Retail Memo: New Details and Analysis About Safeway's Small-Format Summer Bay Area Surprise for Tesco's Fresh & Easy Neighborhood Market

We were one of the first publications to report on December 10, 2007 that Pleasanton, California-based Safeway Stores, Inc. was developing a new, small-format (15,000 -to- 20,000 square feet) grocery store similar to Tesco's Fresh & Easy Neighborhood Market, which the San Francisco Bay Area-based supermarket chain plans to initially open in the San Jose area sometime this summer.

Tesco plans to open an initial 18 of its small-format, combination basic grocery/semi-upscale fresh foods and specialty grocery stores in the San Francisco Bay Area beginning in late 2008, or more likely in early 2009. A number of these 18 initial stores will be located in the South Bay Area, in San Jose and the surrounding communities.

Since we reported the Safeway small-format grocery store development story, we've followed up with a couple analysis pieces, and have been following Safeway's development process closely, doing research and talking to as many industry--and industry-affiliated--sources as we can. As a result we've learned some additional facts about the new small-format stores.

Stores likely to open in July or August, 2008

First, based on information from our various sources, we believe the first of the four -to- five pilot Safeway small-format grocery stores will open in either July or August of this year in the San Jose area. Part of Safeway's reason for wanting to open the stores this summer, is so that the retailer can have the intial stores opened for a significant period of time prior to Tesco entering the market in either late 2008 or early 2009.

It was initially believed Tesco would open the first of its Bay Area Fresh & Easy stores this summer. However, Tesco says it won't open stores in the region until 2009. We still believe its possible Tesco will try to open a few Fresh & Easy markets in the Bay Area in late 2008. The first store location lease (of the 18 signed to date) the British retailer signed in the Bay Area was for an empty Albertsons supermarket building on Bird Avenue in the city of San Jose, which it will remodel into a Fresh & Easy Neighborhood Market store.

Safeway wants to have its small-format grocery stores open and doing business before Tesco's Fresh & Easy even comes to town, so to speak. By opening the first stores in July or August of this year, it could give Safeway anywhere from six months to close to a year of retail operations before the first key is even turned in a Fresh & Easy store door by Tesco in the Bay Area.

Safeway small-format grocery stores: A few snapshots

We don't have a complete picture of what the Safeway small-format grocery stores will look like in terms of design or overall product mix. However, based on conversations with sources and much analysis ,we do have some pieces of the puzzle filled out thus far.

In terms of design, we expect something fairly upscale inside and out. However, the stores aren't going to be super upscale. Rather, they will be attractive in terms of design but also somewhat utilitarian looking. They aren't designed for only high-end consumers.

In October, 2007 Anthony Gilmore, the former Northern California Region President for Whole Foods Market, Inc. resigned his position with the supernatural foods grocer to accept an executive position with Safeway Stores, at its corporate headquarters in the East Bay Area city of Pleasanton.

While leading Whole Foods' Northern California division, Gilmore completed an aggressive and varied new store opening program for the supernatural grocer in the region. His strength was in being able to organize and lead the development of "new generation" Whole Foods' stores, giving each of the new stores its own local flair.

Small-format grocery stores aren't really a new development for Safeway. In fact, it's more of a retro, "back to the future" concept, if not in actual store format, at least in size. Pictured above is a small Safeway grocery store located in San Francisco, California circa the 1940's. The store was located in either the city's Nob Hill or Tenderloin neighborhoods. Notice the "tag line" on the Safeway sign, "Distribution Without Waste." It's a perfect slogan for 21rst century "green" grocery retailing. (The grocer might want to bring the slogan back.) Pictured below, is a small-format Safeway store which was located at 228 Seventh Street SE in Washington D.C. The market was built and opened in 1940 and remained open and profitable for 46 years, closing in 1986.

For example, under Gilmore Whole Foods built its biggest and most comprehensive food store in Campbell, California, which is located in the famed Silicon Valley, and is only a few miles from San Jose. This store, which is now called the Northern California flagship, is nearly 80,000 square feet. It's a double-story superstore, filled with numerous in-store dining venues, a wine bar, a mini day spa, and much more. The store also fits its location well, both in design and in its product mix.

Further, Gilmore lead the creation of what is arguably Whole Foods' most innovative store to date: its European-style market hall store in downtown Oakland, California. The store, which opened in October, 2007, is designed like a European food hall, yet contains all of the departments--and more--the supernatural grocer is famous for.

In addition, Gilmore pioneered the building of Whole Foods' lifestyle-oriented superstores as retail anchor stores for upscale multi-unit housing developments in the city of San Francisco.

For example, the newest San Francisco store, which is located in the hip, up-and-coming Potrero Hill neighborhood, is the ground floor retail anchor of a huge, high-end condominium development which is becoming a very popular place to live in the city. The store design is modern, like the condo project, but also incorporates the history of the neighborhood. Among the store's unique features are an indoor-outdoor wine bar and bistro which features a DJ who spins tunes for customers on weekend evenings.

Gilmore's charge in his position at Safeway is primarily retail format development. He's been working on the chain's successful lifestyle format, including a project which involves creating a "second generation" lifestyle format for Safeway's supermarkets. Some of these "second generation" developments are already beginning to show up in the retailer's new lifestyle stores.

What we refer to as the "second generation" aspects include more upscale design and interior packages--colors, flooring, shelving, and the like--and added in-store features like the fresh nut bars and similar new in-store venues appearing in a number of the grocery chain's recently-opened lifestyle supermarkets.

Gilmore also was brought on, in part, to work on the small-format grocery store project, both from a format design and product selection and merchandising standpoint. Expect to see his input in how the 15,000 -to- 20,000 square foot grocery markets look, the products sold in them, and how they reflect the communities (localism) they are in. We expect some unique and creative flourishes in the store's design and product selection.

Prepared foods to be central to the small-format Safeway stores

Safeway is nearing completion of a line of fresh, prepared foods which it will begin rolling out in its lifestyle stores soon. The prepared foods' line includes ready-to-heat and ready-to-eat entrees, side dishes and grab-and-go type foods. Some of the prepared foods' items will be under the retailer's O' Organics brand, others under its Eating Right healthy foods brand, and still others under one or more new brands. These prepared foods items will be sold in all of the grocer's lifestyle stores--as well as in the new, small-format grocery markets, we believe.

Safeway already has extensive prepared foods offerings--which it has grown dramatically over the last couple years--for sale in its lifestyle supermarkets. For example, it offers fresh soups, sandwiches, pizzas and other items under its Safeway signature brand. The grocer also offers prepared entrees and side dishes under various store brands, along with many other ready-to-eat and ready-to-eat items.

A little over a year ago, Safeway bought a restaurant in the San Jose area. The grocer has been using that restaurant to develop and test items with consumers as a way to develop its fresh, prepared foods items. Look for an extensive array of fresh, prepared foods in the new small-format Safeway grocery stores. These items should range from basic, inexpensive items, to much higher-end gourmet items, which are being developed by professional chefs at the company-owned restaurant.

A limited assortment of discount groceries

In a conference call with supermarket industry analysts last week, Safeway CEO Steve Burd said because of the inflationary and recessionary nature of the U.S. economy, consumers are increasingly filling their shopping carts with cheaper groceries in his stores. He even said the company is seeing more shoppers buying generic groceries in Safeway-owned stores.

Safeway's stock tumbled to a 52-week low last week, even though the grocer's fourth-quarter profit met analysts expectations. Analysts--and Burd--attribute this decline in stock value to the current bad economic climate in the U.S., which like Burd argued to the analysts is causing even middle-to-upper end consumers to buy more discount grocery products.

During the conference call, Burd described the current rate of grocery inflation as "the highest I've seen in my 15 years as Safeway's chief executive."

We wouldn't be surprised to see Burd and company use the new, small-format stores to merchandise a limited assortment of basic grocery items (say 60% store brand/40% national brand) at discount prices, along with the fresh, prepared foods and other offerings. (We don't know this for a fact, and nobody at Safeway has gone on the record with us either confirming or denying this. Our view is based on discussions with numerous sources, as well as our own analysis.)

Safeway has two very strong selling value-positioned store grocery product brands. One is a low-end, near generic line, the other a mid-range brand. They also have Safeway Select, a premium, yet competitively-priced multi-category store brand, in addition to a number of other store brands.

In fact, these three--low-end, midrange and premium--store brands are the top market share sellers in many of their respective categories, such as various canned fruits and vegetables and other packaged goods. These product brands--like the Safeway retail brand--are strong in the Bay Area. Unlike Tesco's Fresh & Easy store brand, which will be new to the region, Safeway's brands have extremely strong equity with Bay Area consumers.

For example, the San Francisco Chronicle, the region's highest-circulation newspaper, runs a column in its food section every Wednesday in which it compares at least 10-12 grocery brands in a different grocery products category each week. Safeway's store brands (even the value brands) frequently place in the top three, beating out in many cases the top national brand in a given category, which sells for much more at retail than the Safeway store brand.

Safeway has a huge advantage over Tesco in this approach. First, the grocer knows the Northern California (and especially Bay Area) market inside-out. It's far-and-away the number one market share leader in the region. Second, the grocer has decades of market-specific scan data in its databases. This is an invaluable tool when choosing a limited basic grocery products selection for a store.

Lastly, Safeway has over 20 years' of consumer/shopper data from its club card program. From a consumer-buying and behavior perspective, this information, combined with the market-specific scan data, can help the grocer not only choose the optimum limited-assortment basic grocery selection for its new, small-format stores, but also the club card data can guide the retailer in custom-tailoring the stores to each and every neighborhood. This is powerful information that even the world's number three retailer Tesco can't buy for any price. If they could, the retailer's Southern California stores would have a different basic grocery item product mix, and be tailored much better to the city's and neighborhoods they are located in.

What's in a name?

Lastly, and actually the most fun, is the question: What will Safeway name its small-format grocery stores?

While we don't have any specific information from sources inside or outside of Safeway Stores, Inc. who can provide us with information credible enough for us to go on the record and give you the name Safeway's new, small-format grocery stores will go by, we are willing to go out on a limb and offer a potential or even probable name, based on three key factors we've identified and anlalyzed. Those three factors are:

>First, Safeway Stores, Inc. likes the Safeway name and brand. All of its 271 stores in Northern California are branded Safeway, with the exception of a small division of warehouse stores called Pak 'n Sav. In addition, all of the grocery chain's stores in the Pacific Northwest, Arizona, Colorado and western Canada fly under the Safeway banner, as do the stores in the Washington D.C./Maryland/Virgina tri-state region.

All of the company's other banners--Vons, Pavillions, Dominicks, Randall's, Tom Thumb, Genuardi's and Carr's--were formerly independent chains which Safeway acquired, and as a result decided to keep the chain's names rather than change them to Safeway. The grocer sells its Safeway brand-named private label products, such as the Safeway Select, in all of these banner stores however.

The Safeway food retailing brand has strong consumer equity in Northern California, and especially in the Bay Area, where most of its stores are located, along with its corporate headquarters. As a result, we believe the grocery retailer is likely to use "Safeway" as part of the name for its new, small-format grocery stores when they open this summer.

Second, over the last four or five weeks we have floated a name for the small-format stores around to industry sources inside and outside of Safeway. We also have heard this name used by some Safeway suppliers, and others such as food brokers, who do regular business with Safeway at its corporate headquarters in Pleasanton.

While none of our sources (in the case of those outside Safeway) know for sure what the grocer will name the new, small-format stores, a number of them told us they've heard the name we put out there discussed among some fairly serious industry people in Northern California. In terms of people inside Safeway (who either don't know the name, or if they did likely wouldn't tell us) the name we floated received some interesting responses. Not one of the insiders dismissed the potential name for the new, small-format stores we mentioned out of hand to us.

All this is purely anecdotal, and we aren't claiming otherwise. Rather, its merely one part of the three-part puzzle we are analyzing, along with a couple other factors. (Did you really think we would give you everything?)

The third piece of this three-part analysis puzzle involving the possible name for the small-format, convenience-style grocery stores involves history. Many of our readers may not know this but there is a Safeway chain in the middle eastern country of Jordan.

Safeway Jordan isn't owned by or affiliated with U.S.-based Safeway Stores, Inc. However, there

is an historic connection. U.S.-based Safeway Stores, Inc. once was an international food retailing company. Among it's international operations was Safeway plc. in the United Kingdom. Safeway Stores, Inc. USA sold UK-based Safeway a long time ago. And non- Safeway USA-affiliated Safeway plc. was recently acquired by Britain's Morrison's supermarket chain, which has nearly completed removing the Safeway banner from the stores in the UK.

Prior to selling UK-based Safeway plc. to Morrison's, the companay owned Safeway Jordan and operated stores in that country and in Kuwait. In 2003, Safeway plc. sold its Jordan division to The Sultan Center (TSC), a Jordanian supplier and retailer of food, grocery, perishable and general merchandise items in the middle east. Jordan is a monarchy, so although it has a vibrant private sector, the ruling government family and business sectors are strongly tied-in together.

This is where the history gets interesting. Now, remember UK-based Safeway plc. was once long ago owned by USA-based Safeway, Inc. Safeway USA sold its UK operations to a group there who named it Safeway Plc. That group established Safeway Jordan, then sold the Jordan division to Jordanian-owned TSC.

TSC-owned Safeway Jordan operates three Safeway branded retail formats in that country. Those three retail grocery store formats are:

>Safeway service stores or supermarkets, which are similar to a western supermarket.

>Safeway Wholesale Center, which are a cash & carry-type format.

>Safeway Express, which is a hybrid basic neighborhood grocery store/convenience store/food-service store.

Yes, you guessed it: we are suggesting (not stating as fact or saying we have any confirmation) there is a decent probability that Pleasanton, California-based Safeway Stores, Inc. will name its new, small format grocery stores, which will open this summer in the San Francisco Bay Area, Safeway Express.

There's an added caveat for Safeway Stores, Inc. in going with the Safeway Express name for its new, small-format grocery markets as well: Tesco, parent company of Fresh & Easy Neighborhood Market, operates Tesco Express small format grocery stores throughout the UK and in other parts of Europe. These stores are the model from which Tesco created its Fresh & Easy grocery market format in the U.S. There are significant differences between the two formats--Tesco Express and Fresh & Easy--but also many similarities.

It would be ironic if Safeway names its new 15,000 square foot -to- 20,000 square foot grocery stores in the Bay Area--which will go head-to-head with Tesco's 10,000 square foot -to- 15,000 square foot Fresh & Easy grocery markets beginning at the end of this year or in early 2009--Safeway Express. In many ways, using that name for the stores would set the stage for an all out premptive summer surprise by Safeway for Tesco's Fresh & Easy Neighborhood Market in the Bay Area and elsewhere in Northern California.

Retail Memo: Breaking News: Tesco's Fresh & Easy Confirms it will Open 18 Stores in San Francisco Bay Area

As our regular readers know, we were one of the first publications to report and write about Tesco's Fresh & Easy Neighborhood Market's plans and strategy to launch a retail invasion into Northern California, with its small-format, convenience-style Fresh & Easy grocery markets.

We can now report that Fresh & Easy Neighborhood Market has formally announced and confirmed 18 "done-deal" store locations in the San Francisco Bay Area region of Northern California.

Those Bay Area store locations are:

San Francisco (2 stores), San Jose (2 stores), Hayward (2 stores) and Antioch (2 stores). Additionally, single-stores will be opened in the Bay Area cities of Oakland, Concord, Walnut Creek, Danville, Oakely,Vallejo and Farfield. These seven cities (and stores) are all located in the East Bay Area.

Further, single Fresh & Easy stores will open in the Bay Area cities of Mountain View, Sunnyvale and Napa. Mountain View and Sunnyvale are just a few miles from San Jose in the South Bay Area; Napa is about 30 miles north of San Francisco in the North Bay Area.

Fresh & Easy also will open four stores in the Sacramento metropolitan region. The grocer has applied with the state of California for liquor licenses for these new stores. Two of the stores are located in Sacramento, the other two in Folsom, which is right next door to Sacramento.

The locations of these stores are:

Sacramento:

>3311 Northgate Blvd.

>3615 Bradshaw Road

Folsom:

>25000 Blue Ravine Road

>9522 Greenback lane

Fresh & Easy Neighborhood Market isn't confirming the four Sacramento region stores at this time.

We identified most if not all of these cities in previous pieces. Additionally, Fresh & Easy is looking for more locations in the Bay Area and elsewhere in Northern California for its grocery stores. Some of those locations are in these same Bay Area cities, others are in other cities in the region.

Additionally, as we reported over a month ago, Fresh & Easy plans to build a distribution center in the Northern Central Valley city of Stockton. Stockton is about 30 miles from Sacramento and about one hour from San Francisco. The location is well situated geographically to serve the retailer's Northern California stores as far north as Napa and as far south as Fresno.

As we've reported before, Fresh & Easy would like to have as many as 40 -to- 50 grocery markets in Northern California by the end of 2009. These first 18, which are far from the only stores the retailer will open in the region, should begin opening in mid-to-late 2008, with many of them not opening until 2009.

Eventually, Fresh & Easy plans to have stores throughout Northern California, primarily in the Bay Area and Central Valley regions. The Bay Area is the grocer's prime target market. These additional new stores would be located as far south in the Central Valley as Bakersfield, which is about half-way between Northern and Southern California, with other potential locations in the Central Valley cities of Merced, Turlock, Modesto, Manteca, Stockton and Tracy. Tracy is only about 15 miles from the most far-eastern Bay Area city, Livermore. (By the way, our commercial real estate sources tell us Livermore is on Fresh & Easy's store location radar, as is nearby Pleasanton and Dublin.)

By focusing primarily on the Bay Area, and secondarily on the Central Valley as we describe above, Fresh & Easy would be able to ring the Bay and the Valley with its small-format grocery stores, which average about 13,000 square feet and feature a selection of reasonably-priced basic, everyday grocery items, a large selection of fresh-prepared foods, fresh meats and produce, and specialty, natural and organic packaged goods. The stores are sort of a neighborhood grocery store meets Trader Joe's in terms of design and format.

The confirmation of the 18 Bay Area stores by Tesco's Fresh & Easy Neighborhood Market will further activate the competitive DNA of such local food retailers as Pleasanton, California-based Safeway Stores, Inc. Safeway already plans to open at least five new, small-format stores of its own in the San Jose region. The stores will be about 20,000 square feet. Based on what we know so far, the new mini-Safeway stores will offer basic grocery items like Fresh & Easy, with a major emphasis on Safeway's private label items, which are hugely-popular in its Bay Area supermarkets.

The new, mini-Safeway's (we haven't learned the actual name yet, although some sources have told us it will be Safeway Express) also will feature a strong selection of fresh, prepared foods, in addition to other offerings.

We will be providing further analysis on the Northern California market and Fresh & Easy's potential to succeed in the region in the next few days.

Fresh & Easy Neighborhood Market Northern California Linkage:

Read a number of recent pieces we've written on Tesco's Fresh & Easy Neighborhood Market and Northern California here.

Tesco Fresh & Easy Update: Northern California

Tesco inks deals for three new Fresh & Easy store locations in Northern California's San Francisco Bay Area, Distribution Center in Stockton

British grocer Tesco has locked-in three more locations for its Fresh & Easy Neighborhood Markets convenience-oriented grocery stores in Northern California, according to our sources. All three stores are in the San Francisco Bay Area. The stores are in San Francisco, Oakland and Farfield, which is located about 40 miles from San Francisco.

This makes four "done deal" store locations in the Bay Area region of Northern California we've been able to confirm thus far. Tesco won't confirm the four Bay Area locations but a spokesman does say the grocer is looking "hard" for ftore sights in the region.

We were one of the first to report over two months ago that Tesco's first Bay Area Fresh & Easy grocery market will be in San Jose, on Bird Avenue. We also reported at that time about Tesco's first Fresh & Easy location in the southern Central Valley, which will be a store in Bakersfield. Bakersfield is in the middle of the state, about 75 miles from Los Angeles (south) and about 150 from Sacramento (north).

Tesco currently has 15 stores open, ten in Southern California and five in Las Vegas, Nevada. On Wednesday, December 5, the grocer opens its first stores in Arizona.

The San Francisco Fresh & Easy store will be located in the city's predominantly African American neighborhood of Bayview-Hunters Point. City government and neighborhood sources in San Francisco told us Tesco signed an agreement last week to locate the store in an old Coca Cola bottling plant in the neighborhood.

Bayview-Hunters point is a low-to-moderate income neighborhood, and is considered the last "affordable" area in the city. (That's "affordable" by San Francisco standards, which are very high. A 1,200 square foot, two bedroom, one bath house in the neighborhood sells for about $600,000 on a good day.)

Tesco executives, Bayview-Hunters point community members, and city officials will hold a groundbreaking for the Fresh & Easy market on Thursday, December 13 at 11:30 a.m., our sources told us. Amy Cohen of the San Francisco Mayor's office of economic and workforce development has been working with neighborhood activists for a long time in an attempt to lure a grocery store to the neighborhood, which is underserved by retail food stores, especially those offering fresh fruits and vegetables. The group scored with Tesco.

One of Tesco's strategies (and promises) with its Fresh & Easy chain is to locate stores in what the retailer calls "food deserts," areas and neighborhoods in the U.S. that are underserved by grocery stores. In the case of Bayview-Hunters point, the British grocer is making good on this strategy--and promise.

The first Oakland store location will be at the site of the former Eugene International Market at the Jack London Gateway Shopping Center on Market Street. Our sources tell us Tesco has signed a lease for the site and plans to start remodeling the 27,000 square foot building soon. This buuilding has been vacant for a long time, and city officials and the center's management has been trying to fill it for some time.

Fresh & Easy stores average about 10,000 to 13,000 square feet. Our sources told us Tesco might sublease the other roughly 50% of the building to another retailer, such as a drug store.

Tesco has, however, leased buildings this size, or even larger, and made them smaller for their Fresh & Easy format. For example, some of the retailer's recently-opened stores in Southern California are in remodeled Albertsons' supermarkets. The stores were closed a couple years ago by the supermarket chain. These stores were over 27,000 square feet before Tesco "shrunk" them as part of the renovation process for its Fresh & Easy format. As such, Tesco might do the same to the Oakland building rather than subleasing the extra square footage out to another retailer.

The Oakland Market Street location, near downtown, is in neighborhood that until recently has been underserved by retail food stores. However, in just the past few months Trader Joe's has built a new store nearby, as has Whole Foods Market, Inc. These stores are the first for both specialty grocers in Oakland. The stores are about a 10 minute drive away from the Fresh & Easy sight.

There's also a Lucky supermarket--which is a former Albertsons' store that's name was changed to Lucky by Save Mart Supermarkets when the grocer purchased Albertsons' Northern California Division earlier this year--and a Pak n' Save warehouse-tye market nearby. Both stores are within about a 10 minute car ride from the Fresh & Easy location. Pak 'n Save is the warehouse store division of Pleasanton, California-based Safeway Stores, Inc. Even though the other stores mentioned are a close driving distance away, many of the neighborhood's residents either walk or use public transportation. Therefore, the Fresh & Easy will be a major plus for those neighborhood residents, who tend to be lower income consumers.

The map (above) shows Tesco's strategy to ring the Southern California region with Fresh & Easy stores. The grocer wants to have as many as 200 stores in the region in the next two years. Tesco plans on following this same "Starbucks-like" strategy in Northern California.

We wrote a piece on November 14 in which we were one of the first to report that Tesco plans to use Oakland as a retail beachhead of sorts in its push to build numerous stores in Northern California and the San Francisco Bay Area. (you can read our story here.) As we reported, Tesco is planning to build at least five Fresh & Easy stores in Oakland. We named all five locations in our November 14 piece. The Market Street location was one of those five. Further, we reported in the story the grocer was planning to build a distribution center in Northern California to serve its stores in the region. That distribution facility will be located in Stockton, which is about 30 miles from Sacramento and about 60 miles from San Francisco.

We don't have the exact location yet of Tesco's Fresh & Easy store location in Fairfield. However, we know the grocer plans to build one in the city, located on Interstate 80 between San Francisco and Sacramento, because it's applied for a liquor license for a retail food store to be located in Fairfield, California.

As we've been reporting for at least two months, Tesco plans on ringing the Bay Area with it's Fresh & Easy Neighborhood Markets, which sell a selection of basic Fresh & Easy private label and national brand groceries, along with fresh prepared ready-to-eat foods, fresh produce and meats, and other product offerings.

The stores are small: on average no more than 13,000 square feet. Pricing on the basic grocery items is low thus far in the stores the grocer has opened in Southern California and Nevada. Grocery item retails are far lower than those at traditional convenience stores, and as much as 5-10% lower than those at nearby supermarkets, based on price comparisons we did in Southern California.

Fresh & Easy's prepared foods selection runs from basic items like meat loaf, mac 'n cheese, and burgers, to upscale offerings like Beef Burgundy with Red Wine Sauce, Thai foods entrees and other high-end prepared foods. Currently, the retail prices on even the upscale prepared foods are very reasonable.

In addition to San Francisco, Oakland and Fairfield, we've reported earlier that Tesco was negotiating with a shopping center manager in the East Bay Area city of Danville to locate a store in the center in an empty Albertsons supermarket building. Our sources tell us the deal is nearly completed. However, we can't confirm it yet.

Other Bay Area cities where Tesco is on the verge of inking deals for Fresh & Easy store locations include: Pittsburg, Antioch, Concord, Walnut Creek, Dublin, Pleasanton and Livermore, all in the Easy Bay Area. Brad Nail, economic development director for the city of Pittsburg, says he's currently talking with Tesco represenatitives about locating two stores in the city.

In addition to the leased Bird Avenue location in San Jose, the grocer is currently looking at as many as three other locations in that city, which is the largest in the Bay Area, according to our sources. Additionally, Tesco is looking at sights in the cities of Menlo Park, Palo Alto, Mountain View, Burlingame, San Mateo, Daly City and South San Francisco. These cities are located in what's called the San Francisco Peninsula, which stretches from San Jose south up to San Francisco.

The Bay Area isn't the only Northern California region where Tesco is negotiating for Fresh & Easy store locations. Our Sacramento real estate sources told us the grocer is looking at multiple sights in the capital city--perhaps for as many as 5 or 6 stores. Tesco executives also are talking to real estate people and shopping center managers in the northern Central Valley cities of Stockton and Modesto.

Fresh & Easy locations also are being sought in the southern central valley city of Fresno, a fast-growing metropolitan region with a population of over a million people. Fresno is not far from Bakersfield, where the first southern Central Valley Fresh & Easy will be built, as we reported above.

Although nobody has actual numbers, based on conversations with our sources and other industry observers, and predicated on the fact that a retailer has to have a set amount of stores to make a regional distribution center like the one Tesco's plans to build in Stockton, we are hearing that as many as 100 Fresh & Easy stores could be build in Northern California in 2008-2009. If so, that number of stores will have a significant impact on grocery retailing in the region.

The Northern California region also will have a significant impact on Tesco's Fresh & Easy operation. It's a very strong union region in terms of supermarkets. All of the area's chains and most of its larger independents are union stores. Tesco should expect a well organized, strong movement in the Bay Area to get the region's Fresh & Easy stores unionized, especially in San Francisco and Oakland.

The Bay Area is also hometown turf for Safeway Store's, Inc. It's corporate headquarters is in the Easy Bay Area city of Pleasanton. Safeway's CEO Steve Burd has said the grocer is watching Tesco's Fresh & Easy format closely, and that the Pleasanton-based grocer is developing it's own plans for an Express-type grocery market should it feel any serious loss in sales from the Fresh & Easy stores in California.

Whole Foods Markets plans to build as many as 20 new supernatural stores in the Bay Area in the next five years. The grocer's most recent stores in the region have averaged between 55,000 and 68,000 square feet in size. Whole Food's strategy of huge, multi-departmental stores is the opposite of Tesco's less-is-more, convenience-oriented format.

The region also has numerous other serious food retailing players. Lucky Stores, Raley's/Nob Hill, Andronico's, Lunardi's, and many more, all offer a combination of basic groceries and fresh, prepared foods, albeit in a larger retail store format. There's no doubt Tesco will heat up the already competitive food retailing region with its Fresh & Easy format beginning next year.