Wednesday, May 14, 2008

Small Format Food Retailing Special Report: Tesco's Fresh & Easy is On the Move Towards Goal of Becoming A Statewide Food Retailer in California

The blog Fresh & Easy Buzz, which chronicles, writes about and offers analysis on Tesco's Fresh & Easy Neighborhood Market small-format combination basic grocery store and fresh foods retail food store chain, is reporting today the retailer plans to open five stores in the Fresno, California Metropolitan area in California's Central Valley region.

As Natural~Specialty Foods Memo readers know, we first started writing about Tesco's Fresh & Easy small-format food retailing venture before the retail chain opened its first store in the Southern California city of Hemet, in late October of 2007.

Since then, the fledgling small-format convenience-style grocery chain has grown to 61 stores in Southern California, Arizona and the Las Vegas region in Nevada.

The results of the Fresh & Easy stores opened to date have been a mixed bag. Some are doing well, but others are underperforming considerably.

Of course, the jury is still out, since even the first batch of the grocery stores haven't even been open a full year yet. The first year celebration for Tesco for those stores will come in November-December of 2009.

Meanwhile, Tesco continues to expand the number of Fresh & Easy stores in its base, not only in the three market regions it's currently in, but also throughout California. None of the California market stores outside of Southern California have opened yet, but the retailer is locking up leases on various empty retail buildings it will turn into Fresh & Easy grocery markets, as well as signing a few deals for empty commercial lots or in new developments where it will built new small-format stores from the ground up.

Tesco is currently taking a new store opening break from April until July, after which it will start opening new grocery stores at a feverish pace once again.

In terms of the California Market, Tesco has signed leases to open five stores in the Bakersfield area in the state's southern Central Valley, which is about 100 miles from Bakersfield, 18 stores in the Sacramento market, and 19 stores in the San Francisco Bay Area.

Tesco hasn't confirmed the five Fresno stores yet, but they have applications into the California Alcohol Beverage Control Board for an off-sale beer and wine license, which de facto means they have signed leases on the buildings, since it's a prerequisite in California to have a valid store location/building leased or owned in order to apply to the board for a valid off-sale license.

The first stores in the Central Valley and Northern California are likely to start opening in early 2009, although a couple may open at the end of this year.

Originally, Tesco said it would have about 200 of the small-format grocery markets open in California, Arizona and Nevada by the end of this year, including a number of the Central Valley and Northern California stores. However, in March the retailer revised that number down to about 150 open by the end of 2008, and said it isn't likely any the the Central Valley and Northern California stores would open until 2009.

Tesco continues to keep a stiff upper lip regarding Fresh & Easy store performance. However, as we've reported in numerous pieces, the stores thus far haven't met Tesco's projected sales target of about $175,000 -to- $200,000 a week by this time. We know these numbers aren't hard and fast at Tesco. Rather, they're targets based on break-even numbers needed to meet investment and operations goals.

The sales targets are important though, and that is in part is why Tesco's Fresh & Easy U.S.division took the three month pause; to evaluate operations and marketing and put more focus in those two areas rather than putting all its focus on opening new stores.

From November, 2007 to March, 2008, Tesco opened a new Fresh & Easy store about every three days.

With the five stores coming to Fresno, the Bakersfield stores, the 19 in Sacramento and the 18 in the Bay Area, along with one Fresh & Easy Buzz reported also will be opened in the Northern Central Valley city of Modesto, Tesco is on the way to being a real statewide retailer in California, home to 38 million people and the world's fifth biggest economy on a per-capita basis.

Tesco currently operates about 30 small-format Fresh & Easy grocery stores in Southern California, and plans to open many more in the region. The other half of the stores (61 total) are in Arizona and Nevada.

Adding the Bakersfield, Fresno, Sacramento region and Bay Area stores, which will start opening early next year, to that mix will give the retailer a base of nearly 80 stores in California. Of course, that's not counting all the additional grocery markets in Southern California it will have opened before the year is out, which could be as many as 50.

Tesco could easily have around 150 small-format Fresh & Easy grocery stores in California alone by the end of 2009, depending on a number of variables, including sales at existing stores, commercial real estate trend, and just how fast they can turn leases into stores.

Tesco also plans on opening more stores in the Central Valley, the Bay Area and the Sacramento regional market. Those listed above are just the initial salvo. Tesco's store location people are out there as we write this locking up additional leases throughout California.

As Tesco gets more Fresh & Easy stores open and operating, we will be better able to see if its philosophy and strategy of opening a critical mass of stores fairly close together works.

As we've written in the past, the retailer's goal with its small-format grocery stores is similar to that of Starbucks with its cafes, which is to locate the units a couple miles apart in their market regions so as to saturate an area with the stores. The strategy being to geographically, as well as operationally, be the default neighborhood grocer in a given community.

California is a highly competitive grocery market, so the jury is still out on Tesco's neighborhood grocery store strategy, despite the rapid pace in which it has been opening Fresh & Easy stores. Opening new stores, although not a simple task, is much easier than making them profitable. Stay tuned.

Editors Note: There are numerous stories in the archives about Tesco's Fresh & Easy neighborhood market. You can look through the archives or do a search using the box at the top of Natural~Specialty Foods Memo.

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