Will Tesco Turn it Around?

Fresh & Easy is rolling out a new Express store format, but can the company come out on top after nearly four years of heavy losses?

By Erin Rigik, Associate Editor.

Tesco’s Fresh & Easy Neighborhood Market grocery chain debuted with a bang in 2007, rolling out 20 stores in rapid succession in California, Nevada and Arizona.  But about four years in, the chain has endured mixed success and questions abound about the British grocer’s ability to find its niche in the U.S. market.

Fresh & Easy has seemingly executed operations effectively. It built distribution centers to support smaller-format grocery stores that measure 10,000-15,000 square feet in upscale, growing neighborhoods. In four years, the chain has expanded to 176 stores in its three operating states—California, Arizona and Nevada. It emphasizes prepared foods and has an impressive private label offering.

Despite the things it has done well, Fresh & Easy has struggled mightily to turn a profit and its losses have ballooned over the four years it’s been in business. Industry analysts wonder if Fresh & Easy’s growth can pick up enough momentum, while others are scratching their heads as to the core customer the chain is trying to attract and the way it seeks to position itself in the market.

“They have a tough challenge,” said Dick Meyer, president of Meyer & Associates, a consulting firm specializing in the financial and strategic needs of c-store and petroleum retailers. “They’re trying to create a brand new market, in a saturated market, in a tough recession, and in the three worst recession-hit states and at a time when everyone wants value.”

Fresh & Easy isn’t the only chain to struggle in the Southwest market area with a smaller-format store. Walmart experienced its own set of challenges in the same market as Fresh & Easy when it opened a similar sized concept called Marketside by Walmart, rolling out four smaller-format stores around 15,000 square feet in Arizona in 2008, specializing in fresh meals at value prices. The stores later closed.  

“Using Walmart as a backdrop, the question becomes about the format itself,” said David Bishop, managing partner at Balvor LLC, who noted that with traditional c-stores between 3,000 and 5,000 feet and traditional grocery stores around 45,000 square feet, customers unaccustomed to the mid-sized grocery store might be unsure of how it fits into their normal shopping patterns.

The Long Haul
Tesco, Bishop noted, has persevered longer than Walmart because it is willing to invest more or—depending on viewpoint—lose more. “Their volume per outlet is challenging at best—maybe better than what Walmart had per site, but they’ve also been in it longer. What it suggests to me is a long and gradual growth and not short and steep. Customers didn’t open their arms and wallets to these concepts like maybe Tesco expected, but shopping patterns in the U.S. are different than in the UK.”

While an average grocery store of 46,000-50,000 plus square feet might bring in $460,000 in average weekly sales, Fresh & Easy Buzz Blog estimated that Marketside stores averaged between $45,000-$60,000 in weekly sales. Tesco, meanwhile, reported on June 14 that its new stores in northern California have started with weekly sales per store of $150,000 in the entire first quarter.

Given those numbers, “Maybe that’s the reason Tesco has allowed Fresh & Easy to continue even in the face of high losses—they’ve had improving, although slow, growth,” Bishop said.

With its gluten-free, additive-free and other healthful foods, one could argue the chain is vying to compete against the likes of Whole Foods. At the same time, it shares common elements with a standard grocery store, including self-checkout counters, national brands, conventional merchandising and a more traditional and sanitary environment.

But with steep price cuts and a limited product array, Fresh & Easy seems to mimic Aldi. And with its emphasis on private label and freshly prepared foods in a smaller format, it also resembles Trader Joe’s, but without the unique products from around the globe and upscale ambiance.

With its amalgamation of different formats it’s almost as if the chain is pulling the best elements from several popular U.S. chains in order to be all things to all people.

“In doing that you could argue there is no focus area where it clearly has defined itself. Customers may come away from the store not knowing how it fits into their lifestyle,” Bishop said.  In other words, customers may be unclear on whether Fresh & Easy is the place to fill in with quick grocery pickups, or the equivalent of an upscale prepared food shop to pick up dinner, or the place to do a major pantry stocking trip.

“So we have a small box retailer with limited assortment; it’s not the everyday low price leader like a Walmart, but it’s a low cost alternative—at least in comparison to Whole Foods. All those different types of positioning could translate to the chain not being absolutely certain who their core customer is. They are trying to communicate with a lot of different customers on a variety of bases, but those value statements don’t resonate necessarily with the customer segments,” Bishop said.   

The Whole Foods shopper, for example, varies drastically from the traditional supermarket customer, both demographically and from a lifestyle standpoint.  “It’s very hard to simultaneously make a price value appeal from the cost side and a wholesome appeal from a product side,” he said.

Future Plans
As analysts speculate about Tesco’s future, the company’s vast retailing experience and deep pockets have to be taken into consideration. The company is very much a retailing powerhouse everywhere else it operates in the world. Not only has it succeeded with its Tesco grocery stores, but it has seen strong success with its Express format in the U.K. Of the 200 stores the chain opened in 2010-2011 in the UK, 150 were convenience stores, growing the total number of Tesco Express stores to 1,285.  Tesco’s plan is to duplicate its retail model in the U.S. by expanding into new markets.

“Our U.S. expansion has been focused mostly in Southern California,” said Brendan Wonnacott, head of communications for Fresh & Easy. “Two years ago we expanded up into Bakersfield, Calif., and last year we expanded further north into Fresno.”

This year, the chain has continued with an aggressive expansion plan, pushing into the San Francisco Bay Area and Northern California, opening a total of 15 new stores in Northern California, as well as nine in Southern California as of presstime. Previously, the chain announced that by 2012 or 2013 it plans to operate about 400 stores.

In August, Fresh & Easy announced it plans to also test a new Fresh & Easy Express brand of smaller-format stores as a way to expand in areas that can’t accommodate its usual 10,000 square-foot grocery store.  The new Express stores, which are in the early stages of development, are expected to measure 3,000 square feet.

“We are opening a couple of them in Southern California in neighborhoods that currently can’t accommodate our standard 10,000 square-foot store,” Wonnacott said. The launch date for the stores has yet to be announced.

The Fresh & Easy Express offering will consist of a carefully selected range of fresh foods at affordable prices, including prepared meals, fresh produce, meat, dairy, frozen foods and other daily staples.

“We have always been flexible in our store footprint from renovating existing buildings, anchoring mixed-use developments, to building from the ground up,” Wonnacott said. “Now we are going to explore the market opportunity with Express-type stores.”

Core Operations
Fresh & Easy has focused on aggressively expanding its private label brand of healthful prepared foods to include new lines such as “Gourmet” and “eatwell,” among others (see sidebar at end of article). This is made possible by its distribution center just outside of Los Angeles, which opened in November 2007 alongside the debut of the chain’s first stores.

“Having the ability to work on our own products and fit them to our strict guidelines—no added colors or flavors, preservatives or trans fats, no high fructose corn syrup—gives us an incredible opportunity to develop new products, as does working with suppliers and our own team of chefs,” Wonnacott said. “We have a broader campus facility—our ‘Kitchen,’ as we call it. We also have our Produce Campus right down the street. So it’s a very efficient setup.”

Plus, Wonnacott said, the products are developed based on the needs of local consumers. “What we’re seeing is folks are more focused on affordability so what we’ve been focused on is building our Fresh & Easy brand products to meet those needs.”

Even as it approaches its fourth birthday, the chain continues to be known for its deep discounts, including coupons in the range of 10-25% off for its “Friends of Fresh & Easy” rewards customers.  

“To be effective you have to offer affordable prices—it’s what everyone is looking for,” said Wonnacott. “We’re offering the same products at the same prices across the board, and it’s a way we’ve been able to structure our business.”

This fall, Fresh & Easy is set to introduce its “Thank You” loyalty card program, building on Tesco’s popular Clubcard. The program is an evolution of its “Friends of Fresh & Easy” email program that was introduced in December 2008. The new Thank You card will first be tested in seven stores in the Bakersfield, Calif., area this fall  and is a digital points-based program where customers earn one point for every dollar spent, which can be exchanged for cash-back rewards.

Challenges Ahead
While Fresh & Easy has a U.S. plan, Tesco has had to do some damage control back home. At Tesco’s annual meeting in Nottingham, England in July, CTW Investment Group, which advises U.S. union-sponsored pension funds, urged Tesco to conduct an independent review of Fresh & Easy, citing years of heavy losses.

Chairman David Reid rejected the request, and Chief Executive Phil Clarke announced Fresh & Easy is making progress. “We’re getting more customers through the door, and they’re spending more with us,” he told Reuters. Clarke added that he visited the U.S. chain four times in 2011 and took the board to visit the chain in March. Clarke said he believes Fresh & Easy can reduce its losses significantly this year and break into profit towards the end of the 2012-2013 financial year.

Fresh & Easy Buzz Blog reported that Fresh & Easy has suffered a whopping $900 million in losses since November 2007 and about $300 million in Tesco’s latest fiscal year ended Feb. 26, 2011.

For Tesco’s first quarter of 2011-2012 fiscal year, (Feb. 27 to May 28,), however, overall sales at Fresh & Easy were up a promising 21.9% and same-store sales grew 11.1%, but those numbers are most likely boosted with help from discount coupons, which cut prices at the expense of profit margins in a way some analysts say the chain can’t sustain long term.  

Comparable-store sales were up 8.6% in the fiscal year 2010-2011 fourth quarter ended Feb. 26.. Same store sales for the same period increased 9.4% over the previous fiscal year. Meanwhile, trading losses from operations widened by 13% to approximately $306.1 million in the year ended Feb. 26, 2011, as reported by the Wall Street Journal. Tesco has pointed to higher-than-expected losses as it integrated its food suppliers following two acquisitions as explanation for the poor numbers.

Silver Lining
Fresh & Easy’s distribution center, however, could provide the foothold the chain needs to pull itself out of the red, especially if the chain can succeed in boosting its presence in the market and leveraging that scale to better reach customers through advertising.

“Right now if they are in a market with only a handful of stores, it’s hard to go to radio or TV and really broadcast their message,” Bishop said. “I think part of their thought is from a logistics or supply chain aspect. They need to build up the store base to create some efficiencies with the transportation and distribution to drive their costs down and, at the same time, building that presence will allow them to utilize different advertising channels to reach a broader consumer base.”

But as the chain grows, it risks cannibalization by concentrating on building stores too close to each other, which could be one reason for its plan to offer the Fresh & Easy Express format.

“Fresh & Easy Express, with its 3,000-square-foot size, would allow the chain to move into some lower-priced real estate locations and still offer a similar assortment,” Bishop said. “It would allow them to penetrate more markets more effectively.” The Express format focuses more on take-home grocery pack sizes as opposed to immediate consumables.
“The question becomes, ‘How does the smaller size affect the consumer value proposition?’ For instance, will they introduce foodservice elements like dispensed beverages to help drive consumers to the store while repositioning the store as more of a fill-in trip for grocery stores?” Bishop said. “Just offering a lighter version of the same concept is not a guarantee for improved results.”

To be successful, Fresh & Easy must clarify where the format fits into the retail landscape and decide who it wants to compete with—grocery, club, convenience or Whole Foods, etc. Secondly, it needs to meet a need for the customer that isn’t already being satisfied elsewhere. Simply imitating the best qualities of other formats isn’t the best recipe for success in a crowded retail market.

“I am inclined to think more positively than negatively about a Fresh & Easy c-store format,” said Gene Hoffman, president and CEO of Corporate Strategies International, citing Tesco’s extremely successful Tesco Express stores. “They know how to operate a successful c-store business. I think well-populated Southwest America is ready to accept something a little different that also supplies the need for convenience, quality and uniqueness.”   

Hoffman certainly knows the market. He is a former president of The Kroger Co., America’s largest food retailer, and a past chairman and president of Supervalu Wholesale Food Cos., the country’s largest food wholesaler.

As the middle class feels an increasing economic squeeze, Hoffman noted a new c-store format “can possibly partially soothe growing consumer angst with new and diverse experiences and unique products that aren’t too expensive.  That’s what Trader Joe’s—which was started by a German businessman—is doing. Within that arena of hope lies the success—or failure—of Tesco’s new American c-store format.”   

Finding the Key to Success
If Tesco can’t bring in a profit in the coming year, it wouldn’t be the first UK retailer to attempt the U.S. market and fail, such as Mark & Spencer with Kings Super Markets and J. Sainsbury with Star Market in Boston, among others, leading Bishop to speculate, “Maybe there is some pride involved in Fresh & Easy’s perseverance. The quicker they can respond and fix things based on lessons learned, the more likely they’ll be successful going forward.”

Operating in the Southwest, Tesco must also stay tuned into the expansive demographics, ethnic desires and work and lifestyles of the diverse population in that area.

“Fresh & Easy must continue to fine-tune its business plan, make itself a magnet for more customers, tune its assortments and its industrial engineering so it can distribute and operate efficiently until it is better than available alternatives,” Hoffman said.  “Tesco is determined to be a successful player in America and, I presume, they will not give up here until their bottom line reflects success. If I were a betting man, I would bet on them. But it will take more time and it won’t be easy. We could see Fresh & Easy seeking the Holy Grail for quite a while.”

Food for Thought

Fresh & Easy Neighborhood Markets has beefed up its private label product array, expanding on its proprietary prepared meals. The offering includes:
• Gourmet—Affordable, restaurant-quality fresh and frozen products—including soups, entrees and desserts—made with fresh premium ingredients. In March, Fresh & Easy further expanded the Gourmet line adding frozen pizzas for $3.99 that are handcrafted in Visso, an Italian village just outside Rome. The dough and sauce are made on-site and the pizzas are baked in a stone oven.
• eatwell—A line of prepared meals focused on health and wellness that retail for around $4. Packages include nutritional labels showing the calories, fat, saturated fat and sodium. Fresh & Easy also introduced a range of frozen eatwell meals for $1.99.
• Goodness—A healthy snacks line aimed at kids. Packages are served in child-sized portions and retail for $1.19-$3.99.
• Wine—Since the chain’s debut in 2007, almost all stores have sold national wine brands as well as 27 wines that retail for $3.99–$19.99 each and are exclusive to the chain, with grapes grown in vineyards starting in Napa Valley and Sonoma through Monterey, down to Santa Barbara.

Strides in Energy Efficiency

Energy Efficiency has been a strong focus of Fresh & Easy since its debut. Over the past four years, the chain has a given away more than a million reusable bags to reduce its dependence on plastic bags. Other highlights include:
• A LEED Gold Certified store in Cathedral City, Calif. Fresh & Easy has also included LEED elements at dozens of stores, such as skylights to utilize natural lighting. LED lighting has been incorporated in the freezer cases and exterior of the stores.  
• Its first GreenChill certified store debuted in September 2010. It has eight stores currently certified through the program—the most of any grocer in the country. It also has a Gold certified store in Oceanside, Calif. Awarded by the U.S. Environmental Protection Agency’s (EPA) GreenChill Partnership, GreenChill certification recognizes stores for using environmentally friendlier commercial refrigeration systems that meet benchmarks for cutting emissions. Only 45 of the nation’s more than 35,000 grocery stores have received GreenChill Store Certification.
• Refrigeration units include energy efficient doors on freezer and dairy cases; triple-pane glass with an anti-fog coating on refrigerator doors, eliminating the need for door heaters for icing or fogging; and night curtains on refrigerators to conserve energy while keeping product at the appropriate temperature when stores are closed.
• Fresh & Easy has reduced water consumption in more than 45 stores by 30% using EnviroTower water conditioning technology. With EnviroTower its refrigeration systems use less than 600,000 gallons of water per year compared to similar refrigeration systems that typically use 2-3 million gallons of water per year. The EnviroTower system also helps reduce the amount of energy Fresh & Easy uses on refrigeration by up to 5%.
• The company partnered with REC Solar, a solar electric system provider, to add roof-mounted solar systems to nine Arizona stores in order to use more than 410 kilowatts (kW) of solar energy. The system is expected to produce 620,000 kilowatt-hours (kWh) annually, the equivalent of reducing 22 million pounds of carbon dioxide over the next 25 years. Fresh & Easy stores already use 30% less energy than a typical supermarket.





  1. Marketside by Walmart still has all 4 stores open. They never closed them.

  2. Paulbooth999 says:

    Tesco did pull out of Japan recently after several years of trying but they are very big in South Korea, Thailand, Malaysia and China. I don’t think they will give up in the United States until they are in the black. Does anybody understand the the property game they are playing with their stores in the US. Are they wholly owned or leased?

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