EL SEGUNDO, Calif. — Tesco has scaled back the development pace of its Fresh & Easy Neighborhood Market stores in the Western U.S., and the company continues to tweak its format as it prepares to expand into Northern California.
Originally scheduled to have 200 stores open by the end of next month, it now appears the company will fall short of its reduced target of opening 150 locations by then. And although it had planned to enter Northern California by early this year, Fresh & Easy executives recently told SN they see the latter half of 2009 as the earliest date of entry for that market.
Analysts said they believe Fresh & Easy is also falling short of its sales goals.
Meanwhile, the chain continues to make some minor changes to its marketing messages to adjust to the economic downturn. Along with its overall themes of convenience, quality, sustainability and freshness, it has recently launched more price-focused advertising for its small-format stores.
Simon Uwins, Fresh & Easy's chief marketing officer, said evolving to meet customer demand is what Tesco, the chain's United Kingdom-based parent company, strives to do. “Listening to customers and responding to their needs is the hallmark of what Tesco does, and it's how we approach the business,” he told SN. “It's what we do all over the world, and it's what we've done here in the U.S. We don't replicate formats. We always develop stores based on what people in the local markets tell us and make changes when they tell us to change.”
Besides using its website to communicate with customers, Fresh & Easy is also reportedly using Twitter, a text-based messaging service, to keep customers informed and also to answer their questions immediately.
That communication resulted in a decision by Fresh & Easy last spring to stop expanding its store base for three months so it could tweak the model in response to customer suggestions — a process that involved boosting the color palette and adding new signage to explain some of the format's strategies better, including its commitment to freshness, quality and concern for the environment, Uwins noted.
In response to shopper requests for help stretching their budgets as the economy tightened, Fresh & Easy launched a program earlier this month in which it offers six packages a week of seasonal fruits and vegetables priced at 98 cents a bag, he said, adding that it introduced a line of beef and poultry products late last year priced below its Fresh & Easy brand.
“These moves show we're able to meet consumer demand for fresh foods while helping consumers stretch their budgets,” Uwins explained.
Mike Griswold, a Boise, Idaho-based consultant with AMR Research, Boston, said the introduction of the 98-cent produce pack is a good sign “because it shows they have become a bit more promotional to reflect current economic conditions, and that's a big positive.”
David Bishop, managing partner for Balvor, a sales and marketing consulting firm based in Barrington, Ill., told SN he believes Fresh & Easy is onto something with its format.
“This is an extremely unusual time for retailers to operate in, and the timing is not as good as Fresh & Easy had hoped,” he said. “But longer term, it might be the right format at the right time.
“With large chunks of sales coming from fresh foods and private label, Fresh & Easy is delivering value in two of the cutting-edge industry trends, and it's delivering good values in both.”
However, a British analyst told SN he thinks Fresh & Easy faces some challenges in a recession.
“You can view them as either a low-price operator or an organic/healthy foods store, and it's the latter that reflects most of the appeal it has today,” the analyst said. “And though the stores are relatively inexpensive, they haven't really done a good job getting that message out yet.
“Though they may be getting a bit more promotional than they had originally planned, they still have no plans to be more than an EDLP operator with a promotional twist, and they're still relying primarily on word of mouth to get people to give them a try.”
Fresh & Easy operates 110 stores of about 10,000 square feet, with assortments limited to 3,500 SKUs, in Southern California, Phoenix and Las Vegas. Those measurements put it at about one fourth the size of typical U.S. supermarkets.
According to industry estimates, Fresh & Easy's annual sales per store are estimated at close to $6 million on the low end up to $13 million at some of its best locations, for total annual volume of about $400 million for the fiscal year ending Feb. 28.
Nearly 16 months after it opened it first stores in November 2007, Fresh & Easy is on track to have 125 units in operation by late February.
Fresh &Easy ran into a buzz saw as the economy weakened, though that could turn into a plus by giving it access to better retail locations abandoned by other operators, observers said.
Since it resumed opening stores in July, the company has opted to maintain its growth rate at one to three units a week for the foreseeable future, rather than accelerating that pace to reach 150 stores by the end of next month, Uwins said.
“We had planned to speed up the number of openings during the fourth quarter,” he explained, “but in light of the economic environment, we thought it would be prudent to keep going at the current rate.”
He declined to say if or when the chain might pick up the pace or when it will reach 200 units. “We're being very prudent in this environment,” he told SN, “so at the moment we intend to expand at the current rate and see where that takes us.”
One reason for the decision to maintain rather than accelerate its growth rate was linked to problems in the real estate market, Uwins pointed out. “In the short term, some developments we were supposed to be part of have shut down.”
However, he said he believes the recession may offer Fresh & Easy some long-term gains. “It could be a great opportunity to find more properties,” he said.
Industry observers agreed that Fresh & Easy may be able to pick up more and better properties as other businesses go under.
“The economic slowdown may mean Fresh & Easy has access to better locations,” one industry analyst told SN. “It's always been flexible on real estate, with stores in upscale neighborhoods, under-served neighborhoods and everything in between, and now it may be able to get some corner locations as other businesses close.”
Bishop told SN he sees the slower pace of openings as a positive development.
“By slowing growth, Fresh & Easy can invest more capital in remodeling existing stores and fixing problems based on what it's learned so far,” he said. “In a down economy, that's not terribly different from what everyone else in the market is already doing.”
However, other observers said they believe Fresh & Easy is using the economy as a smokescreen to hide performance issues.
“It's my judgment that the slowdown in expansion may outlive the economic turmoil,” Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., said.
“Most food retailers are doing pretty well in this environment, at least on a sales basis, and the sharpest operators are looking for ways to capitalize when others may be pulling back, which is why companies like Aldi and Save-A-Lot seem to be accelerating their expansion plans.”
Jim Prevor, an industry consultant based in Boca Raton, Fla., offered a similar opinion, saying that, if Tesco were truly satisfied with the progress of its U.S. business, “[it] would be pushing on the pedal to open more distribution centers and more stores. Its decision to sit tight [and slow expansion] is an outgrowth of the fact it is losing money and doesn't know how to change that.”
A U.S. analyst also said he doubts Tesco management is as satisfied with Fresh & Easy's early results as it says it is.
“It's clear to me Fresh & Easy hasn't lived up to the hopes the parent company had for it,” he noted.
Asked what Tesco could have done to achieve better results at Fresh & Easy, a U.S. analyst told SN, “Maybe they should have done some beta testing after doing their research before opening a group of stores and implementing the format 100%.
“Had they done that, it may have prompted them to limit the extent of private label and ready-to-eat offerings a bit, and they may have started with some manned checkstands rather than all self-service, at least for a while.
“Maybe they were too revolutionary and maybe they should have implemented some programs more slowly — or perhaps they should have simply explained them better from the start.”
Tesco management has expressed satisfaction with the progress the stores have made, noting that 28 locations in operation for more than a year are achieving strong double-digit increases — a figure Uwins declined to pinpoint.
Reporting nine-month results in September, Tesco said sales at Fresh & Easy's “best stores” were running at more than $25 per square foot per week and stores opened since the spring were averaging close to $13, while other Fresh & Easy units were averaging $11.
Sir Terry Leahy, Tesco's chief executive officer, said Fresh & Easy “is very popular, and it is well received by customers. The stores are performing ahead of budget and, more importantly, customers love [them], and we're getting the best feedback we have ever had from any format we've opened anywhere.”
He acknowledged the stores lost close to $120 million in their first four months of operation and will likely lose nearly $200 million for the fiscal year that ends next month.
According to the industry analyst, “When management says Fresh & Easy is doing well ‘against expectations,’ that could mean they thought results would be beyond expectations or that they set expectations very low, because otherwise they probably wouldn't have called a halt to openings for a while last year.”
Uwins said Fresh & Easy does not intend to expand its operations into Northern California until its second distribution center — in Stockton, Calif. — opens. However, given uncertainties over when that facility will be ready, Fresh & Easy is unlikely to move to the San Francisco and Sacramento markets before the second half of 2009, he noted.
“It's taking longer than we anticipated to develop a Northern California infrastructure,” he said, “but once we do, we have store sites lined up.”
With a 1 million-square-foot distribution center in Riverside, Calif., supporting an estimated 125 stores by the end of February, Bishop said he believes Fresh & Easy should probably add another 50 stores in the Los Angeles area and Phoenix to boost capacity at that location before moving north.
“Then they'll need 40 or 50 stores in Northern California to support the second facility,” he said, “which is a pretty low number for a large facility.”
Asked about expansion plans beyond Northern California, Uwins said, “We have no plans at the moment beyond that.”
Observers told SN they believe Fresh & Easy could expand in a number of directions once it's established in Northern California — a move up the coast to the Pacific Northwest; eastward to Denver or Salt Lake, where the demographics are said to be similar to Phoenix and Las Vegas; to Chicago, the destination mentioned most often; or even to Florida.
Any such moves would require a distribution infrastructure that's feasible, observers pointed out.
“What they need is a mature supply chain infrastructure, and the quickest way to get that would be through an acquisition,” Mike Griswold, a Boise, Idaho-based consultant with AMR Research, Boston, told SN — a possibility that could happen if Supervalu were to decide to sell off some distribution properties, he pointed out.
According to the U.S. analyst, “Chicago is the kind of urban area Tesco wants to be in.”
Despite published reports to the contrary, Uwins said Fresh & Easy has not opened an office in Chicago to assess real estate opportunities there, nor would he be pinned down on where the chain might set up shop next.
“The truth is, we keep alert to what's going on all over the U.S., so we can learn.”
Poll respondents who said they expect Tesco to exit the U.S. this year.
Source: Supermarketnews.com  Quick Poll. (Question: Which is most likely: Tesco leaves U.S., Whole Foods gets acquired or A&P goes private?)