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Pundit’s Mailbag — Tesco Gets Reviews From Industry Members

Jim Prevor’s Perishable Pundit, November 13, 2007

Our piece, Tesco Finally Opens Doors…British Press and Protesters Unimpressed, brought several pieces that thought well of the new Tesco Fresh & Easy concept:

I would have to disagree with you on Tesco. I lived in London for 6 years when Marks & Spencer and Tesco were just getting started in the “Ready Meals”; they were terrific.

And Americans talk a good story about calories and diet, but LOVE a good serving of Lasagna!

— George Urda
Cal-Mark Beverage Inc.
Novato Ca

Cal-Mark does private label beverages and so would have special interest in a concept such as Fresh & Easy, which is heavy to private label. In fact, one suspects that if Tesco is successful in building equity in the Fresh & Easy brand, it will try to go as close to 100% private label as possible.

Brands give producers control over retailers. If they can do it, retailers prefer to have control over producers.

The Pundit loves a good serving of lasagna as well and suspects that the particular comment about the lentil and tofu lasagna referenced in the Los Angeles correspondent’s report for The Times of London speaks to a particular demographic. In any case, as long as they eat, that is as easy problem to solve as Fresh & Easy would sell tofu lasagnas if that is where the demand is.

The US, however, has a different way of eating. On the one hand, our larger homes and freezers allow for easy “stock ups” on frozen foods. On the other hand, our vibrant restaurant culture encourages take-out.

So in many a household, you might find a “Lean Cuisine” lasagna in the freezer as a contingency. On a good week, you might find pieces of lasagna that were made using Grandma’s secret recipe and cut into pieces and frozen for future use or the family might pick up Italian food, including lasagna, from their local Italian place.

Perhaps if they are in a Whole Foods or Publix’s new GreenWise, a Central Market or a Fresh Market — they all have beautiful displays of fresh food — the family might be enticed to buy some.

This doesn’t mean that Fresh & Easy won’t sell plenty of prepared foods. The issue is that most of the items in the store do not require daily delivery. So if they properly charge the transportation costs of more frequent delivery to the products necessitating that delivery, it will be hard to sell enough to cover the cost.

How big a market there is for this type of fresh prepared food is unclear. The Los Angeles correspondent for The Times of London put it this way:

The bigger problem here is that ready meals just don’t appeal to Californians — as much as Britons cannot understand it. You can see why by visiting a Gelson’s, a Whole Foods or a Bristol Farms. These LA superluxurymarkets hire their own chefs to prepare gourmet food daily and sell it piled high at deli counters so it looks like a king’s feast. Even boxed sushi is prepared in-house, by a resident sushi chef. Of course, Tesco hopes there’s a middle ground — a refrigerated, prepackaged niche somewhere above Wal-Mart and below Whole Foods. But I’m not at all convinced….

Put another way, the affluent in America don’t want their food pre-packaged in trays, and the paycheck-to-paycheck demographic doesn’t buy many fresh prepared foods — and, of course, every other article one reads is about the “shrinking middle class” — so who will be the customer?

It is also worth noting that this has been tried before. When Marks & Spencer took over Kings in New Jersey, the company tried a range of ready meals that flopped. Now it is true that the technology is better today, the store concept is different, and we are on the West Coast, not the East Coast. So it might work out better — but it clearly is an unknown.

Yes, they are very popular in the U.K., but that information does not give us a definitive answer as to how Americans will like the products. Time will tell.

We also received a letter from an executive on the packaging and logistics side of the business:

The US grocery industry is no doubt the best in the world, but I observed the new Fresh & Easy stores first hand this past week and, in my opinion, Tesco delivered what they promised to the American consumer.

  1. Fresh Food

  2. Convenient

  3. Great Produce

  4. Excellent looking meat

  5. Great valued wine

  6. Bright innovative stores

  7. Completely Green, reusable packaging on all perishable items not just produce.

  8. Easy to sho

I have read your articles. They appear not to be fact-based. Hopefully you will visit a Fresh & Easy and see if you agree.

— James A Vangelos
CEO
Polymer Logistics US Inc
Arroyo Grande, California

Since the Pundit goes back a long way with our writer’s father, Al Vangelos, who we worked with closely when he was Chairman of United and the CEO of Calavo, we’ll cut him some slack on that “not to be fact based” comment — since, of course, agree or disagree, the “fact” of the matter is we were quoting an important reference.

It matters a lot to Tesco, much more than to US-based Pundit readers, that the Los Angeles correspondent for The Times of London writes a piece and it is entitled Tesco in the US? It’ll Never Work.

As far as the substance of our letter-writer’s remarks, we wouldn’t disagree that Tesco has delivered on the promises he identifies.

We wouldn’t have expected anything less. Tesco isn’t some upstart; it is the third largest retailer in the world and successfully owns and operates many concepts and stores in many countries.

We would think Tesco could handle opening six little stores that, all together, would fit inside one Wal-Mart supercenter with plenty of room to spare.

Execution may become an issue if they open thousands of stores or try to go beyond the reach of the distribution center. At this point, it is more a question of the viability of the concept.

We’ve called it a “brilliant or bankrupt” strategy because most retailers would open one or two prototypes to test the concept. Our basic business critique of Tesco’s Fresh & Easy approach is that all this secrecy has indicated a weak concept. A strong concept doesn’t need it.

Warren Buffet, whose investment in Tesco has been trumpeted as an endorsement, is famous for looking for businesses with a sustainable business advantage or deep “moat” around them. We suspect that Tesco’s large real estate holdings in the U.K. may serve as such a moat. Yet we are uncertain what Tesco’s competitive advantage will be in America.

Look at the eight-point list in the letter and ask yourself if any of this is beyond the capability of Kroger, Safeway, Supervalu, HEB, Publix, Ahold, Delhaize and many others.

The reports are of long lines at the initial Fresh & Easy stores. That means little. Tesco gets a lot of news. There are very few stores and they are very small — so very few people account for big crowds. Many in the crowd are journalists, competitors or suppliers checking them out. We know of at least two retailers who have ordered staff to purchase one each of every prepared food and private label item. There are many others.

To us, the business challenge presented encapsulates three basic possibilities:

  1. Consumers will not like the concept. They won’t go for the prepared foods, they won’t find the brands they want, they will find too many items not available or not available in the size or package they prefer. As Kroger’s CEO explained, they may find the concept “not convenient” because it adds an extra store to visit but doesn’t replace any current shopping visit. If this is the case, Tesco will be left with a chain of outdated grocery stores, such as A&P operated 50 years ago, plus an enormous distribution center with nothing to distribute.
  2. The return on capital will not be sufficient. Consumers might like the concept just fine. But if these stores require this enormous infrastructure and ultra-frequent deliveries, great success may not generate the profit necessary to support this structure. Wal-Mart continues a very slow rollout of Wal-Mart’s Neighborhood Market concept not because it is a failure but because Wal-Mart is better off investing its capital in supercenters.
  3. The concept will be loved by consumers and will produce an excellent return on capital. In this case, every competitor will roll out these small format stores, and it is unclear why Tesco will be any more successful at this than anyone else. At very least, the competition for real estate will raise rents and thus reduce profits. Most likely Tesco will never open in most of the country because Kroger will have done Cincinnati, Stop & Shop will do Boston, Acme will do Philadelphia, Publix will do Miami, etc., etc. — all before Tesco gets there. In effect, Tesco will have duplicated the problem Marks & Spencer had with Kings — a little operation in a confined geographic area with little way to expand.

We will add to this that many of things Tesco has promised go beyond the list in our correspondent’s letter and are not so much going to be directly noted by consumers but by “advocates,” and there, we suspect, that Tesco has set itself up for a fall. When Tesco promises to offer “good jobs,” we have no doubt it will do that. We only mean, however, that everyone who takes a job at a Fresh & Easy store will think that the job is a better option than anything else the world provides.

The professional advocates — and the unions that will finance them — will have a completely different standard. To meet their definition of a “good job,” the pay and benefits must exceed that of Tesco’s unionized competitors and even then, won’t cut the mustard unless one person can support a family in middle-class fashion.

As a giant multinational corporation, Tesco will be held to Wal-Mart-like standards. This means every error will be magnified. The company is likely to be better known for its mistakes than its successes. In the UK, it has plenty of problems and critics — but it gets a pass on some things because it is also a British business icon and a great symbol of British overseas expansion to a country whose recent history has been more about the receding of Empire. In America, though, we doubt anyone will feel a need to cut them a break.

Our letter-writer has good reason to be particularly interested in the Fresh & Easy concept. If you check out the Polymer Logistics website here, you see they talk about “Retail Ready” packaging and Fresh & Easy uses a great deal of that. In fact, Polymer Logistics and Tesco have a very close relationship:

Polymer Logistics’ most significant relationship is with Tesco, for the supply of potato merchandising units, beverages and ambient foods. Direct and indirect revenues related to supplies of the Company’s 15 products and services to Tesco represented approximately 52 per cent and 39 per cent of Group revenues for the year ended 31 December 2005 and for the six months ended 30 June 2006, respectively.

In fact, Tesco is among the pioneers of the whole Retail-Ready concept:

Background to Retail Ready Packaging (“RRP”)

The transportation of products from the supplier to the retail outlet has traditionally involved the packaging of the product in cardboard boxes which are loaded onto wooden pallets and transported to the retail outlet by lorry. Typically, the product is then moved to a storage facility at the rear of the retail outlet where it is unpacked by hand and either housed in the storage facility or moved directly onto the shelves ready for sale to the consumer.

This labour-intensive process has proved to be costly and inefficient compared to more modern methods, with retailers having to subsidise the attendant labour costs as well as the damage caused to certain products due to the delivery process involving extra handling. In addition, this process has often led to lost sales due to the non-availability of stock at the point of sale, where a significant proportion of goods are often on-site in the storage facility but have not been put on the shelves.

In order to address these problems, the retail industry has sought a more efficient delivery process and leading UK supermarket retailers, such as Tesco, Sainsbury and ASDA, are now promoting the use of RRP as a solution to the issues referred to above. The Group’s RRP is designed to be ‘display ready’ from factory to the point of sale. Consumers purchase directly from RRP units in-store, with no requirement for retailers to unpack goods from the RRP units onto the shelves. The Directors believe that the Group’s RRP provides a significant number of benefits to retailers and suppliers, as described in more detail below.

It is a very brilliant idea. Whether it is best used in produce is a question mark. We don’t question the efficiency, but we question whether it doesn’t make the product look too institutional and sterile. Maybe it is suitable for an Aldi but not something focused on the image of “fresh.” Of course, perception can change, so we don’t want to rule it out.

In fact, even if Fresh & Easy fails and Tesco beats a retreat as did Marks and Spencer and Sainsbury’s before it, it will probably leave permanent changes on the industry. Many vendors have upped their food safety standards to get the Tesco business. Many have started to focus more on the consumer, and a whole store of retail-ready packaging has introduced many to the concept. Those are all wins for the industry whatever the future holds for Fresh & Easy.

A scion of one of the most prominent names in produce sent this report:

I drove to the Fresh & Easy store in Hemet on Sunday. There are a lot of things I like about it, and I’m looking for a spot near my home where they could put one. It is a smaller grocery store, with a good assortment of products, many in private label.

Cross between Smart and Final and Trader Joe’s? That guy’s on drugs.

Think of it as a well-stocked limited assortment grocery store with some good ready to eat foods, sort of a high end Sav-a-Lot. There’s sandwiches, salads, juices, desserts and warm up meals, but a little more than you might find in a really good truck stop.

It absolutely reminds me of the little old neighborhood grocery store on the way to work where I buy coffee and lottery tickets, but Fresh & Easy doesn’t have coffee or lottery tickets. It’s exactly what it says on the receipt; it’s a “Fresh and Easy Neighborhood Market!”

A word to the Tesco protesters: On Saturday night after the USC game, I left the stadium en route to my favorite 24-hour chili burger stand, and not far from the Armenian-Russian-Latino chain, I passed a competing Latino supermarket with a neon sign “Live Chickens”. So the demonstrators can go protest the live chicken sellers, if they can get past the MS-13 gang security detail.

Meanwhile both Pundit sister publication DELI BUSINESS and I want to know how they pull off this live chicken trick.

Sorry Mr. Pundit, but I was not going to stop with my family at night in that neighborhood for a store check.

I needed a burger, extra chili, way too bad.

But I digress. The point is there are some real interesting business models in play in Southern California.

School’s out on whether the overall Tesco supplier set up is optimal or not, but Fresh & Easy has found a great commercial test site in the alternative lifestyle capital of the world.

There is much to recommend about Fresh & Easy’s merchandising approach and I, for one, am glad to see them mixing it up in the retail arena.

— John Pandol
Vice President, Special Projects
Pandol Bros., Inc.

So is the Pundit. We need innovative ideas and we need to try new things. A new neighborhood small store concept holds out the possibility of thousands of stores all across the nation making the lives of consumers easier and creating opportunities for vendors.

We appreciate John’s letter and relate to the “little old neighborhood grocery store” but do note that though people find charm in the neighborhood hardware store, they mostly buy at Home Depot and Lowe’s… the neighborhood bookstore resonates with many, but the sales are at Border’s, Barnes & Noble and Amazon.com.

It is said that Tesco did an enormous amount of consumer research before launching its Fresh & Easy Neighborhood Market concept. We hope it didn’t misread consumer nostalgia for a bygone way as reflecting likely consumer behavior.

We wish Tesco luck and thank George, James and John for their letters.

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