Tuesday, February 5, 2008

Tesco Fresh & Easy Neighborhood Market Update: Can Fresh & Easy Succeed in the USA? New Nielson Study Analyzes the Chain's Affect on Competitors

"The highly-anticipated and closely-guarded news of the ultra-successful United Kingdom-based Tesco launch of its Fresh & Easy Neighborhood Market in Southern California in 2007 made retailers and manufacturers wake up and smell their Organic Breakfast Blend coffee. Their [Fresh & Easy's] promise of low prices, convenient shopping alternatives, and fresh/organic quality foods--together with their environmentally and socially-enviable sustainability efforts--all sound to good to be true. The question begs: can one retailer be all things to all consumers? One thing is for sure. Tesco is a formidable competitor."

The paragraph above is the introduction to a just-released study by market researcher AC Nielson on Tesco's Fresh & Easy Neighborhood Market, its probability for success in the Western U.S., and its potential affect on competing food retailers in the Southern California, Arizona, and Las Vegas, Nevada metropolitan markets, the three regions where the British retailer is focusing its initial retail efforts in the United States.

In it's research report, "Retail Riot: Tesco Has Arrived in the U.S.: A Competitive Retailer Review," Nielson looks at Tesco's history, its recent march to become an international power-house retailer, its entry into the U.S. food retailing market, and how it stacks up against competing food retailers in the three Western USA markets.

In it's study, Nielson uses demographic data, location research analysis and scan data information to arrive at the conslusion that Tesco's Fresh & Easy will have the strongest competitive affect on Kroger Co. stores in the three regions. Nielson says Kroger Co. banner supermarkets stand to lose as much as $6.7 million a week in sales to Fresh & Easy grocery markets. The report also says SuperValu, Inc., Safeway Stores, Inc., Wal-Mart and Arizona-based Basha's all could lose weekly sales to the 10,000 -to- 13,000 square foot combination basic grocery/prepared and specialty foods Fresh & Easy stores.

The study estimates potential weekly sales losses of $4.4 million for SuperValu banner stores; $4 million for Safeway banner and Von's stores, which are owned by Safeway; $2.4 million for Basha's, and $1.5 million for Wal-Mart.

You can read a full summary of the Nielson study, along with a chainwide, store-by-store competitive analysis of the three market regions, here in Nielson's Consumer Insights publication which was just released today.

Natural~Specialty Foods Memo's Analysis:

We think the Nielson study is a good and comprehensive one. However, it does make a number of assumptions. Chief among those assumptions--although they ask the same question we do about Fresh & Easy's viability--in its analysis is that Fresh & Easy will garner consumer support. The jury is out on that fact as of yet. In fact, thus far based on our observation and conversations with numerous industries sources, it looks to be a fairly long slog for the British retailer with its Fresh & Easy stores.

What do we mean? Just that to date--which granted is only a little over three months--the 37 Fresh & Easy grocery markets thus far opened and operating are doing only mediocre. Overall sales are eratic. Some stores, like the unit in the city of Los Angeles, are doing great. A number of others have very low customer counts and are doing well below expectations. In part this is due to the rapid new store-opening schedule Tesco is following. But either way, it is a fact.

Further, competitor response to Fresh & Easy is just beginning. Wal-Mart will open four small-format grocery markets called Marketside later this year in the Phoenix, Arizona metro region. These 20,000 square foot stores are designed to go head-to-head against Fresh & Easy stores. They also are just the start of Wal-Mart's competitive initiative vis-avis Fresh & Easy.

Additionally, Safeway Stores will open an initial five small-format grocery markets in the San Jose Bay Area region of Northern California later this year. Tesco has plans to open an initial 18 Fresh & Easy stores in the Bay Area beginning late this year or in early 2009. These Safeway Express-style grocery stores also are about 20,000 square feet and will be positioned to compete directly against Fresh & Easy. Our sources also tell us both Wal-Mart and Safeway are looking at locations in Southern California for their respective small-format grocery markets as well.

In addition to these small-format stores from two well known retail brands, Kroger, SuperValu, Basha's, Safeway and Wal-Mart are intensifying their competitive efforts with their respective traditional format stores against Fresh & Easy, especially in Southern California and Arizona. They are lowering prices on basic groceries when they find Fresh & Easy beating their retails, building new stores, and offering new convenience features like curbside grocery order pick-up for time pressed shoppers.

As Nielson rightfully asks in the beginning of its report, "Can Fresh & Easy be all things to all consumers?" In other words, can the retailer's low-price, basic grocery, higher-end prepared and specialty foods format make it in these super-competitive food retailing markets. For us, it's just too early to tell. Southern California and Arizona are super-charged competitive markets. In addition to the major retail players mentioned, there also are numerous price-impact warehouse store formats, other major players like Whole Foods Markets, which is building dozens of new stores in both markets, upscale leaders like Gelson's and Bristol Farms, Trader Joe's and numerous others.

While we agree Tesco is indeed a formidable player. We also have seen the food retailing landscape in these two major Western USA food retailing markets litered with formats and retailers who tried to succeed in the regions but were stopped by the highly successful grocers who have lived and operated in these areas for decades.

We view the Nielson study as an important analysis of what could happen competively should Fresh & Easy gain widespread consumer adoption in these markets. However, that hasn't happened yet--except in the case of a handful of stores.

The jury is still out in terms of how much, if any, weekly sales the Fresh & Easy stores will take from these retailers. Further, with the new small-format entries from Wal-Mart and Safeway coming later this year, we expect to see an all-out competitive battle, especially if like we are hearing both retailer's locate the new, petite stores in Southern California as well as in Arizona and Northern California, which is likely.

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