Our extensive study of Tesco’s journey to America has focused mostly on analysis of the concept behind, and the performance of, its Fresh & Easy division. Ultimately, however, the success of any business depends, at least in part, on the competitive environment in which it operates. Now we have run pieces such as this one discussing how competitors utilize their existing infrastructures to compete with Fresh & Easy. Of great interest, though, is whether other small format stores will become a competitive tool.
Opening a 200,000-square-foot Wal-Mart Supercenter or even a 55,000-square-foot Lifestyle Safeway because Tesco opens a 10,000-square-foot Fresh & Easy superette is a little like trying to crush an ant with an elephant. However, if competitors such as Wal-Mart and Safeway develop viable small format stores, it would change the competitive environment in two important ways:
First, the rollout of such stores nationally — and surely they would be quickly duplicated by other chains if they were successful — would serve to cap the upside for Tesco’s Fresh & Easy venture. It is one thing to quickly lease 300 stores that are of a size nobody wants. It is a completely different issue to go to, say, Boston and roll out such a concept after local retailers have had their pick of real estate.
Second, a successful small store format would add a new arrow to the quiver of competitors — and one that could be realistically used. If Fresh & Easy has a particularly successful store, you can expect the Safeway concept and the Wal-Mart concept to look to open nearby — and Kroger, Supervalu and others won’t be far behind. This type of direct competition that can basically preclude Fresh & Easy from having any very successful stores, yet with the vagaries of real estate, Tesco will need super successful stores to offset its losers.
The importance of this issue: the future of small footprint grocery stores means that Safeway’s opening of its new “the Market by Vons” has attracted great attention. We ran a piece on it, and we have begun receiving feedback from the Pundit Intelligence Network of readers — including this thoughtful letter from a very prominent industry consultant:
The Pundit piece, Safeway’s Small Footprint Store Distinguished By High Service, Upscale Look And Offerings, led me to make a point of adding a visit to “the Market by Vons” to a retail tour we were scheduled to conduct in southern California. It was a little “déjà vue all over again” as I had visited the location on vacation-time beach trips many times over the years.
Everything your Pundit article pointed out is very true, as was the information in the Los Angeles Times article the Pundit linked to in the course of its piece.
The store has now been open for almost a month and the following are some additions to what has already been written… some points peculiar to this store, others germane to the larger question of the future of this format and small format stores in general.
The store only has 35 parking spots in the parking lot, and the beach is in walking distance… in the past I remember that beach goers have used the parking lot, thus severely restricting parking for shoppers. The store currently has a guard policing the lot, but I don’t know if that will continue forever as it is very expensive.
The concept offers seven outdoor tables with a 28-person capacity to sit and eat. If Safeway makes an eating area, indoors or out a feature in future stores, it creates a significant point of differentiation with Fresh & Easy.
The store had two displays outside currently being used by produce with a display of sweet corn and mini watermelon — two great items and at great promotional prices.
At 2:00 PM on a weekday, the store had 34 active customers shopping.
The store has more than the usual field management in the store to work it and “baby sit” it, as this is the first of what Safeway hopes will be many of this new small format concept. The staffing level indicated a high priority project.
As the Pundit mentioned in its piece, Fresh & Easy Loses Price/Assortment War To Wal-Mart In Los Angeles, the Pundit sister publication PRODUCE BUSINESS had recently done a piece entitled Wal-Mart Pricing Study Round XVII: In LA, Wal-Mart Out-Prices Fresh & Easy And Others. This piece included an SKU count for a Vons in Glendora, which we would say is a fairly typical Vons.
Between what information is published in the article and some details the Pundit shared on the phone, we put together a rough count and used this fairly typical Glendora Vons as a benchmark to compare produce SKUs with Vons’ new small footprint store. This is what we came up with:
| “the market” | Vons | |
|---|---|---|
| Fresh fruits and veg | 300 | 346 |
| Value added salads and veg | 55 | 102 |
| Juices | 70 | 88 |
| Cut fruit | 4 | 48 |
| Soy products | 17 | 36 |
| Dressings and dips | 24 | 68 |
| TOTAL | 490 | 688 |
We did not include the dry items, dried fruits, nuts, etc.
For a 15,000 sq. ft. store to have the space and design to stock over 70% of a normal 50,000 sq ft Vons is a great accomplishment.
Much of what the store stocks in produce is organic, high end and often packaged, but they still create a bulk, select-your-own, fresh image.
In reviewing the 70% of produce SKU’s that they maintained from a normal Vons, we would say they did a stellar job of selection. They certainly had the ability to review the Vons scan file before the store closed, so they know what did and did not sell in that location in its previous incarnation.
Management told us that they are adjusting the produce and total store mix as they see what the customers ask for and what they are buying or are not buying.
This store was a little run down Safeway when Vons bought the Southern CA Safeway Division, and it became a little Vons with hardly any investment in the 18 years in has been a Vons.
As the Pundit mentioned in its article, the store’s wine selection was outstanding prior to closing. It is now even more extensive.
With the SKU count down significantly in the “center store,” the store will lose some customers looking for center-store basics, but it should pick up new customers who will be buying the higher priced and higher margin products on the perimeter.
The “center store” aisles are only five foot wide, but with the use of hand baskets and the very small shopping baskets — yet ideally sized for the concept and the type of shopper likely to be attracted to the concept — the aisles are ample.
The “center store” gondolas are 76 inches high with seven shelves and this is a bit high for the average customer, but it didn’t look out of scale so one suspects customers will get used to it. And it was a necessity in order to have room for the SKU count and thus the assortment the store was looking to provide.
Our estimate is the store, prior to closing, was doing a bit less than $200,000 per week and now is probably doing in excess of $325,000. With that, we estimate sales as running no less than $21 per square foot per week and perhaps as high as $25 per sq ft per week.
Our judgment is that the produce department is doing over 20% and may be hitting 25% of total store sales.
We estimate that the other perishable departments are running roughly double the normal percent to total of the typical Vons. We would say that the “center store” is doing less than 30% of the total with the wine department doing in excess of 10%.
This kind of mix is essential in order to maintain their service levels in the perishable departments and to get the turnover to keep the shrink under control. Safeway management has transformed the store from a low payroll store to a very high one.
They have four service and four self-service check outs.
As a chain, Safeway has been slow to embrace the self-service checkouts, and I did check out using one. In the area Albertsons, Fresh & Easy, and Ralphs also offer self-checkout, but Safeway’s system is not very customer-friendly and management has a lot of work to do to make them comparable to the self-checkout systems offered by competitors..
When comparing “the Market by Vons” and Fresh & Easy, we would say the following:
Fresh & Easy has:
- Better prices
- Better self-service check out
- More parking
“the Market by Vons” has:
- 5,000 more sq ft to work with but they have a significantly better selection in all departments, including the center store. Our off-the-cuff guess is they have a total of three or even four times the SKU’s of a Fresh & Easy. Produce alone has 2½ the SKU’s verses Fresh & Easy despite Fresh & Easy constantly touting its produce variety.
The concept makes better use of space and will achieve a much higher inventory turnover.
- The store has a better fresh image with the ability to select what you want
- Better decor
- Better perishables
- Better service
- Sampling throughout the store and not in just one area. The items selected for sampling are all from the perishable departments and were all very good.
There is little question that this is a high-priority project for Safeway and so Safeway will continue to improve this store and any others they role out. The big handicap at this particular store is parking and the parking will always be better in future stores than it is at this store.
Summary judgment: If there was a “the market by Vons” and a Fresh & Easy across the street from one another, I believe “the market” would blow away the Fresh & Easy despite the differences in retails.
We are always deeply appreciative for the efforts of Pundit readers to share their insights with the industry. We are truly blessed with readers both knowledgeable and insightful as this letter amply demonstrates.
To us, this Safeway concept is so service-oriented and so up-market that it leads to one of three possibilities. Either A) There is another shoe to drop, and Safeway will at some point unveil a very different small format store to serve a more modest demographic. B) Safeway does not believe the Fresh & Easy concept is viable except in more affluent areas. We know that much of Safeway’s marketing response has centered on its “O’ brand organic line and Crusty Breads — both upscale lines. If Safeway thought it was losing business based on price, we would expect to see promotion of its cheaper private label product. C) Whether Tesco can be successful or not in poor neighborhoods, that is not where Safeway sees its future.
Our guess is a bit of B combined with a lot of C.
Although Safeway may open some small format stores, we see no indications of massive 300-store rollouts any time soon.
What Safeway may be more concerned about is finding an alternative to closing the 500-odd stores it has right now that are 25,000 square feet or smaller. Now that the Lifestyle rollout is coming to an end, this may provide the next generation lift in sales and profits.
If this happens to hurt Tesco, it is purely coincidental; we would think Safeways’ goal is to maximize the return on its own assets.
Many thanks to our correspondent for his generosity in sharing his time and insights with us all.
