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The Biggest Beneficiary Of A Possible Strike At Ralphs, Vons and Albertsons Might Just Be The Fresh & Easy Chain: With Record Losses And New Management In The UK, This May Be The Last Hope For Tesco In America

Jim Prevor’s Perishable Pundit, May 2, 2011

Southern California supermarket employees have voted to authorize their union leaders to call a strike against Supervalu’s local Albertsons stores, Kroger’s Ralphs banner and Safeway’s Vons stores. A mediator has been called in. The last such strike, back in October of 2003, lasted for more than four months.

The key beneficiaries of such a strike would be non-union Fresh & Easy and Wal-Mart as well as many ethnic and independent stores.

It is possible, still, that the supermarket chains will hang tight. After all, they have operations elsewhere to subsidize losses in this market, and all three chains are anxious to see their cost structures competitive with non-union competitors.

Labor, though, is in a difficult spot. If it “wins” by getting more, it just makes the big three supermarket chains less competitive, which will surely mean job losses down the road. A strike, certainly one of any duration, simply means lost market share… and lost jobs, some of which will probably never be recovered.

Much as the United Auto Workers could demand progressively more as long as the only effective large-scale competitors were Detroit’s Big Three — but bankruptcy ensued once imports and production in non-union foreign transplants came to be significant — in a world with lots of non-union sources of food, it seems suicidal to not find a way to settle.

One place where fervent pro-strike prayers are almost certainly being said is at Tesco’s headquarters in the United Kingdom, as in the most recent Tesco financial reports, Tesco has announced that Fresh & Easy lost about $307 million during Tesco’s 2010/2011 fiscal year, an increase of almost $55 million over last year.

Astoundingly, Fresh & Easy managed to lose almost $2 million for each store it had open at the end of the year.

Tesco claims the problem was costs incurred in integrating Wild Rocket and 2 Sisters, the British transplants it way overpaid to acquire, which we discussed as part of our extensive coverage. This explanation doesn’t really hold any water since Tesco knew it had made these acquisitions when it was giving guidance to the financial community.

The reality is that Tesco doesn’t think it makes sense to vertically integrate. That is why it doesn’t do so in the  far more important UK operation. It was between a rock and a hard place, as those companies can’t operate profitably at low volumes and sales are just not where they need to be. Although Tesco trumpeted that its Fresh & Easy same-store sales, or like-for-like, in British parlance, rose 9.4%, it forgets to mention that this is significantly below what a US supermarket chain would typically expect during the early year maturation process of a store.

Like St. Augustine pleading that Lord should grant him chastity — but not yet — Tesco promises profitability for Fresh & Easy, but sometime toward the end of the 2012/2013 fiscal year.

Honestly, one wonders if the executives at Tesco really understand what the issues are with Fresh & Easy. They do a staged “interview” with the CEO, now Philip Clarke. He addresses Fresh & Easy by saying that the customers who shop there love it — they just need more customers. Although he makes no case for why customers who haven’t liked it for the last several years will suddenly begin to like the stores. He goes on to speak of it as shopping with no additives and preservatives. You wonder if he realizes that they sell Coke and Pepsi in the place.

It is possible that a strike might save Fresh & Easy, but there was hidden in the report a new sign that Tesco’s patience with the division will not be infinite. Tesco has had a kind of loose target of increasing its ROCE, or Return on Capital Employed, to 14.6% for some time, but now Philip Clarke announced not only a date — fiscal year 2014/2015 — but also announced that Tesco was changing its compensation plan for its top 500 executives to incorporate ROCE return as a metric.

This means that Tim Mason and the U.S. executives have to turn around Fresh & Easy pretty quick — or all 500 top executives at Tesco will have a personal financial interest in shutting it down. This makes the 2012/2013 profit expectation less like a goal and more like a deadline.

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