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As Tesco Takes On Sacramento,
Executives Eye Lucrative Incentives

Jim Prevor’s Perishable Pundit, February 29, 2008

Tesco’s Fresh & Easy has been expanding rapidly in Southern California, Nevada and Arizona. Now comes official confirmation of what everybody has known: That Tesco is moving into Sacramento:

FRESH & EASY ANNOUNCES
19 SITES IN SACRAMENTO REGION

Capital City Stores Will Begin Opening in 2009

Fresh & Easy Neighborhood Market CEO Tim Mason was joined today by Sacramento Mayor Heather Fargo and Councilmember Ray Tretheway in announcing plans to bring fresh, wholesome food at affordable prices to the Sacramento region.

Nineteen store locations were announced outside a future Fresh & Easy Neighborhood Market at Northgate Blvd and San Juan Blvd in Sacramento. Other locations revealed during today’s announcement include sites in south Sacramento, Oak Park, Citrus Heights, Elk Grove, Folsom, Rancho Cordova, Rocklin and Vacaville.

“The Sacramento region is a great fit for us — it is vibrant, fast-growing and widely known as having one of the most diverse populations in the U.S.,” said Mason. “We’re looking forward to bringing fresh, wholesome food at affordable prices to all types of neighborhoods throughout the Sacramento area.”

Mason also commented on the company’s entry into the Western U.S., “We have been very encouraged by the response to our stores thus far. Every single week brings more good news as sales, customer numbers and repeat visits are all growing.”

Fresh & Easy currently has 55 grocery markets open throughout Southern California and in Nevada and Arizona. The company is a subsidiary of U.K.-based Tesco, one of the world’s largest international retailers, which has invested $2 billion over five years in Fresh & Easy.

The Sacramento locations are as follows:

Fresh & Easy Neighborhood Market
Sacramento Area Locations*

  • Auburn & Coachman — Citrus Heights
  • lkhorn & Andrea — Citrus Heights
  • Bruceville & Elk Grove — Elk Grove
  • Elk Grove Florin & Calvine — Elk Grove
  • Kenneth & Madison — Fair Oaks
  • Greenback & Madison — Folsom
  • Twin Cities & Carillon — Galt
  • Lincoln & Sterling — Lincoln
  • Sunrise & Coloma — Rancho Cordova
  • Stanford Ranch & Sunset — Rocklin
  • Bradshaw & Old Placerville — Sacramento
  • Broadway & 34th — Sacramento
  • Del Paso & Commerce — Sacramento
  • Franklin & Mack — Sacramento
  • Meadowview & Freeport — Sacramento
  • Northgate & San Juan — Sacramento
  • Watt & El Camino — Sacramento
  • Alamo & Marshall — Vacaville
  • Elmira & Nut Tree — Vacaville
  • Pending Final Negotiations

You can see a map of the locations here.

The key missing ingredient is the disposition of the much discussed distribution center in Stockton. Since our estimate is that volume in the existing stores has been so much under estimate, there is plenty of spare capacity and perhaps Tesco is not rushing to expend that capital.

But then again, it might.

One of the more interesting facets of watching the Fresh & Easy rollout is considering how compensation agreements can affect behavior. There have been plenty of stories with headlines such as Tesco brass in windfall if venture a success.

And, in fact, it appears as if the CEO of Tesco, Sir Terry Leahy, could receive about $22 million in stock and the CEO of Fresh & Easy, Tim Mason, could receive about $18 million in stock if the Fresh & Easy venture is a success.

Now we begrudge these gentlemen nothing and, in fact, a vibrant, growing and profitable Fresh & Easy division would be transformational for Tesco. It could easily be worth that price and more. Just the diversification of revenue and profit for Tesco into North America would probably increase its multiple on the stock market — resulting in billions in value.

Yet, it is also possible that the compensation agreements could distort people’s perceptions and lead to unwise decisions.

We’ve reported pretty extensively that we believe Fresh & Easy is having some real problems.

That doesn’t mean it is a lost cause. But it might mean that it would be wise to stop expanding and focus on getting the concept right or changing the concept.

It is difficult to know precisely what is required by the compensation agreements through the public filings, but it seems to require earning a minimum return on the total investment. But what if, right now, Tim Mason already knows that the money Tesco has invested is all lost but $50 million dollars worth of liquidation value, but freezing the expansion will enable him to make the chain marginally profitable and that he could eke out a very satisfactory return on that $50 million.

A prudent businessperson would have to assess that strategy against continuing to invest billions in an expansion in America.

Yet, the financial incentive that has been structured for both Tim Mason and Sir Terry Leahy seems not to be flexible enough to allow for this type of decision-making.

In fact the incentive is all the opposite: swing for the fences, blow a couple of billion and hope to hit it big.

It is tempting to offer a big incentive in business to achieve what you want to achieve — in this case a large and successful US business. It is dangerous, though, if things are not going well.

Tesco may want to reassess whether its incentive program doesn’t need to be adjusted in light of the present circumstances, and all of us need to keep in mind the hazards of putting people in a position where their interests may no longer align with the shareholders.

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