EL SEGUNDO, Calif. — Industry observers applauded the announcement last week that Tesco's Fresh & Easy here plans to take a three-month breather after opening 59 stores in five months.
However, several told SN they doubt the hiatus had been planned from the beginning, as the company indicated it was.
A British analyst also expressed disappointment that Tesco apparently does not intend to break out Fresh & Easy's financial results when it reports year-end earnings for the entire company next week.
The decision not to open any more stores until July was disclosed in a blog on the chain's website that's written on a regular basis by Simon Uwins, Fresh & Easy's chief marketing officer.
Reflecting on the aggressive store opening schedule that began in early November — an effort he said has been described by others as “an opening program on steroids” — Uwins said the company has been “delighted with the openings. However, we planned to have a three-month break, and other than a couple more [openings] in Phoenix, we're taking it.
“Why? Quite simply, to allow the business we've created to settle down.
“We've given ourselves a little bit of time to kick the tires, smooth out any wrinkles and make some improvements that customers have asked for.
“Today our stores are better than they were last month, which were already better than the month before, and so on. But the next three months will allow us to accelerate this process.”
Fresh & Easy opened its 60th store last week, in the Phoenix suburb of Glendale, Ariz., and is scheduled to open its 61st later this week in Avondale, Ariz., another Phoenix suburb, before halting the expansion process until July, a chain spokesman told SN.
The company is still on target to open approximately 150 more stores over the next year, he added.
Jim Prevor, an industry consultant based in Boca Raton, Fla., who has been critical of the chain in the past, said the hiatus is “surely a wise decision, [because] the more stores Tesco opens, the more money the company loses. No matter how big and praised Tesco may be, this concept hasn't been working, and both Tesco and its vendors will be better off if that is recognized, and soon.”
Prevor suggested that Tesco ought to replace its U.S.-based British staff with Americans. “The team that failed is too emotionally invested in its decisions to properly critique them,” he said. “Americans are different than Brits, and the stores will be more successful if Americans make the decisions.”
Tesco said last month it plans to send Jeff Adams, an American who has worked for Tesco in Thailand and the United Kingdom for the past 10-plus years, to join the U.S. operation, though it was unclear when he will arrive here and what his title and responsibilities will be, the Fresh & Easy spokesman told SN.
Prevor also said Tesco needs to stop running Fresh & Easy as if it had 6,000 stores with tremendous volumes. Noting that the chain's ordering system “seems to deliver a lot of out-of-stocks,” he said each store manager could walk the store with a Blackberry and email what they need each day.
Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with Dutton Associates, El Dorado Hills, Calif., said he believes Fresh & Easy is making the right decision in taking a break from store openings.
“I'm not surprised by the move, because the stores have a lot of flaws and need some work,” he said. “But they are not a total failure and can still be modified to achieve success.”
For example, he said Fresh & Easy might consider using its square footage differently, “possibly by incorporating a treasure-hunt element to add more excitement to the stores.”
Ziegler also said the chain might consider adjusting its everyday-low-price approach to become a bit more promotional “and do more advertising to drive traffic into the stores.”
Patti Edwards, a Seattle-based analyst with Wentworth, Hauser & Violich, San Francisco, said the hiatus is a good move. “What you want to do is get a new concept out there and see how customers respond, then tweak the model before you roll it out. Wal-Mart did it with Neighborhood Markets, and Costco is doing it with Costco Home, so I'm not shocked that Fresh & Easy is taking a short break.”
Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., said Fresh & Easy needs to figure out how to draw more traffic. “If they're going to make it financially, it will be on the basis of generating a lot of repeat customers making a lot of small transactions, and that will require a lot more traffic than anyone I've talked to has said the stores are attracting.”
Tom Arnold, director of the Food Industry Management program at the University of Southern California in Los Angeles, told SN he's been “waiting for something like this to happen — for Tesco to step back and look at what it's doing — because some stores are good, but customer counts and rings per customer seem low.”
James Anstead, a London-based analyst for Citigroup, New York, said “pausing for breath” is not an unusual move for Tesco. “Tesco assures us that similar pauses have occurred in many other of its international markets, and that nothing should be read into this, [though] it would not be surprising for cynics to use this as evidence that management is disappointed by the early results.
“The good news is that Tesco is learning by its mistakes,” he said, including the decision to accept American Express cards at Fresh & Easy, “and there will doubtless be plenty more changes going forward, such as more store-specific ranging, a more flexible approach to self-scanning, and more focus on the rather dull dry grocery and health and beauty sections within the stores.”
Anstead said Tesco does not intend to report Fresh & Easy's results separately, as British analysts had been led to believe. “We were under the impression Tesco would create a [separate] reporting segment — in addition to U.K., Europe and Asia — as soon as the first Fresh & Easy store opened. We remember Tesco telling us this, and the consensus sheet Tesco regularly circulates presents the U.S. as a fourth segment.”
Recently, though, Tesco has been noncommittal about how it will report U.S. results, Anstead noted.
Tesco told SN it has not made any firm decisions on what form its update for investors will take, “but our aim is to be as helpful as possible while also bearing in mind that the Fresh & Easy business has only been trading for five months.”
While Fresh & Easy maintains that the three-month hiatus on further store expansion was planned, several observers told SN they doubt it.
“If you have a major success, then you keep opening as many stores as you can,” Ziegler said. “Stopping for a ‘hiatus’ is just a form of public relations.”
According to Prevor, “Fresh & Easy tried to gild the lily by claiming this had always been planned. We have spoken to a broad array of vendors, all of whom assure us that at no point in time was ever a mention of such a ‘pause’ communicated to them until [the prior] week,” he wrote on his website.
Hertel said Tesco “is trying to put a good face on it, but no one who's been in any of the stores tells you the traffic levels were high, and if they're going to make it, it will require a lot more customers than they've been getting.”
