Guest Column: Fresh & Easy Debriefed
Coming full circle on assessing Tesco's U.S. experiment, and its salability
[Editor's Note: London-based Tesco PLC announced Wednesday that it has appointed an advisory firm to conduct a review of its struggling U.S. small-format grocery chain, presumably with the object of selling it and exiting the United States. In a piece that appeared in CSP magazine and CSP Daily News in 2007, Gerald Lewis was the first to question the viability of Fresh & Easy even before it was launched, when the industry was speculating how it might revolutionize or shake up U.S. c-store and food retailing. (See Related Content below for recent coverage.)]
NEW YORK -- When I wrote a column that appeared in CSP magazine in September 2007 and in CSP Daily News in early November, coinciding with the opening of Tesco's first Fresh & Easy stores in the United States, I was pretty sure that the concept was doomed to failure, but gave it the benefit of the doubt, not knowing what Tesco had up its sleeve or whether it would realize it was on the wrong track early enough to find a way to save it.
It turns out that it had nothing up its sleeve and didn't seem to want to know how wrong it was until it was much too late.
Following is a summary of my 2007 column, "Fresh & Easy Explained":
How big and imminent is [Fresh & Easy's] threat to c-stores? What is its likelihood of success? Should you be worried? How can you compete?
1. The Cold Chain: Fresh & Easy's offer will be based on cold-chain delivered pre-packaged fresh meals. Tesco have brought U.K. suppliers with cold-chain know-how with them to the United States. Cold-chain delivery systems comprise independent fresh food processors preparing their specialties daily, delivered to cross-docking centers, consolidated and shipped to individual stores the same day. Temperature and humidity levels are maintained all along the chain.
Attempts to implement such systems here have failed, largely because of the vastness and low population density of the United States. U.S. food retailers have evolved systems such as commissaries and in-store prep because they couldn't make cold-chain logistics work over the long distances. Perhaps Tesco can figure this out but, if they do, how long will it take for their competitors to do the same thing--and out-market them due to their well-established store networks?
2. Gasoline: Being the first to sell low-priced gasoline at supermarkets contributed to Tesco's success in England. U.S. supermarkets increasingly use gas as a draw. It is a must for c-stores. Tesco won't sell gas at Fresh & Easy sites. Will this negatively impact their draw?
3. Packaging/Perception: Many people in England serve cold-chain delivered meals at home when they entertain. The packages look like frozen foods. U.K. consumers are educated to accept this, but previous cold-chain attempts here encountered resistance from consumers who could not believe that the packages contained fresh foods.
4. Name: In the U.K., Tesco is a powerful brand which connotes quality, value and trust. "Fresh & Easy" is a generic sounding name that will take time to earn that status as a brand.
5. Format: Long ago, U.S. supermarkets found that 10,000-to-15,000-square-foot stores could not be competitive in selection and cost. Could Tesco’s new untried format be similar to Trader Joe's? Unlikely. Fresh & Easy is targeted at lower-income markets while Trader Joe's targets more upscale customers.
6. Competition: If successful, Fresh & Easy will be a challenge to supermarkets more than to c-stores. Had Tesco brought its U.K. Tesco Express format (3,000-sq.-ft. stores) here, it would have represented both a threat and a new direction for c-stores to follow.
7. Changing Consumers' Habits: Tesco’s challenge will be to get enough people to change where they shop. U.S. supermarkets are the best in the world and will surely figure out how to compete before Fresh & Easy has reached critical mass.
8. Research vs. Attitude: The extent of Tesco's research here is the main thing the company has disclosed; however, a lot of market research has turned out to be wrong.
As a frequent traveler, I used to say that BA stood not for "British Airways" but "British Arrogance." Some of this attitude may have crept into Tesco's U.S. venture. Retailing experts in the U.K. say that British food retailers are better than their U.S. counterparts. U.S. retailers have had to become very strong to survive in this most competitive of all markets. Newcomers attempting to enter it need to beware, regardless of how good they may be on their home turf.
What should c-stores do about all of this? Very little for now--except to stay alert for the availability of cold-chain delivered meals and to explore working with supermarkets as co-brands.
Will Tesco succeed here? If anyone can, it can. But if it does, it will have little to do with them having discovered some gap in the U.S. market that no one else has recognized. Rather, it will be based on long-term commitment, skill, ability to adapt and resources.
(See File Attachments below to read the complete column.)
Mistakes Along the Way
While I have to admit to a certain satisfaction in having been right in my assessment of Fresh & Easy, I also feel some frustration in not having been able to get anyone to listen to my advice--and, as a result, seeing several billion dollars go down the drain. I say "several billion" because I not only believe that Tesco's total investment in the U.S. market, plus their accumulated losses, is considerably larger than press reports have speculated, but also for several other reasons.
First, Fresh & Easy is probably unsalable as a going entity. Any purchaser would have the same problems that have caused its demise. Second, the infrastructure built to support it--including a huge warehouse/distribution center; a large food manufacturing plant; and a fleet of delivery vehicles--is probably so specific to its operation that it would require major modification in order to be of value to any potential user. Third, its real estate, which primarily consists of 200 mostly 10,000-to-15,000-sq.-ft. retail sites in strip shopping centers, is, to say the least, not compelling as a group of stores.
In addition to the reasons cited above, Tesco also made several huge mistakes along the way. It spent millions on research and failed to uncover the importance of competitive pricing. It thought it could learn everything it needed to know by building test stores in a warehouse--and failed to test the concept with actual stores in the real marketplace before committing billions of dollars to roll it out. It truly believed that it was the best supermarket operator in the world and completely underestimated the "survival of the fittest" nature of the U.S. market and the strength of the U.S. survivors that would be their competitors. When things didn't go as planned, it got down in the weeds and tinkered with the program (decor, packaging, product line, LEED certification, etc.) instead of reevaluating the viability of the concept--and it even seem to have lied to itself about the results.
In April 2008, to The Daily Telegraph, Tesco's chairman Sir Terry Leahy "rubbished reports that Fresh & Easy …… is struggling. He said that sales at the chain are ahead of budget and that its sales per square foot--a key metric in measuring shops' success--are $20 per square foot per week, double the U.S. average." This seems to be, to say the least, an exaggeration because, in a 10,000-sq.-ft. store, that would translate into sales of more than $10 million per store per year, which is the sales volume of a good full-size supermarket. Nobody who has visited a Fresh & Easy store and seen the lack of traffic and empty shelves would feel that claim was credible.
On the other hand, in a press release in May 2008, Tesco said that it "expected Fresh & Easy shopper numbers to grow from the current 20 to 30 per hour as brand awareness increased." Based on this, if we make the favorable assumptions that the stores are open 18 hours a day, seven days a week, that every visit results in a $6 purchase; and that the average store has 25 shoppers per hour, then Fresh & Easy's average weekly sales would be $18,900 per store--or $983,000 per year. That is very low sales volume for a 10,000-sq.-ft. store. In fact, many 2,500-sq.-ft. c-stores do more. And bear in mind that Tesco then operated fewer than than 100 Fresh & Easy stores, which they supply from their own 800,000-sq.-ft. distribution center. You do the math.
Charles Dickens opening line of A Tale of Two Cities comes to mind. Is it "The best of times" ($10 million per year) or "The worst of times" (less than $1 million per year)? It depends on whether you listen to Tesco … or Tesco.
What can retailers learn from this sad tale? Several things, I think:
- Don't fall in love with a bad idea.
- Don't use research to prove that you are right, use it to get the facts.
- Listen to dissenting viewpoints.
- Test new concepts in the real world and fine tune them to make them work (or not) before going all the way.
- Never underestimate the competition.
- For foreign retailers, understand that the U.S. market is not England times seven. It is the most competitive market in the world, with vast distances, diverse cultures and 50 states each with its own laws customs and lifestyles.
- And it is always best to substitute humility for arrogance.
Gerald Lewis provides transformational retailing guidance and execution to convenience store operators. He can be reached at [email protected] or (646) 215-7741. For more information go to www.geraldlewisteam.com.