U.S. Convenience Gap Underlies Fresh & Easy: Leahy

Tesco's decision to invest in its small-format Fresh & Easy Neighborhood Market stores in the Western U.S. was based on its perception that convenience is a relatively underinvested segment of retailing in the U.S., said Sir Terry Leahy, chief executive for U.K.-based Tesco, in a presentation at the National Retail Federation's 99th Annual Convention & Expo here last week. Convenience is

NEW YORK — Tesco's decision to invest in its small-format Fresh & Easy Neighborhood Market stores in the Western U.S. was based on its perception that convenience “is a relatively underinvested segment of retailing” in the U.S., said Sir Terry Leahy, chief executive for U.K.-based Tesco, in a presentation at the National Retail Federation's 99th Annual Convention & Expo here last week.

“Convenience is the fastest-growing sector of retailing around the world. One exception, interestingly, is the U.S.,” said Leahy. “We felt there was an opportunity in the U.S. [in] this broad area of convenience, so we invested in Fresh & Easy. We believe — hope — this will be a sector that will grow into the future.”

Since opening its first store in Southern California in November 2007, Fresh & Easy has been one of the more closely watched food retailing operations in the U.S., with skeptics questioning the viability of the concept and admirers opening similar small-format stores. It now operates about 132 stores in Southern and Central California, Phoenix and Las Vegas, having recently opened a new store in Fresno, Calif., but the company had hoped to have 150 stores opened by the end of its fiscal year last February — which was down from its original goal of 200.

Tesco said last October that Fresh & Easy recorded a loss of $135.4 million (U.S.) for the first half that ended Aug. 29, compared with a loss of approximately $95.5 million a year ago, which the company said puts it on track to meet its expectation of losing approximately $259 million on the U.S. operation in 2009 — about the same level as the loss the previous year.

Acknowledging that Fresh & Easy is “not like other [retail] businesses in the U.S.,” Leahy said it is based on a “low-cost operating model,” offers nutritious food “that plays well with health-conscious diets,” and has “good green credentials” in its energy usage.

Leahy pointed out that Tesco Express, its small-format, convenience-oriented format in the U.K. and other markets, “has been a huge success,” with more than 2,000 outlets in the U.K. and about 2,000 around the world. The genesis of the Tesco Express format, he said, was the company's observation that busy shoppers are no longer just following a traditional once-per-week shopping pattern but are “less planned” in their shopping. Fresh & Easy also came about as a result of “watching how people behave and shop,” he said.

Closely observing shopper behavior is one of the ways that Tesco has achieved its success in the U.K., where it has substantially outpaced the sales of its main competitors, J. Sainsbury and Marks & Spencer over the past 15 years, said Leahy. “You don't have to dream up innovations — customers will show you the business opportunities,” he said. “All you have to do is stay close to them and be ready when you see change.”

He also advised having direct conversations with small groups of shoppers to find out “the truth” about where your business stands. “They'll tell you what's good and what's wrong,” he said. “If you listen, they'll give you a strategy to fix [what's wrong], and it comes free.”

Though Tesco is famous for its Club Card loyalty program devised in collaboration with U.K.-based Dunnhumby, in which Tesco owns a greater than 50% share, Leahy stressed that “loyalty is created not by loyalty programs but by how you treat your customer.”

In addition to meeting shoppers' desire for convenience — through small-format stores, ready-to-eat meals, self-scanning, online retailing and mobile phone shopping — Leahy believes that the challenges raised by climate change represent another key growth driver for retailers in the coming years. “The science seems incontrovertible,” he said. “We in the developed world are going to have to live on 80% less carbon. We now have got to shift the whole basis of consumption to low carbon.”

For retailers, this is a significant business opportunity, Leahy declared. “Those retail businesses who respond first and best to the consumer's need for low-carbon products and low-carbon living in an affordable way will do the best. This is an opportunity for us all.”