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Tale of Two Tescos

While in Palm Springs for an industry meeting, we had the opportunity to visit the two Fresh & Easy stores in that area. In the differences between those two stores, we may find the core of Tesco’s struggle to make the concept work.

The store in Indio is a brand new building, in a brand new center. It is light and airy feeling and, although at the far edge of residential development in the region, it was a reasonably busy store with a steady flow of traffic during our weekend visit approaching the dinner hour.

In contrast, we visited a store in Palm Desert. This was a remodel of an existing property. It was across the street from a major shopping mall and shared a center with a 99-cent store.

It lacked the pleasing natural light of the other store. This store was dead. At no point during our visit just after we went to the Indio store did the number of customers exceed the number of employees. The primary job of the employees in the store seemed to be doing mark-downs on perishables that were approaching or were at their “best if used by” dates.

In both stores the staff was friendly; in both stores we saw a number of innovative products, especially in the meat and prepared foods areas. We saw continuing disappointments. Out-of-stocks were still unreasonably high for a small chain that could easily do manual ordering to supplement its computer-driven system. The sampling area continues to sample the most mundane dried grocery items and simple deli or produce items rather than any of the innovative products the store carries, since they don’t sample cooked product.

We saw Tesco beginning to abandon some of the policies that have made it uncompetitive — for example, the first two produce items in the store were branded — bags of Peri & Sons onions and Kern Ridge citrus.

The branded bags are obviously attempts to avoid the enormous cost associated with repacking these items and thus either offer consumers a better value proposition or increase Fresh & Easy margins.

Despite the entry of branded product into produce, we saw no evidence that Tesco was looking to offer well known consumer brands, such as Dole, Chiquita, Del Monte or Sunkist.

As we have studied Tesco’s Journey to America, we have often questioned the decision to start out by building a massive distribution center. The problem with this strategy is that it placed tremendous pressure on the real estate personnel to sign a lot of leases quickly so as to amortize the cost of the distribution center. The almost inevitable result of this is that Tesco wound up with a lot of secondary locations.

As the stores have begun to mature and as Tesco has increased its promotions and discounting — with markdowns on perishables and offers of a $5 coupon on a $20 sale — we are finding some stores selling from $100,000 to $120,000 a week, but we are also finding many stores stuck in that $50,000- to $60,000-a-week range.

The prime difference seems to be real estate — as the saying goes, there are three things important in retail: location, location and location.

That overstates it a bit — and profitability can be difficult to judge as sometimes those high traffic locations are pricey. But an unsuccessful high traffic location can be fixed by changing concepts whereas a low traffic location can be a struggle regardless of concept.

One likely outcome of the Fresh & Easy saga: After two or three years of rapid rollouts, Tesco will take the underperforming locations — perhaps a third of, say, 500 stores opened by then — and close them, declaring a massive write-off attributed to “start-up learning” in which it learned what locations work and don’t for the concept.

Of course, location is not a static thing. Right now that Indio location may be a winner. But this may be due as much to the fact that in this developing area, the competition isn’t yet too tough.

We noted that within walking distance of the store, both a Target Supercenter is under construction and a unit of the uber-competitive, super price-focused, employee-owned Winco Foods is being built.

Perhaps these retailers will attract more shoppers to the area and Fresh & Easy, with its small footprint, will be seen as a convenient alternative to the maddening crowds and larger footprints of these other stores. Perhaps. It is also possible, of course, that these new competitors will win over most of the customers and put such price pressure on Fresh & Easy that it can’t make any money even if it gets some customers.

Here is another wild card. There is an empty lot across the street from the Fresh & Easy in Indio, perhaps just the right size for one of the new small footprint concepts from Safeway or Wal-Mart.

We promise to check back after the SuperTarget and Winco open to see how Fresh & Easy in Indio is doing. But if we were investors in Tesco, we would be thinking about a write-down of subprime real estate somewhere down the road.

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