Tesco Upbeat Despite Closures

CHESHUNT, England The incoming chief executive of Tesco here said last week he is confident about the future of Fresh & Easy Neighborhood Market because of the enthusiasm and loyalty of its customer base, even as the company said it would shutter 13 underperforming units. Speaking at a press conference to discuss the company's financial results for the fiscal first half, which ended Aug. 31, Phillip

CHESHUNT, England — The incoming chief executive of Tesco here said last week he is confident about the future of Fresh & Easy Neighborhood Market because of the enthusiasm and loyalty of its customer base, even as the company said it would shutter 13 underperforming units.

Speaking at a press conference to discuss the company's financial results for the fiscal first half, which ended Aug. 31, Phillip Clarke, who will become Tesco's chief executive in March, showed none of the reticence he had expressed in a newspaper interview last month in which he seemed to indicate he would take a wait-and-see attitude on deciding Fresh & Easy's future.

“The key components are coming together,” he said, for Fresh & Easy to achieve profitability in 2012 or 2013, by which time Tesco expects to be operating close to 400 U.S. stores.

For the six-month period that ended Aug. 31, Tesco said its U.S. division, which encompassed 159 stores, lost $151 million (U.S.), while sales rose 47% to $392.7 million and same-store sales rose approximately 10%.

The chain experienced a “small increase” in losses, Clarke noted, due to additional costs related to its acquisition of two suppliers, and increased rent from unopened stores.

“Sales per store are rising steadily towards the levels we require, and losses per store are reducing,” the company said. “Full-year losses have plateaued, although we do not expect this year's losses to be materially different from last year.”

Fresh & Easy currently has 168 stores in California, Arizona and Nevada. The company said last week it plans to open 19 more stores during the second half of Tesco's fiscal year, compared with 14 in the first half.

Tesco also said it plans to “mothball” 13 Fresh & Easy stores by Nov. 2 — six in Arizona, six in Nevada and one in California — with plans to reopen them “when the housing and employment markets [in those neighborhoods] pick up.”

Tesco also reiterated plans to move into Northern California next year.

“With the key components coming together, our plan to accelerate expansion of Fresh & Easy is right,” Clarke said. “The economy should help, but even if it doesn't, we have a good plan to get to profitability by 2012 or 2013, with our [Riverside,Calif.-based] distribution center operating at full capacity.”

As it seeks new store sites, Tesco will look for locations “with a continued focus on areas where the local economy has been less severely hit and where we are seeing substantially stronger sales performance.” A Tesco spokesman said the openings will be focused “around coastal California.”

The key differentiation for Fresh & Easy, Clarke said, is fresh meal solutions, which account for 30% of food sales. Tesco acquired its two primary fresh suppliers, both of whom opened local facilities in 2007 — 2 Sisters, which purchases meat, fish and poultry, and Wild Rocket Foods, which purchases produce — and merged them in June with its own Fresh & Easy Kitchen, located on the same property.

According to Clarke, Fresh & Easy scores higher than its conventional competitors on several metrics. Citing independent surveys, he said Fresh & Easy scores higher on prices, quality, assortment, ease of shopping, in-stock position, store environment, value, checkout, eco-friendliness, freshness, overall friendliness and location.