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Despite Fresh & Easy Sales Growth,
Challenges Lie Ahead

Next week Tesco is due to announce financials, and it is expected we will get the first “hard numbers” on how the Fresh & Easy rollout here in the US is going.

There is little question that Tesco’s efforts to boost sales have been met with some real success. Our best information is that Fresh & Easy has seen sales growth between 6-12% month over month on a “same store sales” basis for the last six months or so.

The “pause” in Tesco’s Fresh & Easy rollout schedule earlier this year seemed to be used principally to shift away from the Every Day Low Price (EDLP) model and move to a much more ad-driven and promotionally priced model. All through the summer, one was greeted at the entry with large “grilling” specials all very attractively priced — often 50% off normal Fresh & Easy retail.

In some cases Tesco abandoned its initial insistence on selling repacked produce under its own brand and has just bought specials it can sell cheaply under the packer’s own label in a special promotionally priced produce section.

Combine this new emphasis on promotional pricing with its pre-existing policy of marking dated perishables down 50% the day before the expire date, and add in the heavy mailing and distribution of coupons good for $5 off each $20 purchase — freely accepted in multiples so $10 off a $40 purchase, $15 off a $60 purchase, etc. — and one sees a very compelling value proposition.

Although Fresh & Easy did poorly in the produce pricing study conducted by sister publication, PRODUCE BUSINESS, we suspect it would do better today and, if we included coupons — which seem ubiquitous and are often distributed at checkout — it might actually beat Wal-Mart.

As a short-term strategy, this heavy emphasis on promotion is probably a smart idea. One of the trade luminaries with a keen mind for retail put it this way:

No doubt Fresh & Easy is getting more promotional and now has ad/in-store specials versus their old EDLP ads. Keep in mind, once you have exposed your model to more people and more people like it, they will support it. It is the right decision to spend on deep promotional specials as the cheapest thing you have is the product, which usually accounts for 25% of the total sales and the rest is rent, payroll, utilities, transportation, and the ad man.

Indeed. Rather than struggling at $50,000 per store per week — which is what we and others, such as the Willard Bishop Group, saw as their sales levels — it is smart to heavily discount the product and build traffic.

The $64,000 question, though, is will these customers “like it”? Will they continue to “support it” when the promotional hook is pulled away? In other words, do the customers attracted by these great deals become loyal to a concept or are they just loyal to great deals? The day Fresh & Easy decides to start making money, will its customers move on to other opportunities, for example, working with a retailer who accepts manufacturer’s coupons?

It is impossible to know for certain and, surely, some of the customers attracted to try the store by bargains will stay for the quality, convenience, ambiance or unique products, etc. Yet our assessment just observing customers is that they are disproportionately elderly, students and others who are very focused on price. We suspect many will not stick around if the bargains become less frequent or substantial.

And the losses seem likely to continue for some time almost regardless of the individual store sales. At one point, Tesco was saying it would have 200 stores open by the end of 2008. Later it guided down to 150 stores open by the end of 2008. The company now has 83 stores open. Its first store to open after its “pause” was July 2, 2008, which was its 62nd store. This means it has opened roughly 1.75 stores per week since the pause.

If Fresh & Easy continues at this pace through the end of 2008, it will open another 15 or 16 stores by year’s end — but that would mean going through Thanksgiving, Christmas, etc., without a breath. In any case, Fresh & Easy may not even have a hundred stores open by yearend and certainly won’t meet its adjusted guidance level of 150 stores.

This is very significant because the large distribution center and heavy executive team is quite expensive, and Fresh & Easy needs to defray these costs against a substantial store base — otherwise it will just keep hemorrhaging money. And time is not on its side. A loss of $100 million today has to be made up, with interest, in the future for this investment to ever pay off. Besides, now that Tesco has its cards on the table, other retailers, including Safeway with its Market by Vons and, shortly, Wal-Mart with its Marketside concept, will turn up the heat.

In addition, as time has gone by Fresh & Easy will experience cost pressures. Although it likes to trumpet wages of $10 an hour — above the minimum wage — the truth is that Fresh & Easy pays significantly less than its unionized competitors, such as Kroger and Safeway, that have the bulk of the market share in the Fresh & Easy trading area. This makes it a juicy target for the United Food and Commercial Workers union, which surely will get full encouragement in this effort from the already unionized chains.

The ever vigilant Nancy Luna of The Orange County Registerwrote a piece when workers in an Orange County Fresh & Easy became the first to formally petition for union membership. The piece is entitled Fresh & Easy Workers in O.C. First To Demand Union Status:

Fresh & Easy employees in Huntington Beach have demanded that the British employer recognize them as a union — a move that could set the stage for the company’s other Southern California workers to follow suit, union officials said Wednesday.

“Obviously, they want fair wages and benefits that are equal to the other people working in the industry,” said Greg Conger, president of United Food and Commercial Workers Local 324.

The Buena Park union represents 23,000 grocery workers in Orange County. Since November, when U.K.-based Tesco launched its first United States markets, called Fresh & Easy, local unions and community watchdog groups have pushed the food giant to become a union employer.

The Orange County Fresh & Easy workers, who earn a starting wage of $10 an hour, are the first employees working for the small-format chain to formally request union status. Fresh & Easy plans to open more than 200 neighborhood markets in the U.S.…

Conger said he expects a response from Fresh & Easy within a week. If the chain approves the organization of a union in Huntington Beach, Conger expects other Fresh & Easy employees to make similar requests.

If Tesco rejects the workers initial move, the employees can force the issue with an election under the National Labor Relations Board. If 50 percent of the employees vote in favor of a union, Tesco must recognize them as a labor group, said Todd Conger, a spokesman for UFCW Local 324.

If that happens, the grocery union anticipates other Fresh & Easy workers to lobby for union status.

“Our ultimate goal is to get all Fresh & Easy employees into the union fold,” said Todd Conger, whose father is Greg Conger.

Helping organize Fresh & Easy workers in Huntington Beach is Graham Ozenbaugh.

The 19-year Vons employee started working at the store as a $10 an hour “customer assistant” in December with the specific goal of getting the workers to form a union.

Todd Conger said the use of undercover union lobbyists such as Ozenbaugh is typical in “major campaigns” waged by labor organizations.

Conger said these workers, who take a leave of absence from their union-grocery jobs, are given supplemental pay. Ozenbaugh earns $20.80 an hour as a Vons supervisor.

“I’ve lived in Orange County since I was 22 and there’s no way I could survive off the wages in that store,” he said of his Fresh & Easy wage.

Wal-Mart has managed to avoid unionization, but Fresh & Easy may not be as successful. Wal-Mart stores are large and so getting 50%-plus-one of the employees to agree is difficult. Most Fresh & Easy stores only employ 20 or 25 people, so it is easier for unions to stack the deck by simply taking jobs at the store as Mr. Ozenbaugh did. Also Fresh & Easy’s pledge to make 20 hours available to each employee and make them eligible for health insurance, etc., will tend to attract a more permanent employee as opposed to teenagers or senior citizens just looking for a little income supplement — this type of employee is more interested in unionization than a student who is just working for the summer or till the end of the semester.

Right now Fresh & Easy has the economy in its favor. With times tough, promotional pricing is a big draw and with the possibility of a recession, employees may want to shy away from unionization efforts fearing for their jobs. Whether this is enough to push Fresh & Easy into the black is very much an open question.

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