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Tesco ‘Pauses’ With
Fresh & Easy Expansion Plans

Jim Prevor’s Perishable Pundit, April 1, 2008

Fresh & Easy announced that it would be “pausing for breath” and it would stop store openings, other than a couple in Phoenix, for the next three months.

This is surely a wise decision. As we have extensively reported, the more stores Tesco opens, the more money the company loses. Fresh & Easy tried to gild the lily by claiming this had always been planned:

“…after opening our first 50, we planned to have a 3-month break from openings…”

Precisely how this break had been “planned” or who planned it is not clear. We can only say that we have spoken to a broad array of vendors, all of whom assure us that at no point in time was ever a mention of such a “pause” communicated to them until last week.

In fact, if our estimates are anywhere near correct, Fresh & Easy is hemorrhaging money and the “pause” is an effort to stop the bleeding and reassess.

Although we’ve been accused of being critical of Fresh & Easy, analytical would be a better term. We wish Tesco nothing but success. It would be great for the industry to have another big, well-capitalized, fast growing buyer.

However, when the Emperor has no clothes, it is our job to say it. And no matter how big and praised Tesco may be, this concept hasn’t been working. The concept has been failing, and both Tesco and its vendors will be better off if that is recognized and soon. So we take the idea of a “pause” as a good one.

In theory, lots of smart people can now address their attention to fixing what is broken or reimagining the concept. They will also have 90 days more to judge consumer reaction. That is all for the good.

But the status quo is not really acceptable for very long.

The first problem is that Tesco adopted what we have called a “brilliant or bankrupt” strategy and built this enormous distribution center. As long as Fresh & Easy has only 60 stores, it is impossible to be profitable — the overhead is simply too great. So standing still for very long is not an option.

The second problem is that a 60-store chain sitting in the midst of a competitive retail environment creates what, in the vernacular, would be called a “sitting duck”. One can only assume that other retailers will redouble their efforts to make life difficult for Fresh & Easy. They will put specials in stores near those Fresh & Easy locations, do more advertising, use loyalty card data to target Fresh & Easy shoppers, renovate nearby stores, build new stores and more. If Fresh & Easy is rolling out, it is a moving target. If it stands still, it is just a target.

So what can Fresh & Easy do to turn things around?

Things range from small, easy-to-implement things, to substantial changes. Here are a few ideas:

  1. Stop running the chain as if it has 6,000 stores doing tremendous volumes. Many of the innovations are designed for a business Tesco doesn’t yet have. We hear so much about the vaunted “ordering system,” but so far it seems to deliver a lot of out-of-stocks — why not give each store manager a blackberry and have the staff walk around e-mailing what they are out of each day? Then Tesco could send that stuff the next day. If you want to get really down and dirty, how about calling in the order? With 60 stores it is not a big deal.
  2. Reduce private label to a bare minimum. Fresh & Easy is an unknown store. That itself makes trial difficult to obtain. To ask consumers who are visiting the stores for the first time to also try product under an unknown label is too much, too fast. Sell the best brands of groceries and perishables and, gradually, increase private label as consumers grow more comfortable with the store — it might take 20 years to get to an almost fully private label store.
  3. Get rid of the packaging middleman in produce. It won’t be possible to compete price-wise if Fresh & Easy adds this intermediate step of putting everything in trays, bags and clamshells. Do as much bulk as possible.
  4. Introduce a frequent-shopper program so Fresh & Easy can have access to consumer data and can do target marketing.
  5. Do a micromarketing assortment for each store. Right now, the offer is all wrong — one size does not fit all.
  6. Stop doing markdowns on expiring food; they cheapen your store. Get rid of sell-by dates where quality or food safety doesn’t require them. They confuse consumers.
  7. Reduce the British staff, keeping only a financial guy to watch the money. Americans are different than Brits and the stores will be more successful if Americans make the decisions. And the team that failed is too emotionally invested in its decisions to properly critique them. Besides, Tesco could use the British team back in the UK. As part of this “Americanization” program, drop resistance to American cultural norms in business — for example, immediately join the Produce Marketing Association, United Fresh Produce Association and Fresh Produce and Floral Council just as domestic retailers such as Safeway and Kroger do.

All these are good ideas. Our sense, however, is that there is a bigger problem. Many of the stores are ill-sited — they lack a sense of place — and it is unclear as to the kind of customer the stores are built for.

The single best answer for Fresh & Easy would be to close the stores and reopen them as two separate chains. One would be modeled after Aldi; the other after Trader Joe’s. Demographics would dictate which store gets bannered in which way.

These two successful concepts would work in the Fresh & Easy footprint, both scream out with a sense of place and with a target customer. Why recreate the wheel? Don’t the British like the opportunity to beat the Germans at their own game?

If Tesco doesn’t do something big, it may not succeed. But it still has a chance to do something great. We wish them every good fortune during this reassessment.

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