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Will Fresh & Easy Improvements Turn The Ship?

Jim Prevor’s Perishable Pundit, October 23, 2009

When there are industry meetings out in California, it often gives industry members a chance to see, sometimes for the first time, some of Tesco’s Fresh & Easy stores.

We’ve been in many Fresh & Easy stores during the long chronicle we’ve kept of Tesco’s Journey to America.

Following the convention, one retail expert from Australia sent a pithy note:

Had a chance to visit several Fresh & Easy stores after the PMA.
(What were they thinking of when they put these together????).

While a US expert, who has been watching along with us since the beginning, sent an update:

With Tesco’s announcement of an anticipated $250 million loss this year at their US Fresh & Easy division, I am sure that, despite their claims that it has to do with the economy, at least part of it is due to their flawed format.

I thought I would drop you a few lines on the Fresh & Easy improvements…

I believe the revamp Fresh & Easy has attempted is the end result of going back to their consumers and vendors and asking the hard questions, listening for a change, and then developing action plans for correcting the flawed format. All great, and not so great, formats start out looking one way and then get hybrid to look a bit different. This is all done to please the consumer and to be operationally sound to make a profit.

Changes I like (some are recent and some over the last 9 months):

• They have some new interior sign work that speaks better about their pricing position.

• Cut down the inventory of many items and added in shelves.

• Added in some 1,000 center store items and they seem to be all branded items.

• Took their end display of ice and relocated it to another end and add a frozen end for more frozen food space and SKU’s. They added a ½ gondola for a coffin case of additional frozen food items.

• Doubled the refrigeration space for cold beer and wine.

• Added in more beer brands and sizes.

• They have two wines priced at $1.99 a bottle and they have implemented a $19.99 full case of 12 price. The brand is Vista Point and they stock Merlot and Chardonnay and both are very drinkable.

In Produce:

• Converted their banana display from full cases to a padded banana display fixture that is kinder to the bananas and will reduce shrink and increase sales.

• Added in about 10-15 SKU’s of bulk produce from apples to citrus, to peppers. All are labeled with the new double GS1 bar code so there is no need for a scale at the front end.

•. Chris Vangelos (one of Allen Vangelos’ sons) is now a buyer at Fresh & Easy and he will bring a good skill set to them.

• They now have a full ad on a weekly basis, and often the prices are as hot as the conventional chains.

• They now have a lot of radio ads.

Changes I didn’t like:

• The coffin frozen food case they added is a non-productive case. They could have put in its place upright cases that would have added four times the linier footage and the ability to add a more significant amount of frozen food items.

• They took care of their banana display problem but didn’t take care of their always green banana problem.

• Every chain provides a free 6-pack container to buy 6 bottles of wine. Some are corrugated and some are cloth and all are free. Fresh and Easy has cloth and they charge, if memory serves, $1.99.

• Have gone from a limited amount of Category Champions who made the significant investments to comply with their food safety standards to spot buying. These Category Champions were there at the beginning when they delivered less than a pallet of certain Fresh & Easy branded commodities three times a week and they are being replaced by branded commodities that didn’t have to make the same investment and don’t have to comply with the stringent food safety standards.

******

I believe their sales are up as much as 30% since they have become price promotional aggressive, using weekly ads, and maintained their EDLP position. I understand they have about 15 store in Northern California all ready to be stocked and opened and the Stockton DC is ready to go.

I don’t know when they will open up Northern California but the unopened stores and DC has to be a huge financial burden. They have about 130 stores going out of their Riverside DC and they are bleeding red, so I would think when they open their Stockton DC the red number will increase.

In our piece onTesco’s recent earnings, we showed that average sales per store, per week are running about $83,000. although up from the $50,000 number that we and others, such as Willard Bishop, were noting early in the concept’s existence — a volume level later confirmed in its financial filings.

Since Tesco management started out with an expectation of selling $200,000 a store per week on a much larger base of stores than has actually opened, the concept is struggling.

Although we agree with our correspondent that many changes have been made and some will help, we see the problems as more fundamental.

1) Lousy real estate

In its initial rush, Fresh & Easy took over too many bad sites. It probably needs to confess its sins, close half the stores and impose rigorous site selection criteria on future locations.

2) Wrong Market Choices

It is not at all obvious that American suburban consumers want to have 10,000 square foot stores to shop in. Once they are in the car to shop, the “easy” thing to do is go to one store that has what they want. Although adding 1,000 mostly branded SKUs can help, most consumers still need to go to a supermarket and if they need to go to a supermarket, then Fresh & Easy is not “easy.” The stores would probably be a big hit in more urban areas — say Manhattan.

3) Not American-style Fresh

Americans think a fresh rotisserie chicken is cooked in a rotisserie in front of their face, not cold in a plastic bubble from a commissary. A fresh sub sandwich is when you get to tell the guy behind the counter, “Extra tomato, skip the olives, please.” Ready meals don’t sell in America. If the fresh program isn’t adjusted, it will be hard to be perceived as fresh.

4) Failure to differentiate.

Here is the rule that they should hang up at Fresh & Easy headquarters and recite it daily: In America, an undifferentiated offer against a diversity of demographics is a loser. There are two choices: Micro market each store — like Wal-Mart’s long time “store of the community” initiative — or only choose locations consistent with your offer — as Whole Foods tries to do.

Unless they change these four points, we doubt it can be a big success.

Bringing in Chris Vangelos is a plus. His brother, James, is a loyal Fresh & Easy supporter and spoke out early on behalf of Fresh & Easy, and we have long had admiration for Chris’ parents.

But this is a strategic issue and we doubt any one person can turn the ship.

Many who could help, won’t. As our correspondent mentions, Tesco has sucker punched its Category Champions and it refuses to pay dues to PMA, United and The Fresh Produce Council, so it loses out on networking and good will.

We agree with our correspondent in another way: Opening up the Northern California division without fixing the concept is just a way to lose money faster.

Many thanks to both of our letter writers for weighing in on this important project.

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