tesco fresh & easy report

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SPECIAL REPORT

Tesco wanted to make a good impres-sion with its Nov. 8 debut in Los Ange-les—a city where image is everything—

and it did just that with a huge crowd jam-ming the aisles on opening day. Companyofficials reported similar turnouts at fiveother grand openings in Southern Californiaand acknowledged customer response ex-ceeded expectations.

“I just came from our store in West Cov-ina,” said Simon Uwins, Tesco’s chief mar-keting officer in the United States. “It wasn’tquite this crowded but it was pretty close.”

More than 100 people stood in line wait-ing to get into the Los Angeles store, with

employees letting customers in as othersleft. And what they saw inside was a Tesco’s

new hybrid format, combining elements ofTrader Joe’s, Whole Foods and 7-Eleven with

some borrowings from its stores in Europe.The basic concept of Fresh & Easy is a

convenient shopping experience with anemphasis on healthy food and preparedmeals from its Fresh & Easy private label.During a brief tour of the crowded store,Uwins explained that 50% of its food offer-ings are from its private label and thateverything is created, cooked and pack-aged at its own state-of-the art “kitchen” inSouthern California, including all of its pre-pared meals.

“We expected prepared meals to be amassive hit here in the U.S.,” said Uwins.

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November 2007

TESCO IN AMERICA

BY DOUG DESJARDINS

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“We expected preparedmeals to be a massive hit

here in the U.S. And so far …they’re being cleared out

rather fast.”

Simon Uwinschief marketing officer, Tesco

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L.A. landing puts Tesco on map

Huge crowds met Tesco’s arrival in Los Angeles, interested in checking out ahybrid retail concept from one of Europe’sbiggest players in the industry.

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“And so far, judging from the gaps wesee in our refrigerated cases, they’re be-ing cleared out rather fast.”

Prepared meals, ranging fromspaghetti and meatballs to sushi tosandwiches, are housed in cases at thefront of the store and in the first twoaisles, giving people the option to getin and out of the store in just a fewminutes. The first three aisles—sawed-off versions of a typical supermarket—also feature a large selection of freshproduce, meat, poultr y and seafoodand an endcap where free samples are handed outtoward the back.

Several things set Fresh & Easy apart from othergrocery retailers like Trader Joe’s and Whole Foods, thetwo it could most easily be compared to. As Uwinsmentioned, its Fresh & Easy private label has a 50%penetration rate and is represented in nearly everymajor food category including produce, meat, pre-pared meals, juice, coffee and mixed nuts.

And that reliance on private label allows it to offer

some very competitive prices. A few examples in-clude a 25-ounce beef lasagna dinner for $3.79, awide array of fresh sandwiches priced under $4 anda half-gallon of milk for $1.98. And some of the pric-ing gives a nod to one of its top rivals with bananaspriced at 18-cents each, one penny below the 19-cent bananas sold at Trader Joe’s.

Overall, Tesco says its prices are well below its mainrivals at standard supermarkets. “We estimate our


SPECIAL REPORT: TESCO IN AMERICA SPONSORED BY

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Nov. 8 saw Tesco grand open in several Los Angeles locations. Each store is a hybrid of an organic supermarketand a convenience store. At least 50% of merchandise stocked is Fresh & Easy private label.

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prices are about 20% lower than mostsupermarkets in the area,” said Uwins.

The aisles feature European-stylemerchandising with products shelvedin their original cardboard containers,a gimmick that gives the store a dis-tinctive look and makes restockingshelves easier. The shelves are alsostocked with cases of product three-deep so that a full case can be pulledup front when one is emptied.

“With that depth to the shelves,there’s no need to replenish them dur-ing the day, and we literally have ourwarehouse on the floor,” said Uwins,noting the technique is unique to itsFresh & Easy format.

The in-store signage is also uniqueand stamps Fresh & Easy as an or-ganic and eco-friendly retailer—a goodimage for Southern California. Nearlyevery green, cardboard endcap fea-tures a message about its productsincluding “all our bagged coffee is

certified organic” and “our dessertscontain 0% trans fats.” LED lighting isalso used in the store, another ele-ment called out in its signs. The storesdo not sell cigarettes but do carry alarge selection of wine along withliquor and beer.

Its general merchandise, healthand beauty and over-the-countermedications offerings run more alongthe lines of a convenience store,though with a much larger selection,albeit smaller than those found in asupermarket. Basics like paper tow-els, diapers and pet food are stockedin a single aisle and its HBC and OTCproducts are located on one longshelf toward the back of the storecapped with a section for greetingcards and magazines. The rather smallselection—and the complete lack ofprivate label products—shows Fresh &Easy is primarily about the food.


Tesco Fresh & Easy’scheckout systems at itsstores are 100% com-pletely automated. Someare designed smaller thantypical and are meant for15 items or less, whileothers are of standarddimensions. And forthose unfamiliar withself-checkout there areplenty of employeesnearby to lend a hand.

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The checkout system is completely automatedwith 100% assisted self-checkout. Five checkoutstands are small and designed for 15 items orless and the rest are a bit larger with scanners andself-pay systems (though there were plenty of em-ployees nearby to help out people not familiarwith the concept).

“We have assisted checkout where people caneither check themselves out or have someonehelp them with whatever level of assistance theyneed,” said Uwins. “Just like everything else wedo, we like to give our customers options.” Self-checkout should also help keep the number ofworkers needed to run a store at a minimum.Tesco said stores should be able to operate with

20 to 30 employees.As expected, Tesco had some de-

tractors at its grand openings in theform of labor unions and neighbor-hood groups. The Carpenters Local1506 picketed in front of the Los Ange-les store and handed out fliers claim-ing that a group hired by Tesco to helpbuild its stores “does not meet area la-bor standards, including paying forhealth care and pension for all its em-ployees on all projects.”

Tesco has a second wave of fiveopenings planned for Las Vegas onNov. 14 and plans to have stores openin the San Diego market in late No-vember as well as in Phoenix in earlyDecember. It expects to have 50 storesoperating in California, Nevada andArizona by next February.

And though Tesco is new to theUnited States, consumer intent to shopat its stores is high. A study conductedby Leo J. Shapiro & Associates in theareas Tesco plans to open showedone-third of consumers interviewedplan to shop at Fresh & Easy stores. ■




Chief marketing officer Simon Uwins (above) was on hand at thegrand opening of the Los Angeles location to lend a guiding voiceto shoppers and press alike. And found throughout the store is sig-nage calling out the eco-friendliness of its products.

“We have assisted checkoutwhere people can either

check themseves out or havesomeone help them …”

Simon Uwinschief marketing officer, Tesco

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F resh & Easy Neighborhood Markets willhave a profound effect on retailing. Justwhat that effect will be, however, is a

matter of debate, one that revolves aroundwhat the concept will turn out to be and whostands to lose if it is successful.

Just about every retailer that is carrying asubstantial amount of food has had to ad-dress the issue of what the Tesco rollout ofFresh & Easy means. Steve Burd, chairmanand ceo of Safeway, which brought Tesco in toboost its online business before breaking thepartnership after word about Fresh & Easyemerged, said at a recent Goldman Sachs an-alyst conference, “They argue that they’vedone more homework here than in any invest-ment that they’ve ever made. What I tell peo-ple generally is you’ve got to respect anybodythat’s coming after your market share. Be-cause they are applying for liquor licenses vir-tually everywhere, as soon as they apply for aliquor license we know the site and run thedemographics and tr y to understand whatthey might be up to. But we really can’t doanything until we see them go to market andsee what kind of a market approach they’regoing to make.”

Eric Schiffer, 99 Cents Only ceo, noted,“They’re talking about having eco-friendlystores. They’re talking about having many fooditems that you take home …which is really notwhat we specialize in, although that could bea potential business for us going forward. Iwould love to be known as the low-price leaderof organic foods, so that’s something for us towork on, and it could be an opportunity. Tescocould lead the way for us by driving pricesdown. But I don’t think that a Tesco and a 99are going to be that directly competitive. If Iwas another retail format, I’d probably bemore concerned. And, in fact, I would love tobe next to Tesco.”

As launched, Fresh & Easy accomodates

families residing in residential communities,be they suburban, exurban or even convertedcommercial, with a particular emphasis onworking moms. The four pillars of the concept—good food, good value, convenience and sus-tainable operations—were established specifi-



Impact:Is shakeup of industry on horizon?

“What I tell people generallyis you’ve got to respect any-

body that’s coming after yourmarket share.”

Steve Burdchairman & ceo, Safeway

Tesco’s entry to the U.S. market definitely has competitors from various sectors on its heels.However, each happen to look at the new format as a forecast for retail here in the future.

IMPACT CONTINUES ON PAGE 7

BY MIKE DUFF

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Impact (continued):Why L.A. will be a tough nut to crack

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keting solutions for the retail and restaurant industries. Each month, the company compiles a Monthly Report on Openings and Closings.

For more information, including methodology used to compile this report, contact [email protected].

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IMPACTCONTINUED FROM PAGE 5

cally to address prime concerns of working moms inthe United States, according to one consultant whohas been in discussions with Tesco.

Yet, things don’t always turn out as planned.Karen Ghaffari, a Fitch Ratings analyst, pointed outthat Fresh & Easy has so many potential competi-tors that what it is and what it will become may bedifficult to immediately gauge.

“If Tesco strikes a chord with consumers, I thinkother retailers will take note of that and respond,”she said. “If Tesco seems to be capturing marketshare and keeping it, that would indicate they’vestruck a chord with consumers, but I don’t think theyare just going to be competitive with supermarketsbut other food retailing as well, including quickserve restaurants.”

Quick serve restaurants may take a hit, but, as ag-gressive advertisers, they can hit back, and quickly.Thus, Tesco might find itself facing a barrage of dollarmeal deals that could impact who shops the store.And not just from McDonald’s. Concepts such as Or-ganics to Go might have a say in determining howmuch investment Tesco must make to win over itscore customer and if it could be pressured intoamending its strategy down the road.

Drug chains, which already entice female con-sumers with a convenience proposition, also areamong the retailers that Tesco may impact outsidethe traditional food sector. But they might providean opportunity as well. Craig Johnson, president ofconsulting firm Customer Growth Partners, said thatTesco is essentially adopting a drug chain site strat-egy, placing its locations on corners home-boundcommuters can’t fail to pass. If a drug store is on thesame pad, Johnson said he envisions them doubleteaming supermarket chains. For t ime-pressedmoms, Fresh & Easy can provide easy, no-guilt food shopping whilethe drug chains take care of HBA and beauty needs in the weeklyshopping context. Add a couple of monthly trips to Costco or Sam’sClub and a time-challenged mom could, potentially, ignore the super-market altogether. Johnson, in fact, suggests that Fresh & Easy couldbecome the kind of retail-altering concept that warehouse clubs be-came in the 1980s.

Craig even challenges the notion, held by many retailers, thatTesco’s giant Riverside, Calif., distribution center requires larger storeformats to be financially viable. “The DC might be designed for greater

intensity than people are anticipating,” he said, adding that Tesco maybe planning for the velocity and density of drug chains.

Tesco has designed its rollout into the U.S. market to quickly estab-lish a niche in what Johnson characterizes as white space where thecombination of good food, good value, convenience and environmen-tal sensitivity that matters to the emerging American consumer con-verge. Even if it thinks traditional supermarket chains are assailable,Tesco is aware it will be challenged for the space it covets, as evincedby Fresh & Easy’s 18-cent banana feature price, which beats that ofAldi-owned Trader Joe’s by a penny. ■

Fresh & Easy is targeted to the time-pressed shopper. With its ability to offer easy, guilt-free shopping, the new format hopes to develop a niche in the U.S. market, taking piecesof business away from takeout restaurants, drug chains and supermarkets alike.

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T esco’s launch in California has gotten alot of attention in North America, but it isonly a small part of a globe-spanning op-

eration, and that can potentially have a lot to dowith just what happens in the United States.

The tremendous Tesco investment in North Amer-ica got a mixed reaction initially in London’s finan-cial community, where some have publicly won-dered why the retailer wants to fight its way into a

mature market when it caninvest in countries with rap-idly growing economiessuch as India and China,which also include less so-phisticated competitors.

For now,London’s invest-ment community, The City,has accepted Tesco’s ra-tionale that the UnitedStates represents the

world’s largest retail market and that it can grow inan underdeveloped niche. Indeed, with industrial In-dia and China recently losing their edge in recentmonths to energy producing Russia and given theposition of countries that are developing both indus-trial and energy sectors such as Mexico and Brazil,then taking into consideration possible conflict overTaiwan, Tesco’s American bid could be regarded asone of the biggest retail hedge moves ever.

With potential abundant in the world’s largesteconomy, Professor Mohan Sodhi of London’sCass Business School said, “The City should beforgiving.” Nevertheless, he noted that the initialconfirmation of Tesco’s U.S. ambitions has had anegative impact on the company’s share price.Since then, Tesco has convinced the British fi-nancial community that it has developed a wellthought out U.S. expansion plan. Backers nowseem to outweigh skeptics, and The City is look-ing at the Fresh & Easy rollout with anticipation.

Sodhi said Tesco has carefully managed the in-formation emerging about its U.S. expansion, evenreassuring markets it won’t get in over its head.

Published accounts have Tesco executives promis-ing a rapid U.S. departure if Fresh & Easy flops. Onthe other hand, Sodhi pointed out that Tesco hasvery deep pockets—annual sales of around $70billion—it can use to support the rollout.

Tesco has lots of international experience,too. While it is Britain’s No. 1 supermarket op-erator, with about 800 stores, it operates1,200 in Ireland, Central Europe and Asia.

Beyond that experience, Jaime Vasquez, a JPMorgan European retail analyst, noted in a confer-

ence call earlier this year that Tesco is doing wellin every country where it currently operates; doesa good job in food, including an extensive andpopular line of private label items; has good re-plenishment systems; maintains tight control over

its supply chain; learns quickly; scales well to lo-cal conditions; is exemplary in using customerdata; and sent one of its best and brightest, TimMason, to head the U.S. operation. Still, initially, itis “expecting to lose $130 million a year,” andthat’s something The City will watch carefully. ■

Tesco has invested heavily in the American market, a move that has London’s financial district uneasy.The move has the potential for great success; yet if things go south, it promises to exit quickly.

Financials:Entry felt from freeway to The City

TIM MASON

BY MIKE DUFF

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