Why So Much Content
On Tesco/Fresh & Easy?
Jim Prevor’s Perishable Pundit, May 2, 2008
Here at the Pundit, we often publish letters from readers around the world. Typically these letters deal with issues important to the industry.
We actually receive many more letters commenting on our coverage. We consider ourselves blessed in that most of these letters are very kind. We don’t run many of them, partly because they are often quite short — “Go Jim!” — and partly because we are mindful of the Momma Pundit’s admonition that one can break one’s arm patting oneself on the back.
We almost always publish all letters providing a substantive critique of anything we’ve written.
Sometimes, though, we are torn as to how best to respond to questions regarding our way of operating. We confess a temptation to rely on the adage, “Never explain. Your friends don’t need it and your enemies won’t believe you anyway.” But, in the end we suppose ourselves swayed by the pen of Thomas Jefferson, who began our Declaration of Independence by explaining that when such an important event was occurring, “a decent respect for the opinions of mankind” required the giving of a public explanation.
In this spirit, we wanted to explain ourselves when it comes to the issue we have been most frequently asked about in recent days: Why do you write so much about Tesco and Fresh & Easy?
We have written a great deal on this subject. Over 70 articles just in the Pundit and more in sister publications. Considering that Fresh & Easy is a teeny regional chain, it seems like overkill.
Yet when people give us their time, they are relying not just on our reporting obviously important things, but they are trusting in our judgment to select things that they should know about, whether it affects them today or not.
You can be sure that nobody working on the initiatives at Safeway or Wal-Mart to set up small format stores has written to ask why we devote so much space to Fresh & Easy. They know the importance.
There are, of course, many interesting things being done by retailers all over the country. Yet few are rolling out by the hundreds of units; few represent completely new concepts and few are demanding as much change by the supply chain.
If Fresh & Easy succeeds, we would expect many dramatic changes in American retailing:
- There are around 34,000 supermarkets in the US. If 10,000-square-foot formats such as Fresh & Easy were to garner 20% of the market and the formats realize the same sales per square foot as a US supermarket, we can anticipate that there will be around 34,000 small-format stores and 6,800 supermarkets will close. There are almost 150,000 convenience stores in America. If these new small-format grocery stores take away 10% of their business, this would mean about 15,000 convenience stores closing. This is a revolution in real estate and the food business.
- Although concepts such as Trader Joe’s and Aldi are almost completely private label, the nature of these specialized concepts is that you can’t have stores every mile or two — Tesco thinks the Fresh & Easy concept can sustain that density. Right now Fresh & Easy is pulling back a bit on private label, but it is clear that this is its long term direction. If other small-format stores mimic this private-label strategy, it cuts off vast segments of American retailing from branded marketers. This is a revolution in food marketing, branding, etc.
- Although competition in the food retailing industry is intense, it is difficult for new entrants to open conventional supermarkets for the simple reason that in most places it is simply impossible to get prime locations that can accommodate a 50,000-square-foot box. Had Tesco decided, for example, that it wanted to enter the New York metro area with large supermarkets and grow without an acquisition, it could easily take decades, maybe a century, before it became a major factor in the New York metro market. Larger stores such as club stores and supercenters can require special permits or zoning, which can be difficult to obtain.
Because a 10,000 square foot store can be built “as of right” and in commonly available real estate, a viable concept would reshuffle the competitive deck. Wal-Mart has been having a dickens of a time getting much presence in major cities where unions are powerful, such as New York. It seems as if every proposal to open a store is World War III. Yet if a small-format concept works, Wal-Mart can easily enter New York with hundreds of small stores. Safeway can enter Boston, Kroger can enter Philadelphia. This would be a massive change in the nature of competition.
- Small-format stores, if located in urban areas, may wind up displacing independent grocery stores and fruit stands, butcher shops, etc. If a larger percentage of the business goes to big chains that self-distribute, this small-store format could pose a direct threat to terminal markets and independent wholesalers.
- If part of the issue is the novel format, the other issue is Tesco itself. As the third largest retailer in the world and an operator of multiple formats, if it should be successful with Fresh & Easy, it is highly unlikely it would be content with that singular concept. With small-format stores providing critical mass to a network of distribution centers, they would likely open even smaller convenience stores similar to Tesco Express in the UK, standard supermarkets such as the Tesco superstores in the UK and supercenters such as the Tesco Extra concept in the UK — all adapted to US consumers of course.
With a successful US operation as a base, acquisitions would be less risky, so we would expect our prediction that Tesco will buy Meijer as a base to roll out supercenters will come to pass. Tesco would love to buy Whole Foods, though the stock is too pricey right now. But let Whole Foods slip up and the stock nose-dive, and Tesco will zoom in. Many large US chains, such as Kroger and Safeway, have been working on enhancing operations and increasing profitability, but their store count has barely budged. Tesco could reshuffle the deck of US retailing in a dramatic way.
- Retailers in the UK tend to control their suppliers in a way American retailers do not. Tesco or its competitors, J. Sainsbury or ASDA, may allow suppliers to work with a smaller upscale chain such as Waitrose or Marks & Spencer, but if you work with Tesco, you generally can’t work with Sainsbury. Because vendors are typically exclusive and everything is private label, the British retailers drive food safety, sustainability and much more — many would say to higher standards in Britain than we have in the US. If you go in a Fresh & Easy, you will note many interesting things. Despite every chain in the country selling 4.4-ounce packages of blueberries, at Fresh & Easy they are six ounces. Most grape clamshells are variable in weight, but at Fresh & Easy every grape clamshell is exactly one pound.
Now we think Fresh & Easy is wrong on some of these decisions. Grapes don’t grow in neat one-pound bunches, and we don’t think the consumer values the consistency enough to pay for all the waste. We suspect many consumers will pay the same price for a 4.4-ounce package of blueberries that they will for six ounces, and we know of no evidence that six ounces is a size preferred by consumers. Whatever motivated these and similar decisions — whether consumer research or a drive for distribution efficiencies — what is notable is that Tesco takes control, and the company is not willing to be dictated to by the supply chain.
This attitude will be a sea change, especially when Tesco obtains sufficient market share to tell vendors that they have to choose: sell Wal-Mart or Tesco, not both.
So, we write about Tesco because to those with open minds, the discussion is not about a small chain on the west coast; it is about the future of retailing, the future of branding, the future of food safety, the future of wholesaling, the future of sustainability, the future of competitors, suppliers and more.
Some have spoken out and said we should wait to see how it all turns out for Tesco before we comment. Readers of the Pundit, though, have to make investments and business decisions now to avoid the dangers and capitalize on the opportunities that Tesco’s rollout in America represents.
We want to help our readers succeed and part of the way we do that is by sticking our neck out and trying to figure things out before they are definitive. We call that “Business Intelligence,” and it is part of the value one gets by reading the Pundit.
Our intent to deliver that value is why we so often write about Tesco and Fresh & Easy.