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London Calling …
Questions About Tesco

Jim Prevor’s Perishable Pundit, January 30, 2008

The financial community in London is beginning to realize that Tesco’s U.S. venture is fraught with risk and uncertainty.

The Telegraph in London published a piece entitled, Have Tesco’s US stores failed to win the West? It is an intriguing piece because reporters James Quinn and Mark Kleinman caught what many journalists missed — Tesco has made a decision:

Tesco has decided against releasing comprehensive sales figures for its fledgling US business until next year amid scepticism that it can mount a serious challenge to Wal-Mart’s dominance of the world’s biggest food retailing market.

In other words, accounting conventions dictate when companies must release separate financials; they don’t prohibit public companies from doing so at an earlier date.

Sometimes one learns more from what public companies elect not to say than what they actually say. When Tesco was disclosing Christmas sales numbers, it elected to characterize not the sales of its Fresh & Easy operation, but its response from customers as “very encouraging.”

Quinn and Kleinman recognized that this is not the kind of characterization that will get anyone at Tesco in trouble even if the actual sales are bad. If the facts justified it, Tesco executives could have said something specific, such as that sales are way exceeding plan and, as a result, the amount of capital necessary to grow the chain will be less than expected.

The reporters also became aware of some of the questions regarding the performance of Fresh & Easy that we have been discussing here at the Pundit:

One of America’s most influential commentators on the grocery market has unveiled a list of criticisms of Fresh & Easy, Tesco’s US operation, in his blog, accusing the business of failing to know what its customers want, mismanaging stock and not living up to its green credentials.

Jim Prevor, a food writer and publisher who edits two magazines about fresh produce and whose blog, perishablepundit.com, is read by thousands of Americans, said: “My assessment is that from the customer count and the dollars being spent, it is not possible to make the enterprise profitable.”

The damning verdict comes less than three months after the grocery chain opened for business on the US West Coast. In its January trading update issued earlier this month, Tesco said that “interest” in Fresh & Easy had been “encouraging” but declined to give any guidance on the stores’ early sales performance. Retail industry speculation suggests that the business may be undershooting internal sales estimates, but Tesco has said that sales figures for the first 18 months are “meaningless” while Fresh & Easy is established.

Prevor, who claims to have had conversations with and e-mails from more than 200 suppliers and contacts as well as other retailers, and has also conducted several site visits to Fresh & Easy shops, told The Sunday Telegraph this weekend that Tesco had failed to appreciate what US shoppers wanted from their local grocery store.

“The vast majority of comments [about Fresh & Easy] contain a line similar to this: ‘It may just be the time of day or day of the week or perhaps just this particular store — but there were practically no customers in the store,” said a post on Prevor’s website this weekend.

“The concept is sterile-looking,” he said. “Americans have fairly strong brand preferences, and unfortunately the nature of this concept is heavily skewed to Fresh & Easy’s own label. So something designed to be convenient becomes quite inconvenient.”

He also alleged that most stores had been “plagued by a high level” of out-of-stock items and suggested that the concept’s environmental credentials appeared to be skewed because, for example, pieces of fruit and vegetables are sold individually wrapped in plastic.

Prevor also speculated that Tesco could be incurring higher rent costs than necessary because of the relatively small size of the stores, which occupy 10,000 square feet of floor space each. In a number of its 33 locations, Fresh & Easy has had to rent larger stores, with space lying empty as a result.

Seeing the contradiction between Tesco’s characterization of the consumer response as “very encouraging” and our assessment that sales are light, the reporters turned back to Tesco to get a response:

Tesco this weekend rejected Prevor’s criticisms and said it was committed to opening a further 90 stores across California, Nevada and Arizona. “We have taken the West Coast by storm, and been extremely encouraged by the response from customers,” said a spokesman for Britain’s biggest retailer, pointing out that the concept is based on offering customers something different from what already exists in the marketplace.

Of course, none of this answers the question the reporters posed. That they are committed to opening another 90 stores in California, Nevada and Arizona was never questioned by anyone. They have built a big distribution center, signed lots of leases, and they are going to work very hard to fix the concept and the execution.

Saying that Tesco has “…taken the West Coast by storm” is just fluff and has no verifiable meaning. The most obvious thing you can say about this response is that Tesco did not choose to issue sales numbers for the stores to reassure its shareholders that management’s efforts are working well.

Other reporters in the United Kingdom have also begun picking up on the story. For example, London’s Evening Standard published a piece, written by Rosamund Urwin entitled, Tesco hits back at US sceptic. Urwin caught on to our discussion at the Pundit as well:

…its Fresh & Easy stores, launched across the Pond in November, came under fire from one of the America’s most revered commentators on the food industry. Jim Prevor, who writes the blog perishablepundit.com and edits two magazines on the grocery industry, delivered a damning verdict on the chain, saying the stores are routinely almost empty.

He concludes that sales are not strong and ‘Tesco has yet to prove the viability of the Fresh & Easy concept’.

Urwin also received feedback from Tesco:

‘While it is still early days, we are pleased with how things are going, and the customer reaction is particularly encouraging,’ said a Tesco Spokesman.

Once again, more smoke than fire in that response. Does it mean that the concept is generating good responses on consumer surveys and lousy sales? Who knows?

It is also notable that Tesco refuses to have executives on the record saying anything. Note that both the Telegraph and the Evening Standard had to rely on unattributed sources in their stories.

In any case, Tesco’s denials have even less credibility today than they did the day these articles were written in the United Kingdom.

Since these articles were written, we published another piece entitled Pundit Analysis Buttressed: Tesco’s Fresh & Easy Sales Only 25 Percent of Plan, Says Willard Bishop Report

Willard Bishop is one of the top consultancies in the industry. We ran an interview last year with the title Pundit’s Pulse Of The Industry — Willard Bishop Consulting’s Bill Bishop and their expertise is relied on by major retailers, vendors, associations, etc.

Even if someone doesn’t like our intelligence network here at the Pundit, they can’t be dismissive when a report by as credible a source as Willard Bishop includes this line:

Current performance doesn’t appear to meet initial sales projections of $200,000/store/week. Our very rough estimate is that a typical store is achieving about $50,000/week, or only 25% of initial projections.

Obviously, Tesco is not obligated to release these numbers, but you can tell a lot about an organization by how it deals with a critique. Healthy organizations develop a culture accepting of criticisms and use the input as part of their own process of continuous improvement.

This open and accepting attitude allows organizations to thrive by reaching out of their comfort zone for help. So Tesco’s response to the questions posed by the Telegraph and the Evening Standard about the Pundit’s assessment tells us more about Tesco’s defensive posture than it does about the substance of any issue.

Thomson Financial in London noted the Telegraph story and also wrote a version that was picked up by countless news outlets, such as Forbes. All this led us to spend quite a few hours helping investment bankers in the City — London’s version of Wall Street — to understand the situation better. This interest by the financial community in Tesco’s performance in the US will not go away.

Tesco is a rich company. If it has to lose some money before it gets its venture in America right, it can do that. If, however, Tesco doesn’t step up to the plate and frankly discuss the problems this division is experiencing, it will find first that it will be harder, take longer and cost more to fix the problems and, second, that Tesco will lose not only money, but credibility with investors. No company can afford that loss.

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