Tesco’s Fresh & Easy Opens for Business
Tesco has certainly created high expectations for its U.S. debut. With pronouncements such as offering “Whole Foods quality at Wal-Mart prices,” Tesco has led some to talk in terms of the company revolutionizing the American grocery industry with its Fresh & Easy Neighborhood Market format.
James Anstead, a retail analyst with Citigroup, is in that camp. Recently, according to a BBC report, Mr. Anstead wrote, “Tesco’s entry could potentially go down as a genuine turning point in the industry, possibly comparable with Wal-Mart’s decision to start opening Supercenters in the 1980s.”
While Tesco comes into the U.S. well capitalized (it plans to invest $250 million), the chain opens with the knowledge that it is not the first British retailer to take on America. Tesco follows Sainsbury’s and Marks & Spencer to the States. These chains both opened in the U.S. with high hopes, only to eventually pull up their stakes and head home.
At least one pundit, Chris Ayres of The Times of London, believes Tesco’s U.S. venture is headed for failure. Mr. Ayres, who serves as the paper’s Los Angeles correspondent, reasons that the retailer doesn’t understand what shoppers in California want despite all the time and money it has spent trying to get to know them.
For one, Mr. Ayres wrote, “Sir Terry (Leahy, Tesco’s CEO) is trying to sell the residents of the most diet-fixated, calorie-paranoid, carbohydrate-obsessed city on Earth a combination of red meat, pasta, bread, cheese and booze. A round of applause, please, for the Fresh & Easy marketing department. Incidentally, if someone offered you a beef lasagna and bread at an LA dinner party, you’d sue them. A three-cheese lentil and tofu lasagna you might get away with – but you’d still be unpopular.”
Another problem is Tesco’s pre-packaged meals, according to Mr. Ayres. He cites the chef-prepared meals offered fresh daily in stores such as Whole Foods, Bristol Farms and Gelson’s and wonders if consumers in LA are interested in products that represent “a refrigerated, prepackaged niche somewhere above Wal-Mart and below Whole Foods.”
While the company’s official opening is scheduled for tomorrow, the chain has already gotten started with a soft opening at a location outside of Los Angeles in Hemet, Calif.
Bob Pratt of The Press-Enterprise (Riverside, Calif.) was among those to shop the Hemet store and he admitted experiencing some disappointment entering a Fresh & Easy for the first time. He was looking for a Trader Joe’s-like experience only to find that while Tesco offers about three aisles of comparable items, most of the store was akin to Smart & Final.
“The food is touted as fresh, easy-to-make and healthful,” wrote Mr. Pratt. “It does have smartly packaged fruit, produce and meats, but I was shocked to see Lay’s potato chips, Banquet TV dinners, Stouffer’s lasagna, Lucky Charms and Fruit Loops cereals and, I’m not kidding about this, Velveeta Shells and Cheese, the ultimate in processed food.”
Prices at the store, based on Mr. Pratt’s account, were extremely competitive. He mentioned purchasing a bottle of Argentine Terrazas Malbec for $7.99 while elsewhere he has paid $15.
As to where he finally comes down on Tesco’s first iteration, Mr. Pratt wrote, “I’m not likely to drive across town to shop at Fresh & Easy often, but when the San Jacinto store opens down Esplanade Avenue from my work, I suspect I’ll be a regular. Perhaps someday I’ll try the exquisite Velveeta Shells and Cheese.”
Those interested in getting a look inside Fresh & Easy without traveling to
California can see a video of the store at the Fresh & Easy blog site: www.freshandeasy.com/blog
Discussion Questions: Based on what you’ve heard and seen to this point, have you any firm opinions about the Fresh & Easy Neighborhood Market format? What do you expect Tesco will learn from the first stores it opens in the U.S.? Has Tesco demonstrated the requisite flexibility in other markets to make you believe it will make the necessary adjustments needed here to succeed?
How can anyone fairly judge Tesco’s Fresh & Easy based on one store’s soft opening? Retailers use soft openings to refine their offerings and train their staff. And it’s unlikely that Tesco will spend $250 million without making changes along the way. Velveeta or not, if the stores make money, who can argue with Tesco? And if the stores please everyone who reads ReatilWire, but they don’t make their investment return goal, does that mean Tesco should be happy?
It may be too early to comment on the potential success of Tesco, but it certainly makes a statement about the American grocery industry, that it is potentially revolutionary.
Let’s see. We are talking about the initial market entry of a foreign based chain with small format stores focused on fresh food with the fairly generic name of “Fresh & Easy.” Is that it?
The consumer is certainly tired of big box, monolithic stores with endless aisles of similarly packaged food. They are looking for a “fresh and easy” shopping experience so the Tesco concept is appealing. The question is whether they will execute it well. The initial look is not encouraging. I think shoppers will be disappointed by the pre-packaged fruit, the case ready meats, and the dominance of house branded items.
Is the consumer really looking for yet another Trader Joe’s?
However, American grocery chains should certainly take notice and try to adapt some of this “revolutionary” concept of “fresh and easy” into their business models.
There is a local independent supermarket near me on Long Island that started as a neighborhood grocery with narrow aisles, but people went there because the service level was high and everyone was so friendly. Then, they expanded and re-did the store. Lots of nice produce and tasting stations around homemade spreads and artisan cheeses. Place got really busy (but kept the service level).
Waldbaum’s just re-did its stores but this local supermarket expanded yet again. Now it has wide aisles and more gourmet stuff (you would never be at loss to find the olive oil you want, for example). They are thriving even more.
Moral of the story is that a smaller format can succeed extremely well nestled in a neighborhood with big supermarkets. Now, having said that, was Fresh & Easy executed properly in terms of layout, assortment, etc? I couldn’t tell you until I take a trip down there. However, if I had to make a bet sight unseen, I would bet that Tesco got it right.
Mr. Chris Ayres of The Times of London needs to leave the confines of West LA and visit the rest of the Los Angeles DMA. Like any retailer, Tesco’s offering will succeed if the store locations are properly selected.
The Los Angeles Grocery business is very distinct and fluid. During the last strike independent markets (from 7 to 35 stores) gained new customers and learned how to keep them. Most of these grocers have the same products found in the national chains plus products from Mexico and the rest of Latin America not found in the national chains. Further, their offering of fresh produce, exotic produce, spices, and 40 feet service delis is unparalleled by any national grocer–including Wal-Mart.
While 10 years ago the aforementioned grocers were almost exclusively visited by Hispanics, customers from every neighborhood are now visiting the “Mercados.”
I anticipate Tesco will occupy the space between the Mercados and the national chains–currently Whole Foods does not occupy this space.
Being disappointed is natural. How could any chain live up to all the pre-opening press? I think Tesco will find that opening in undesirable neighborhoods won’t work. They also will find that taking the best locations rather than just any location will also make a difference. Still, I find it hard to believe that a store will sell Whole Foods quality at Wal-Mart prices. I’ll have to see it to believe it. When I start hearing about the store having a line around the block, police directing traffic, and the store running out of carts, then we will know they are successful. So far I have not seen that mentioned in the press.
Phoenix will be the big test. I think just about every significant grocery executive or supermarket owner owns a second home in the area. When the Phoenix stores open, a lot of experts will be visiting them.
Southern California has such a large and diverse population that any generalization you make about it can be both true and not the whole truth. Far as I can tell, Tesco isn’t opening where the wealthy diet- and appearance-obsessed people congregate. And even where they do, you’ll notice a line down the block for a fried chicken and waffle restaurant, and another for a place that serves hot dogs.
I remember walking into my first ALDI, first Whole Foods, first Costco, first Wal-Mart Supercenter, first Wal-Mart Neighborhood Market and other “new” formats.
Although all new formats presented some great new ideas and concepts, I was disappointed somewhat in what was “hyped” vs. what was “delivered.”
That said, Tesco will do fine in the US with Fresh & Easy in most markets. Here in Phoenix, there is no similar format or concept available. If you want food you have to go to Bashas, Fry’s, Safeway or Albertsons–all carbon copies of one another. You can drive 15 miles to visit one of the Trader Joe’s scattered throughout the Valley (many do) but the four “grocers” offer nothing innovative to differentiate themselves.
So, enter Tesco…. I’m sure there will be some level of disappointment but when the dust settles, I believe they will offer something to consumers that can’t be found at traditional stores.
After the critics quiet down, I’m sure we’ll see $15 – $20 per square foot in more Tesco Fresh & Easy stores vs. $7 – $10 per square foot in their competitors.
Just a few points to make about Tesco in general and Fresh & Easy in California in particular.
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 and persuading people that they are the best thing for the consumer since sliced bread (which I rarely purchase in any case).
Secondly, over the past few years I’ve made several tours of supermarkets in Southern California, looking particularly at prepared food areas and what’s on offer. Setting aside Trader Joe’s and Wholefoods, I have visited several with extremely impressive selections, all cooked several times each day on the spot and therefore available just about as fresh as anyone could want and without having spent hours (or longer) in plastic boxes or bags being shifted from pillar to post with a pause at the hub en route. Granted, one or two of them did leave the food sitting out on display longer than I would have liked rather than bringing it out of the kitchen in smaller quantities at shorter intervals but the principle was one that even a picky, hypercritical fussbudget like me would recommend (although I did not taste much and cannot recommend anyone for flavour). Customer care levels and information availability also got pretty high marks in my book. The point being that Tesco has got a fairly high standard with which to compete and high standards are not exactly their forte (in my opinion, I hasten to add).
Thirdly, there is the usual question of the disparity between what people say they will do and what they actually do when it comes down to it. Granted, there was much time and effort, as well as cash, put into their market research but that does not guarantee that response once the stores are opened will match expectation for way too many reasons to start enumerating here.
Fourth, and finally, my own private Little Bird in Escondido has been watching progress of the new-build there and reports that the location selected is less than salubrious bordering on very peculiar indeed. I would be interested in hear Camille’s viewpoint on this as it is very near to her. Little Bird is a fairly typical consumer in the area rather than any kind of pundit or guru so I rate her opinion quite highly (just don’t tell her so as she is my mother and would be too shocked for words to hear me say such a thing).
In conclusion, I will not hesitate to visit F&E next time I’m in the area and look forward to seeing just how close it comes to matching up to the hype.
If Mr. Dorgan means ebitda return on investment in 3 years time, one hundred pounds says Whole Foods will be ahead in Nov 2010.
I suspect Tesco’s venture here in the Southwest will (has!) set off a wave of competitive chess moves among its entrenched competitors. The publicity bandwagon is rolling; the coverage has been fairly intense. Seldom have we seen a retail startup with so much scale and so many resources. This company will be under the videoscope for the foreseeable future, magnifying both its successes and its mistakes.
We can nit-pick the merchandise mix all we want and speculate on whether it will match up well with the preferences of various pockets of customers. To Velveeta or not to Velveeta–that is a question the shoppers will answer with their wallets.
Most pundits did not “get” Trader Joe’s and also most thought the Apple store was silly and narcissistic. So the more negative I hear the more stock I buy in Tesco. In addition, the unions are anti-Tesco and are helping to try and undermine any good publicity. Like most good retailers they are seeking uncharted waters which I believe is the space between supermarkets, convenience stores and food to go from all variety of sources. Retail veterans get upset when they can not define or put new concepts in to clearly defined categories–sorry but this is really new and different–and different from supermarkets is a very good thing to be. How about help that cares, product that is fresh and easy and and company that is trying to please customers instead of ignoring customer preferences while raking in the slotting fees?
Three points:
1. Tesco’s economic footprint in the US will certainly be small for some time, but it’s intellectual footprint is large, and will likely remain so. As others have noted, this is a very large market. But Tesco is contributing to an evolution that they will no doubt accelerate.
2. When opening a new chain of “supermarkets” in the US, any retailer has about a million items to select from, that already exist in US warehouses. Most have selected 30,000 – 40,000 items to stock their stores with, even though the typical household buys a maximum of 300-400 SKUs in an entire year, about 150 of those constituting their core purchases. As a consequence, a typical US supermarket sells $10 – 20 million per year. However, Stew Leonard, with a comparable size store sells 5 – 10 times that with less than 2000 SKUs. (HEB Central Market seems to be doing just fine with a close knock-off of Stew Leonard’s.)
Tesco has built what we call a “big head” store, focusing on what shoppers want to buy, not on what the brands want to sell. This doesn’t mean there isn’t a place for the “long tail,” but that story is too long for here.
3. The single most common NUMBER of items purchased in a supermarket is ONE. If you didn’t know that, you have never looked at the composition of a store T-log. In fact, half of all supermarket trips result in the purchase of five or fewer items. I always tell my retailer friends that those single item purchases are by “stock-up shoppers,” they just don’t happen to be on a stock-up trip on that particular occasion. Tesco could be VERY successful targeting that half of the supermarket trade.
There are other major factors favoring Tesco’s play here, and it will be a bit before we can judge whether they have forgotten how to execute or not, but they are aiming right at a sweet spot in American retailing that existing business models have distorted almost beyond imagining. Don’t forget that when Sam Walton spurned slotting fees and other brand promotions in favor of “true” pricing based on the value of the goods FOB, he laid the foundation for the world’s largest corporation. I expect a considerably more intelligent response to this present challenge, which will redound to everyone’s benefit, including Tesco’s.
I’ll wager that Tesco will be making more money in the US in three years’ time than Whole Foods is in the UK.
Living up to the industry hype about Fresh & Easy would be next to impossible and may be irrelevant to the average American (and even the average Los Angelino). What matters is what real shoppers think. Tesco’s marketing team brings great ideas…but they may be better off positioning vs. mid-tier fast food options vs. the gold standard of Whole Foods. The combo of McDonald’s speed, Wal-Mart pricing, home-cooked health, and back-to-basics family time might better communicate the message. It is always better to exceed expectations!
Tesco came in with a strategy on what format and selection would succeed in the markets they targeted. Anybody who’s worked with new product development knows you need to do several test markets before you have a refined product that satisfies the target consumer’s need. As far as test marketing goes, Tesco executives did extensive pre-testing, including running a store-lab, but pre-testing tells you only so much and the real refining of product strategy happens when rubber meets road. Tesco knows this, which is why they did not start with 200 stores.
Also, if you study the demographics of the Zip Codes where the initial stores opened, you will know that there are at least 3 or 4 different demographic segments in there (the segmentation I came up with was 4). Point is–Tesco is going to take these initial results, see what worked and what didn’t in each segment, refine their strategy, and roll it out across a broader set of locations that they will open in the future.
It is naive to expect Tesco to come in into a new market and have the perfect format and selection across as diverse a market as they are targeting, especially since others have been trying this in different ways for years. I didn’t expect them to that and I am pretty sure Tesco didn’t expect to do that either.
Talk of revolutionizing the food industry is a little over the top, especially at this point in time, however, I can fully appreciate how they have listened what customers want. It will be interesting to see how they react. I’m particularly curious about customers’ reactions to forced POS self-checkout. Will this be a turn off or a perceived time-saver? How will customers react initially?
Mr. Pratt’s point that he would not drive across town to shop at a store is just the point. These stores are designed to be a “neighborhood” market. They are competing with other food retailers in a one to three (at the most) mile radius. Not everyone in LA and Riverside is carb paranoid. I’m sure Tesco has performed extensive demographic analysis and understands the preferences of the potential customer base around each “neighborhood” location. Also, I would be shocked if they didn’t sell some processed food products from brand name manufacturers. Look, people still want to eat Lay’s potato chips, Banquet TV dinners, and their kids want to eat sugar-filled cereals and mac n’cheese.
Obviously it’s too early to predict success or failure, or somewhere in-between. They are going into this with an aggressive expansion plan and big capital, which shows a high degree of confidence. Given Tesco’s track record for success, I’m willing to give them the benefit of the doubt.
It’s too soon to tell. The key here is that the expectation bar has been set way too high. This is a new venture for all intents and purposes and the only surprise would be if Tesco didn’t make horrific gaffs, at least at first.
It’s also ridiculous to assume that any one company can revolutionize the U.S. food industry. Wal-Mart didn’t (it just expanded and scaled what was already being done by Meijer, Inc., Fred Meyer and–God forbid–Kmart). The idea that Tesco could transform the industry by opening one store in California is laughable.
As to whether or not they are flexible enough to successfully adjust their operations–only time will tell. But, Tesco is a sharp operator and sharp operators tend to be quick (and unsentimental) learners.
All the early feedback I’ve had so far is of mild disappointment, but nobody could have lived up to the buildup Tesco got. I think they’ll be a mild success. The industry has learned a great deal in recent years about logistics, efficiency and satisfying shoppers. Tesco, good as it may be, cannot defy the laws of physics. While their optimism has charmed my socks off, they’ve got a tougher battle ahead of them than they think.
“For one, Mr. Ayres wrote, ‘Sir Terry (Leahy, Tesco’s CEO) is trying to sell the residents of the most diet-fixated, calorie-paranoid, carbohydrate-obsessed city on Earth a combination of red meat, pasta, bread, cheese and booze. A round of applause, please, for the Fresh & Easy marketing department.’”
Is Mr. Ayres being serious? Shocking it may be, but LA actually has meat aisles…in supermarkets…in LA! And shocking it may be, but the mainstream of LA, much like the rest of the US, are not on any diet, which is the reason the city is always among the first choices for supermarkets to attempt expansion. Tesco will have to adapt to American standards and it only has to apply that mold consistently throughout the country. City differences are slight, as Tesco may understand.