Small-Format Food Retailing Memo: Post-Pause Frenzy: Tesco to Open at Least 30 New Fresh & Easy Stores Over Next 90 Days Beginning On July 2

Pictured above is the Fresh & Easy grocery market set to open on July 2 in a shopping center in Manhattan Beach, California. The photograph of the Fresh & Easy store was taken from in front of a Trader Joe's, which is nearly next door to the Fresh & Easy in the shopping center. The two stores even share the same parking lot. (Photo: copyright, 2008 Natural~Specialty Foods Memo.)

Tesco plans to open between 30 -to- 37 new Fresh & Easy Neighborhood Market grocery stores over a 90-day period beginning on July 2 when it opens its first new store, in Manhattan Beach, California, since taking a three month new store opening pause which began in Early April, based on information the retailer published in this press release yesterday.

Tesco currently has 61 of its small-format (10,000 -to- 13,000 square foot) combination basic grocery and fresh foods grocery markets open in Southern California, the Phoenix, Arizona Metropolitan region, and in the Las Vegas, Nevada Metropolitan market area.

In the press release, Tesco announced it will hire an additional 750 new employees over the next 90-days for the new Fresh & Easy Neighborhood Market stores it plans to open during this time period. Most of those new employees will be at store-level.

Additionally, in the press release, Tesco says it employs an average of 25 workers per-store

[Note: In most its previous press releases, Tesco's Fresh & Easy Neighborhood Market has said it employs and average of 20 workers per-store. We assume the average is 20 -to- 25, and the retailer has decided to use 25 rather than 20 now. If not, it would then appear Fresh & Easy Neighborhood Market has either revised the average, or has recently increased the number of employees it has on a per-store basis. You will see below why we mention this. It's not to knit-pick.]

Based on this data in the press release--hiring 750 employees over the next 90 days; the majority of which we know to be store-level hires from our sources--it's a good estimation that Tesco will be opening about 30 -to- 37 new Fresh & Easy stores beginning on July 2 and for the 90-day period following that.

Here's the math: 25 employees per-store on average; hiring 750 new employees over the next 90 days; equals 30 new stores during that three month period. At 20 employees average per-store, it works out to about 37 new stores. Therefore, we estimate Tesco will open between 30 -to- 37 new Fresh & Easy grocery stores over the next 90-days beginning on July 2.

We've been reporting Tesco would resume its rapid new store opening pace with Fresh & Easy at roughly the same frenetic clip it's been opening the stores at since November, 2007, which has been the opening of a new Fresh & Easy grocery store about every two and one-half -to- three days.

Numerous publications have written during the current three month new store opening pause it was likely Tesco would open fewer stores once the break ended. However, we've stated all along that would not be the case.

Rather, we've said, as the data from yesterday's press release and our analysis indicates, Tesco would start its rapid-fire new store opening machine back up once the three month pause ended and resume opening new Fresh & Easy stores once again on the average of about one new store every two and one-half -to- three days, which opening 30 -to- 37 new stores over the next 90 days in fact equates to. In other words, the new store pipeline is full and ready to be opened.

With a current store count of 61 Fresh & Easy stores, opening about 30 -to- 37 new stores over the next three months will give Tesco 91 or slightly more Fresh & Easy stores by early fall, 2008, with about three more months to go in the year still remaining to open more.

Initially, Tesco said it planned to have 200 Fresh & Easy stores open and operating in the Western USA by the end of 2008. Earlier this year the company revised that number downward, saying it would have more like 150 stores opened by the end of 2008.

In large part, Tesco revised that number down from 200 to 150 stores because initially it planned to start opening the about 50 Fresh & Easy stores that will open in the new markets of Bakersfield, Fresno, the Sacramento Metropolitan region and the San Francisco Bay Area, this year. However, the retailer has said those stores won't start opening until early 2009.

Even if Tesco has 100 Fresh & Easy stores open by say October 1, that would still leave 50 new stores to be opened between October 1 and December 31, in order to achieve the 150 stores open by the end of 2008 estimate.

In our analysis that's not likely to happen for a couple reasons.

First, it would mean opening a new store nearly every day, which we don't think Fresh & Easy plans to do; one every three days is hectic enough.

Second, October -to- December is the holiday shopping season--Thanksgiving and Christmas--which is the busiest time of the year in food and grocery retailing, making it difficult if not near- impossible to open that many, or close to that many, stores during the season.

We do believe it possible Tesco could open an additional 30 new stores during those remaining months of 2008 however, which would give the retailer in the neighborhood of 130 stores opened by the end of the year, which is close enough to 150 for even the most ambitious food retailer or pickiest analyst.

As we've written before, we can't recall another grocery retailer in modern food retailing history that's embarked on as rapid of a new store opening blitz as Tesco has with its Fresh & Easy Neighborhood Market USA venture, especially in a concentrated market region like the Western U.S. In fact, in only three Western USA states--California, Arizona and Nevada thus far--for that matter, limiting the geographic region even more.

Of course, doing so is key to Tesco's Fresh & Easy retail marketing and positioning strategy for the small-format Fresh & Easy grocery stores. It's what we call a "critical mass" store opening and location strategy: opening up as many stores within two miles or so of each other in selected markets as fast as possible with the goal of becoming in a sense the de facto neighborhood grocer in those cities and neighborhoods.

The question is: Has the three month new store opening pause given Tesco's Fresh & Easy Neighborhood Market enough time to improve and optimize its marketing, merchandising and operations in its stores so as to better compete for primary shoppers along with creating the means to generate needed new consumer trial?

Our analysis is no it hasn't. However, Tesco is viewing Fresh & Easy as a work in progress. Therefore "getting it right" right now isn't as important as getting more stores open "right now" is for the retailer. Remember, "critical mass" is crucial to Fresh & Easy's overall strategy.

Of course so are sales, margins and profits, as they must be to any food retailing chain. But the logic within Tesco in the main is those will come later.

Also what will have to come later in our analysis is a re-evaluation of many of the Fresh & Easy Neighborhood Market store locations in all three current market regions--Southern California, Las Vegas and Phoenix, Arizona Metro market.

Most of these Fresh & Easy stores are located in retail store buildings formerly owned and operated by supermarket chains like Albertsons and Ralph's, and in former Rite Aid drug stores, as well as in various former big box retail stores of various retail types.

These various stores were closed by their respective retail operators for various reasons; among them being sales underperformance in the locations.

Fresh & Easy, being a different format than say the Albertsons and Ralphs stores could eventually perform well in these locations. Additionally, in those former non food retailing locations, a food retailer might succeed where a non-food retailer failed. However, we know many cases in which Fresh & Easy stores in these locations aren't currently performing very well, particularly in the Las Vegas market, but in the other two markets as well.

That's not Tesco's primary concern at present however. Rather, "critical mass" is the focus, which is why starting once again on July 2, with the opening of the new Fresh & Easy grocery store in Manhattan Beach in Southern, California, followed by one new Fresh & Easy grocery market opening about every three days for the 90-days following that, Tesco will once again be on a Fresh & Easy Neighborhood Market new store opening tear.

Retail Memo: Latest Sales Figures Show A Flight to Discount Grocers, Including Small-Format Aldi and Lidl, in the UK Market

A no frills, small-format Aldi limited assortment discount grocery store in Spalding, UK, which is in the district of South Holland in the southern part of the county of Lincolnshire, about 110 miles from London, England.

Discount supermarkets in the United Kingdom (UK), including no frills, small-format grocers Aldi and Lidl, are seeing a sales surge as the weakening economy puts a crimp on consumer food budgets in the nation and market.

According to just-released market research data from respected UK international research firm TNS WorldPanel, Aldi- UK experienced year-on-year sales growth of about 19% in the 12 weeks to May 18, 2008, while small-format discount grocer Lidl saw sales growth of about 9%.

Both Aldi and Lidl are Germany-headquartered small-format, no frills discount grocers, offering a limited assortment of mostly store brand (but name brand as well) food and grocery products across all dry and perishables categories.

If the impressive Aldi and Lidl sales gains aren't enough to demonstrate a current shift in UK shopper choices and supermarket preferences in the price-impact retailer direction, two other price-focused discount grocery chains, Iceland and Farm Foods, also posted double-digit sales gains over the same 12 week period, according to TNS WorldPanel data.

One the other hand, Tesco, which is the leading food and grocery retailer in the UK, and Sainsbury's, the UK's number three supermarket chain, saw slight decreases in sales during the same period.

Aldi, which currently operates 300 of its limited assortment, price-impact, no frills small-format discount grocery stores in the UK, was the clear sales increase winner, according to TNS WorldPanel director of research Edward Garner. According to Garner, Aldi's 18.9% sales gain for the period translated to sales of ~577 million pounds.

Even more impressive, the grocer's market share rose from 2.5% to a current 2.8%, says Garner.

While a 2.8% share of the market isn't much in the grand scheme of things, compared to number one Tesco's 31.1% for example, Aldi continues sales period-after-sales period and year-after-year to grow its share of the market in the UK. Further, with only 300 stores, Aldi has about 20% of the total store count in the UK as Tesco has, and only slighlty more than that compared to number two Asda and number three Sainsbury's.

Aldi currently is in a major growth program in the UK, with plans to at least double the number of stores it has in the nation over the next 4 -to- 5 years.

Lidl also is growing its store count aggressively in the UK, and has shown regular sales increases, although not as high as Aldi's, for the last few years.

After Aldi, the next best performer for the 12-week period ending May 18 was Iceland, according to the TNS WorldPanel data. The price-impact grocer's sales increased by a healthy 12.2%, to ~352 million pounds for the sales reporting period, according to Gartner.

This is significant because Iceland hasn't been a player of note in UK food and grocery retailing. However it appears the current economic downturn in the nation, which is leading shoppers to choose more price-focused supermarkets, is benefiting the fledgling discount food retailer.

Farm Foods, another discount grocery chain that hasn't been much of a player historically in the market, saw its sales increase a significant 10.7%, to reach ~100 million pounds, a record for the price-focused supermarket chain.

Small-format discount grocer Lidl had the least sales increase of the four price-impact discount grocery chains. However, at 9.6% the German fighting tiger small-format grocer wasn't too far behind. Lidl's sales for the period were ~478 million pounds, not all that far behind Aldi's considering Lidl has fewer stores in the UK than fellow German grocer Aldi.

Despite the worsening economic conditions in the UK, taken as a whole the nation's supermarket chains still did fairly well, with sales up 6.6% overall in the 12-week period, according to TNS Worldpanel research director Garner.

Sector leader Tesco PLC saw a slight drop in market share of 0.2%, to 31.1% of the total food and grocery sales market, but still turned in period sales of ~6.4 billion pounds, which is a 6% year-on-year sales increase.

UK industry researchers and observers do say they are seeing a current shift from the mainstream supermarket sector--chains like Tesco, Asda, Sainsbury's and Morrisons--to price-focused discounters like Aldi, Lidl, Iceland and Farm Foods, with a particular shift to Aldi.

TNS Worldpanel's Garner says Aldi's heavy investment in new stores "is being rewarded with strong growth in the current climate."

"This is virtually solely fuelled by new shoppers visiting the stores rather than existing shoppers spending more," adds Garner in offering his estimation about UK shoppers' trending towards discount grocers like Aldi.

Aldi and Lidl are the two best positioned to grow their store counts and capitalize on it if this trend by more shoppers to shop discount grocers continues or increases. Both German chain's are heavily capitalized and growing rapidly internationally.

In fact, Tesco is so concerned about the threat from these two fighting small-format tigers it's currently in the process of designing its own small-format, limited assortment, no frills discount grocery chain in the UK.

Tesco operates the small-format Tesco Express format throughout the UK. But those stores are more of a hybrid neighborhood grocery store/convenience store rather than a no frills, price-impact small-format retail format. Therefore, they don't compete for the same general market that Aldi and Lidl do.

However, since Tesco's internal research started showing a couple years ago the Aldi and Lidl stores were cutting into sales in all its formats, the giant retailer decided to create its own small-format discount grocery store format. There's no word as to when the first store of the new format will open in the UK. Most market observers though say the first one should open by early next year if development continues on track. Tesco isn't currently talking about the project.

It's going to be interesting to see if the sales growth trend which currently is favoring the price-focused retailers in the UK continues into the next reporting period.

Most economists don't expect an improvement in the nation's economy for the rest of the year, so the climate and conditions should remain steady for a repeat perhaps of this period's sales numbers and direction. If not, perhaps the movement towards the price-impact food retailing sector in the UK will then be seen to be more of a fad than an actual trend.

New TNS Retail Forward Study Looks at What We've Called the Small-Format Grocery Store Retail Revolution in America and Quantifies Our Analysis

As regular Natural~Specialty Foods Memo (NSFM) readers know, in August, 2007 we first suggested there was emerging the beginnings of a small-format grocery store retailing revolution occurring in the United States, in which major grocery chains were more-and-more getting into the game by creating and launching stores ranging in size from about 10,000 -to- 25,000 square feet, which is what we in the main define as small-format.

[Do a key-word search in the search box at the top of the blog using phrases such as small-format grocery retailing revolution, small-format grocery stores, small-format food retailing, Small Marts, small-format revolution, small-format stores, small-format food stores and small-format price-impact stores, (one phrase at a time of course) to get a sampling of those pieces. We also suggest reading through the NSFM archives for more pieces.]

We've sited the success in the U.S. of German Retailer Aldi, with its over 850 small-format, price-impact Aldi USA grocery stores, SuperValu, Inc.'s success with it's growing Sav-A-Lot small- format discount grocery chain, the Trader Joe's phenomenon, with the rapid-growth and high demand all over the U.S. for its specialty grocery stores, which now number well over 300, and the entrance into the Western USA by Tesco, with its small-format, convenience-oriented Fresh & Easy Neighborhood Market grocery stores, as examples of this growing small-format grocery store revolution.

And that's not all. From August, 2007 to the present we've also sighted as evidence of a small format grocery store revolution in America, the fact that mega-retailer Wal-Mart has developed its very own small-format grocery store, it's 15,000 -to- 20,000 square foot Marketside banner, the first stores of which are set to open in the Phoenix, Arizona Metropolitan region this summer.

Additionally, we've reported on and written about Safeway Stores, Inc.'s planned intrance into the small-format grocery store segment. Safeway plans on opening four or five 15,000 -to- 25,000 square foot combined grocery and fresh and specialty foods-oriented grocery stores this summer in the San Jose region in the San Francisco Bay Area.

Other players in this small format revolution we've written about include Pennslyvania-based Wawa Food Markets, which operates hundreds of hybrid small-format grocery markets-convenience stores in the Eastern USA, supermarket chain Hy-Vee, which recently opened its first small-format grocery store in Lincoln, Nebraska, supernatural grocery retailer Whole Foods Market, which has created Whole Foods Express, it new small-format store of about 20,000 square feet, the first of which is set to open soon in a remodeled former Wild Oats Market building in Boulder, Colorado.

These players are just the tip of the small-format grocery store retailing revolution in the USA of which we've reported on, written about and analyzed here in Natural~Speciatly Foods Memo.

Lastly, we've also written about the fact that the original small-format food retailer, the local independent grocer, continues to thrive in Americaby building and operating small-format grocery stores. That independent is in fact the model in many ways for the small-format revolution being created by this larger, chain operators.

International small-format grocery store revolution

Further, we've also said there's an international small-format grocery store revolution occurring. Many of the players are the same--with a few more added--internationally.

Tesco, with its rapidly-growing Tesco Express hybrid grocery store/convenience store chain and German grocery chains Aldi and Lidl are leading the international small-format grocery retailing revolution.

France's Carrfour, the second largest retailer in the world, is becoming a major player in the international small-format grocery store revolution as well, especially in Asia.

And of course, many other smaller players, as is the case in the U.S., are part of the growing small-format grocery store revolution throughout parts of the globe.

New TNS Retail Forward small-format grocery store study

It's seems we were somewhat on track beginning nearly ten months ago when we proclaimed a small-format grocery store revolution was occurring in the U.S., as well as in many other parts of the world.

A new study just released by the well-respected market research firm TNS Forward's Columbus, Ohio office says consumers are ready and willing to shop at small-format grocery stores that feature convenience in shopping and fresh, prepared foods.

The study also includes a caution which we use frequently in our pieces here at NSFM, which is that the jury is still out as to whether small-format grocery stores in general will meet consumer expectations, satisfy their needs as a primary or even secondary shopping venue, and provide a return on investment for the stores' owners.

The study also hits on three key points we make often about small-format grocery stores:

>Research: The study says food retailers considering a small-format grocery store strategy must monitor and analyze shopper needs, attitudes and expectations well in advance of launching a small-format store or chain.

>Localism: The report says paying attention and focusing on local (region and neighborhood) culture (and cultural differences) and demographics is key in launching any small-format grocery store venture.

>Partnering: The research study says retailer's launching a small-format grocery store venture need to seek input from grocery, fresh foods and consumer packaged goods suppliers and partners, as they have national knowledge as well as local experience, among other reasons for doing so.

The above three aspects of small-format grocery store retailing, which we summarize as research, localism and partnering, are themes we've been including in out numerous pieces on the small-format grocery store retailing revolution occurring in the U.S. and in other parts of the world for months.

U.S. Consumer attitudes about small-format grocery stores

The TNS Retail Forward study says 64% of U.S. shoppers surveyed said they would either definitely or probably shop at a small-format grocery store. [Based on our own research and some others we think that number is a bit higher.]

The study also notes consumers surveyed indicated the combination of the small-format (convenience), combined with fresh, prepared foods offerings is a compelling offer for "the time-pressed shopper."

Jennifer Halterman, a senior consultant at TNS Retail Forward and the primary author of the study says, "The small-store trend is part of an ongoing evolution in the retail food sector, and we expect more players to throw their hats into the ring."

We agree completely with the latter part of her quote--that more retailers are throwing, and getting ready to throw, their small-format grocery store retailing hats in the ring. I

In fact, we invite Ms. Halterman--and our readers--to stay tuned over the next couple of weeks as we will be reporting and writing about some new entrants into the small-format grocery store retailing revolution who nobody else has reported on yet. In fact, look for one or more of those fresh pieces later today, along with lots of upcoming analysis in the weeks ahead.

Retail Memo: Designing the 'Perfect' Small-Format Grocery Store in a 'Near-Perfect' Place

Today's Boston Globe Magazine has a piece about retail grocery industry veteran Michael Szathmary who, along with a group of developers and advisors, is designing what the group hopes will be the "perfect" grocery store for residents of a nearly 3,200 acre planned residential development in Plymouth, Massachusetts called Pinehills.

The article's author, Lisa Prevost, describes the Pinehills residential community as "a designer version of classic old New England."

The attractive planned community has a bank, Post Office, community center, health club, and even a wine shop, but it has no supermarket--and hasn't had one since it opened six years ago. And it's residents are dying for one; they currently have to drive six miles to get to the nearest supermarket. The lack of a grocery store also has been a negative for the community's marketing people when trying to lure new residents to the development.

Pinehills' residents (Prevost calls them a mix of casual cooks and connoisseurs) have high expectations for their neighborhood grocery store. As a result, Szathmary and his store development team have brought a number of the residents in on the store design process.

And, these folks have lots of ideas. Among the products and features they want in "their" store is lots of "freshness"--squeeky-fresh produce, eye-tempting cuts of fresh prime meet, and mouth-watering fresh baked goods are just some of the group's "must-haves" for the store. A culinary center with a demonstration kitchen, attractive, well-groomed employees, lots of specialty foods, and even e-mail alerts telling customers about weekly specials, are some of the other ideas Pinehill residents, who've been serving as focus group members during the store development process, have.

Perhaps neighborhood resident and focus group member Sandi Blanda summed-up the group's desires best when she told Prevost, "I basically feel that when you walk into a market, it should always feel like Thanksgiving." Blanda, a professional artist who says she is used to New York City's specialty foods markets and custom butcher shops from her many years living there, says "It's (all) about variety and freshness," a theme her fellow residents in the group agree on.

Grocer Szathmary, who's spent most of his life in the retail food business (including helping to launch the Nature's Heartland natural-foods store chain which was bought out by Whole Foods Market, Inc. in 2000), and his development team are equally passionate about wanting to create the "perfect" grocery store for the planned community, which has a current population of about 2,500.

Team-Szathmary's store design thus far is a small-format (about 14,000 square feet) market that's a mix of the traditional neighborhood grocery store--where shoppers can get all the basic grocery items they need at competitive prices--and a specialty market, with the kinds of fresh and upscale features (and products) on the wish list of the focus group's members.

The design team also wants the store to fit "perfectly" into the community. The current design offers a bit of an old New England look (like Pinehills) with an upscale flair. The goal is for the store to not be too upscale, but at the same time not be too basic. That's a tall order for any retail store design team.

Because of it's small size, the store will by necessity have a limited assortment of products compared to the supermarkets nearby, most of which are at least twice as big, and in many cases three-to-four times its size.

This isn't a problem though in many ways. As we write about regularly here, small-format stores are all the rage today. Trader Joe's grocery markets, for example, average about 10,00 square feet. Tesco's new Fresh & Easy Neighborhood Market stores average 13,000 to 15,000 square feet--and in fact are a similar basic neighborhood grocery, specialty store format to what Szathmary's team is designing for Pinehills.

Further, the new small-format grocery stores that Wal-Mart and Safeway Stores, Inc. plan to build and open later this year in Arizona and Northern California respectively, are in the 20,000 square-foot range. In other words, the Pinehills' team is right on (format size) trend. All have or will have limited product selection.

The Boston Globe Magazine piece is an interesting explanation and dissection of how a group of people go about planning and designing a retail food store--and all the considerations that need to go into doing so if that group is passionate and cares strongly about the end result.

Read the full Boston Globe Magazine article, "Building an Appetite," here.

>Click here to see a full-sized, graphic diagram of the store's design. (Once at the link, go to the "Building an Appetite" story, then go to "Graphic: Shopper Paradise?" and click there to view the graphic.

Retail Memo: Wal-Mart and Safeway Stores Could 'Box' Tesco in With New Small Format Stores

Analysis & Opinion: The small format food retailing revolution has just gotten even hotter in the Western U.S, with Wal-Mart Inc.'s plans to open its new MarketSide stores in Arizona. And in California, Safeway Stores continues with its plans to open new, small format stores in the San Francisco Bay Area. Meanwhile, Tesco is being pretty quiet about the new developments, but continues to open a Fresh & Easy Neighborhood Market store nearly every other week.

The news that mega-retailer Wal-Mart will build four (to start) 20,000 square foot grocery markets named "MarketSide" in the Phoenix, Arizona metropolitan region adds new, additional competitive pressures to Tesco's Fresh & Easy Neighborhood Market small format stores.

These Wal-Mart "Small Marts," which at 20,000 square feet are about 5,000 to 7,000 square feet bigger than Fresh & Easy stores but half the size of the retailer's Wal_Mart Neighborhood Market format, are likely to be similar in format to British grocer Tesco's small format grocery markets.

Based on what we currently know--from published reports and additional information from our sources--the small format stores will offer a mix of basic groceries, prepared foods, and specialty items. This mix is similar to Fresh & Easy's. At this point, we aren't sure what else the "MarketSide" stores will merchandise, but are rather sure they will feature some version of this basic grocery, fresh foods mix, along with whatever else the stores will sell.

As out readers know, we reported recently that Pleasanton, California-based Safeway Stores, Inc. has secured leases in the San Francisco Bay Area region of San Jose for five new, small format stores the retailer plans to open later this year. While we don't yet know the name of these Safeway small format stores, we have fairly good information they too will offer a mix of basic groceries and prepared foods.

Neither of these developments are good news for Tesco's Fresh & Easy. Just two months ago, Fresh & Easy stood as basically the lone food chain pioneer in this hybrid small format, basic grocery/fresh foods merchandising arena. Had this remained the case, Fresh & Easy would have had plenty of time to rollout its numerous planned stores in California, Arizona and Nevada, perfected its format, and not had to share the media limelight with two powerhouse, US-based retailers--Wal-Mart and Safeway--as they are having to do now.

This won't be the case however. Wal-Mart's initial opening later this year of four stores in Arizona, all four in areas where there are Fresh & Easy stores, and Safeway's opening later this year of five stores in the San Jose region in Northern California, will put a competitive check on Tesco. (Tesco plans to start opening Fresh & Easy stores in Northern California later this year. The grocer also will build a distribution center in Stockton, in Northern California, to serve up to 50 stores in the region it wants to build in the next two years.

Both Wal-Mart and Safeway are major retail brand names. Safeway, which is based in Northern California, will have a major marketing advantage with its small format stores against Fresh & Easy. Safeway also already has all the supply-chain and marketing infrastructure in place to serve these new, small format stores. The grocer operates about 300 supermarkets in Northern California, including numerous stores in and around San Jose. It's corporate headquarters is about 30 miles from the San Jose region. It also has a distribution facility nearby.

Wal-Mart already has a number of Supercenters in Arizona, including in the Phoenix region where it will open the small format "MarketSide" stores. The chain, like Safeway has all of it's logistics in place, to say the least. As the world's largest company and retailer, Wal-Mart will have no problem matching Tesco on selection, price and marketing muscle. Arizona also is one of the best food markets for Wal-Mart. Opening it's first small format stores there is, in addition to going head-to-head against Fresh & Easy, a smart move in general for the retailer.

Like a game of chess on a chessboard, Wal-Mart and Safeway have the ability to box Fresh & Easy in: Wal-Mart in Arizona (to start) and Safeway in Northern California (to start). Safeway also has numerous supermarkets (over 400) in Southern California, where its Vons' stores are the number two food dollar market share leader, just behind Kroger Co.'s Ralph's. Further, the grocery chain also has a retail presence in Nevada.

Safeway already is looking to Southern California to possibly locate some of the new, small format stores, and can do so easily as it has the same fully-developed infrastructure it has in Northern California. (Safeway has this fully-developed supply-chain ability for the entire Western USA. For that matter, for the entire USA.)

Wal-Mart can go anywhere. The mega-retailer actually developed the "MarketSide" stores in the San Francisco Bay Area, where a team of executives spent months developing the format. Expect stores in Northern California (urban and suburban stores), Southern California and elsewhere. The global giant knows no geographical--or supply chain--limitations.

So, just a couple months ago, the United Kingdom's biggest grocer was sitting alone on top of the small format, hybrid grocery/prepared foods format in the U.S. Today, just a blink of the eye later, there are two major competitors--the world's biggest retailer, Wal-Mart, and the number one food retailer in the Western USA, Safeway.

The result of these two retail players getting into the game in the Western U.S. means Tesco's mission has just become even harder than it already was. Creating a completely new enterprise--Fresh & Easy, a new format, supply chain and all else, is hard enough in and of itself. For Tesco to now operate and grow the venture with Wal-Mart and Safeway on its heels will be in many ways an even bigger challenge that those original red-coated British invaders faced when they tried to rest the former colony away from a bunch of upstart Americans who wanted their own, sovereign country.

Tesco is good though, and they shouldn't be discounted. They've built their Tesco Express small format chain into the best in Europe. But Wal-Mart and Safeway are equally good, especially in their food retailing homeland. Of course, Wal-Mart isn't the most nimble of food retailers. It will be interesting to see if the mega-retailer can make the transition from big box, mass food retailing to small format, niche retailing. They've done so to a certain degree with their 45,000 square foot Neighborhood Market format. However, at best they have thus far earned a B- with that format.

Wal-Mart has just hired a veteran of UK food retailing, Jack Sinclair, to run its U.S. grocery operations. Sinclair isn't just any veteran of UK food retailing. He spent many years with Tesco, and knows the British retailer's operations (including small format) well. For those who think Wal-Mart is merely dabbling with the "MarketSide" format and stores, the hiring of Sinclair should lay those thoughts to rest.

Safeway has become as nimble a retailer that exists in the U.S. (and internationally for that matter) these days. The grocer has turned its retail business around with its upscale Lifestyle format. It continues to innovate with the format with its new stores, adding new departments and in-store features.

Safeway also has what is perhaps the most successful premium and organic store brand in the business today, with its O' Organics grocery and fresh foods brand. Think we might see some O' Organics brand products in the new, small format Safeway stores?

Safeway also owns an upscale restaurant in the San Jose area, and has been using it to develop innovative, fresh prepared foods items which we believe will find their way into these new, small format markets. The small format store business isn't something Safeway just thought of. The grocer started a research project targeting Tesco's Fresh & Easy venture at least two years ago, and has been working on its small format development program for at least that long.

As we've been writing about here for nearly six months, there is a small format food store revolution happening in the U.S.--and in Europe and Canada. Doing battle are not only Tesco, and now Wal-Mart and Safeway Stores, but a host of others. German grocer Aldi plans on building as many as 100 of its no frills, price-impact, small format grocery stores a year in the U.S. for the next few years. The retailer already has nearly 900 of the little, no frills discount grocery stores in the country. Aldi also owns California-based small format specialty grocer Trader Joe's, which is another major competitor for Fresh & Easy.

Giant Eagle supermarkets also is building more of its Giant Eagle Express small format stores, which are similar to a Fresh & Easy Neighborhood Market store.

Whole Foods Market, Inc. will open its prototype Whole Foods Express later this year in a former Wild Oats store in Boulder, Colorado. Look for these Express stores from Whole Foods to have lots of fresh, prepared foods items, especially grab-and-go, high-quality but convenient offerings. Also, don't be surprised if some of these Whole Foods' Express stores pop-up in California, one of the supernatural grocers best markets--and one of its top target regions for store development and growth over the next five years.

There's much more going on in this small format revolution. [You can read many of the pieces we've done by typing-in the key words: small format, small format revolution, small format retail food stores, small format grocers, Small Marts, Fresh & Easy and similar phrases in the search box at the top of the blog. Type just one phrase at a time in though. Also use the tags at the end of this piece as search words.]

Meanwhile, the small format revolution's battlefield is becoming a bit more complex--and more intense--for Tesco's Fresh & Easy.

Wal-Mart and Safeway, independently, are flanking the British grocer from two sides--Wal-Mart in Arizona, Safeway in California. We will see one or both of these retailers converge on the middle--Nevada--soon as well. Of course, the big battle, and the big market, is California, south and north. It's a state of nearly 40 million people, which is bigger than most European countries. We suggest you'll see Tesco, Wal-Mart and Safeway battling it out with small format stores in California beginning later this or in early 2009.

The revolution has just started though. Don't rule Tesco's Fresh & Easy out. But don't underestimate Wal-Mart and Safeway either, especially when it comes to not wanting to loose food dollar market share in their home country--and in Safeway's case, on it's home turf.

This revolution won't likely be televised. But we will continue to report on it and write about and analyze it here for our readers. Stay tuned.

Retail Memo: Natural-Born Category Killers

The small store, no-frills, price-impact food retailing format revolution has arrived in the natural and organic foods retailing category, as well as in the conventional food retailing segment. The rapid growth in the natural and organic products categories has created an opening for category-killer formats, and a couple are emerging. Both are small format stores compared to supernatural grocers, and both recently announced major growth initiatives.

Supervalu Inc.'s 15,000 square foot Sunflower Market (pictured above) is one of the two small format, price-impact natural foods stores we believe has the potential to be a real player in the natural and organic foods "category killer" retailing segment. The format is no-frills but extremely attractive in design.

In August and September of this year, when the U.S. Federal Trade Commission (FTC) was vigorously opposing the acquisition of Wild Oats Markets by Whole Foods Market, Inc., we wrote about and offered our analysis on why such opposition by the FTC (and others) made little sense in light of the realities of today's natural and organic foods retailing environment.

The FTC's chief argument in opposing the merger in a federal court was that it would create an anti-competitive situation in the supernatural food retailing category, allowing Whole Foods (combined with Wild Oats) to be able to raise its retail prices whenever the grocer desired.

(Although the U.S. Federal Court in Washington, D.C. denied the FTC's September, 2007 pre-acquisition legal challenge, and denied an appeal a short time after that--which allowed the merger to go forward and for Whole Foods to begin to integrate Wild Oats' operations into the Austin, Texas-based grocer's culture--the agency again filed a post-merger lawsuit last month, asking the same federal court to review the deal. To date, the court has avoided the FTC's request to give it another hearing on the merger.)

We argued then, and still do, that although acquiring Wild Oats and removing it as a competitor would provide Whole Foods with some near-to-medium-term competitive advantages, those advantages would not be all that significant--and would be rather short lived at best.

Boulder, Colorado-based Sunflower Farmers Markets is the other small format, no-frills, price-impact natural foods retailer we believe has the potential to create a serious impact in natural products retailing with its 20,000 to 25,000 square foot stores.

Why? First, huge supermarket chains like Safeway Stores, Inc., Kroger Co., Supervalu, Inc., Publix and others (all four mentioned have annual gross sales at least ten times that of Whole Foods), and smaller but big regional chains and multi-store independents throughout the country, have moved into the natural and organic products' retailing space in a big way--and it's getting even bigger.

For example, Safeway's Lifestyle stores are looking more and more like a hybrid upscale conventional supermarket/Whole Foods-like format these days. The same with many Publix, HEB and Wegmans' stores, to name just a handful rather than taking a couple paragraphs to list the many more doing the same. Further, dozens of large, regional grocers (Raley's in California, Giant Eagle, Rice Epicurean, Bristol Farms; the list goes on and on) are creating new stores that are going head-to-head with Whole Foods' stores in their market areas.

On top of all that, mass merchandisers Wal-Mart, Target, BJ's, and Costco Wholesale are offering more an more natural and organic items in their stores, as well as creating their own store branded organic grocery products.

Next, in terms of the Wild Oats' acquisition allowing Whole Foods to be able to raise its retail prices at will, we argue that is far from the case. First, Wild Oats' wasn't a big enough chain in terms of market share to even make that kind of difference. In other words, swallowing up Wild Oats did not make Whole Foods a monopoly in any real terms, even if John Mackey though it would.

Second, with its "Whole Paycheck" nickname (which company executives detest) firmly established in the food retailing lexicon (as well as in the minds of many consumers) Whole Foods has become hyper-cautious about its retail price structure, and about raising prices.

Lastly, if one really makes a close analysis, they will find Wild Oats Markets' wasn't even Whole Foods' chief competition. Most of their stores were too small, their merchandising practices were outdated in many aspects, and their in-store prepared foods programs were minimal compared to today's industry standards.

Rather, that chief--and growing--competition comes from the types of retail formats the grocers mentioned above, and others, are creating and growing rapidly. It also comes from mass merchandisers like Wal-Mart, Target, and Costco Wholesale, all who have moved aggressively into the natural and organic products retail space and continue to do so. It's a brave new natural and organic products retailing world folks, and with all do respect, Wild Oats was in many ways still living in the old world.

Part of this new natural and organic products retailing world (NOPR 2.0 we call it) is the successful creation, selling and growth of store brand organic grocery lines from the likes of Safeway, Kroger, Target and many others.

The store brand organics are proving wildly successful. For example, Safeway recently said its O' Organics store brand has been the most successful private label brand launch in the chain's history of developing store brands. In fact, Safeway plans to begin selling the O' Organics line to food retailers in other countries beginning early next year. Additionally, Giant foodservice distributor Sysco has started distributing a number of O' Organics items to some of it's customers, and plans to do so nationally.

Kroger's store brand organics line (as well as its all-natural brand) has been such a huge success that the chain is currently expanding it into more categories and adding scores of additional skus. Kroger's CEO has said his plan it to be the chain that sells organic groceries to the "masses' in the U.S.

The hundreds of millions of dollars in brand new sales from these store brand natural and organic grocery products has had to come from somewhere. It's not just from shoppers who have traded up from conventional groceries to organics. Rather, the new sales are coming from a variety of places: replacing and reducing sales of some manufacturer brands to be sure, some consumer trade up from conventional grocery items of course; but more significantly its also coming in large part from natural products retailers, especially Whole Foods. The supermarket store brands are taking share away from Whole Foods and other natural foods retailers in the grocery products segment.

Shoppers who shopped a supermarket and also Whole Foods, and bought all of their natural and organics at Whole Foods, are now finding they can get a large share of those same items at the supermarket, and generally at better prices. As such, Whole Food's "share of the stomach" in the natural and organic grocery category is getting eroded by these store brand Organic lines.

Whole Foods knows this, that's why the grocer keeps innovating, putting new types of restaurants in their stores, becoming a prepared foods guru, adding wine cellars, mini day spa's and other cutting-edge features in-store. The retailer's executives knows what's happening in terms of the natural and organic grocery sales environment, and they plan to be ahead of the retail curve in terms of not finding themselves overdependent on natural and organic grocery sales in the future.

Lastly, we argued this phenomenon--the growing number of big food retailers going after the natural products consumer--would also be met with a new one.

That new phenomenon is the emergence of a handful of food retailers (and formats) that have determined the natural and organic categories are ripe enough--and growing fast enough--to "pick off" by the creation of category killer formats designed to undercut Whole Foods (and others) significantly on price. That category growth is without a doubt here, with much more to come. Organic foods' category growth has been 25 to 30% per year in the last five years. Further, projected growth for the next five years is about 20 to 25% annually.

These retailers have realized the market is there to create a natural foods store format with the following characteristics: small format (or footprint), no frills design inside and out, limited category assortment and--the major positioning point-- everyday low-price, price-impact across all product categories and sectors. These stores offer more than just bare bones departments and selections, but do so in a no-frills but attractive, small format box.

These elements not only tap into the desire by a growing number of consumers to be able to buy natural and organic products for less, it also opens the category to new shoppers. It's an expansionistic format all around. Further, the format taps into the growing desire by many shoppers to be able to buy groceries in a more convenient way. Rather than spending lots of time in a huge store, they want to get in and get out--but still be able to get the natural and specialty products they want. Convenient, in-and-out shopping, a good product selection, and low prices--does anybody really believe the natural products consumer isn't ready for that combination?

Natural-Born category killers: Sunflower Farmers Market and Sunflower Market

In previous pieces on this topic (but in less detail) we identified two natural foods retailers--Boulder, Colorado-based Sunflower Farmers Market and Supervalu, Inc.'s Sunflower Market--as the most likely candidates to create a category killer application (format) in the natural and organic foods retailing space in the U.S. Further, we suggest these two retailers are the two best candidates to provide a retail one-two punch to Whole Foods in terms of taking market share from the supernatural grocer. (By the way, don't be confused by both having Sunflower as the major part of there names. It happens to many. In fact, it happens so often that Supervalu has a link on its Sunflower Market website that says, "Looking for the other Sunflower Market? Click here.)

Based on a couple of recent developments, one just this week, it looks like we might have been right four months ago. First, Supervalu recently announced that their Sunflower Market stores, a format which is only a little over a year old, have exceeded the company's expectations. And as a result of that, the grocer said its going to aggressively increase its new store opening time- table for the stores, building 50-60 new Sunflower markets in the next 4-5 years.

As part of this growth plan, Supervalu also said it plans to open stores in states it currently isn't in with the stores. Sunflower Market stores (five so far) are currently located in Illinois, Ohio and Indiana. Plans include expanding eastward. The small format stores are only 15,000 square feet and offer a limited assortment of natural and organic foods, non-foods, fresh produce, meats, fish/seafoods and perishables. They also have a fresh-baked bakery/cafe in-store, a health and wellness department and full wine and craft beer departments. (read more about the format here.)

The small format stores are no-frills but also offer a slightly upscale look to them in both design and style, do to the in-store bakery/cafe and attractive health and wellness departments. (It's important to note the assortment is limited relative to Whole Foods and other large supermarkets. However, it isn't limited in terms of the industry standard, in which most independent natural foods stores still aren't any bigger than 15,000 square feet.) Numerous market basket price checks have shown Sunflower Markets' overall everyday prices on natural and organic products to be 10-20% cheaper than the everyday prices on like items at Whole Foods' stores.

The other Sunflower, Arizona-based Sunflower Farmers Market, also is a small format, no-frills, price-impact, natural and organic category killer format like Supervalu's Sunflower Market. Sunflower Farmers Market also has something else in common with it's namesake natural foods retailer--its expanding dramatically as well.

Earlier this week, the small format, price-impact natural products' grocer announced it has received a $30 million investment from California-based PCB Capital Partners to build new stores and expand into other states. The company currently has 13 stores in Arizona, Nevada, Colorado and New Mexico. With the $30 million in hand, Sunflower Farmers Market plans to have a total of 50 stores in the Western U.S. in five years, including expansion into Utah and Texas, which is where Whole Foods Market, Inc.'s corporate headquarters is located. The retailer will open about 13 new stores next year.

Sunflower Farmers Market was founded in 2002 by Mike Gilliland, who also is the founder of Wild Oats Markets. He left Wild Oats a number of years ago. This time around Gilliland and company are taking a price-impact, value approach to natural and organic foods retailing. In fact, the grocer's motto is: "Serious Food at Silly Prices." That should tell you much about its positioning.

The stores, similar to Supervalu's Sunflower Market, are fairly no-frills. They also offer a limited assortment of natural and organic products across all categories. The selection is ample though, and looks far from bare bones. The centerpiece of the stores, which are about 20,000 to 25,000 square feet, are its produce departments, the one place the natural grocer departs from its limited assortment merchandising philosophy and offers an extensive selection, including lots of organic produce items. The farmers' market-style produce departments, which are placed in the center of the stores, represent about a third of total store sales, according to Gilliland.

In fact, he says when fresh meat is added to produce in terms of sales, both represent about 50% ot total store sales. Groceries, health and body care, nonfoods and vitamins/supplements comprise the other 50% of total store sales.

Gilliland says he's set Sunflower Farmers Market's pricing structure so that shoppers will pay 20% to 30% less on natural and organic groceries, perishables and the other items featured in the stores than they would pay at Whole Foods and other natural foods stores. Produce prices are particulary hot, do in large part to the fact that the grocer self-distributes all of its own produce, cutting out the middle man and distributors.

With 50 stores in the Western U.S. in five years, the natural products category killer should be a major force in natural foods retailing, and its pricing structure, which is considerably lower than Whole Foods across the board, could position it well to take market share from Whole Foods and others in its market regions.

As a category grows, its logical that competition will follow, and formats will morph

We aren't suggesting Whole Foods Market, Inc. is in any imminent--or even long-term for that matter--danger of failure. What we are suggesting is that we're seeing the beginnings of a small format, price-impact movement in the natural and organic food retailing niche similar to what is happening in conventional food retailing. The scale is much smaller, the players fewer and they're not nearly as large in size and scope overall. However, we believe the natural and organic foods category killer concept and format is real. And, with 100-plus stores combined between the two "Sunflower" chains in as little as five years, they're going to take a nice chunk of category market share.

The prime drivers of this phenomenon are the super growth of the natural and organic categories, a lack of price reductions by existing retailers to reflect that growth, and a desire on the part of many consumers for faster, more convenient stores to shop in. If you combine these key trends, a small format, no frills, price-impact store focusing on the natural and organic categories makes much sense--and has huge growth potential.

Obviously, Supervalu's Sunflower Market and Sunflower Farmers Market are both betting on that concept. Along side them are numerous conventional supermarket operators like those we mentioned in this piece and many others who are betting on the categories growth to drive their sales and profits. That's why they're investing in upscale, "Whole Foods-style" stores, creating and marketing extensive store brand natural and organic grocery lines, and positioning their stores more and more towards the natural products consumer.

Taken along with what's occurring in the small format revolution being led on the high-low end by Tesco--with it's Fresh & Easy Neighborhood Markets chain which has already opened about 30 stores in one month, with 200 to be opened by the end of next year--and German food retailer ALDI--which is opening up 100 of its small format, no-frills, price-impact stores a year for the next few years (on top of the 850 small format stores it already operates in the U.S.)--what Supervalu and Sunflower Farmers Markets are doing with small format store rapid growth plans further solidifies the reality of the small format food retailing revolution across all product retailing categories and types of positioning.

In fact, Whole Foods itself is getting into the small format food retailing game. Early next year it will open a prototype Whole Foods Express store in an old Wild Oats store building in Boulder, Colorado. The store will be about 15,000 to 20,000 square feet, and is said to offer a mix of grab-and-go prepared foods, a limited assortment of natural and organic groceries and perishables, and other convenient offerings.

By the way, we don't believe the Whole Foods Express format will be a natural/organic category killer, but stranger things can happen. And, if the grocer's new Whole Foods Express format did turn out to be a natural and organic foods category killer, that would make things really interesting.