Fresh & Easy Cautious on Growth

U.S. economic downturn prompting prudence on Tesco's part; 200 stores by Nov. 2009

EL SEGUNDO, Calif. -- One of Tesco PLC's most senior executives has said that the "meltdown" in the American economy will force the supermarket giant to slow the rollout of its one-year-old Fresh & Easy Neighborhood Market Inc. business, reported The Times of London. Tim Mason, CEO of Fresh & Easy, said that plans for the chain to expand into northern California could be put on hold because of the recession gripping the United States.

In an interview with the Times, he said that it was prudent to take a far more flexible approach towards the expansion of the business, [image-nocss] which celebrates its first anniversary yesterday by opening its 100th store, in Orange County, south of Los Angeles.

Tesco had hoped to have 200 Fresh & Easy grocery/convenience stores operating across southern California, Arizona and Nevada by February next year. Mason said that now he hoped to reach this target by next November.

The group has talked of having 1,000 stores on the West Coast, stretching from Seattle to San Diego, said the report; however, a move into northern California would require huge capital investment because of the need for a new distribution center.

"The industry is in a very different place than when we came out and did the feasibility research three years ago. Then, the U.S. consumer confidence index was at the highest level it had ever been. In October, the U.S. consumer confidence index was the lowest it has been since 1967, so it's a big change. We will still open stores every week, but it's prudent to slow things down a bit," Mason said. "There's a big cost step for us when we open up northern California and we can be quite flexible about when we do that. As things get to a point that we like how it's all coming together, we like the way the stores are growing into the second year, then we can accelerate. If the economy takes a turn for the worst, it would be unwise to accelerate."

The comments come two days after shares in Tesco had suffered their biggest one-day fall for a month after it emerged that the group's sales in South Korea, Tesco's largest market outside the UK, and China had slowed in the tougher economic climate, said the report. The group unveiled plans for spate of store openings in the eastern China provinces of Shandong and Fujian next year.

London-based Tesco is spending $1.25 billion over five years trying to break into the United States. The move has been the subject of speculation since the first store opened near Los Angeles a year ago. The group still refuses to publish any financial information about Fresh & Easy's performance, and some analysts believe that sales have missed internal expectations.

Mason put the store opening program on hold in March for three months to evaluate what Fresh & Easy could do better, the report said. It has since put far more emphasis on price promotions to emphasize its claim to be 20% cheaper than traditional U.S. supermarkets.

Mason conceded that the chain had found it harder than expected to crack America, not only because of the more mature nature of the market-"we are not filling a vacuum"-but also because of the economic slowdown.

El Segundo, Calif.-based Fresh & Easy has been unable to open some stores in Phoenix and Las Vegas because property developers decided to shelve plans for certain sites.

"You only have to look at the pronouncements of retailers that have been here more than a year," Mason said. "Starbucks and Costco, to pick but two, have said that California, Arizona and Nevada are among the most difficult places that they operating in. Tesco has stores all over the world, and there have been one or two weeks where customers everywhere wake up on a Monday morning and say: 'Oh dear.' Times are quite tough."

But Mason insisted that critics doubting the potential of Fresh & Easy would be proved wrong, adding that to go from no stores to 100 in a year was an "exceptional" achievement. "We are absolutely thrilled with the customer response from those loyalists that have got it, and really loved what we do," he said.