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The Failure Of Tesco’s Fresh & Easy: Diverse Voices And 'Déjà Vu All Over Again'

Jim Prevor’s Perishable Pundit, January 22, 2013

Our piece, Twenty Lessons Learned From Tesco’s Fresh & Easy Failure, brought many responses. Some were high fives:

This is a tremendous document  you should print this into a book.

Excellent work  glad you took the time to do it.

— Karl Kolb Ph.D.
Chief Science Officer
The High Sierra Group
Chippewa Falls, Wisconsin

From as far away as Pretoria, South Africa, some saw the matter as predictable:

The mighty TESCO had you under their noses. You were the perfect man for the job but blood was always going to be thicker than water.

— John Pereira
Evergreens – the Fresh Market
Pretoria, South Africa

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:

You just shot a dead horse 20 times!

Were we right or were we right about Fresh and Easy?

— David J. Livingston
DJL Research
Pewaukee, Wisconsin

We heard from several investment bankers from London, including one who had some specific points:

I had been checking your site to see what you were going to write about Fresh & Easy’s demise — I was surprised you held off for so long!

But it’s a great piece of analysis — very interesting. In fact, I am going to send it to another European retailer, which is about to open stores in a distant market . . .

The only two points I would make are as follows:

1.   From speaking with Tesco, I think they are determined to get out cleanly and completely — and only mentioned the possibility of a joint venture as a way of keeping all options open.

2.   I would question point 1. I would be surprised if you could find a single analyst report which advocated that Tesco move to the US before they announced the move. The old saying about UK retailers failing in the US was very widely-held, and most people regarded the US as a very tough market due to Wal-Mart. Now, that’s not to say that some people did not fully embrace it when it was announced – but that is different to saying that the City urged Leahy to do it. I think he wanted a big trophy project to crown his career. I think Leahy takes the blame, not the analysts! (Of course, this is my memory and could be selective — but is what I remember!)

But a very informative piece — I wonder how much Tesco would have saved by following your advice . . .

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 an excellent piece.  

By the way, Wal-Mart once told us that from an antitrust perspective, they are so big that they are not really allowed to buy any retailer in the U.S. and they would never get Hart Scott Rodino approvals. There is an exception allowed for units in extreme financial distress, but they said as a practical matter they really would never buy another chain.

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:

Great article on the reasons Fresh and Easy failed. 

Thanks  for the plug regarding my consulting abilities on the local market, and I would love to work with Bruce Peterson and Tim Riley. If Tesco had done something such as you propose a few years ago they might not have failed. 

You were so right on with the reasons for failure,and I especially like #19 on the economy. If the stores had the right mix and the right prices (and I believe they had the wrong mix but the right prices), they would have appealed to the price-conscious customer in a down economy. This should have been one of the main reasons that Fresh & Easy would have succeeded, but they couldn't help themselves with the dominance of an unknown private label with no brand equity.Their concept of having a "bake off" bakery operation was too little too late.

I really feel bad for those "Category Champions" who made the investment in time and resources to be good vendors and then were left at the alter when they had an opportunity to buy cheaper. 

Fresh & Easy was supposedly all about "saving the planet," but it insisted on "extra" packaging and shipping "air" to their stores. I often saw less than two pounds of produce in six or eight packages in an RPC that could have held 10-12 pounds. The amount of pounds of produce they would get on four full pallets would be what a good conventional chain would get on one pallet.  That is a lot of wasted packaging and energy for a company that was saving the planet.

 It will be interesting to see who buys Fresh & Easy, but my bet would be Aldi or a Dollar store company, as it would give them 200 locations and a DC. I am sure that the sale negotiations could exclude the Wild Rocket Foods and Two Sisters facilities. 

It would give Aldi a foothold in California, Nevada, and Arizona, and some of those locations would make very good Trader Joe's. Trader Joe's knows these markets and could help Aldi make an immediate impact.  The same would be true of Family Dollar and Dollar General as they have shown interest in the market.

— Dick Spezzano
Spezzano Consulting Service, Inc.
Monrovia, California

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:

I fought, yes fought, for 5 years to combat the internal issue at Fresh & Easy. Two months ago I decided I had had enough, the organization was not interested in winning with its employees and vendors; it was interested in winning at their expense. After all, they are TESCO. As one of the higher level Americans, I was constantly a buffer trying to keep the Americans from leaving due to the routine verbal abuse from our British peers and managers.

Within the the Fresh & Easy factories, the Americans were treated as 2nd class citizens. This was a lesson I learned in my first weeks there. 

I experienced and vocally fought to change many of the items mentioned in your recent article, but the arrogance of the business was so deeply ingrained that I was finally internally exiled. My last days at the company were spent looking for co-packing opportunities for all 3 factories. This was something I voiced that they should be doing when I was interviewing with them in December of 2007. In the end, the British management team was a day late and a dollar short. I found a new home with one of our potential co-pack opportunities.

Out of this whole experience, the most eye-opening fact is that Fresh & Easy didn't listen to the consumer. It in fact told consumers what they wanted. I know because I was one of the few Americans in the product development meetings fighting for what at least one American wanted. 

While I am saddened that the organization I worked 50-60 hours a week for is ultimately going to cease to exist, I am happy that as an American, we have again shown another British retailer that Americans don't like to be told what to do… or what to eat.

I have been diligently helping many of the great people I worked with over the last 5 years find jobs as they will soon be needing them. An ex-Fresh & Easy employee, Kevin Palmer, and I are setting up a website —  www.socalfoodjobs.com — to help in placing many of our qualified friends. It has just been set up, and we are preparing to populate it with job postings. In just the last week we have helped 3 people to get interviews for positions that were not openly posted on any job boards. While this is not a big number, it is a beginning.

My new path finds me in the home grocery/meal delivery market, 2013 is set to be a big year as venture capitalists are seeing the grocery industry as prime for disruption.

—Richard Chover
Director of Operations and Supply Chain
Fresh Dish
Los Angeles, California

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:

Your take on Fresh & Easy is right on, with the view from the top.

I worked for Fresh & Easy in two of their stores in Las Vegas, one in the 2007 roll out, and a second as a new store opening in 2008.

The problems I saw and attempted to express to DM and RM were:

1) Product was not neighborhood specific, as you pointed out. This was extremely apparent at the roll out when we were attempting to sell tripe and trotters.  As a chef I knew what they were, and how to cook them, but, I was one person in one store, and there were not that many customers who even recognized them as an edible product.

2) Middle management had the same attitude as upper management as to 'knowledge'. Simon Uewins was at my store twice, the second time to show how they wanted displays done on end-caps.  Well, with Simon showing all, including RM DM and store managers how it was to be done, it did not translate at all. The managers then began working with individuals (the TL's and CA's), but each of the managers did the display differently, and none to what Simon had produced.

3) In the first months there was no way for people to contact headquarters directly, no 800 number, no web or emails, it all just flowed down from the top like the proverbial smelly mud.

4) Kitchen Table was only allowed to produce EXACTLY what HQ said to produce; do not make anything from what might be going out of code soon, or even think of being locally creative.

5) POS advertising often had pretty pictures of cakes, pies, desserts, but prices were for NY strip steaks; just one example of "what the (expletive deleted)" advertising.

6) Resetting huge sections of stores on a 2-3 month schedule, as developed by the munchkins at the mock store with no customers. I actually had several customers in the stores I worked at leave carts of groceries in the aisle, vowing never to return when they saw another reset of a department or aisle.  Granted, tweaks of spots for products need to be made when something is added or deleted, but the wholesale changes made were uncalled for.

7) Never try to send an idea, prospective location, or customer complaint to HQ, SM, DM, or RM always made sure they went into file 13; likely, as you pointed out, that upper management from UK viewed the personnel hired in the US as basically slave labor with no brains, so why should they listen to us.

Thank you for your article, very enlightening. I would also point out that even with my undergrad business degree, and master’s degree, plus culinary degree, I was viewed as no better than any uneducated, inexperienced person they might have hired in a third world country.

— Frank Carroll
Frank Carroll Photography
Las Vegas, Nevada

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:

Just completed your “treatise” on Fresh and Easy, and enjoyed your completeness and writing style.  I follow your comments on most subjects  but F&E has been fascinating.  We were involved with supplying a lot of the Wild Rocket equipment, and your comments are certainly true.  More recently, as they expanded the distribution center (inside), they also expanded security.  It is much easier to get into Google manufacturing, than F&E.  Anyway, I just wanted to say thanks for your updates on pertinent and often tricky subjects.

— Tom White
Owner
ANZU
Marina, California

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:

Just finished reading the Perishable Pundit and I thought it was a good analysis of Fresh & Easy’s failure.

I remember when Marks & Spencer bought Kings and they thought American deli salads were terrible and changed the recipes.

They thought American cookies were too sweet and switched high end cookies to British biscuits.

They stopped delis from making their own roast beef, baked ham and roasted turkey and moved to brand name cold cuts, losing their competitive uniqueness.

It’s not hard to understand why Americans went to other supermarkets to buy what they liked, not what M&S wanted to sell. I remember the “new” Kings executives making fun of the way Americans do things at industry conferences.

Although they kept Kings’ key supermarket executives, their wings were clipped. Back in the good old days, on occasion, deli department sales exceeded produce sales. Deli departments often did over $100,000 per store per week. Those days gradually faded away.

It is the same scenario all over again.

— Lee Smith
Publisher & Editorial Director
Deli Business
Cheese Connoisseur
Boca Raton, Florida

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.

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