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What's in Store: Not so easy

Tesco struggles in home market and with U.S. small-store format Fresh & Easy

The Fresh & Easy retail chain has struggled in some U.S. markets.  - Photo courtesy of Fresh & Easy
By Christine Blank
March 05, 2012

Global supermarket giant Tesco PLC launched its Fresh & Easy format in the United States to much fanfare in 2007. Tesco had planned to open nearly 1,000 of the 12,000-square-foot stores within five years.

However, the London-based retailer has experienced a bumpy road with Fresh & Easy across the pond and is now facing increased competition and declining profits in the U.K.

Tesco announced earlier this year that it would be “mothballing” — temporarily closing — 12 Fresh & Easy stores in certain locations with weak performance. The stores are closing this quarter in Arizona, California and Nevada.

“Tesco started opening stores in the midst of an economic crisis and a housing crisis. All three of those markets have had a much higher percentage of underwater houses and foreclosures,” says Neil Stern, senior partner with retail consultancy McMillan Doolittle in Chicago.

At the same time, Tesco is opening 25 U.S. Fresh & Easy stores in the first quarter of 2012. Fresh & Easy’s sales soared 29 percent in its most recent fiscal third quarter and comparable store sales rose 11.9 percent. Tesco expects to break even with the Fresh & Easy concept by the end of its fiscal year 2012-2013.

Still, to grocery industry analysts, the rapid closures and openings in a chain of approximately 180 stores indicate strategy adjustments are under way.

“They are probably still tinkering a bit with what the right neighborhood profile is and the right offering,” says Jim Hertel, managing partner at retail consulting and strategy firm Willard Bishop in Barrington, Ill.

While Tesco has said it tailors Fresh & Easy offerings by location, Hertel and others say that is not the case. “I visited the stores when they only had a few open, and they seemed to be quite similar to one another,” says Hertel.

Instead of just altering store locations, Tesco needs to evolve its fresh offerings — including seafood — in order to be successful in the United States, say retail analysts.

“They have demonstrated the ‘easy’ part — the stores are small, have limited SKUs and are easy to shop. However, the brand does not demonstrate ‘fresh’ to the U.S. consumer,” says Stern. Instead of sporting meat and seafood counters — like most full-service supermarkets in North America — Fresh & Easy instead carries packaged meat and seafood.

While Tesco and most other supermarkets in the U.K. don’t have service counters, it is a model that may not work in America. “Our definition of ‘fresh’ in the U.S. historically means service counters and products being prepped and created in front of you. To Tesco, ‘fresh’ means it is prepared fresh daily in its commissary and delivered to the store,” Stern says.

While Tesco alters its U.S. Fresh & Easy strategy, it faces bigger problems at home, including a 2.3 percent drop in comparable store sales in a six-week period ending Jan. 7 because of poor food sales over the Christmas holiday period. Tesco also said its profit growth would be “minimal” for fiscal year 2012-2013.

Tesco’s shares dipped 13 percent on the news, dropping Tesco’s share of the U.K. grocery market below 30 percent for the first time since 2005. Meanwhile, major competitor Sainsbury increased its market share and budget retailer Iceland Foods realized its strongest performance in 10 years during the same period.

Tesco faces increasing competition from U.K. retailers that are not as invested in the “hypermarket” space that Tesco operates in and those who are doing something different with their fresh offerings. For example, sales at Morrisons (the U.K.’s fourth largest grocery retailer) grew by 5.6 percent, for the six weeks ending Jan. 1.

“Christmas trading came late this year with a greater emphasis on fresh food, playing to Morrison’s traditional strengths,” the retailer said in a statement. Morrison’s runs a U.S.–style supermarket, complete with fully staffed perishable departments.

Contributing Editor Christine Blank lives in Lake Mary, Fla.
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