NEW YORK -- In yesterday's column, I cited Winston Churchill's saying about Russia--"It is a riddle wrapped in a mystery inside an enigma"--to describe how I feel about Tesco, Fresh & Easy, Yucaipa and Wild Oats. I posed the riddle of what went wrong with Fresh & Easy, and the mystery of why Tesco convinced itself for so long that the venture was not failing, when it clearly was.
Click here to view Part 1 of the column.
Tesco PLC last week agreed to sell most of its Fresh & Easy Neighborhood Markets Inc. small-format grocery business to investment firm Yucaipa Cos. LLC, for an undisclosed amount. The decision follows London-based Tesco's strategic review of its U.S. retail business. Los Angeles-based Yucaipa will acquire more than 150 stores as well as El Segundo, Calif.-based Fresh & Easy's Riverside, Calif., distribution and production facilities.
Now for the enigma. Why has Yucaipa acquired Fresh & Easy? It seems clear that it has not done so to continue and expand the existing failed business model. The distribution albatross hasn't flown off. It will become bigger with the closure of 50 of the 200 stores.
So here are some possible reasons. Was Tesco so anxious to get out of town that they virtually gave Fresh & Easy away? (How much cash actually changed hands? We'll have to wait for the footnotes in Tesco's 2013 annual report to find out.)
Ron Burkle's Yucaipa is an investment company in the business of creating value. So far it has created a lot of value in grocery retailing. Has Burkle figured out how to use some of the facilities he has picked up for a song to enhance the profitability of his other grocery holdings?
Or could he have just been able to make made too good a deal to pass up ... with the details to be worked out later? (The retail real estate would only be of value in the stores to be kept--and, as I read it, Tesco will take the inevitable losses on those to be closed; 15,000-square-foot leased spaces in strip shopping centers are not particularly hot properties.)
Or does Time magazine know something we don't? It has tapped Wild Oats, which currently has no stores, as one of four retailers that may become the next Whole Foods. Jim Keyes, the former 7-Eleven CEO, recently sold the defunct Wild Oats company to Yucaipa. It is rumored that he will now become CEO of Wild Oats and use the Fresh & Easy acquisition as the base for getting the new chain off the ground. This seems a likely scenario. Otherwise, on what basis would Yucaipa have selected which of the Fresh & Easy stores to keep and which to close? Is the plan to convert the selected sites to Wild Oats and to adapt the acquired logistical assets both to support it and other existing Yucaipa grocery assets within range?
Time will tell. In the meantime, Tesco is at least $3 billion out of pocket and back home licking its wounds--and I am still waiting for someone to call. But here's the thing: even if I am wrong about where this is heading, batting 500 ain't all bad. (That's not a quote from Winston.)
Gerald Lewis provides transformational retail guidance and execution principally to convenience chain operators. He can be reached at glewis@c-man.net or (646) 215-7741. For more information go to www.geraldlewisteam.com.
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