Our piece, Pundit’s Analysis Buttressed: Tesco’s Fresh & Easy Sales Only 25% Of Plan, Says Willard Bishop Report, dealt with a report from one of the trade’s most prominent consultancies that came to this conclusion about the current state of Tesco’s Fresh & Easy operation:
Current performance doesn’t appear to meet initial sales projections of $200,000/store/week. Our very rough estimate is that a typical store is achieving about $50,000/week, or only 25% of initial projections.
Now we have received a first-person report from another prominent consultant in the trade backing up this assessment:
Last Saturday, as part of my travels, I spent about four hours visiting five Fresh & Easy stores. I was in stores between 10am and 2pm.The customer count was a high of 9 and a low of 4.
The store conditions have improved, but there are still out-of-stocks in produce, meat, meals, and the deli case.
To Tesco’s credit, its store level employees are very friendly and helpful and they say they have not experienced any labor cut backs. However, the employees did say that those who have quit have not been replaced.
Their retail merchandising execution is very consistent, and they have now started to market the store. In the last four weeks, they have produced a mailer as do the other chains in the area.
The piece is in effect for two weeks (52 items). The piece is all private label with the exception of the back page that is all branded and mostly health and beauty aids. They now have an in-store piece that has both private label and branded products at excellent price points. They now do more comparisons at the Point Of Purchase (POP) level comparing their prices with Store 1 and Store 2 where they originally did this against Vons and Ralphs.
They mailed out a four-week $5 off on a $20-or-more purchase (excluding dairy and alcohol) each week and freely hand this out at the check stands. Friends in the area received this Tuesday in the mail a piece that is titled, “Entertaining with ease”. It has 12 items on it for the Super Bowl with six private label and six branded and a $5 coupon off on a $20 purchase, excluding dairy and alcohol. All items are good prices but not great, and the chains have them beat on all of the branded items — this is the problem of being an Every Day Low Price (EDLP) company.
All five stores had consistent merchandising, pricing and the same SKUs in produce. They also all had two specials leading off the produce dry section — 10# bag russet at $1.99 and a 10# bagged navel at $3.99. This is the first time they have allowed the vendor to do the packaging and use their own brand and you could tell it was to cut cost and they were in bins.
A source at a local Fresh & Easy who I knew in a prior position told me that the Fresh & Easy store he works at is doing $50,000 per week and not growing. Bill Bishop and the team at Willard Bishop are right on it with their sales estimate.
We know that management at Tesco and at Fresh & Easy had expected to be doing $200,000 a week per store. So this shortfall is no near miss.
Not surprisingly, Tesco is starting to make changes. Beside the obvious operational improvements to reduce out-of-stocks that are necessary, the company is starting to promote more.
Yet the volume that Tesco needs seems unlikely to be in the cards for a long time. When a new store opens, sales commonly drop, not increase, by 20 or 30% within the first four weeks.
Then, they can start to grow, but rarely by leaps and bounds. If these stores have stabilized at $50,000 a week after being open a month or two, you would expect to see sales at $60,000 a week a year later, $69,000 two years later, $80,000 after three years and, say $90,000 after four years.
Now if the concept really takes off and gains wide acceptance, instead of a gain of 20% and then 15% each year, you could get a gain of, initially, 35% and then 25% after that. Still that would only mean $67,500 per week per store a year from now.
And in this particular case, Tesco is unlikely to achieve these rates of increase because the competition is not sitting back and waiting for Tesco to increase sales.
Vons/Safeway, for example, has been hitting Tesco hard. Vons and Safeway released two mailer pieces each lasting about four weeks with very strong prices on commodity-type items such as milk, Coca-Cola, eggs, etc.
Vons and Safeway are also using loyalty card data to target customers who have reduced their shopping trips to their local Safeway or Vons store by a consistent 20% weekly. They are assuming that these are “customers shared” with Fresh & Easy.
Vons and Safeway are mailing loyalty-card customers specials for produce, Safeway Select private label items, and the mailings heavily promote Safeway’s O brand organics, crusty breads and prepared foods. Safeway believes that these are the strong areas for the Fresh & Easy concept and it wants to take that advantage away from Fresh & Easy.
Though this competitive approach is one that Vons/Safeway is using in all of its stores that compete with Fresh & Easy stores in California, Arizona and Nevada, it is all just a precaution. To date, Safeway sales show no impact from the opening of the Fresh & Easy stores.
And this is just competition from existing stores. While Tesco plans a rollout in San Jose and the Bay Area, Safeway is not sitting still:
Safeway has retained Cornish & Carey Commercial real estate brokerage and is seeking at least five South Bay locations for stores about a third the size of its regular outlets, or approximately 20,000 square feet, real estate brokers say. …
At the same time, Safeway this summer opened a new Redwood City restaurant, Citrine New World Bistro, to test consumer acceptance of prepared entrees that it wants to sell, according to an interview published Oct. 15 with Safeway Chairman, President and Chief Executive Steven A. Burd.
We’ve already mentioned Wal-Mart’s plans to open an Express format store here and, when Tesco and others fight for real estate, Tesco may be in for unpleasant surprise:
Where landlords find themselves confronted with interest in a single site from more than one grocer, say a Safeway and Tesco’s, for instance, Safeway probably has an undeniable edge, adds David Taxin, a principal with South Bay retail brokerage Meacham/ Oppenheimer Inc. Safeway has long been considered a gold-plated tenant with proven ability to pay its rent and to anchor firmly, he says. That’s attractive, particularly in a marketplace that is strong today but could see softening in rents and vacancy rates if the national and regional economies continue to slow. (Safeway also owns a fair percentage of its locations.)
Tesco is relatively unknown and “untested” not only as a retailer but as the key traffic driver, Taxin says. Consequently, it might find itself a less attractive alternative for some landlords compared to other better-known brands.
“There is concern that (Tesco) may stumble,” agrees a developer who has talked to the company’s leasing agents and representatives. “These are expensive little stores they are doing. They are paying a lot in rent, and you have to do a lot greater volume per square foot to make it work. All of us are eating right now, so the only way for them to stick around is to steal market share from others.”
Safeway has a history of fighting back strong and hard when competitors attempt to take bites from its market.
On top of Safeway’s efforts and Wal-Mart’s plans, Kroger is pushing its 100,000-square-foot supercenter-like Marketplace concept, which was tested under Kroger’s Fry’s banner in Arizona.
All this means that it is going to be very, very difficult for Tesco to quadruple sales in each store.
Now, as our letter indicates, Tesco is likely to start looking for ways to reduce costs in light of the weak business the stores are doing.
Our correspondent points out that store employees are reporting that Tesco hasn’t done lay offs of store personnel, but employees who leave are not being replaced.
This is no small matter. Retail is a high turnover industry, and new hires — 100% of Tesco’s employees — are the highest turnover. Add in a completely new concept — which means many employees will leave because they don’t like the business, their schedule, their immediate boss, the store, the drive to the store, the pay, the customers, etc. — and it would not be shocking to see 60% of Tesco’s store level employees leave within the first year of operation.
Obviously, such attrition will start to have an impact on customer service, cleanliness, stressed employees won’t have such pleasant attitudes, lines at check out will form when people don’t know how to use the self-checkouts, etc.
Then our correspondent drops this shocker: “They also all had two specials leading off the produce dry section — 10# bag russet at $1.99 and a 10# bagged navel at $3.99. This is the first time they have allowed the vendor to do the packaging and use their own brand, and you could tell it was to cut cost and they were in bins.”
This observation strikes at the integrity of the whole concept. Build up a private label business? Not if you carry it on and off. Strong vendor relations? Not if they are going to be looking for the cheapest deal.
Still, we are receiving mixed reviews from vendors. Although many tell us sales are way below expectations, some have said that the $50,000 per store number is too low, based on their sales to Fresh & Easy and extrapolated to the whole store.
Well, one thing we noted on our visit to Fresh & Easy was that all the produce had expire dates. So we asked our correspondent to go back and try to get a sense of the kind of shrink the stores might be experiencing.
Here is his report:
I went into a store at 8 at night and back in at 8 in the morning to see what was taken off of the shelf. I counted the produce packages that would go out of code at 385 packages!
Of these 385 packages, only about 15 of these would be dumped in a regular supermarket. Tesco will have to address the code life they are putting on the packages and extend them.
Indeed, code dates may need to be changed. But in the meantime, this explains why some vendors think Tesco is selling at higher rates than the $50,000 per week Willard Bishop estimates. Tesco is buying at a higher rate than its volume justifies, then it is donating or dumping the product.
This means the financials on the stores are even worse than would be expected at such low sales volumes. We’ve written a great deal about Fresh & Easy, but in light of our correspondent’s report, there is little question as to why Tesco isn’t rushing to release any numbers on its Fresh & Easy adventure in America.