t disclosed the locations it has leased, if it is really true that they are going to open 400 stores in two years, it is highly likely that they will wind up with a lot of sub-optimal real estate.

Not enough new centers are built or vacancies occur to pick up all prime locations within range of one distribution center. And moving into existing centers involves complicated negotiations with existing tenants.

In fact, local retailers regularly wait years, sometimes decades, while romancing landlords and tenants to get prime space. It is just almost impossible to get hundreds of prime spots in a short order.

These are “B” sites at best and many will probably fail.

8) Our impression and reports from others are that Fresh & Easy must be experiencing phenomenal shrink levels. A simple look at the pull-by dates indicates an awful lot of product is being pulled.

9) The sheer volume of stores Tesco plans to open will create a challenge for other operators even if Fresh & Easy is not successful. Two hundred stores at even $100,000 a week is a big loser for Tesco but, still, it’s over a billion a year from other food retailers.

10) The meaning of convenience is in flux. But we didn’t find enough of a product range, particularly branded items, to allow Tesco to be our only grocery store. So to us it felt like one more trip we didn’t need. We didn’t find drive-through windows or curbside pickup or anything that would make it convenient for us. Different strokes for different folks, of course, but not the kind of clear win they were surely hoping for.

Several other retailers are going to be testing small footprint concepts — and they should. The question May be why Tesco rolled out with this little box in dour gray without building a couple of prototypes? Perhaps something will click and it will all work or, perhaps, consumers will reject the concept as too big and lacking the product mix of an American convenience store, yet too small and lacking the product variety of an American supermarket.

We think the intention to roll out so many stores at once indicates weakness in a concept. It means Tesco must have felt everything it was doing could be easily copied. Yet if it doesn’t get the sales numbers up, it is not clear that anyone is going to try to copy them.

Many thanks to our correspondent for his thoughtful and well researched letter.




Will Tesco Keep Its Promises?

Jim Prevor’s Perishable Pundit, December 19, 2007

Our piece, Tesco Takes Heat For Not Supporting Underserved, pointed out that the Los Angeles Times has attacked Tesco for not fulfilling its promise to locate stores in the “food deserts” of Los Angeles — areas without supermarkets so that residents typically must pay the higher prices of local bodegas or convenience stores.

The piece brought several notes, including this one from an important grower/shipper:

The LA Times editorial you quoted included this reference:

The first Fresh & Easy locations opened last week in Glassell Park, Anaheim, Arcadia, Hemet, West Covina and Upland. The much-heralded store in South Los Angeles was not among them.

Tesco offers an explanation for the delay: That store will be part of a development at Adams Boulevard and Central Avenue that also will include affordable housing, and the residential portion of the project hasn’t yet secured all of its funding.

This begs the question of whether Adams and Central in Los Angeles is really underserved residential. It is 15 or 20 blocks from USC.

The Los Angeles produce market is on Central Ave and Olympic (about 10th Ave.), and Adams is about 15 blocks south. It’s kind of light industrial as I remember, and I can’t quite remember that exact location of the garment district, but there are ‘back to downtown’ gentrified buildings moving that way. The apartments might be ‘affordable’ because they are 650 sq ft.

Not more than 10 or 15 blocks west on the ‘Figueroa Corridor’, the Staples Center is on Olympic, the LA Convention center is on Washington (about 20th St), Adams kind of starts USC student housing area, Jefferson (about 33rd) starts the campus, and Exposition (about 40th), starts the Coliseum, the Rose Garden, the Museums, which are all part of Exposition Park.

It’s south central LA in the sense that if you get arrested in that area, you are booked at the south central division of LAPD. (They tell you that as part of freshman orientation at USC)

The truth is that there are no places in LA without supermarkets.

We also heard from a former Sunkist employee, who gave us some insight into his former employer here, and now has opined on this controversy:

The complaints from the LA Times signify less the tone-deafness of Tesco than another example of the LA Times just not getting it. Not a surprise for those of us who live in Los Angeles.

As a resident of metro LA for most of my life, and knowing the areas that Tesco is looking at and going into, they, in fact, represent a broad swath of incomes, ethnic and socio-economic demographics.

The use of the term “food deserts” in reference to South LA shows that the LA Times does not understand or care to understand basic economics. It also does not understand the changing demography of South Central LA.

This area is increasingly Hispanic, mostly recent immigrants who are not acculturated, and less and less African-American. The Hispanic populations in the urban parts of southern California that consist of recent immigrants are serviced primarily by small ethnically oriented stores that have lots of produce in them.

In addition, the food deserts that came into southern California were a result of the Watts riots in the 60’s and the flight of the middle income black families into other areas of greater LA.

This flight took the income that could support a supermarket such as a Vons (Safeway), Ralph’s (Kroger) and Albertsons out of the area. The 1992 riots was the final coup de grace for retailers in South Central. Should a retail business feel guilty for closing a space that cannot support its operating costs, let alone delivering a profit? Of course not. Here are some facts to put things in perspective:

  • Tesco (Fresh & Easy) HQ in LA is in El Segundo. Distance to Watts: 10 miles. A little bit less as the crow flies.
  • The LA Times building in downtown LA. Distance to Watts about 10 miles.
  • A one-way commute of 40+ miles is common in greater Los Angeles.
  • Ralph’s has a store in Compton — yes, that Compton.
  • Ralph’s also recently announced plans to go back in South Central LA.
  • Vons has a store in Gardena — just as bad, just without the “Gangsta Rap” street cred. So does Albertsons.
  • Census tracts are not the best way to measure consumer traffic, and the inherent message is that Fresh & Easy should be located next to liquor stores.
  • And what poverty rates are they studying against? I’m pretty sure the poverty rate for the USA is much lower than what one would consider the poverty rate for LA. $20K goes a lot further throughout the rest of the USA than LA County or even the state of California.
  • And lastly Fresh & Easy is geared to a specific niche: Multiple-person households that need quick-and-easy meal solutions. Perfect sense here in LA with the commuting we do. Think single Moms and two-income families with children. Or a Trader Joe’s household with small children located in urban and suburban settings.

Let’s let Tesco get a firm footing in the Southern California market before the LA Times starts mongering its usual pabulum and accepting its musings as the gospel.

— Delos Walton

We are a big believer that every retailer should decide where it wants to put its own stores. The story here is less that Tesco is doing anything wrong by locating its stores where it thinks best than it is a lesson for all business in press relations and managing expectations.

Nobody complains that Whole Foods or Bristol Farms isn’t opening stores in the hood. If Tesco had simply said it intends to open stores everywhere there are customers willing and able to support its concept and left it at that, it would get no more heat on the issue than does Von’s or Ralph’s.

In this case, however, it was Tesco that raised the issue. As the LA Times said:

When British grocery chain Tesco announced that it would expand into Southern California with its new line of Fresh & Easy Neighborhood Markets, shoppers and local officials took heart. They were particularly excited about the company’s stated commitment to doing business in underserved neighborhoods, including South Los Angeles — where affordable, fresh groceries have been hard to come by since the 1992 riots.

We think urban supermarkets, certainly in bad areas, almost have to be left to independents. Every urban store we have personal knowledge of succeeds because it breaks the law — not in a malicious way, but doing what it has to do to stay in business.

This May mean paying “protection” money, using a garbage carrier that has been “pre-selected” for it, perhaps locking the night crew in the store for restocking so the store isn’t robbed blind — in violation of fire codes, taking shoplifters down to the basement to “teach them a lesson” so they will not come back, etc.

Few chains can do these things because you can’t write a policy that says employees will do illegal things. Yet it is hard to stay in business in these milieus if you don’t. The few exceptions are typically very large stores that can afford a fortune in security charges — typically hiring actual policeman to be on site 24 hours a day. Because of holidays, vacations and sick time, a store typically has to be able to pay the salaries of around six full time police officers — to always have one at the store!

In this case the point was two-fold:

First, Tesco needlessly raised expectations by promising to open stores in under-served areas.

Second, having asked to be evaluated by that standard, it was completely predictable that advocacy groups, labor unions, the press, government agencies, etc. would be looking to that criteria. Clever issues management of the situation required Tesco to open a store in a “food desert” early on, Maybe as its first store — and bask in the reflected glory of its socially responsible nature.

Our assessment is that this is just the first of many areas in which we are likely to hear that Tesco didn’t deliver on its promises.

For example, Tesco hasn’t released any statistics, but it made a big deal that its employees will all have access to “comprehensive” health insurance. In all likelihood, this health insurance will either provide poor coverage or will be sufficiently expensive that most employees won’t buy it. After all, an employee who earns $10 an hour working 20 hours a week is only making around $800 a month — how much can that employee afford to pay for health insurance?

In all probability, for all the socially responsible talk, the percentage of employees covered by health insurance, pensions, etc., will compare very unfavorably to the employees at unionized operators such as Von’s and Ralph’s. This will all come out and Tesco will wind up looking worse than if it had never made such high falutin’ promises at all.

We appreciate the insight both of our correspondents delivered to the intricacies of the LA market.




Was Tesco’s Real Estate Decision A Result Of Hubris Or Humility?

Jim Prevor’s Perishable Pundit, December 20, 2007

One of the issues that keeps coming up in our discussion of Tesco’s new operation in America is real estate.

It is fair to say that retail and real estate always intersect.

We previously pointed out that Tesco was going to have a problem and wind up with a lot of sub-standard real estate simply because it is impossible to roll out stores on Tesco’s schedule, yet do it only with great sites. In fact, we contrasted the way Tesco was working with Kroger’s approach.

We also ran a piece entitled, A Closer Look At Tesco’s Finances, which pointed out that substantial holdings of real estate can distort earnings:

Warren Buffett, the world-renowned investor, through Berkshire Hathaway, the company of which he is CEO, has acquired a significant stake in Tesco, which has been interpreted as Buffett’s endorsement of Tesco’s chances of taking on Wal-Mart in America. The Pundit wonders if a better interpretation is that this famous value investor has noted Tesco’s substantial real estate holdings and decided that this value will eventually be unlocked.

Tesco owns a great deal of real estate and the City, London’s version of Wall Street, has been pressing Tesco to sell it. Tesco’s management has generally resisted such pleas, and when it has sold real estate, Tesco has tried to do it with complicated joint ventures through which it is impossible to know if Tesco actually got the maximum price for the property, as Tesco continues to lease the space on a basis negotiated before the sale.

Tesco CEO Terry Leahy was reported by Reuters as explaining his position this way:

“Tesco has a lot of property, but it is important to remember property ownership is an integral part of retailing and Tesco will always have a majority of its space as owned space.”

Actually, owning real estate is an excellent way for retailers to report earnings that appear sterling but are actually not providing an adequate return on deployed capital.

In retailing the relevant capital being deployed is not what a building cost 30 years ago or its depreciated basis; it is what the building could be sold for today.

As part of its annual report, Tesco announced that after some large joint ventures that transferred over 10 billion pounds sterling of property to ventures with the British Airways Pension Fund and The British Land Company PLC, Tesco still has real estate, mostly individual stores, worth 28 billion pounds sterling.

Here is the rub: The entire profit of the Tesco organization was just reported, before tax, at 2,653,000,000 pounds sterling. All else being equal, this means that if Tesco sold all the real estate and the new owners leased it back to Tesco on a net, net, net basis (meaning Tesco still had to pay the real estate taxes, insurance, maintenance, etc.) and demanded a 10% return on their investment, Tesco would lose money.

If the investors were content to make a 5% return on their money, Tesco would see its profits plummet by more than 50%. And all this assumes that Tesco’s report on the value of its property is accurate. Possibly, a true liquidation, without regard to lease terms for Tesco, would realize even higher values.

However one figures it, the mighty Tesco has an operating business that crucially depends on billions of dollars in real estate deployed at sub-par returns.

Yet in the United States Tesco doesn’t have this legacy of real estate investments and so will have to lease property at market value.

Which means, even if its U.S. operation is equally as successful as its British parent, it will be significantly less profitable than the British operation.

The other day, in our piece, Tesco Observations From a Retail Pro, we published this point:

As you would expect, in order to make a real estate impact Tesco took every dark site available. Many of these sites are dark because someone else could not operate them profitably.

Hubris, or as the Greeks wrote it, ὕâñéò, is typically translated today as an exaggerated pride or self-confidence. We think of it, typically, in the context of “Hubris against the Gods,” which is the character flaw of the heroes in Greek tragedy.

These heroes commit an “act of hubris” known as Ate — in Greek àôþ — which is commonly translated as “ruin, folly, delusion.”

This action is the cause of the “nemesis” — in Greek ÍÝìåóéò — translated as destruction or downfall.

From this we get our modern sense of the word as overconfidence and arrogance often drawing on an ignorance of history and a complete lack of humility.

The question is really whether Tesco, in looking at these dark stores where others failed, approached the situation with humility or arrogance.

It is the easiest thing in business to assume that others failed because they weren’t any good — they didn’t merchandise well, they didn’t build the right distribution center, they didn’t position themselves properly — and then plunge in, assuming you know how to do it better.

Every once in awhile it is true — but, mostly, it is false. Mostly it is a hubristic attitude. The most reasonable approach is to assume that competitors draw on similar talent pools, have a similar cost of capital, etc., and, most crucially, that they are good at what they do. In this case, that American firms operating those very sites knew what they were doing.

Then one looks at that empty store front with humility and moves cautiously.

To some extent, the fate of the whole Fresh & Easy venture May depend on whether Tesco acted with hubris or humility in evaluating these sites.

For Tesco’s sake, we hope it is the latter. For if it is the former — if it was an act of delusion, of Ate, to lease these sites — then we can expect its American competitors to act robustly. They May remember the scene in Shakespeare’s Julius Caesar in which the Goddess known as Ate appears, a symbol of vengeance. Mark Antony, speaking of Caesar’s murder predicts:

“And Caesar’s spirit, ranging for revenge,
With Ate’ by his side come hot from Hell,
Shall in these confines with a monarch’s voice
Cry “Havoc!” and let slip the dogs of war …”

Caught in a series of sub-standard locations, Tesco May find that hubris, as it must, brings its price as its American supermarket competitors decide to fight back and thus “…let slip the dogs of war…”

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