Tesco Fresh & Easy Update: News & Analysis

New Retail Regions: Tesco Aggressively Seeking Fresh & Easy Store Sites in Northern and Central California

On Friday, October 19 we reported here that Tesco had secured its first store location in Northern California in the Bay Area city of San Jose. That store will be located in a former Albertsons supermarket building in San Jose's Willow Glen district.

According to commercial real estate and municipal official sources we talked to, Tesco will completely renovate the building to decrease it's square-footage and make it suitable for its 10,000 to 13,000 square-foot Fresh & Easy Neighborhood Market format. These sources also told us plans call for the store to open in the summer of 2008.

Talking with the same and additional sources in the San Francisco Bay Area yesterday (10-26), we learned Tesco is aggressively looking for Fresh & Easy store sights throughout the nine-county Bay Area (including in San Francisco), as well as in other Northern California regions and in the Central Valley, which is located mid-way between Southern California and Northern California.

In addition to the San Jose location, which is a done deal according to our sources, Tesco has inquired with the East Bay Area city of Danville's Economic Development Department about possibly locating a Fresh & Easy store in that city's Green Valley Shopping Center. The shopping center in the upscale, high-income community, is currently without an anchor retail food store since an Albertsons supermarket closed there in 2006.

Jill Bergman, Danville's economic development director, recently said Tesco has talked to her about tenant improvements to the center's vacant Albertsons store but hasn't filed any applications regarding the store as of yet. Commercial real estate sources also told us Tesco has been talking with the building's owner and shopping center representatives about locating a Fresh & Easy store there.

Our commercial real estate sources also told us Tesco is busy looking in other cities in the East Bay Area, including Pleasanton, Livermore, Walnut Creek, Concord and others. They also told us Tesco is interested in a number of other empty Albertsons store buildings in that region as well as in the South Bay Area, where San Jose is, and the San Francisco Peninsula county of San Mateo.

A commercial real estate agent in San Francisco told us he recently talked to a business associate who said Tesco representatives told him they plan on opening more than one Fresh & Easy store in the city of San Francisco if they can find suitable locations in the dense, urban city.

The Bay Area and other Northern California regions aren't the only areas north of Southern California where Tesco is aggressively looking to locate store locations for its Fresh & Easy convenience-oriented grocery markets.

Last week, the Bakersfield Californian newspaper reported that Tesco is in serious negotiations with a property management firm to locate a Fresh & Easy Neighborhood Market in Southwest Bakersfield, at a shopping center at White Lane and Buena Vista Road, south of the city's Stockdale High School.

Bakersfield is located in the center of California in Kern County, about a 100 miles from Los Angeles to the south, and about 250 miles from Sacramento to the north. Tesco wants to locate the store at that particular location and has a zoning change application before the Bakersfield City Council. The change of zoning would allow retail food stores to locate in the shopping center (which currently isn't the case for some reason) and pave the way for the Fresh & Easy store there, according to the newspaper report.

Natural~Specialty Foods Memo's Analysis:

If Tesco moves aggressively into Northern California--which we believe it will based on our information and analysis--it will add an interesting competitive twist to food retailing in the region, especially in the Bay Area, which currently is home to about seven million residents.

Safeway Stores, Inc. has its U.S. corporate headquarters in the Easy Bay Area city of Pleasanton and is the food retailing market share leader in the nine-county Bay Area. Recently, Safeway has been opening up very upscale versions of its "Lifestyle" format Safeway banner stores in the Bay Area. These new stores average about 45,000 to 65,000 square-feet in size and feature numerous prepared foods offerings, including in-store restaurants, cafes with fresh baked goods and gourmet coffee, wine departments with tasting bars, gourmet olive bars, and other upscale features. Huge selections of specialty and natural groceries and expansive fresh produce departments also are part of the mix in these stores.

Whole Foods Market, Inc. also is a major upscale player in the Bay Area with about 21 stores at present. The retailer has opened three new, large natural foods lifestyle-oriented supermarkets in just the last two months, with more new stores on the way. The supernatural grocer plans to built at least 21 new stores in the next 3-5 years in the Bay Area. Upscale quality, prepared foods are a major feature in Whole Foods' Bay Area stores, like they are in Tesco's Fresh & Easy format stores.

The Bay Area also is home to numerous upscale multi-store and single store independent retailers. Many of these grocers have been national pioneers in upscale, natural and specialty foods retailing. Among these independents are Mollie Stones Markets, Andronico's, Lunardi's, Draeger's, Cosentino's, Zanotto's, Berkeley Bowl, and a number of others. All offer high quality prepared foods in their stores, which are collectively located all over the nine-county Bay Area.

Tesco's Fresh & Easy format has some major differences from these upscale supermarket and supernatural foods retailers however, despite the fact that prepared foods play a major positioning point in what all of them do. First, the Fresh & Easy format is smaller--about 10,000 square-feet--and designed to bridge the gap between huge superstores and traditional convenience stores.

Second, It's upscale, but also offers basic groceries and non-foods offerings. Fresh & Easy stores also will have fresh produce and meats, perishables of all kinds and other offerings one would expect in a neighborhood grocery store. This helps them in that they can supply basic needs to shoppers (like all the supermarkets mentioned above do) and not become just a tertiary retailer in the region.

Lastly, Fresh & Easy is non-union. All of the major supermarket chains and independents in the Bay Area (except Whole Foods and Wal-Mart) are union shops. The average retail clerk, with one year's full time experience (journey level), makes about $20.00 per hour in wages and has a full health benefits package which adds another $10-$12.00 an hour to their compensation in terms of the high-quality value of their benefits package.

However, like Whole Foods and Wal-Mart (which has only a handful of Supercenters in the region), Tesco's Fresh & Easy will be a non-union shop. With the exception of management staff, all of the retail associates in the Fresh & Easy Neighborhood Market stores set to open in Southern California, Nevada and Arizona, will be part-time. They will work at least 20 hours a week and no more than about 35 hours a week. Their average salary will be $10.00 hour, according to Tesco. Fresh & Easy store's part-time associates will have a health care policy but it will be nowhere near as good as what the unionized supermarket retail clerks have. In fact, the union retail clerks health policy is one of the best in the U.S.

We suspect Tesco to basically try to maintain their current employment policy and wage structure for Northern California, although the retailer likely will have to increase the hourly wage by at least two or three dollars an hour in order to attract employees in the Bay Area, which has a very low unemployment rate, and was recently ranked number one as the region with the highest salaries in the U.S. The Bay Area is a much more competitive labor market than Southern California, Nevada and Arizona are.

Even if Tesco has to pay two, three or four dollars an hour more, it's still at an advantage from a labor standpoint compared to the unionized retailers. Of course, the Bay Area is a heavy union region, and shoppers support union supermarkets like Safeway, Lucky Stores, the independents mentioned above, and others who pay their employees well. In fact, it's likely Tesco will be welcomed to the Bay Area with an organized campaign against their lower wages. There is such a campaign currently going on in Southern California against Tesco but its fairly small. Expect a larger, better organized campaign in the Bay Area, which is the most liberal region in the U.S.

Either way, established Bay Area retailers like Safeway and Whole Foods won't sit back and let Tesco take significant market share with its Fresh & Easy stores in the region. In fact, Safeway CEO Steve Burd has already said the chain is studying Tesco's format and is prepared to open its own Safeway convenience-type stores if the retailer believes Tesco is becoming a threat with its Fresh & Easy format in the Western U.S.

Whole Foods also is in the process of converting a former Wild Oats store in Boulder, Colorado into a new retail concept for the grocer called "Whole Foods Express." We think this development is in part a reaction to Fresh & Easy. We also believe Whole Foods won't hesitate to roll its "Express" stores out in places like the Bay Area and Southern California if they determine Tesco is taking market share from them with its upscale, convenience-type stores.

Tesco's Fresh & Easy Neighborhood Market format could do very well throughout the Bay Area and elsewhere in Northern California however. In the Bay Area's suburbs there's a huge base of time-pressed dual income families who like the concept of being able to get fresh, prepared foods, fresh produce and meats, basic, specialty and natural groceries in a fast and convenient way, without having to shop a large store.

In both the suburbs and cities like San Francisco, Oakland and San Jose, there also is a large, single professional population who doesn't cook often or at all and spends a sizable amount of their disposable incomes at restaurants and for prepared foods to go.

Trader Joe's has markets throughout the Bay Area and Northern California and is adding more stores at a rapid clip. Their smaller store, upscale format is very successful in the region. The Bay Area also is a "foodie" region. Its consumers have an appreciation and like for quality foods, and if Tesco is able to offer the same quality upscale fresh, prepared foods at its Fresh & Easy markets as it does at its stores in the UK, the offerings should go over well with the region's quality food loving population, helping to make Fresh & Easy stores a success.

Fresh & Easy Store Opening Update

Coming Up: The first six Fresh & Easy Neighborhood Markets will open at 10:AM on November 8 in Southern California cities of Los Angeles, Anaheim, West Covina, Upland, Arcadia and Hemet. Five Fresh & Easy markets will opn in the Las Vegas metropolitan area on November 14. On November 28 another store will open in the Orange County (Southern California) of Laguna. Stores will open in Arizona before the year is over, as well as additional Fresh & Easy markets in Southern California (including San Diego) and Nevada.

A Little Background Reading: This article from today's (10-27-2007) London Daily Telegraph newspaper talks about the numerous British retailers of all types who have ventured to the U.S., only to fail. As the article says, "The U.S. has long been a graveyard for UK retailers." However, in the piece Tesco says it will be different than all of the others who've ventured into the U.S. retail market, only to fail and close shop. The story provides some good background to our piece.