Pundit Interviews

Pundit Letters





Perishable Pundit
P.O. Box 810425
Boca Raton FL 33481

Ph: 561-994-1118
Fax: 561-994-1610


email:
info@PerishablePundit.com

a

Produce Business

Deli Business

American Food & Ag Exporter

Cheese Connoisseur



What Will Be The Fate
Of Fresh & Easy?

Jim Prevor’s Perishable Pundit, November 24, 2008

In a piece entitled, Tesco Uses Poor Economy As Excuse For Fresh & Easy Pullback, we made the case that the media had been too accepting of Tesco’s claim that it was slowing its US expansion due to the state of the economy. That assertion brought some interesting feedback. One of the trade’s marketing experts put it this way:

I wanted to add a few comments to yours regarding Fresh & Easy and the affect the slow economy may have had on their expansion plans.

At a recent panel of five chain executives held here at the Fresh Produce Association of the Americas Convention earlier this month, most agreed that the economy is affecting HOW shoppers shop: e.g., less trips, larger packs, less luxury items, more private label, etc.

“Back to basics” seems to be the watchword. Having seen Fresh & Easy stores in our own back yard, it seems that while they focus on private label, their offerings are neither value-priced nor sexy enough to attract the strapped consumer. Trader Joe’s, in contrast, continues to do it right on both counts.

So we believe here that the problems with Fresh & Easy are two-pronged: Slow economy AND bad assortment. The British are retreating!

— Veronica Kraushaar
President
VIVA Marketing Strategies
Nogales, AZ

Yes, Veronica is really pointing out the muddiness of the position Fresh & Easy has staked out. It is neither Aldi — with value-priced private label — nor Trader Joe’s, with a funky, fun, foodie culture that is worth paying for. It has talked like Whole Foods, with its emphasis on green and sustainability, but claims somehow to be really cheap which implies something else all together.

The article from the Times of London that we quoted included a rather stunning line where Tim Mason, The Fresh & Easy CEO, explains that the chain is not a failure because, “We are absolutely thrilled with the customer response from those loyalists that have got it, and really loved what we do…”

It is a rather odd thing to say actually, because the translation goes like this: “among those consumers who love us, we are loved, but most consumers don’t love us at all.”

Every business has some people who appreciate what it does… the question is whether there are enough of those people to make the business viable.

In fact we wonder if Mr. Mason isn’t deluding himself. With the generous use of discount coupons and discounting on perishables, Fresh & Easy has never really tested whether the “loyalists” who “get it” are actually so enamored of the concept that they will pay a price sufficient to sustain it. Until that test is run, Mr. Mason doesn’t know, can’t know, if very many people actually “get it” at all.

One of the industry’s highly experienced retailers read the piece and sent this note along:

Your piece, Tesco Uses Poor Economy As Excuse For Fresh & Easy Pullback, was right on.

I’m mindful of both Lee Scott’s comments, which you point out, and Jack Welch’s comments at PMA: “…in these economic times, you either BUY your competition or BURY them.”

Tesco is a remarkable company with a strong financial position.

If Fresh and Easy was performing for Tesco, they would, as you said, “… push the peddle down…” to accelerate the program, ESPECIALLY in the current environment in the U.S.

NOW is the time for strong companies to take market share, and it’s interesting that Tesco backs off. Your analysis of that was right on.

It is obvious that the concept is not performing and that headquarters back in the UK has lost faith in the concept. The question is what will happen now. Six options:

  1. Close up. Cut the losses. Retreat.

  2. Muddle through. The big distribution center has been built, so keep opening stores but at a slower rate. Hope the concept catches on or that incremental change will turn things around.

  3. Radical change, such as rebannering the stores, perhaps half as Aldi clones and half as clones of Trader Joe’s, as was suggested here.

  4. Throw the stores into a joint venture with an American retailer, such as Safeway.

  5. Do a US acquisition, such as Meijer, as was suggested here, or Whole Foods, as was suggested here. The Fresh & Easy stores might do better reoriented as local minimart versions of larger stores where together they hold onto a greater share of the consumer’s business.

  6. Franchise.

Although a shut down would be embarrassing, we think the financial crisis has given sufficient cover that it might well happen. Tesco’s stock would probably rise as management could focus on the home market, where it is losing share to Wal-Mart’s ASDA division and the deep discounters; plus the specter of continuing and growing US losses would be removed as a market concern. Six months ago, we thought that the pride of Tesco executives would keep the stores open but, today, with the whole world collapsing financially, Tesco could site unanticipated circumstances and go home. Indeed, the fact that Tim Mason gave that interview to the Times of London, not the LA Times, is a good indicator that the intended recipient of that message was the City in London — perhaps softening them up for what is coming next.

Muddling through is possible; one is reminded of Wal-Mart’s glacial expansion of Wal-Mart’s Neighborhood Market stores. But we are not sure of the point. What does Tesco need to have 200 little superettes on the west coast? If they can’t have a thousand of these, will they want to bother?

They seem to have no stomach for any radical redesign of the concept. They seem to want to prove themselves right and a radical redesign would prove they were wrong.

The possibility of a joint venture is real. We mention Safeway both because it had been Tesco’s partner in an Internet shopping venture and because Fresh & Easy has signed a lot of leases in the Bay area and can’t support the stores without a new distribution center. Safeway could use its existing infrastructure up north, and down south the existing Vons and Fresh & Easy distribution centers could be rationalized. The problem, of course, is that if the stores don’t make money, why would Safeway want them? Unless it believes it could do a better job or that the stores — located between full-size supermarkets — could be used as consumer fill-in depots between big shops. In its "the market by Vons" concept, which we profiled here and here, Safeway does have a possible model for how it would revamp the chain if it gets control.

We suspect that an acquisition would actually be Sir Terry Leahy’s first choice. The problem is that Tesco selected a launch strategy, in part, because the City in London had warned Tesco management that a big US acquisition would not be looked on favorably. The only thing that would change that assessment would be if the City believed that Tesco was plucking up a prime asset at a bargain-basement price. Maybe this would be possible if Whole Foods burns through the capital infusion we mentioned here.

Franchising might be a possibility. Sell off the stores to independent owners, as Save-A-Lot has, and provide the supply and marketing services. Up north, they could partner with perishable food distributors to handle that supply chain. The problem: If the stores don’t make a profit, the independent owners will go broke — so it only works if the ownership itself changes the dynamic and makes the stores successful.

Clues as to what will happen are more likely to be found in London than Los Angeles. Fresh & Easy is so small in volume and now that top UK management seems to think a big win is unlikely, if things get worse in the UK, the whole US venture may be seen as a distraction.

J.P. Morgan recently downgraded Tesco to underweight — a big change for a stock that has been a wonder boy for a very long time. Fresh & Easy is not large enough to have played much of a role in J.P. Morgan’s calculations, but if its assessment is accurate about things in the UK, it may well determine the fate of Fresh & Easy:

  • The J.P. Morgan Food Retail Team spent a miserable November day on the Old Kent Road in London comparing products in Tesco and Aldi. We think that Aldi threatens to overturn many axioms of ‘best practice’ in UK grocery retailing to which Tesco is so firmly wedded.

  • Aldi, with its 3% market share, is exerting price leadership in the UK, and we believe it poses a major threat to Tesco.

  • Tesco may have miscalculated with the Discount Brands initiative. Tesco has, in our view, responded in a tactical fashion to a structural threat. We see this as a defensive move that does not tackle the heart of the problem (Tesco Value is low quality and Tesco’s own label expensive).

  • Our analysis shows that Tesco is consciously matching Aldi on price on a whole host of readily identifiable and fairly standard products (ones where price comparisons are easy). But the majority of SKUs carried by Aldi are not price-matched. Many of these items are difficult to compare on price because their weights are different or, potentially, their quality. In our opinion, the price differential on products that are difficult to compare is the most revealing aspect of this Tesco versus Aldi comparison: it is among these items that we think the biggest pricing gap between Tesco and Aldi really exists.

  • The bulls’ idea that the Discount Brands have higher gross margins than the standard own label is unfounded, we think.

  • We believe there is a danger of focusing too much on the micro-analysis of individual SKU demand curves, which is what we think Tesco has been doing with Dunnhumby. We wonder whether Tesco, through its relentless focus on customer segmentation and maximization of profit from each customer, has lost sight of the bigger picture (i.e., the cost of the trolley customers roll out the door with).

It sounds as if Tesco may have bigger things to worry about than fixing up a small chain of tiny stores.

© 2017 Perishable Pundit | Subscribe | Print | Search | Archives | Feedback | Info | Sponsorship | About Jim | Request Speaking Engagement | Contact Us