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Tesco Trumpets Increased Sales Numbers But Growth Is Still Underperforming

Jim Prevor’s Perishable Pundit, December 24, 2010

One of the patterns that we have observed in our study of Tesco’s journey to America as Fresh & Easy is that much of the media takes the easy way out and simply parrots company press releases. They may not be specialists in the company or industry they are reporting on, or they just don’t have the time to really dig in deep.

So when Tesco announced its results for the third quarter, the reporting on Fresh & Easy frequently focused on the one statistic that management elected to highlight:

In the United States, sales were up 38.5% with a particularly successful Thanksgiving holiday period. Like-for-like sales growth remained strong at 9.8% driven primarily by increased customer numbers.

This was the lead for many of the articles that mentioned Fresh & Easy. The implication was that this is a strong performance. It is actually very weak performance.

Numbers such as these can’t really be interpreted in isolation. The total increase in sales tells us mostly that Tesco opened more Fresh & Easy stores. The “like-for-like,” which in the U.S. we call “same store sales,” can only be interpreted in the context of the age of the stores.

Stores have a natural maturation process the first five or so years. You expect sales to increase each year.

We explained this almost three years ago in a piece titled, Fresh & Easy Reaches Out To Shoppers As Competitors Work To Block Its Growth:

…the volume that Tesco needs seems unlikely to be in the cards for a long time. When a new store opens, sales commonly drop, not increase, by 20 or 30% within the first four weeks.

Then, they can start to grow, but rarely by leaps and bounds. If these stores have stabilized at $50,000 a week after being open a month or two, you would expect to see sales at $60,000 a week a year later, $69,000 two years later, $80,000 after three years and, say $90,000 after four years.

Now if the concept really takes off and gains wide acceptance, instead of a gain of 20% and then 15% each year, you could get a gain of, initially, 35% and then 25% after that. Still that would only mean $67,500 per week per store a year from now.

Fresh & Easy is in the sweet spot right now for same-store sales. None of its stores are over five-years-old, so all should be increasing nicely. Stores going from year one to year two should be increasing at least 20% and preferably 35%. Stores going from year two to three or three to four should be showing same-store sales increases of at least 15% and, if the concept is really successful, 25%.

Obviously there are other factors that are needed to evaluate the situation. Large boosts in sales can often be achieved through heavy promotional expenditures, low prices, extensive couponing, etc. So we have to wait for Tesco to release profitability information to really evaluate these claims.

But this much is clear: The 9.8% growth in same-store sales is not a triumph. It is below the average experience of American supermarket chains for young stores. It indicates that Fresh & Easy continues to underperform.

The trumpeting of the number is really a bet that the media will not be familiar with the facts and will repeat the claim without qualifying it — a bet Tesco won, at least in this case.

Of course, in the end, media relations can only go so far. The question is will the stores make an adequate return on investment. That seems unlikely for a very long time.

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