Our extensive study of Tesco’s Journey to America as Fresh & Easy continues with lots of news regarding Tesco.
First Tesco announced its sales numbers and faced headlines like this in London’s Telegragh: Tesco Sales Suffer As Clubcard Push Fails
Despite months of heavy promotion and a doubling of Clubcard loyalty points to customers, sales in Tesco’s UK stores rose by less than the City was expecting over the three months to the end of November.
…JP Morgan, the bank, said: “This is disappointing, in our view, in the context of the doubling of the loyalty card rewards and the heavy advertising expenditure incurred.
“It is therefore quite possible that like-for-likes will fall below 1pc in the fourth quarter, which would imply negative real like-for-likes once the benefit of [store] extensions is excluded.”
As if the failure of extensive investment to boost sales over the City’s expectations was not enough, Tesco also got hit by news that Wal-Mart’s ASDA, J Sainsbury and Morrison’s all gained market share while Tesco stayed flat: As the Times of London explained in a piece titled, Wm Morrison Grabs Record UK Market Share:
Wm Morrison, Britain’s fourth largest supermarket, has grown its share of Britain’s grocery trade to a record high of 12.1 per cent in the past three months, according to the latest closely-watched survey figures.
The figures, produced by TNS Worldpanel, a retail consultant, show that Morrison’s market share grew year-on year at twice the rate of the rest of the market. It stood at 12.1 per cent for the three months to 29 November against 11.7 per cent in the same period last year.
…Asda and J Sainsbury also grew their market share to 17 per cent and 16.1 per cent respectively while Tesco, the market leader, has remained flat at 30.6 per cent, after market share loss throughout 2008 and 2009.
Now one seemingly bright spot in the report was the little US operation, Fresh & Easy. The Financial Times focused on the psychology of Tesco’s executives and headlined: Tesco Confident for US Venture as Sales Rise After Revamp:
Tesco, the UK’s biggest retailer, said it was seeing signs of improvement in its fledgling business in the US, where it is battling to make a success of its Fresh & Easy venture….
Sales at Tesco’s US business rose 37.4 per cent. The retailer said like-for-like sales were stronger at Fresh & Easy, after an overhaul of the range in September and its first significant advertising campaign. “We have seen a good increase in the number of customers coming into Fresh & Easy stores and a slight uptick in basket size,” said Laurie McIlwee, finance director.
Consequently, Tesco is maintaining its forecasts for Fresh & Easy. It expects the business to be on track to make a loss over the full year close to its $259m deficit last year.
“It is good that it has not got any worse,” said Mr McIlwee.
A 37.4% increase in sales is strong, although our experience with Tesco is that if it didn’t announce the same store sales number, what the British call like-for-like, it is because the number would look worse, not better.
More broadly, though, the key problem is this: Even with this strong sales performance, they expect to lose another quarter of a billion dollars this year. This indicates that the cost of bringing in the customers and getting sales — either through advertising or discounted prices — is too high. The inherent virtues of the format and product choice are not bringing in sufficient business so they have to go out and buy it. That is a very difficult conundrum to get out of.
There are more reports around, but we have some doubts about the credibility of them. For example, the Financial Times ran a piece titled, Tesco Plans US Loyalty Scheme:
Tesco has indicated that it plans to launch a version of its successful Clubcard shopper loyalty programme for customers of its Fresh & Easy chain in the US.
…A recent advertisement for a new marketing position at Fresh & Easy’s US headquarters in the Los Angeles area lists “2010 planning for loyalty programme” amid the job responsibilities.
That advertisement is pretty thin reed on which to leap to the conclusion that Fresh & Easy is about to introduce a US version of its famous British Clubcard.
We don’t think it is a bad idea. In fact we were shocked when they opened Fresh & Easy without all the tools — loyalty club, micromarketing, etc. — that make Tesco a success in the UK, and we knew that the boss of the US operation, Tim Mason, had been credited with a major role in developing Tesco’s loyalty program in the UK.
Still, we don’t see it in the cards immediately. First, in the UK, Tesco partners with Dunnhumby and it can’t do so in the US where Dunnhumby partners with Kroger, so it would be a big job to set up. Second, it is just not obvious that this should be the priority. The subtle manipulation of data is powerful for Tesco in the UK or Kroger in the US, but Fresh & Easy is so small, its focus should be on building a critical mass of sales, not the subtle manipulation of assortment to squeeze another half a percent in margin.
If we ran Fresh & Easy and could do just one thing, we would focus on accepting manufacturer’s coupons. We once advised them that they needed to accept American Express and they finally did it. Let us see how long they allow other retailers to have this obvious competitive advantage.
Finally, there are press reports out there declaring that Fresh & Easy is going to dramatically expand its southern California campus, as The Press-Enterprise claims in a piece titled, Expansion of Fresh & Easy Hub Planned:
Fresh & Easy Neighborhood Market, owned by British grocer Tesco, will move forward with plans to expand its already large Inland campus at the Meridian business park near Riverside to a total of nearly 2 million square feet on 88.4 acres.
The March Joint Powers Authority’s planning commission approved Fresh & Easy’s final environmental report and site plan for the expansion at a Wednesday morning meeting.
The authority oversees redevelopment of the former March Air Force Base including the Meridian business park being developed by LNR.
Dan Fairbanks, the agency’s planning director, said Fresh & Easy could have its building permits to start construction on the expansion by the summer.
The 767,000-square-foot expansion will add space to the company’s warehouses, parking, office space and kitchen, allowing it to serve 550 Fresh & Easy grocery stores in Southern California, Nevada and Arizona. Today, it could supply up to 235 stores and employ up to 1,250 people.
The company has opened 132 stores and employs about 670 at its Meridian distribution center.
Fresh & Easy had hoped to open 200 stores by the end of 2008 but the company slowed its growth from opening five or six stores a week at first, to now opening about one each week, said company spokesman Brendan Wonnacott, who described the move as “prudent.”
“This is about planning for future expansion,” he said of the efforts to build out its Meridian facility.
After the expansion, the distribution center and kitchen could employ a maximum of 2,750 people in jobs ranging from human resources, information technology, finance, warehousing, drivers, machine operators and food preparers, according to the JPA staff report.
Ben Shearer, director of construction for Fresh & Easy, said about 400 construction workers built the first phase.
Supervisor Bob Buster, a March Joint Powers commissioner, at Wednesday’s meeting called it an “all-in bet” on the future by Fresh & Easy.
Something is off here. First of all, each Fresh & Easy store is about 10,000 square feet, so 550 stores will be 5,500,000 total square feet. Why does Tesco need two million square feet of support space to handle 5,500,000 square feet of retail space? That ratio is all off. Second, surely Tesco has learned that it would be better off paying a little extra to work with wholesalers and brokers and maintain flexibility until its concept is settled and success. To sink money into distribution centers before the retail concept is known to work makes the enterprise unnecessarily risky.
Perhaps they will get the permits but postpone construction or build out the campus as a real estate play. It simply makes no sense to spend the money building this complex to supply a chain of money-losing stores.
