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For Fresh & Eash, the heat is on

Britain's Tesco is one of the world's savviest retailers. So why is it losing millions of dollars in America?

Fresh&Easy-employee

In early October of 2010, executives at Tesco, the much-admired British grocer, sat down to issue their financial statements for the first half of the year. The numbers were impressive: profits were up more than 15 per cent, and international divisions in Korea and China helped kick up revenues 8.3 per cent.

But it was hardly time to clink the champagne glasses.

Tesco’s bosses, including outgoing CEO, Sir Terry Leahy, and his replacement, Phil Clarke, previously head of international operations, had to deal with one nagging problem: a big red blot on the American chain they launched three years ago called Fresh & Easy Neighborhood Markets. This year Fresh & Easy has lost US$150 million on $390 million in sales. For every dollar customers spent in a Fresh & Easy store, the chain lost 38 cents.

If the losses annoyed them, Leahy and Clarke didn’t show it. Instead, they announced a new battle plan that involves expanding in some parts of the U.S. while temporarily retreating in others. The goal: make Fresh & Easy profitable by 2013.

The plan, in a nutshell, calls for closing 13 Fresh & Easy stores in recession-ravaged Arizona, Nevada and parts of California until local economies recover. In the meantime, 19 new stores will open elsewhere in California over the next six months.

“There’s no need to carry out some big strategic review,” says Clarke. “It’s clear that continuing and moving toward profitability is the right thing.”

It’s easy to bet against this optimistic view. In its three years, Fresh & Easy simply hasn’t lived up to early predictions. And a few experts wonder whether the format–a hybrid between a supermarket and a convenience store with an average of 4,000 SKUs in 10,000 square feet–will ever appeal to American shoppers. If they’re right, Tesco’s North American adventure could end before it really gets going.

THE BRITS ARE COMING

The hype before Tesco opened its first Fresh & Easy store in California, in November 2007, was considerable. Tesco, winner of the brawl for the supermarket consumer in Great Britain, was bringing its unique marketing prowess to North America. For the first time in more than a quarter century, a self-distributing supermarket operation was opening from scratch on these shores. The English were going to show the colonists just how to do grocery merchandising right.

Opening day was decidedly anticlimactic. Grocers, consultants, academics, analysts, journalists and even some shoppers dropped in to see what all the hoopla was about. What they saw was different than any other grocery store. Fresh & Easy advertised no artificial colours or flavours and no added trans fats in its private label brands. It offered an everyday low price strategy but no coupons or loyalty card. And customers were encouraged to use the self-serve checkout (although employees were on hand to assist with and authorize beer or wine purchases).

Then, as now, company officials saw this whole mix as a crucial point of differentiation over conventional U.S. grocers. “The key to Fresh & Easy is simplicity,” says Brendan Wonnacott, Fresh & Easy’s communications director. “We do exactly what we say on the door: we are a market that offers fresh, wholesome food and an easy shopping trip right in your neighbourhood.”

The impression from the grocery trade, however, has been that the stores are a round peg where a square one is needed. Jim Prevor, author of the blog Jim Prevor’s Perishable Pundit, is typical of those prognosticators. Prevor, who has posted more than 80 entries about Fresh & Easy on his site (perishablepundit.com), says the retailer’s strategy results in a product assortment that is not customized to each store and thus doesn’t appeal to local shoppers. He also thinks the stores have a “product mix lacking the brands that American consumers look for.”

Regardless of the critics, Fresh & Easy moved on to open more than 60 stores in its first nine months, each emphasizing produce and prepared foods and promoting Fresh & Easy private label throughout the store. The initial plan was to open more than 220 locations.

But within months, Fresh & Easy started to face some bumps. By far the biggest was the 2008 recession. Fresh & Easy was particularly vulnerable to the downturn because its stores were situated primarily in markets such as Las Vegas, Phoenix and suburban California. Prior to 2008, these markets were the poster boys of America’s booming economy. But the sub-prime housing implosion that helped cause the recession knocked that growth flat. In places like Phoenix, homeowners who couldn’t pay their mortgage abandoned entire streets. Not exactly an ideal climate in which a slightly upscale grocer could expand.

DEEP POCKETS BIG EGO

Fresh & Easy’s announcement that it will shutter 13 Arizona and Nevada stores is an indication the situation hasn’t improved much since. “The current economic climate has made it even more important for us to be prudent in our expansion,” notes Wonnacott. Still, Fresh & Easy expects to open one store a week. By 2013, it anticipates having 400 stores in the U.S., up from the roughly 160 now.

Ryan Mathews, president of Black Monk Consulting in Michigan and a longtime observer of the supermarket industry, isn’t convinced the actions taken by Fresh & Easy are going to be enough to guarantee the chain’s long-term survival. Part of the problem is that Fresh & Easy doesn’t understand the cultural nuances of American shoppers. Yes, the things Fresh & Easy does well–offer convenience and portion-controlled packs–are important to U.S.

Yes, the things Fresh & Easy does well–offer convenience and portion-controlled packs–are important to U.S. consumers. But Mathews asserts that this thinking led the company to make the mistake of pre-packing everything on its shelves and then only opening sites that made sense in terms of where its initial warehouse was located.

“Sometimes the approach worked better than other times,” he points out. “But it never created the kind of energy and consumer excitement its planners hoped for. Now we have the strategy of opening in food deserts, which seems a bit like watching a format chase around looking to find a market that fits it, rather than a retailer learning from its mistakes.”

Will Fresh & Easy survive?

To some degree it depends on the size of Tesco’s corporate ego and how long those executives back in England are willing to float a money-losing chain 8,000 kilometres away. Then again, having fought its way to become the dominant British grocery chain, Tesco isn’t known for quitting.

“Tesco is one of the best retailers in the world and there is no doubt that–given time and a fresh orientation–it could crack the U.S. retailing code with the same success Walmart enjoyed when it restaged its Mexican operations,” says Mathews.

Fresh & Easy management is convinced there is a place in the market for its brand of retailing. “We found customers shop at many different stores to piece together their weekly shopping trip, so we put together a format to simplify our customers’ lives.

Fresh & Easy is a local market, in the neighbourhood, carrying everything customers need to do their daily and weekly shopping,” concludes Wonnacott. “Since opening our first stores in November 2007, we’ve continued to do what we do best: listen to our customers and continue to evolve and improve, as any smart retailer should.”

Whether that leads the company to profitability and success in North America remains to be seen.

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