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Kroger And Tesco Approach Store Acquisitions Differently

Jim Prevor’s Perishable Pundit, June 22, 2007

A&P had put up for sale all of its 66 Farmer Jack stores in Michigan. Now Kroger is buying 20 of the best locations all over southeast Michigan, including prime locations in places such as Bloomfield Township, Dearborn and Troy. A Wisconsin consultant got to the point:

“I figured Kroger’s would pick all the cherries,” said David J. Livingston, managing partner of DJL Research, a supermarket consultant in Pewaukee, Wis. “That’s what happens when you have a lot of money. You end up getting the best stores.”

The disposition of the remaining 46 stores, most in metro Detroit, is uncertain. Hiller’s, Hollywood, Spartan Stores and various independent grocers have all been mentioned as possible buyers. Many of the stores are likely to be shuttered or converted to non-food uses.

As part of its plan to open in America, Tesco came to San Diego and announced its plans to open seven stores in and around the city. These are the locations:

Fresh & Easy Market locations — San Diego

  • Campo Rd. and Kenwood Dr., Casa de Oro
  • Catalina Blvd. and Canon St., Point Loma
  • East Vista Way and Vale Terrace Dr., Vista
  • East H St. and Tierra Del Rey, Chula Vista
  • Lake Murray Blvd. and Navajo Rd., San Carlos
  • Main Ave. and Ammunition Rd., Fallbrook
  • Valley Parkway and Ash St., Escondido

Tesco executives also elaborated on the concept:

Tim Mason, CEO of Fresh & Easy, said the company has extensively researched the American market and found that consumers go to a variety of different stores to get their groceries and are now clamoring for a one-stop shop.

Because different stores cater to different needs, consumers go to one store to find the lowest prices and other places to get better produce and meat and still other places to find specialty items, said Simon Uwins, chief marketing officer for Fresh & Easy.

“To bring that back together is what we are trying to do,” he said.

However some are skeptical:

Whether Fresh & Easy will deliver that experience is another question, said David Livingston, a supermarket consultant based in Wisconsin.

“It sounds a little far-fetched to me,” he said. “How can they be small stores that offer high quality and low costs. Somewhere in there something doesn’t fit.”

It is hard enough indeed to operate a small store with high quality and low costs. To make the quality and value proposition so great that consumers will change habits and stop the practice of going “to one store to find the lowest prices and other places to get better produce and meat and still other places to find specialty items…” seems very difficult to pull off.

Kroger’s acquisition and Tesco’s announcement illustrate a profound difference between the companies.

The obvious one is that Kroger declined to take over the inner city stores of Farmer Jack, while many of the Tesco locations are in very marginal neighborhoods. And this seems to be part of the plan:

Mason stressed that Fresh & Easy markets would be located in various types of neighborhoods, from affluent areas to places that have often been underserved by traditional supermarkets.

Well, aside from Pathmark, not many substantial chains have wanted to open in these marginal neighborhoods, so it is good that Tesco will try. They will have the advantage of lessened competition, but our experience is that urban markets are tough for large chains.

It is not that the business isn’t there; it is that it is difficult to operate within the law. One urban operator we know, for example, found he got robbed blind every time he ran a night shift to clean and stock the store. The solution? The night crew is locked in the store and the night manager is given instructions to immediately break the glass if there is a fire or other calamity. It has worked like a charm — but is against every law and fire code, and Tesco could never do it.

Another urban store we know brings shoplifters down to the basement to extract some “rough justice” all of their own. Many pay homage to mob-run garbage pick-up services. There is some question if Tesco has a real plan to operate in these kinds of environments.

We’ve been writing in this space for months that despite Tesco’s vaunted consumer research, this was a concept driven by real estate realities and now Tesco is pointing that out as well:

Mason said Fresh & Easy’s smaller store size was dictated not only by consumers’ preferences but also by the realities of the real estate market.

In San Diego, for instance, only one of the seven stores — the Escondido location — is being built new. All the other locations are existing structures, such as a former Albertsons store in Point Loma. “If we had turned up here in California to open up seven big-box stores, we wouldn’t be celebrating the opening of seven new stores — we’d be celebrating seven new lawsuits,” Mason said.

Real estate-driven retail strategies often fail. First there is usually a good reason all this real estate is available — it is mostly subpar. Second, if by some miracle you find a strategy that can utilize it, competitors can quickly compete because of the easy availability of this type of location

Finally, people in a mad dash to add stores often take lots of poor locations. Boston Market failed, in no small sense, because it was so hell bent on growth; it took marginal locations just to expand.

Too many of the locations smell of a desperate attempt to build critical mass and thus utilize the massive warehouse and procurement operation Tesco committed to build. One suspects they would have been better off working with Supervalu or other wholesalers as Tesco acquired excellent locations in a disciplined way over longer periods of time. Then when they reached that mass they could build distribution centers. Note that Target is just now building its first perishables distribution center and that will still be operated by Supervalu.

Contrast this mad dash for locations with the highly disciplined approach The Kroger Company took to expanding in Michigan. A&P preferred to sell all the stores as a group — Kroger had no interest. It wanted what it wanted.

As we mentioned previously, Kroger’s Chairman and CEO David Dillon also questioned the convenience of such a small store — pointing out that a store that doesn’t sell what you want is not convenient. In light of that, re-reading the quote of Fresh & Easy’s Chief Marketing Officer still startles when you realize he is talking about a store a third or fourth or fifth the size of modern supermarkets:

Because different stores cater to different needs, consumers go to one store to find the lowest prices and other places to get better produce and meat and still other places to find specialty items, said Simon Uwins, chief marketing officer for Fresh & Easy.

“To bring that back together is what we are trying to do,” he said.

Kroger, owning Ralph’s, is doubtless watching every move Tesco makes. But being the disciplined operation it is, Kroger also is not going to rush to open an unproven concept, in unproven locations. Maybe Tesco wants to make A&P an offer for those 46 other stores?

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