Tesco Still Optimistic on U.S.

CHESHUNT, England The integration of two dedicated foodservice businesses by Fresh & Easy Neighborhood Market should help the chain to reach a break-even point at 300 stores rather than the 400 originally projected, Phillip Clarke, the newly installed chief executive officer of Tesco plc, said here last week. Tesco is the parent company of U.S.-based Fresh & Easy, which has 172 stores in the Southwest.

CHESHUNT, England — The integration of two dedicated foodservice businesses by Fresh & Easy Neighborhood Market should help the chain to reach a break-even point at 300 stores rather than the 400 originally projected, Phillip Clarke, the newly installed chief executive officer of Tesco [4], said here last week.

Tesco is the parent company of U.S.-based Fresh & Easy, which has 172 stores in the Southwest.

Despite increased losses for the fiscal year, Fresh & Easy can grow earnings if it can get more customers to shop the stores, Clarke added. “I've spent a lot of time with the Fresh & Easy team, and I remain confident that break-even toward the end of fiscal 2012/2013 remains a realistic objective,” he said.

According to a European-based analyst, who asked not to be identified, “If Fresh & Easy can generate positive momentum, it would take the heat off — and positive momentum means profitability. Certainly, sales need to continue to grow — with same-store sales continuing to improve at a rate of about 10% — for the company to show profit improvement.

“Right now it doesn't look like Fresh & Easy is working, but no one can say it can't work. Given the high fixed costs, it's obviously not going to make money until sales hit a certain level, and while it may not look very promising right now, that could change if the stores can achieve the levels Tesco is forecasting over the next year or two.”

With Clarke coming in as the new CEO, Tesco could have shut down the U.S. operation without losing face, the analyst noted, “but clearly it's choosing not to do that. And though the numbers were a little behind what were forecast, Tesco appears to remain pretty confident of turning things around by the end of next year.”

For the fiscal year ended Feb. 28, the loss at Fresh & Easy, excluding currency exchange rates, was $303.6 million (U.S.), a 10% increase over last year's losses, with sales rising 38% to $808.2 million and same-store sales up 9.4%. Fresh & Easy operated 164 stores at the end of the fiscal year, compared with 145 a year earlier.

He said the company has developed some ideas about how to drive traffic, including opening the stores earlier.

After spending time with Fresh & Easy management and visiting many of the stores, Clarke said the decision was made to open the stores an hour earlier — at 7 a.m. instead of 8 a.m. — “and to sell coffee and pastries from the in-store bakeries, which is normal in America but something we weren't doing.

Clarke said the newest Fresh & Easy stores are achieving sales of $13 per square foot, and the chain's best units are achieving weekly sales of $200,000.

Fresh & Easy is scheduled to open three stores this week. The company said it plans to accelerate the rate of new-store openings this year to around 50.