Friday, October 19, 2007

Fresh & Easy Update

British Grocer Marches North: Tesco to Open First Fresh & Easy Neighborhood Market in Northern California in San Jose in Summer 2008

Natural~Specialty Foods Memo (NSFM) was one of the first publications to report that UK-based Tesco was planning to branch out from Southern California, Arizona and Nevada to Northern California with its Fresh & Easy Neighborhood Market format stores.

We've now learned from our real estate and other sources that Tesco is planning to open it's first Fresh & Easy store in Northern California's famed Silicon Valley sometime in the summer of 2008. The store will be located in a former Albertson's supermarket building in San Jose's Willow Glen neighborhood.

The former Albertson's store, which was closed along with 36 other underperforming stores in Northern California in August 2006, is located at 1409 Bird Avenue in San Jose. Tesco has confirmed it will be renovating the store and locating a Fresh & Easy Neighborhood Market at the site in mid-to-late 2008. Our sources tell us it will likely open in the summer of 2008. Tesco will completely renovate the former Albertson's store to fit the needs of its Fresh & Easy upscale, convenience-type format.

The shopping center where the former Albertson's store is located is managed by San Diego, California-based Asset Management Group. The commercial property manager has been trying to get a retail food store into the building since the Albertson's closed in August 2006. The firm was in negotiations for some time with local, muti-store independent Zanotto's Markets (based in nearby Scott's Valley, California), who was interested in leasing the building and putting a store there. However, Asset Management decided to go with Tesco instead.

This will be Tesco's first Fresh & Easy Neighborhood Market in Northern California. The retailer is scheduled to open it's first six of the 100 stores it currently is either building or has in the pipeline on November 8. All six of the stores are in Southern California.

Natural~Specialty Foods Memo (NSFM) has identified (and Tesco confirmed) the specific locations of three of those six stores. You can find out those specific locations by reading our Thursday, October 11 story here and our Friday, October 12 story here. Additionally, Tesco has formally announced the location of one of the six stores to open on November 8. That store is in Upland, California (San Bernardino County). The store is located on Eighth Street & Mountain Avenue. Today Tesco announced the specific locations of the remaining two stores to open on November 8. Those two stores are in the Glassel Park/Eagle Rock neighborhood in Los Angeles and in Hemet, a city in the Southern California desert region. All six stores will open at 10:AM on November 8.

Tesco's Fresh & Easy Neighborhood Market format stores average about 10,000-13,000 square feet. The convenience-oriented stores feature an assortment of Tesco private label upscale prepared foods (including many grab-and-go items), specialty, natural and basic groceries, fresh produce, meats, perishables and other offerings in a format which puts an emphasis on quality and convenience for shoppers.

Tesco's entry into San Jose in Northern California's Bay Area in the Summer of 2008 should be interesting. The Bay Area is a very upscale food retailing market, with Safeway Stores, Whole Foods Market, Inc., Trader Joe's and many upscale independents all currently building new stores in a fairly rapid clip.

The upscale, convenience-oriented Fresh & Easy format will be most similar in the Bay Area market to Trader Joe's in size and product offerings. However, many observers believe it will take some market share from Safeway with its upscale, fresh food offerings, which has been an area Safeway has been focusing on for the past few years (and currently focusing more on) with its Lifestyle format. In fact, Safeway CEO Steve Bird has said the Pleasanton, California-based chain has been tracking all of Tesco's movements regarding its Fresh & Easy store locations, demographics and merchandising, and that Safeway is prepared to enter the market with its own convenience-oriented stores if Tesco proves successful.

We will reserve judgement however on the effect the Fresh & Easy stores will have on Safeway--and other upscale retailers in the region for that matter--for a few reasons. First, it will take a serious critical mass of Fresh & Easy stores in the Bay Area (and elsewhere in Northern California) to hurt Safeway, which is the region's market share leader. Second, Trader Joe's and Whole Foods are extremely popular natural and specialty-oriented retailers in the Bay Area. Both chains are building larger and more lifestyle-type stores (as is Safeway) in the region. These three upscale chain's stores are getting more interesting in terms of product selection and other features with each store new store built.

Further, Trader Joe's stores are already smaller than supermarkets and convenient to shop in. Additionally, Whole Foods has a prototype convenience-oriented format called Whole Foods Express, which they wouldn't hesitate to roll out in the Bay Area (where the grocer is in the process of building at least 20 new supernatural lifestyle stores over the next couple years) if they feel the heat from the Fresh & Easy format. Whole Foods, Safeway, Trader Joe's and the others mentioned (plus others) have strong brand equity and shopper following in the Bay Area. Tesco will need to create this same equity and shopper loyalty to succeed in the region.

All three--Safeway, Whole Foods and Trader Joe's--will be far from a pushover for Tesco or any other retailer starting-up in the market. The Bay Area also has numerous very sophisticated upscale independent retailers. Mollie Stone's, Andronico's, Lunardi's, Cosentino's, Draeger's, Zanotto's (and a few others) are all multi-store food retailers with stores throughout the Bay Area. These retailers offer various sized stores and do very sophisticated merchandising of upscale fresh, prepared foods and natural and specialty products.

The Bay Area is a sophisticated consumer market for fresh foods as well as natural and specialty foods. More so overall than Southern California is in many ways. Tesco will have a number of different challenges--merchandising, shopper loyalty, political and others--than the chain is going to have in Southern California, Arizona and Nevada, its first three target market regions.

We expect Tesco to build numerous Fresh & Easy stores in the Bay Area now that they have decided to open the San Jose store. This is the chain's stated strategy--to create a critical mass of stores in whatever regions they enter--and also is needed from the standpoint of logistics, marketing and advertising.

Logistically, Tesco's new distribution center is located in Riverside County, in Southern California. That's about an eight to 10 hour one-way trip to the Bay Area in a semi truck and trailer. The more Fresh & Easy stores Tesco has to deliver to the more economically efficient logistics They will have. The same for marketing and advertising. Print and radio ads for example cost a retailer as much for one store as they do for 50 stores. As Tesco's U.S. CEO for Fresh & Easy stores, Tim Mason, has said, the company plans on following a "Starbucks like" critical mass store location philosophy.

We will be observing this development closely--as we're sure Northern California retail food chains and independents will be, including those in the traditional convenience store industry.

What's On-Tap: Fresh & Easy Neighborhood Markets: The first six Fresh & Easy Neighborhood Market stores to open will all be in Southern California. Those six stores will open at 10:AM on November 8, 2007. The stores are located in the Southern California cities of Los Angeles, Anaheim, West Covina, Upland, Arcadia and Hemet. Each store will have a five day grand-opening beginning at 10:00AM on November 8. The grand openings will include numerous in-store activities, food and beverage tastings, promotions and other special events. Store openings in Arizona and Las Vegas, Nevada (in addition to more Southern California store openings) will follow shortly after the first stores open on November 8, 2007

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