Friday, February 22, 2008

Retail Memo: Tesco's Fresh & Easy Neighborhood Market @ 50 (Stores): Analysis, Observation and A Few Suggestions for Some Ways Forward

Fresh & Easy Not Achieving Sales Goals: Consultant
From: Supermarket News, February 21, 2008

BOCA RATON, Fla. — Fresh & Easy Neighborhood Markets have not yet come close to achieving the sales levels Tesco officials were originally hoping for, according to an industry consultant here. Speaking yesterday with investors in the U.S. and the United Kingdom in a conference call sponsored by New York-based Citigroup, Jim Prevor said the 52 Fresh & Easy stores that have opened since November are averaging weekly sales volumes of $50,000 to $60,000, or about $5 a square foot — below the goal of $200,000 a week and $14-$22 in sales per square foot the company had projected. A spokesman for Fresh & Easy declined comment when contacted by SN. Prevor said the volume estimates are based on discussions with competitors, vendors, industry observers and Fresh & Easy store managers, "who all confirm each other." Prevor also said Fresh & Easy is paying rent on stores in the Bay Area in Northern California after deciding to open them early in 2009 instead of later this year as originally planned. The Tesco spokesman told SN the company never intended to move into the Bay Area until 2009. In other comments, Prevor said Fresh & Easy is not laying off employees but is not replacing any who leave. The company spokesman declined comment on that assertion.

Our Analysis: The State of Fresh & Easy Neighborhood Market @ 50 Stores

The above report on Tesco's Fresh & Easy Neighborhood Market's store performance to date is from today's issue of the supermarket trade publication Supermarket News.

Our sources (industry analysts, commercial real estate agents, suppliers, food brokers, consumers, store-level workers, and others) have been telling us similar things--and more--regarding the Fresh & Easy store's overall sales performance to date. Our regular readers know we've written about this fact--and that we've suggested some possible solutions in past pieces based on our research and analysis.

Regarding weekly Fresh & Easy store sales, we've heard from our sources weekly figures as low as those Mr. Prevor reported at the industry conference, and as a high as around $100,000 per-week for some of the stores. In particular, we've been told by two good sources the Glassell Park neighborhood Fresh & Easy grocery market in Los Angeles is doing about $100,000 in average weekly sales. However, we don't disagree in the main with Mr. Prevor's overall sales numbers. Even if all the stores were averaging $100,000 per-week, which they aren't, that would be far from what they should be doing.

Of course, it's important to keep in mind that the longest-open Fresh & Easy store, which is store number one in Hemet, California, has only been open since late October, 2007, which is less than four months. Further, many of the stores have only been open for one month. In other words, if Tesco's estimates for the Fresh & Easy grocery stores really is $200,000 per-week in start-up mode (which sounds close to right based on our research) they were too high to begin with, which is something we mentioned months ago.

The plain fact is, however, the stores' need to do at least $200,000 per-week--and do so in a time not too far down the road--to be viable. This is even more true because Fresh & Easy's retail prices on the stores' basic grocery items are relatively low, thus meaning they earn relatively lower gross margins overall than say Whole Foods Market or even Trader Joe's.

Since the bulk of the stores' total sales will come from these private label and national brand basic grocery items, the only way the retailer can make up for the low gross margins is to sell more; something the Fresh & Easy stores aren't currently achieving. Brisk sales of higher margin prepared foods will help increase overall margins, but it isn't enough all by itself.

Unfortunately for Fresh & Easy, logistics problems, which in-turn is suppressing prepared foods' sales makes it all the more difficult at present to boost those overall gross margins.
In terms of the labor issue, that "Fresh & Easy isn't laying off employees, but isn't replacing those who leave", we are hearing a bit of a different twist on why this is the case from our sources, who include current store-level employees.

We're being told that in Southern California especially, but also in Arizona and Nevada, Fresh & Easy stores are having a difficult time finding employees who will work for the starting salary of $10.00 hour the retailer is paying. Additionally, with the exception of a couple full time store-level managers, Fresh & Easy is only offering employees a maximum of 20 hours a week. [Although, in those stores where workers have left, employees who want extra hours are being given them, but they still aren't 40 hour a week jobs. And the extra hours are only temporary and not guaranteed week-to-week.]

We aren't saying Prevor is wrong that Fresh & Easy is trying to cut back on store-level labor by not hiring replacements at times when employees leave. Rather, we're just adding an additional twist we recently learned from our sources. Further, we believe it's this hourly wage/labor issue that's key, not only in the case of replacement workers, but in an overall labor case as well for the retailer. We see Tesco having to raise entry-level wages, especially when they open stores in the San Francisco Bay Area of Northern California, beginning late this year or in 2009.

Part of this labor problem is that especially in Southern California, $10.00 hour isn't a particularly decent starting wage. The state of California's minimum wage is currently $8.00 hour. It was raised beginning last year, and again this year, from a minimum wage of $6.75 just two years ago.

With the exception of Whole Foods Market, Inc., Trader Joe's, Wal-Mart Supercenter and Fresh & Easy Neighborhood Market, all of Southern California's (and Arizona's too) major supermarket chains and independents are union shops.

Entry-level retail clerks start off at a far-higher hourly wage than they can get at Fresh & Easy, and have a health benefits packaged that's more than twice as good in both quality and employee contributions as the one currently offered by Tesco. (Fresh & Easy offers all employees who work 20 hours or more a week a minimal health insurance plan. It has far higher employee contributions across the board compared to the union clerks' plan.)

These union supermarkets in Southern California include: Market share leader Ralph's (owned by Kroger Co.), Safeway Stores, Inc.'s Von's chain, Albertsons (owned by SuperValu, Inc.), Stater Bros., Bristol Farms (also owned by SuperValu, Inc.), Gelson's--and frankly nearly every other chain and independent in the region accept those listed above and some small, family-owned markets and the mom and pop stores, which aren't union. It's estimated union shop supermarkets make up about 85% of the total grocery dollar market share in Southern California, according to the California Grocers' Association, based in Sacramento.

Most of the chains and independents in Arizona and Nevada are union as well. The retail clerks in those states' union shops make slightly less per-hour than those in Southern California, but have the same health plan. Their hourly salary is still far higher than the $10.00 hour Fresh & Easy is paying however.

Additionally, the clerks in the union shop supermarkets have a clear career path if they choose. A clerk with the equivalent of one year of hourly experience (this generally takes about one year for a full-timer and two years for a part-timer to achieve) makes about $21.00 hour in Southern California, and about $19.00 hour in Arizona and Nevada. In addition, they get the excellent union health benefits plan, which is one of the best private sector plans in the U.S.

Most of the union shop supermarket chains also offer discount stock purchase programs (if public companies) or profit-sharing plans (if privately held), and the retail clerks' union has a retirement plan, which employers pay into in addition to workers. A union clerk with 25-30 years of experience upon retirement can get about $35,000 -to- $40,000 per year in union retirement benefits in addition to collecting Social Security.

It's not only union supermarkets that Fresh & Easy is competing with on the labor front. In Southern California, for example, Starbucks, major retail department stores and many other retail stores pay a starting wage of more than $10.00 hour. Even McDonald's pays $10.00 hour in Southern California. Then there are receptionist jobs, administrative assistant jobs--the types of jobs that don't generally require a post high school education--that also pay over $10.00 hour in the region. We recently saw an advertisement in the Los Angeles Times' for "character mascots" at Disneyland. The hourly pay was $12.00.

Fresh & Easy Neighborhood Market 2.0

Based on the data offered by Mr Prevor, and the information we continue to get from our sources, along with much personal participant observation in the Fresh & Easy stores, we suggest Tesco needs to do at least the following three things in terms of their Fresh & Easy grocery store retail operations to help create success:

1. Solve the frequent fresh foods' out-of-stocks problem.

In the last eight weeks we've interviewed at least 100 shoppers inside and outside of Fresh & Easy grocery stores in Southern California and Arizona. In addition, we've read at least 100 reviews of the grocery markets' on online review boards like yelp and others. Using basic content analysis research methodology, we've scored the most frequently made consumer complaints by category and subject.

One of the most often repeated consumer complaints we've identified is frequent store-wide out-of-stocks of fresh, prepared foods and fresh produce in Fresh & Easy stores. This is particularly the case beginning in the late afternoons and into the evening nearly every day.

Further, we've seen this situation with our own eyes in over a dozen Fresh & Easy grocery stores. In the evenings we've observed the prepared foods' refrigerated case shelves with many out-of-stock items, and in some instances the shelves were nearly empty. Unfortunately, this fact has more to do with logistics problems than massive sales.

Not only are Fresh & Easy stores losing sales from this serious logistics problem, the grocery chain is losing customers as well. This is especially the case as it concerns first time shoppers. And, since all of the stores have only been open for a short time, new shoppers means most shoppers. These shoppers' come to the store in their neighborhood for the first time--in many cases because they've heard about the markets' extensive prepared foods offerings--see the out-of-stocks, and often don't return for a second visit. A grocer can never build a strong core of primary shoppers with these kinds of logistics problems. This is something Tesco's Fresh & Easy needs to fix right away, before it defines the retailer.

2. Spread the Fresh & Easy message: Targeted radio advertising.

While it's true Tesco's Fresh & Easy Neighborhood Market has obtained lots of "free media" or publicity for its new venture and stores, the fact is most of that publicity has been either in grocery trade publications--which consumers don't read--or has been in local newspapers, which if one checks newspaper company financials' these days, will notice aren't being read by people in very large numbers. Further, most of this publicity in the local newspapers happens when a new Fresh & Easy store opens in a city. After that, there isn't much mention of the stores.

In our research interviews with consumers, we've frequently been asked, "Why doesn't Fresh & Easy advertise more, other than sending out it's mass-mailed product advertising circular?" We've been asking that same question to ourselves for some time. The fact is, despite all the newspaper articles--and some television coverage--about new store openings, consumer awareness of Fresh & Easy in Southern California, Arizona and Nevada is low.

A start-up venture on the scale of Fresh & Easy can't rely on this minimal publicity to create the awareness needed to drive shoppers to its stores. The three states where the grocer currently has stores--(Southern) California, the metropolitan Phoenix region in Arizona, and the Las Vegas, Nevada metropolitan area, are all "car culture," commuter cities. People spend hours in their cars in these places daily. They generally commute by automobile back-and-forth to work, use their cars to even run the shortest of errands, and in many cases even eat while driving since they spend so many hours of their day in the car.

The other thing these millions of commuters do is listen to the radio while spending all these hours in their automobiles. Tesco's Fresh & Easy Neighborhood Market is missing a huge opportunity to reach and communicate with all these potential new customers by not running frequent, and high-quality, 30-second radio spots in these regions.

The great thing about radio advertising is that it can be targeted. For example, in Arizona it can be focused only in the Phoenix metro and suburban areas where the retailer has its stores. The same is the case in Nevada. Radio ads can be targeted only in the Las Vegas metro area and not elsewhere in the state.

For Southern California, where the grocer has a more spread-out store base, the radio ads can still be focused, and the time bought accordingly. For example, Orange Country, Los Angeles and San Diego can all be selected as separate radio advertising markets, and time buys made on that basis.

Compared to other mass media, radio is cheap. It also can be micro-targeted. Most importantly, in the regions' where Tesco has Fresh & Easy stores, the radio spots will reach potential customers where they live--in their cars. Tesco needs to create awareness of the Fresh & Easy brand and most importantly its stores. We believe the retailer is making a big mistake by not using radio extensively as a media tool in its marketing toolbox.

3. Create A sense of place: Put the 'Neighborhood' in the 'Neighborhood Markets.'

It's our analysis that a major problem with the Fresh & Easy grocery stores is they lack a sense of place. The stores' are positioned as neighborhood grocery markets--places where local residents will do most of their shopping rather than just shopping them like they would a convenience store.

The fact is though, based on our research, consumers are doing just that: shopping the Fresh & Easy neighborhood markets more like they shop convenience stores rather than using them as their primary--or even in most cases secondary--neighborhood grocery store. If this becomes the norm, the format will fail. It's not a format (or business) based on a convenience store operating model.

We believe one of the primary reasons consumers are shopping the stores in this manner (against the format positioning) is simply because the grocery markets' lack a sense of place, or neighborhood feel. The Fresh & Easy store's need more warmth. They need to offer more reasons for shoppers to linger in them and to spend time buying more of their groceries once in the store. They are called "Fresh & Easy," rather than "Quick & Easy," after all.

We have two suggestions on how Tesco can create more of a sense of place in the grocery stores, or how it can put the "neighborhood" in its neighborhood markets:

First, add a small in-store "Fresh & Easy Cafe" to the store format. This can be a 600 or so square foot in-store cafe, serving coffee drinks, smoothies, fresh-baked goods and the like. It's nothing new. It just has to be created on the scale to fit the store's 10,000 -to- 13,000 square foot size, which is why we suggest about 600-700 square feet.

The "Fresh & Easy Cafe" needs to reflect the neighborhood. It also needs to offer a good selection of food and drinks at reasonable prices. But there's no need to low-ball on those prices.

Such an in-store feature will provide a place for neighborhood residents to come to, and to spend time in, while shopping the store. Many will even come to the cafe when not shopping. And that's part of the point. When the cafe becomes a "third place" for neighborhood residents, you can bet they'll end-up doing much more of their grocery shopping there, and more often too. It's a proven fact such in-store features create more primary customers. They also extend shoppers time in a store, which generally leads to purchasing more groceries. It's all about getting primary shoppers, along with growing that average customer ring.

[Note to Fresh & Easy Neighborhood Market executives: We suggest the following to you: First, do a Google search using the keyword Third Place. (We even linked it for you.) Read some of the many articles about third place theory as it relates to American (and British for that matter) culture, society and retailing. One key book on the subject is: "The Great Good Place," by Ray Oldenburg. It's really must reading for any company trying to create a neighborhood-oriented grocery store chain, cafe chain or other "neighborhood-oriented" retail businesses.

Starbucks has often been sited by you (Fresh & Easy executives) as a model for Fresh & Easy. Starbucks uses "third place" theory and practice extensively in its store design and operations. In fact, it's a key to the chain's success. Whole Foods Markets, Inc. has employed third place theory very well in food retailing. In fact, at home in the UK, Tesco plc. does a decent job of it in some of its stores, using among other things its popular in-store "Tesco Cafe."]

Second, in keeping with this need to create more of a sense of place in the Fresh & Easy stores--and thus increase the average customer ring and create more primary shoppers--we suggest Fresh & Easy Neighborhood Market take a cue from its parent company, Tesco. But that's too logical, you say?

In the UK, most Tesco stores (it varies depending on the particular format) offer a wide variety of basic everyday-type services to customers and potential customers. You could call these basic services "neighborhood-oriented" needs in fact. Among these basic "neighborhood" sevices include: mobile phone sales and mobile phone plan sales, insurance services, internet service plans, postal-type services, and other similar everyday services one would love to have available to them right in their own neighborhood grocery store.

Taking that cue from its parent, Fresh & Easy might consider, for example, setting up small neighborhood service centers in the grocery stores. These small centers would offer postal services like sending packages via UPS or Federal Express, the use of fax machines for a nominal fee, perhaps a computer or two with free internet use for customers, and a few other services. The store centers' might even want to get into the automobile and other insurance segment businesses down the road, perhaps leveraging on the Tesco plc. model. Fresh & Easy doesn't even have to operate these centers themselves if they don't want to. Rather, they could carefully outsource them to someone like the "UPS Store," which has similar freestanding franchises all over the U.S.

The specifics of what these in-store "Neighborhood Service Centers" offer isn't what's significant at this point. Rather, it's that the concept of having such centers helps to achieve the much needed goal of creating a better sense of place in the Fresh & Easy grocery stores. And, as we've said, we believe doing so will lead to the ability to better achieve two key metrics in the retail grocery business: increasing the average customer store-purchase ring, and creating primary shoppers.


Anonymous said...

Great insight, how come they haven't hired you. It will be interesting to see how long Tesco will go, and be able to stomach such low $per ft. sales, they have incredibly deep pockets, but...
Will they call it a learning experience and fold up eventually like Super-Valu's Sunflower?
I doubt it, Tesco is a more agile company than Super-Valu. Super-Valu's Sunflowers seemed to talk the talk in their literature, but could they walk the walk with enthusiastic and naturally-inclined staff?
Methinks it difficult to launch natural/organic hybrids in Middle America or the South as there is not as much buy in by the populace for the pure food movement at grocery retail, yet.
Where are the majority of natural/organic hybrids? The Coasts, upper midwest, and the Southwest. Following demographic trends?

Anonymous Seattle

Letterpress said...

Here's our review of our foray into our local Fresh and Easy (3/1/08) which opened this week.
Out of stock on many items.
Most of their flowers (first thing seen when entering the store) were wilted or bruised.
Produce unappetizingly displayed ("naked" and in black plastic crates).
French bread was stale. Indian nan was good and fresh.
For dinner we had their tortilla soup: basically inedible with an astounding 1300 mg of sodium per serving (way too salty) with a funny smell & weird texture. (Try Von's tortilla soup for something delicious.)
Tortilla chips: either they were stale or thick, but there was no "fresh" taste.
Potato chips: merely OK.
I kept remembering our trips to England, thinking, yeah, this feels like eating British food.
You're dead on: no ambiance or sense of place. We think it's a cross between Food4Less, 7-11 and TJoe's--although without TJ's charm, quirkiness, delicious food, and excellent produce.
Who's their customer? Their target audience? Bottom line? I give it about six months.
I'm from the Inland Empire in Southern California.