Fresh & Easy Sees Profits in Near Future
Fresh & Easy is keeping its talking points succinct
and positive. Consider the latest pronouncements from Tesco, the chain’s parent
company.
- Total sales and same-store numbers are up, albeit off a low base.Â
- Store count at the chain is expected to go from under 170 locations today
to 400 by 2013. The company plans to open an average of two new units a week
until it reaches its goal.Â
- Sir Terry Leahy, Tesco’s current CEO, says Fresh & Easy will be profitable
by 2012/13.Â
- Philip Clarke, Tesco’s CEO in-waiting, says there is no need to do a review
of the U.S. business despite some bumps in the road Fresh & Easy has
hit since it opened in 2007.
Many analysts agree that while Fresh & Easy may still face challenges, it
has deep enough pockets to make it. An indication of that may be found in Tesco’s
announcement that it “mothball” 13 stores.
According to Tesco, the
Fresh & Easy locations were in areas hardest hit
by the “residential and commercial property crash … The expected population
growth in these neighbourhoods has simply not materialised and we’ll
re-open these stores when the housing and employment markets pick up.”
Discussion Questions: Has Fresh & Easy turned the corner in the U.S.?
Do you believe it can profitably sustain its projected growth rate?
- Statement of Results – 26 Weeks Ended 28 August 2010 – Tesco PLC
- Fresh & Easy closing store – The Press-Enterprise
- Tesco unveils US food chain expansion – The Telegraph
- Tesco Signals It Will Push Ahead in U.S. – The Wall Street Journal
- Tesco half-year profits up on international growth – International Business
Times
It’s a mediocre idea with mediocre execution–hard to believe it will survive to reach profitability in 2012/2013 unless Tesco lets its ego get in the way and keeps on propping up bad business results. Blaming poor performance on the economy reminds me of the three envelope story.
Tesco is still on a learning curve in America. Fresh & Easy hasn’t turned a corner yet but with so many factors in play today, Tesco shouldn’t be counted out. Tesco is a proud and successful retailer that didn’t come to America to be a loser. They will eventually (which is a flexible term) find the way here and develop a profitable business.
First of all, blaming a “residential and commercial property crash” on your woes shows a lack of class and is no excuse. Good retailers do well despite economic conditions. You don’t see Wal-Mart, Trader Joe’s and Aldi mothballing stores and whining about housing and the economy.
Fresh & Easy has improved their store performance from extremely poor to just regular poor. I don’t see opening stores for the sake of opening stores as being a solution to their problems. Remember, it’s one thing to say it in a press release. It’s another thing to actually do it in real life.
If Tesco thinks there is no need to review their US operations, well that is just for the press release. I’m sure they are deeply concerned. I also suspect they will revise those predictions about being profitable by 2013, most likely by the next person who takes over at that point.
The economic and housing crash is a valid explanation of why F&E’s rate of expansion is less than originally planned, and why some stores which were located in residential areas that were forecast to expand but instead contracted significantly are being mothballed. The big start-up losses reflect two factors; 1) lack of sufficient scale to dilute heavy upfront investment in logistics and in-house food production facilities that supply 30% of F&E’s range; 2) low initial sales densities and high peak-of-market rents. Both factors are being reversed as store growth accelerates and densities rise (+12% comp store sales in Q2) on the back of growing positive word of mouth aided by external advertising that only kicked off in September 2009.
Those who have doubts about what customers think could try asking them, or checking out online review websites such as Yelp.com. You may be quite surprised! Meantime, I’m sure parent company Tesco is quite happy to see competitors and commentators rehashing the negative consensus view….
Tesco has a hard road to travel to reach store growth and profitability predictions by 2013. They have the deep pockets and strong ego to push it; but even with that, they are business people. Prudent minds will prevail. The U. S. market is not as easy to penetrate as they might have thought. Be on the lookout for new, more realistic forcasts coming soon.
If my analysis of Tesco’s two most recent annual reports is correct, their most recent fiscal year sales of $563M in the US came from an average of 130 ‘opened stores’ or $4.3M per store or ~$290/sf…. Hmmm, with gross rents likely averaging in excess of $15/sf, that makes for a very high “Health Ratio”–well above any that grocers can afford to pay. Compare this with Trader Joe’s with sales levels 6x to 7x higher in comparably-sized stores. I guess the good news is that Fresh & Easy has room to grow their sales.
As an occasional Fresh & Easy shopper–I do like their fresh veggies and fruit–fairly priced and reasonable variety with organic options. Also their self-checkout system really is ‘easy’ and works significantly better than the cramped and temperamental system at Ralphs–I actually enjoy checking out; never a line. Hmmm, is that the system or lack of customers? Regardless, the checkout system is good. So at least in part they live up to their name “Fresh & Easy.”
I’m on the “don’t count Tesco out” side. I’d always be cautious about betting against one of the best retailers in the world, in a business they ought to know.
At this point I think we all know the score: a large and opinionated group sees this as an unmitigated disaster, while a smaller group is “willing to give it a chance” (usually more on faith in Tesco’s reputation than on actual results.) A bigger issue might be why anyone cares: with some 63B GBP ($100B) in revenues at the parent, it’s clear that even if F&E “succeeds”–however we define that term–it will not count for very much…this isn’t a business plan as much as it’s a lab experiment.
Hmmm, was I right or was I right?