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

Fresh & Easy Opening Countdown

Anaheim Fresh & Easy Store Will Be One of First Six in Southern California to Open

Earlier this week we reported that Tesco announced six of their Fresh & Easy Neighborhood Market stores in Southern California would be the first to open, all on November 8, 2007. Those stores are in Orange, Los Angeles, San Bernardino and Riverside counties.

Today we learned from sources in Southern California that a Fresh & Easy store in Anahiem (in Orange County) located at the corner of Lincoln and Western Avenues near Buena Park will be one of the first of the six outlets to open on November 8. The Anaheim store will open on November 8 at 10AM. Tesco has confirmed this with Natural~Specialty Foods memo (NSFM).

The Lincoln and Western Avenue Fresh & Easy (number 4 on the map above) is one of nine stores currently being built in Orange County. Tesco says it has 100 stores currently either being built or in the construction pipeline for Southern California, Arizona and Nevada. Many more are being planned to follow. Tesco also said it plans to enter Northern California with Fresh & Easy stores sometime next year.

Fresh & Easy Neighborhood Market stores are about 10,000 square-feet and feature upscale, fresh prepared foods (including grab-and-go items), basic groceries, specialty and natural foods and other offerings. The focus is on fresh and specialty-oriented foods in a smaller, faster format than the traditional supermarket in the U.S.

(Fresh & Easy store location map courtesy of the Orange County Register.)

Tuesday Talking Points Memo

Billionaire Investor Warren Buffet is Betting Big on Tesco and the Success of its Fresh & Easy Neighborhood Markets in the U.S.

Warren Buffet is pictured above with his close friend Microsoft founder Bill Gates. Buffet, the world's second richest person (Gates is number one), is giving his $40-plus billion fortune to Gate's foundation to be used for global good.

Warren Buffet, America's most famous investor and the second richest man in the world, has been buying an increasing amount of stock in UK-based mega-retailer Tesco (parent company of Fresh & Easy Neighborhood Markets in the U.S.) over the past year. Buffet's Berkshire Hathaway investment firm now holds about 3% ownership in Tesco, an investment valued at a little over $1 billion. Buffet currently holds about 230 million shares.

Omaha, Nebraska-based Buffet, know as "The Oracle of Omaha" for his magic touch as a long-term investor, began buying Tesco stock last year at about the time the retailer announced it was planning to enter the U.S. retail food market with its upscale, convenience-type food stores called Fresh & Easy Neighborhood Markets. The Fresh & Easy format features stores of about 10,000 square-feet which specialize in fresh, prepared foods, specialty groceries and related upscale offerings.

The first Fresh & Easy markets are to open in Southern California on November 8, 2007, with other stores to follow in Arizona and Las Vegas, Nevada before the end of the year. Tesco currently says it has at least 100 Fresh & Easy stores in the pipeline, either under construction or in the planning stage. More will follow that, first throughout the Western U.S. and then elsewhere, according to Tesco. It's estimated Tesco could have 1,000 Fresh & Easy stores in the U.S. in 10-12 years with estimated sales of over $7 billion.

Having Buffet betting on Tesco and the Fresh & Easy format should be a vote of confidence to the retailer--and something competing supermarket chains and other food retailers should keep their eyes on. Buffet is a long-term investor and seldom if ever picks losers. His fund, Berkshire Hathaway, turned in a 29% profit last year. Fund profits in 2006 totaled $11 billion, up from $8.5 billion in 2005. The homespun but savvy Buffet tends to turn in similar profits most years. He still works out of his Omaha office with partner Charlie Munger and a small staff. At 76 Buffet is the junior of the two. Munger is in his early 80's.

Wall Street is watching Tesco's upcoming launch of its Fresh & Easy stores and also has taken notice of Buffet's substantial investment in Tesco. For example, right after Buffet's announced in March of this year that he was buying another substantial chunk of Tesco shares, the retailer's stock went up by 5%.

Patricia Baker, a supermarket industry analyst at Merill Lynch believes Tesco's Fresh & Easy format will be a "formidable competitor to U.S. supermarkets." She recently told her investors she believes Safeway Stores, Inc. will be the most susceptible to a drop in share price because of Tesco's focus on the Western U.S. where Safeway has major operations. About 30% of Safeway stores are located in the Western U.S. Safeway's stock has dropped about 3.5% this year, even as the Standard & Poor's 500 Food Retail Index has risen 8.1%. Baker may be on to something although it's important to note that no Fresh & Easy stores have yet to open.

Safeway isn't sitting still though. Although it doesn't have Buffet as a major investor, CEO Steve Burd recently said the chain has studied what Tesco is doing with the Fresh & Easy format inside and out--and is tracking where their stores will be. Burd says Safeway is prepared to enter the market in the Western U.S. with a similar small format, convenience-type store should they deem the Fresh & Easy stores a success in the market. If they do Burd says Safeway can do it better since they are a known brand name in the U.S.

Meanwhile "The Oracle of Omaha" Buffet is sitting on ownership of 3% of Tesco, which had 2006 sales of $85.5 billion and is the world's third largest retailer. Being a long-term, value investor Buffet is more likely to buy more Tesco stock rather then sell anytime soon. In addition to its Fresh & Easy Neighborhood Market initiative in the U.S. Tesco is building similar stores all over Europe and East Asia. Additionally, the retailer operates huge superstores throughout the world, selling everything from food to clothes, and everything in between. It's the grocery market share leader in the UK and a major player globally.

We're told Buffet is watching the upcoming Fresh & Easy store launch closely just like Wall Street is. And Wall Street is watching Buffet to see if he increases his holdings in Tesco. Buffet spends much time in California (Berkshire owns California-based See's Candies among the many firms in its portfolio) and we expect him to drop in and check out a Fresh & Easy store in Southern California when they start opening next month.

Perhaps if he likes what he sees he will increase his stake in Tesco? We aren't sure however if Buffet will personally go for Fresh & Easy's upscale prepared foods offerings. Among the companies Berkshire Hathaway owns is the Dairy Queen hamburger chain and Buffet is know for eating at a Dairy Queen when in California. A note to Fresh & Easy management: Buffet's favorite beverage is Cherry Coke. We suggest making sure you have it in the cold case when the Southern California stores open in a month. It's good investor relations.

Resources:

You can read Warren Buffet's autobiography here.

You can view Buffet's Berkshire Hathaway company website here.

You can view Tesco's website here.

You can view the Fresh & Easy Neighborhood Markets Website here.