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[23 comments]

Tesco Considering All Options for Fresh & Easy

December 5, 2012

It appears as though The Times of London had it right. Back in 2007, when Tesco opened its first Fresh & Easy concept stores in the U.S., the paper ran a story with the headline: "Tesco in the US? It'll Never Work."

Yesterday, The Telegraph reported that Tesco is launching a "strategic review" of its American business unit that may lead to a sale, a joint venture or even a closure of the chain altogether. The report says it is unlikely Fresh & Easy will move forward as-is.

The chain has failed to turn a profit since being launched a little over five years ago. In October, Tesco CEO Philip Clarke told Reuters, "Fresh & Easy needs to be able to demonstrate it can be a positive return for shareholders."

FINANCIALS:     [LON:TSCO] [ ]

Discussion Questions:

Where did Tesco go wrong with Fresh & Easy? What would you do with the chain if the decision was yours to make?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What would you do with Fresh & Easy if the decision was yours to make?

Comments:

Maybe we should ask, "where did Tesco go right"? Ever since it opened, I think the weight of opinion on RetailWire had been negative. Sterile stores, bad locations, weak assortment, a "Euro" feel that didn't play well here, no particular reason for being. The impression I always had was that this was a "damn the torpedoes, full speed ahead" initiative, not one driven by any consumer niche or need. So I'd kill it—lick your wounds and go home.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

Not that I want to jump on the dog pile BUT a review of my record on this topic will show that I hated these stores from the time they opened.

There ... I feel better now.

Tesco is a great company and it successfully operates many great formats. Fresh & Easy just wasn't one of them. This is a classic case of why at retail doing your homework up front, (and not believing your own press clippings,) is far more preferable than trying to get the public to convert to a new—and less satisfying—way of shopping.

It's hard to know where to start. The initial product selection, site selection and supply chain model were all terribly flawed.

Perhaps the real lesson here is the danger of extrapolating from what seems to be a demographic fact or two—as in, people live in smaller households and want to spend less time shopping—and convincing yourself that this is somehow a trend broad enough to require, and support, a new format.

I'm sure Tesco will continue to be successful and I'll enjoy seeing its next new format. Until then—I told you so!

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Ryan Mathews, Founder, ceo, Black Monk Consulting

They were totally clueless from the start. There was no meaningful research. Poor locations were chosen. They were unable to live up to the pre-opening expectations. Just an overall amateur job.

When I heard they had bought into the food desert scam, I knew it was over for sure. We found about a dozen locations that could be operated as a small supermarket. The rest will be sent to the real estate funeral directors and either become dollar stores, or go dark.

David Livingston, Principal, DJL Research

Tesco failed to deliver consistent product freshness and a selection of ready-to-heat foods tailoring to local tastes. Closing down a chain of nearly 190 stores, if groups or individual locations can't be sold off, will be costly for Tesco. Better to cut loose this failure than invest more money in a losing venture.

'weo'

When asked several years ago about the impact Tesco's entry to the U.S. market would have on the c-store industry, my answer was that if they developed Tesco Express locations it could be a big one. Why? Because they were already heavily involved in bringing a fresh offering to convenience retailing. Their stores in the U.K. were what we are still striving to accomplish here.

That being said, when I saw my first Fresh & Easy I had two thoughts. The first was that this format will have little impact on the c-stores and, second, I was not sure it was viable. It will be interesting to see who is interested in buying the locations and what they morph into.

I would sell the business (if I could). Tesco is under pressure at home and its investors want the pain being inflicted by Fresh & Easy to go way (albeit perhaps to a lesser extent) rather than to continue via a JV.

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Steve Montgomery, President, b2b Solutions, LLC

If it is true that "East is East and West is West," then Fresh & Easy would have been better off staying in England where it would be more vital rather than in the difficult Southern California market.

If it was my decision to make, what with the U.S. grocery industry in some disarray, I'd lick my wounds and expand Tesco in other directions such as digital retailing.

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Gene Hoffman, President/CEO, Corporate Strategies International

In my view, Fresh & Easy as a concept contained several fatal flaws. First, the premise that shoppers would be attracted to quick meal offerings sprinkled over a sterile, Aldi-type presentation proved to be a major disconnect from a shopper experience perspective. Secondly, many of their locations were housed in abandoned supermarket buildings in declining shopping centers with trade area demographics that were simply not conducive to a fresh, on-the-go meal solution concept. Store site selection was apparently not viewed to be the critical success factor that it turned out to be.

Taking this review one step further, contrast Fresh & Easy with Fresh Market. The latter understood that making "Fresh" appealing to the shopper is not just having the product available, but to be able to romance the product in an environment that invites sampling, aromas, with food experts on hand to whet the appetites of the fresh, on-the-go shopper.

Unfortunately, "Fresh & Easy" turned out to be neither "fresh" nor "easy" for the U.S. market. Some of their locations will have some value to suitors, but most will likely return to being the closed storefronts they once were.

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Mark Heckman, Principal, Mark Heckman Consulting

I don't think Fresh & Easy was competing in the same arena as other grocers in the US. They didn't seem to have a consistent position in the market place. Their inventory of products and brands was limited with enough out-of-stocks to make the stores look like they were going out of business. Their pricing was not exactly value pricing all of the time. There were advocates, but at the same time Fresh & Easy never built a strong base of loyal consumers.

I think they should sell, to cover real estate obligations and product essentially, and cut their losses.

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Joan Treistman, President, The Treistman Group LLC

All hat and no cattle, from day one.

David Livingston, Principal, DJL Research

They started in the wrong market—Southern California. What retailer of Tesco's scale would enter an expensive (labor, real estate, logistics, taxes, etc.) market like this at the outset?

Secondly, Tesco underestimated the competition.

Third, Tesco didn't gather the Market Intelligence of LISTENING TO THE CONSUMER first, and then adjusting their plan-o-gram to meet consumer needs and expectations.

Four, tied to #1—crippling real estate rents, which prevent profitability.

Cut the losses. Too many mistakes have been made, and recovery to profitability is unlikely in the next 3 - 5 years.

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Roger Saunders, Managing Director, Prosper Business Development

Astounding that they didn't "get it" with so many intelligent, accomplished and sincere market analysts telling them they had a dud on their hands. Arrogance, I guess. A shame for so many people in the trenches. Sell it if you can, but more likely just close it for the many good reasons cited by others.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

But who would buy this company except for PE vultures? Aren't you really just buying a boatload of liability?

All of the locations I'm aware of (unlike Marketside) were 20-year lease terms. Average if not all F&E leases aren't set to expire until 2028 or 2029! So in addition to poor locations/real estate and no-doubt high rents, their long term commitment to these stores was always perplexing unless leases were structured strictly to finance the construction/build-out (likely).

I continue to be amazed at how often retailers in general are still committing to high rents nationwide when there's generally such little competition from other users (obviously this is case by case.) The build-out/construction costs has a lot to do with these rents, but you still will find a minority of frugal retail operators out there who are far more efficient on rent savings/expense when considering market conditions.

Drew McElligott, Director, Brauvin

1. They thought the US would adopt an English shopping and eating style.
2. They used British management. British management is oil floating on a fresh water sea. Nuances of class are not heard over the heartbeat of America.
3. Their research was lousy, especially on variety and store size.
4. Their early real estate decisions were atrocious.
5. They over invested in infrastructure.
6. They imported supply chain partners who knew nothing about the market.
7. In the face of failure they ignored the facts and perhaps believed their own spin.
8. Local competition flanked them.
9. Other foreign forays floundered at the same time.
10. They violated almost all of Sun Tzu teachings in the "Art of War."

Other than that, they gave it a try.

'DrCellmor'

Pre-opening, Fresh & Easy was touted as playing in the C-store space, where I think they could have had a large impact. Instead, from day one they were a small "supermarket" with nearly negligible C-store character. On day two they shed any vestige of C-store character as fast as they could, and raced to proliferate SKUs (increasing attractiveness, bringing shoppers into the store) at the same time deepening the steel canyons (aisles, aka center-of-store aisles, a "dying" modality that is VERY poor at actually selling the shoppers.)

So they ended up with some nice neighborhood, small supermarkets, with a few good ideas, but a lot of hungover ideas from their founding that they had rejected themselves, but clung to their execution—sites, etc.

I think Walmart's Marketside was a parallel play. The reality is that several C-store chains are successfully moving C-stores in the direction of super-C-stores, the direction Fresh & Easy and Marketside may have had better luck with. There is still a BIG hole in the market there, that by and by, the C-stores will move up into, rather than supermarkets moving down into. But then, that flank of the supermarket has been given short shrift by the supermarkets for forty years. During those years the C-store industry has grown, more or less, from scratch, eating supermarkets' lunches as they go. (In many cases, literally!)

With one third of supermarkets' transactions coming from one and two item purchases, they remain sitting-duck vulnerable.

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Adjunct Senior Fellow, Ehrenberg-Bass Institute

"No particular reason for being" is probably the best and precise comment. It seems to me that anyone can sell a can of soup or a box of cereal. What many food retailers lack is excellence in produce, seafood and meat and baked goods.

A few years ago there was a small mom & pop store nearby that was known for its produce and meat, but they still had a modest center store full of typical supermarket packaged goods that few people ever bought there because the store could not compete with a nearby Kroger on either price or selection. I think they could have survived by playing up their strengths and getting read of their weaknesses. They could have leased out part of this space to someone who wanted to run an upscale bakery.

'schindler'

To be fair, one can have the most brilliant concept or the most idiotic...but you'll never really know what you truly have until you implement it and consistently and thoroughly respond to customer reactions over time. The hubris displayed by Tesco with this concept appeared to inhibit their recognition of the problems as well as their willingness and ability to respond from Day 1.

Many (myself included) scratched their heads from Day 1. But, hey (I thought), maybe they know something I don't. So I certainly won't claim to have been a genius. The true tragedy here, however, is the seeming inflexibility of Tesco to move in response the customers' alarm bells over the past 5 years. What a surprise?! Large organizations have a tough time making Bold Choices.

Kevin Price, President, The Market Performance Group, Inc.

It's a shame. Tesco Fresh & Easy stores had an image problem. Nobody knew they existed, what they stood for, and had horrible real estate. Even more critical, Tesco in Southern California was like the Republican party during the last election. Fresh & Easy never understood the demographic make up of their trading areas.

I believe Tesco would have benefited tremendously by retaining a good advertising agency that would have helped them see the forest for the trees.

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Carlos Arámbula, Managing Partner, MarcasUSA LLC

Even given my well-known and very strong dislike of Tesco, I have to take exception to a few of the comments made. Notably those disliking F&E because it is too "Euro"—it is nothing of the sort. And that it caters more to British tastes—ditto.

The few branches I visited bore no resemblance whatsoever to Tesco Express in either fact or vision. Nor were they anywhere near as good as many of the small American supermarkets I've visited. I do wholeheartedly agree with those who say Tesco just didn't get it.

As for research, one of their biggest boasts was the amount of work done before opening the first unit. Talk about schadenfreude (oops, sorry to be too Euro for some of you) but I think you know what I mean.

BUT BUT BUT I do feel very sorry for all the people who will lose their jobs as Tesco admits it has lost the plot.

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Bernice Hurst, Contributing Editor, RetailWire

"First, I freely declare that I detest Tesco and the way in which they operate. I would be delighted if this venture turned out to be a flop. While they are undeniably good at many things, top of the list for me is PR ..."
Bernice Hurst RW 11/07/07

So I guess it wasn't just a Brits vs. Yanks thing. My recollections are pretty much in line with Dr. Needel's—certainly the trend has been one of increasing negativity—but in looking back at the RW poll for that day, no fewer than 72% predicted it would be "highly or somewhat successful" (uhm....)

Anyway, as is always the case when anyone gets an F on the big test they bragged they would ace, the question becomes "What did you learn?"

Specifically:

(1) Was the timing - i.e. outset of the Great Recession - a problem? Certainly didn't help, but most here think the concept was a dud regardless;

(2) Was does this say about Tesco's abilities overall? Not everyone was fan before this—(see above)—but it's always bad to extrapolate from one example (even great companies make big mistakes);

(3) Was this a cultural issue? Maybe, but the Germans seem to do just fine with Aldi and Trader Joe's, as do Swedes with IKEA...perhaps Napoleon should have looked east rather than north when he talked about a nation of shopkeepers.

'notcom'

The original concept of Tesco Express—small format with consistent quality fresh produce, and fresh meal options sounded great. Poor locations, large amounts of unfamiliar private label in basic generic packaging did not resonate. Assortments were confusing and inconsistent. Probably will have to be sold—locations likely not of interest.

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Anne Bieler, Sr. Associate, Packaging and Technology Integrated Solutions

Tesco did many things right and I think the smaller local store concept will have greater importance in future years. What they did wrong is store dècor. Their store design is pure European and this is just not competitive in the California market. Their heavy Private Label for an unknown retailer was a difficult sale. They underestimated the price factor in the US market which is much greater than Europe.

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W. Frank Dell II, CMC, President, Dellmart & Company

Unlike most who comment on RetailWire who are wedded to traditional supermarkets and defend them in spite of the fact they have been losing market share every year for the past 15 years, I actually did support the arrival of Fresh & Easy and I am not celebrating their potential demise. I think the location strategy and the branding and marketing were less of a fit with the US than was the concept itself.

We are a fertile environment for innovative food concepts and for alternatives to tired traditional supermarkets, and our convenience stores that sell food that is scary outside of the major brand packaged and canned goods. And for those of you who don't think "Euro" works here, check out the success of Pret a Manger (and their expansion plans) and by the way in spite of their name they are British. Also, our beloved Trader Joe's as I am sure most of you know, is German owned.

Michael Tesler, Founding Partner, Retail Concepts

I just do not know where to start. They did SO many things wrong. The wrong locations. The wrong product mix. The wrong pricing. The wrong promotion style (remember those coupons?). The wrong attitude toward "people." Now I am going to elaborate.

The grocery business is a "people" business. They completely tried to remove that aspect from these stores. Self checkout. Few employees. A disregard for their staff's ability to actually think to the point that they put freshness dates on single apples, oranges, or potatoes? Seriously, let your employees determine when a piece of produce is rotting.

Then there is that "customer" aspect. They seemed to forget about customers in many ways when they first opened. No cash back with debit cards. No acceptance of American Express. No acceptance of EBT. No acceptance of coupons... I know they fixed all this... but first impressions....

I have seen good, but then not so good, but nonetheless solid, changes to the stores in the past year. The mix in the stores has expanded and improved vastly. The prices have increased substantially. I think they are trying to get a few more "days" out of the products as I find the product freshness has declined. The appearance of the stores has improved significantly.

I think had they moved more slowly, learned from their mistakes, and learned where their niche was (they needed to target areas with more younger people; young people LOVE these stores), and marked appropriately, they could have built a small, profitable presence in a slower manner. But they rushed, tried to be all things to all people, did so in an arrogant manner, and failed.

I am sorry to see them go. I liked some of the recent changes... and the more of their items I tried, the more I wanted to go back and try. The quality of their exclusive goods was all in all very good.

'storewanderer'

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