The Failure Of Tesco’s Fresh & Easy: Diverse Voices And 'Déjà Vu All Over Again'
Jim Prevor’s Perishable Pundit, January 22, 2013
From as far away as Pretoria, South Africa, some saw the matter as predictable:
We also heard from old compatriots who contributed to the Pundit in relation to Fresh & Easy. For example, David Livingston contributed to these pieces:
Wal-Mart Re-Positions Marketside
Headstrong Tesco Claims Success With 98-Cent Fresh & Easy Line
Tesco’s ‘Selective’ Market Research
Kroger And Tesco Approach Store Acquisitions Differently
Aldi Challenges Wal-Mart As Low-Price Leader
Reading Tesco Between The Lines
Then he made a wry comment on our “Twenty Lessons” piece:
We heard from several investment bankers from London, including one who had some specific points:
The answer as to what they would have saved is forever going to be a mystery. The cost of an operation such as Fresh & Easy is not just the dollars expended but the management attention that didn’t get paid to other operations or opportunities because everyone was focused on Fresh & Easy. We also don’t know what, if anything, the company can salvage in a sale.
But there is every reason to think that Tesco could have found a profitable toe-hold in the market. Look at the success of Mariano’s in Chicago. What made it successful? We could say it is the great soup bar or the fresh produce but, in reality, these are secondary effects. It is successful because it was put together by all the old Dominick’s people. They knew the market, from real estate to consumers; that is the key.
Tesco’s efforts were not so much to open a successful food retailer in the markets as to impose a foreign entity on the body politic. Once in a while this works. But it is as we wrote here, here, here and here … it is a “brilliant or bankrupt” strategy. Even in the exit — if Tesco had built 20 normal-sized grocery stores, the company would have a lot better chance of selling them for some large portion of the investment than it does with these small stores. So, it turned out they weren’t brilliant, and the only reason they are not bankrupt is because they had a lot of shareholder’s money to burn through.
We do agree that the odds are heavy that Tesco will just sell out or close up. We suppose Tesco’s executives will listen to any proposals, but almost any joint venture one could imagine will require Tesco to put up more cash and it probably will not want to do that.
As far as the original motivation, it is certainly true that no amount of urging by investment bankers can make a company such as Tesco do what it does not wish to do and ego-building by its ex-chairman Sir Terry Leahy is as good an explanation as any.
However, as JFK said after the Bay of Pigs fiasco, “Victory has a thousand fathers, but defeat is an orphan.” Back when there was hope for Fresh & Easy, several investment bankers laid out the necessity for Tesco to avoid seeing too large a share of its earnings come from developing countries or unstable markets lest it affect the P/E at which Tesco stock traded.
The logic here did not compel opening in the US but strongly led to it. They all claimed at the time that their analysis of Tesco’s situation helped move Tesco to the decision to open in the US. They all forgot saying this, but the Pundit was there.
One executive very experienced in retail questioned the viability of Wal-Mart doing any retail acquisition:
This is almost always true. The only situation under which Wal-Mart could both get approvals and wouldn’t risk general attack would be a situation where thousands of people were imminently about to lose their jobs and Wal-Mart could ride in as a white-hatted hero to save the jobs, sales tax revenue, etc.
It is a long shot and, as we said, Tesco is so competitive with Wal-Mart we doubt it would do it anyway, but this scenario — a sudden closure of stores, manufacturing facilities, warehouses and attendant job loss — might be the exception that proves the rule.
A local expert, who as we mentioned in our “twenty Lessons…” piece, should have been on the Fresh & Easy team (much as Bob DiPiazza had been brought in to help with the launch of Mariano’s), weighed in as well:
We also feel compassion for the “Category Champions,” who were needlessly treated poorly. But they are big boys and knew what the risks and rewards were of getting involved. Most of the vendors are among the very best in the industry, and they will live to fight another day.
The Pundit Momma used to teach us that “wise men learn more from fools than fools from wise men,” and the top vendors learned from their interaction with Tesco, and those lessons will be carried with them. The sadness is that Tesco played the “fool” role in this drama.
We too watch with interest who will buy the stores. But our guess is that many of the stores don’t meet the traffic specifications for an Aldi. Some do and some, absolutely, are Trader Joe’s and Dollar Store-friendly locations. But we don’t think any of these value Fresh & Easy as a going concern, and most of the stores lose money every day. Very often in these situations the employees feel aggrieved, that promises were broken — true or not — and theft starts zooming.
Many locations won’t make it as food stores. Others will do so only with non-union ethnic families operating the stores.
Rather than navigating all this, we suspect Tesco will wind up putting a lock on the door, closing up and selling the whole thing in bulk to an investment group. That group will sell everything off in pieces and negotiate individually with retailers.
It is possible that an Aldi or other organization may partner with an investment group to make an offer, with Aldi taking the stores it wants and the investment group taking the rest.
We do suspect that when they start to realize how much money they are losing to shrink, they will close up sooner rather than later.
One of the shocking things about this ending for Fresh & Easy is how many Americans keep calling and writing, complaining they were treated as second-class citizens. Most insist on anonymity, but this gentlemen signed his name and is working to help Fresh & Easy folks get jobs elsewhere:
Well, the disruption won’t come in the form of Fresh & Easy.
This whole business of contempt for Americans, which started at the top and led to the key positions all being filled by expatriates, is rather odd. We have lots of British friends. They are nice people, so there is something about this situation that has led to such a peculiar attitude by Tesco.
On the vendor side and maybe even the employee side, the issue is probably more a matter of being Tesco than being British. The Americans they did bring in were people who worked for Tesco in places such as Thailand for extended periods. These folks were out of touch in America but were trusted by Tesco.
When it comes to consumers — and Mr. Chover clearly has it right that as Dick Spezzano confirmed, the assortment was all wrong — they weren’t listening to the shoppers. Why? We hypothesized here that the core problem was that we both spoke English. It sounds like a joke but only halfway. The executives from Tesco are smart people, and when they land in China or Poland they realize these people are obviously different — they speak a different language. This leads to an acknowledgement that everything else has to be different — assortment, design, etc.
Here we are just similar enough that they may think they know what we would or should be eating. We’ve told the story of the odd decision to devote 25% of the opening salad SKUs to watercress-based fresh-cut salads many times — the question is what motivated Fresh & Easy to decide to do what American retailers and salad producers chose not to do?
There are only a few options: 1) The British executives believed that the producers in America didn’t know how to make a good watercress-based salad, and once Americans experienced it, they would love it. 2) The British executives believed that American consumers were not exposed to this wonderful product, and once exposed would quickly chose to buy it. 3) The British executives paid no attention to their much-talked-about research and simply went with their gut.
Of course, all three options show enormous arrogance.
The structural question, of course, is: What policies did Tesco have in place to check the inclinations of a clubby group of Tesco executives, who were going to go not only from the primo place to work in Britain to America but from being the “big fish” who had real pull with vendors and even had big power to sway consumer sentiments to being, well, nothing?
Apparently there was no such policy and Tesco paid big for that structural failure.
Even the store-level employees have been weighing in:
Tripe is stomach tissue and trotters are pig’s feet. In America few eat either. Even with a lot of micro-marketing it is hard to think of many micro-markets where these would be important items. Again, for such a well-researched launch one is compelled to shrug one’s shoulders and say they did all the research for show. It is impossible to believe that the researchers came back and said Americans eat lots of tripe and trotters.
Now in the UK when the recession hit, you had headlines such as, Pig’s Trotters Fly Off The Shelves as Customers Seek Cheap Meat Cuts, but this had nothing to do with America.
It seems nobody listened. Whether to higher ranking American executives, store level employees or the customers themselves.
It is not all bad, but one supplier tells us that as time went by Tesco didn’t get looser; the company got tighter:
Well, security is good when food is concerned so we can give them some props on that one, but were they afraid of someone damaging the food or just paranoid about protecting their innovations?
You would like to believe that a lot will be learned from the demise of Fresh & Easy, but Lee Smith, who serves as Publisher and Editorial Director for Pundit sister publications DELI BUSINESS and CHEESE CONNOISSEUR and also used to work at Kings, reminded us that this is as Yogi Berra said “Déjà vu all over again”:
Edna St. Vincent Millay was among the first women to receive the Pulitzer Prize for poetry. She advised that “It is not true that life is one damn thing after another. It's the same damn thing over and over.” Which is pretty much what seems to have happened here.
Of course Karl Marx had a different take: "Hegel remarks somewhere that all great, world-historical facts and personages occur, as it were, twice. He has forgotten to add: the first time as tragedy, the second as farce."
Which, many would say, more closely describes the Fresh & Easy experience.
Many thanks to our correspondents for weighing in on this issue. Their contributions will be mined for insight for a long time to come.