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FRESH COMPETITION

TESCO’S FRESH &?EASY CONCEPT WILL CHANGE THE U.S. GROCERY BUSINESS, OBSERVERS SAY

By Molly Knight

Tesco’s Fresh & Easy stores may be small, but their impact on the American grocery industry probably won’t be. Tesco opened 30 of these 10,000-square-foot supermarkets throughout Southern California and in Las Vegas and Phoenix in November and December. And the company says it will open 20 more by the end of February.

By the end of this year there are likely to be some 200 Fresh & Easy stores in California, with the company making a particularly energetic push in the Bay area. Tesco, the world’s third-largest retailer after Wal-Mart and Carrefour, says it will invest roughly $2 billion dollars over five years expanding the concept across the U.S.

“This is going to be absolutely huge,” said Phil Lempert, a food industry analyst and the founder of SupermarketGuru.com, an industry newsletter. “Eventually, Fresh & Easy could have more of an impact on American health than any other retailer.”

What sets this concept apart is not the fresh, high-quality offerings, which are similar to those of Bristol Farms, Trader Joe’s or Whole Foods Market, sources say. It is the fact that those fresh, high-quality offerings are priced low — a kind of amalgamation of the virtues of Wal-Mart and Whole Foods.

“Fresh & Easy attracts the value shopper with its affordability, and the upscale shopper with gourmet items like cheeses, desserts and wine,” said Jennifer Halterman, senior consultant at TNS Retail Forward, a Columbus, Ohio–based retail consulting firm. “That’s something we simply haven’t seen before.”

Fresh & Easy helps keep prices down by offering fewer items in each category, thus simplifying things for shoppers. Unlike many of its competitors, it also employs nonunion labor. And because the stores do not use checkers or baggers, they carry only about 25 employees each.

A TNS Retail Forward comparative analysis shows that a half gallon of store-brand milk costs $1.98 at Fresh & Easy, $2.69 at Vons and $2.99 at Albertsons. An 18-ounce box of Kellogg’s Corn Flakes goes for $2.75 at Fresh & Easy, versus $4.39 at Ralphs and Albertsons.

“Half of their inventory is made up of their private brand,” said Halterman. “As customers become more familiar with the Fresh & Easy name and gain more trust, we may see an increase in the percentage of private-brand goods, which means high profit margins.”

The report estimates that there will be 500 Fresh & Easy stores in the U.S. by 2011 and predicts that annual sales will exceed $4.1 billion. Further, sales will more than double to $10 billion by the end of 2015. Sales per square foot will be about $900, Halterman says, significantly higher than the industry average of $571.

The size and layout of the Fresh & Easy stores will facilitate quick, convenient shopping, Halterman says, considering that grocery stores measure 34,147 square feet on average. “I get 6,000 to 8,000 e-mails a week from consumers, and most of them say they are overwhelmed by choices in grocery stores,” said Lempert. “The days of 50,000-square-foot stores are over. Fresh & Easy really satisfies the needs of a mass market because it’s fresh, convenient, healthy food sold in a store where food isn’t piled to the roof.”

Each Fresh & Easy store has an identical layout, which is one of the reasons Tesco is able to roll out new units so quickly, sources say. All the stores have eight aisles, each nine feet wide, and polished concrete floors. The high ceilings and industrial lighting evoke Costco, while the store’s size is more reminiscent of Trader Joe’s.

A third of each unit is dedicated to baked goods, dairy, meats and produce. Fruits and vegetables are prepackaged, with prices clearly marked. A 16-ounce bag of organic carrots goes for $1.03, a 12-ounce package of washed, ready-to-cook broccoli sells for $1.88, and a bag of 10 plums costs $2.81.

“Certain customers aren’t going to be comfortable with not being able to squeeze that tomato or smell that apple,” said Mike Griswold, retail research director at AMR Research, a consulting firm in Boston. “But there are also going to be people who are happy that 10 other people haven’t been handling what they might eat.”

Adding to the convenience of the stores are precut and preassembled meals ready to heat and eat, grab-and-go sandwiches and salads, and single-serve beverages. All checkout counters are self-scanning.

Griswold says the typical Fresh & Easy customer is someone who needs to stop at the grocery store on the way home from work to pick up milk, dinner and dessert but lacks the time to go on a treasure hunt. “These people don’t want to be overwhelmed by the thousands of choices at the typical grocery store,” said Griswold. “They know what they want, and what they really want is to get in and get out.”

Fresh & Easy has run into a few problems. For starters, there were wide reports of goods being out of stock in November and December, which Griswold himself saw in two of the three stores he visited. “This is to be expected of any retailer without the benefit of a sales history for that particular unit, so the problem should be fixed in a month or two,” said Griswold. “What I worry about is how they are going to sustain their inventory as they continue to expand and as more people learn about it. I know their distribution center is working around the clock right now, since their produce is labeled with dates and is only on shelves for a day or two.”

Some customers were disappointed at the lack of variety on the shelves. “The ketchup aisle might have Heinz and Fresh & Easy’s generic brand,” said Griswold. “So if you’re lucking for Hunt’s, you’re out of luck.” At the La Mirada, Calif., store, a 57-year-old man who was otherwise happy with the price points was discouraged to find the store carried only Gillette and Personna razors, and not his preferred Schick Ultra blades. “The only negative I can see about this place is that they seem to carry a couple of brands,” he said. “But with most of the stuff I’m looking to buy it isn’t a big deal.”

Fresh & Easy also received a blow in the form of a California court that ruled that the chain’s distribution center in Riverside, Calif., should have been reviewed under the Environmental Quality Act.

Tesco has promised to open stores in traditionally underserved areas, such as South Los Angeles, which has lacked affordable, quality grocery stores ever since the destruction of its big supermarkets in the 1992 race riots. Tesco says it will take years to break ground on stores in such challenging areas, and some doubt that it will ever happen. “I think it may just be talk to appease local activists,” said David J. Livingston, an independent supermarket analyst and consultant in Pewaukee, Wis. “I don’t know any national chain that can go in and make money there.”

Still, Tesco may go into such neighborhoods and take a loss as a public relations exercise, Livingston says. Though most of the stores thus far have opened in Los Angeles, Griswold calls Phoenix the real test market. “Every shopping center executive has a second home there, so they’ll be scrutinizing Tesco’s every move,” Griswold said.

Eventually, others will be watching closely too, sources say — competitors with trepidation, consumers with hope.