Tuesday, November 27, 2007

Tuesday Talking Points Memo: Eastward-Bound for Fresh & Easy

Tesco is looking beyond the Western U.S., to Chicago and the East Coast, for Fresh & Easy Neighborhood Markets' expansion

"Natural~Specialty Foods' Talking Points Memo expects to see other large retailers look closely at and even get into the "Small Mart" format. We especially believe there's a niche on the East Coast. Thus far all three players-Tesco (Fresh & Easy stores), Wal-Mart (in development) and Whole Foods (Express prototype store soon to open in Boulder, Colorado) are focused on the Western U.S. The East Coast, with its demographics and mix of large cities and suburbs is wide open (for Fresh & Easy-type stores)."

Nearly three months ago we were predicting here that the eastern USA is fertile ground for Tesco, with its Fresh & Easy Neighborhood Markets format, and others to launch what we call a "Small Mart" format revolution. "Small Mart's," a term we coined because of Wal-Mart's ongoing research into developing two small format stores, are small footprint grocery markets like Tesco's Fresh & Easy, which the British retailer has started opening in the Western U.S. Thus far, thirteen Fresh & Easy stores are open in the U.S.--eight in Southern California and five in the Las Vegas, Nevada metropolitan area. Two more Fresh & Easy convenience-style grocery markets open tomorrow in Southern California. The first stores open in Arizona in early December.

Two news stories, one on November 25 in the London Times Online and another last week in the publication Retail Week, are reporting that Tesco is scouting the Eastern U.S., particularly New York and New Jersey and down to Florida, and the Chicago metropolitan area, for locations for Fresh & Easy Neighborhood Markets. Additionally, Retail Week reports Tesco is looking for a sight in the Chicago region for a distribution center.

We've heard these rumors of a Midwest and Eastern U.S. expansion from our sources--who've been very reliable to date--for the past month. However, we haven't reported on it as the time- line we've been hearing is 2009. However, it's highly-probable Tesco has moved it's post-Western U.S. expansion time-line up, as the retailer is on the fast-track in terms of it's Fresh & Easy growth strategy.
For example, as we were one of the first to report, Tesco executives are currently combing Northern and Central California for Fresh & Easy store locations and a distribution center to serve the region. It's possible the grocer could build as many as 50-75 stores in Northern and Central California in the next 24 months.

Southern California was initially the primary target region for stores in the state for 2007 and 2008. Tesco plans to have 50 Fresh & Easy stores open in Southern California, Nevada and Arizona by February, 2008, according to Tim Mason, CEO of Tesco USA.

According to Retail Week, a U.S. source told the publication Tesco was "definitely" considering launching a distribution center and Fresh & Easy stores in and around Chicago. However, the source said it's unlikely Tesco would do so before the end of 2008. This source's information to Retail Week fits our sources' information fairly well in terms of the time-line for Midwest and Eastern U.S. expansion plans.

In Saturday's London Times Online story, which includes an interview with Tesco CEO Sir Terry Leahy, the publication reports industry sources in the UK have told it that Tesco officials are "swarming the East Coast of America to check for potential (Fresh & Easy) locations in New York and Florida." Sir Terry wouldn't confirm this to the Times however.

Tesco's rapid geographical expansion in the U.S. makes sense based on the model the British-based international retailer is using for its Fresh & Easy stores. Both Sir Terry and Tim Mason have said Tesco USA's strategy is one similar to Starbucks, in that they want Fresh & Easy markets literally in every neighborhood in their trading regions. By making the green and white bannered convenience-style grocery markets ubiquitous in the regions it chooses to do business in, Tesco can create a "mass retail" effect similar to what Starbucks has done with its upscale coffee shops. It's also what conventional convenience store operators like 7-Eleven and Circle-K have done in the U.S. for decades.

Rapid U.S. geographical expansion also fits into Tesco's overall corporate strategy in terms of its growth and sales goals. Sir Terry told the Times Tesco's target is to have more than half its sales from outside Britain in the next five to ten years. Currently, less than a third of Tesco's sales come from outside Britain, where it's the second largest food retailer after number one J. Sainsbury.

International expansion has been the hallmark of Sir Terry's decade as the head of Tesco. In addition to the Fresh & Easy venture in the U.S., Tesco has gone into Eastern Europe in a big way. The retailer also is currently working on plans to expand into Russia. Today, Tesco has stores in 12 countries outside the UK. In the ten years since Sir Terry has been in charge, Tesco's sales have doubled, the majority of those sales coming from international operations.

In many ways the U.S. will be the retailer's biggest challenge though. Other British retailers like Marks & Spencer and J. Sainsbury tried stores in the U.S. in the past--but failed. Further, the Fresh & Easy format--stores that average about 10,000 square feet and offer a combination of up-market fresh prepared foods along with basic national brand and private label groceries--is a gamble in a country where Wal-Mart Supercenters, Costco Wholesale Stores, Whole Foods, Trader Joe's, Safeway Stores, Kroger, Supervalu and so many others divide up the competitive food retailing pie using a variety of strategies--ranging from super upscale and organic foods marketing to deep discount pricing strategies.

Tesco has been extremely successful with its "Express" grocery market format however in the UK and throughout Europe. Fresh & Easy is a variation of that proven format. As such, many believe there's a space in the U.S. food retailing scene for just such an operation--a combination basic grocery market and upscale prepared foods retailer housed in a smaller, more convenient format.

With its sights set beyond the West Coast, to America's heartland and East Coast, Tesco is betting with its corporate wallet that such a food retailing space exists in the U.S. They just might be right?

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