TESCO'S 'FRESH & EASY' PLANNED FOR PHOENIX, L.A.

ELLIOT ZWIEBACH

LONDON - The convenience stores Tesco plans to open in the U.S. next year will be called Fresh & Easy and will be located initially in Los Angeles and Phoenix, according to several trade reports last week.

In an effort to maintain control over all facets of its operations, Tesco, based here, has apparently decided to operate its own distribution centers in both areas rather than rely on third-party arrangements, observers told SN - with reports indicating the retailer plans to acquire a 1.4-million-square-foot warehouse in Riverside County, east of Los Angeles, and a slightly smaller facility in the Phoenix area. The reports also said Tesco had opened a U.S. headquarters in El Segundo, Calif.

A spokeswoman for the company declined to comment.

Tesco disclosed plans in February to move into the U.S. with a series of convenience stores on the West Coast featuring prepared foods and other fresh products, in addition to some packaged goods. The Fresh & Easy stores set for Los Angeles and Phoenix will reportedly cover approximately 12,000-15,000 square feet each and are likely to be built in a variety of locations - urban and suburban, on corners, within shopping centers and neighborhood strip malls or in gas stations - as the company experiments to determine the optimal demographics, sources told SN.

Operating stores in both sprawling Los Angeles and a smaller, more concentrated but growing area like Phoenix will give it exposure to a very broad base of customers as it tries to determine what will appeal to U.S. consumers, the sources added.

"The key is, can Tesco find the land with the exposure it needs?" Judi Butterworth, senior vice president of real estate firm DeRito Partners, Phoenix, told SN. "There are a lot of properties available with 10-25 acres, but it's questionable whether anyone would want to carve out a two-acre plot for a Tesco convenience store."

However, she said she believes Tesco is entering the market at a good time "because a lot of grocery store operators have enough real estate deals in the pipeline for the next couple of years so that Tesco can open a store in an area before some of those supermarkets are built and begin to build customer loyalty. And choosing to play the convenience store card also comes at a good time because there's not much activity among traditional c-store operators in the U.S."

Real estate sources told SN it's doubtful Tesco has made deals for any specific sites. "They're looking around and kicking the tires," Bob Pearlstein, first vice president of CB Richard Ellis, Phoenix, told SN. "They're looking at some peripheral sites where homes are being built, not just in-fill sites - and while they might prefer corner locations, they'll go after other locations if they consider them home-run sites."

Frank Demeter, principal at Boulders Realty Advisors, Phoenix, said some corner sites available in Phoenix might be too small for a 15,000-square-foot store, "though developers could put two adjacent pads together to accommodate that size and sell the property for a higher price."

He estimated that real estate costs in Phoenix could run to $15-$18 per square foot at the low end up to the mid-$20s at the high end.

Brian Roberts, a North American analyst for Planet Retail, London, said Los Angeles and Phoenix "are fantastic locations for the Fresh & Easy stores, since both are affluent, populous markets.

"But they're different markets with different competitive situations that will require different product mixes and different merchandising strategies, and that will allow Tesco to see if the Fresh & Easy concept has legs," he said. "But if Tesco can make the concept work in those kinds of different markets, then the prospects for a long-term rollout is all the better."

Roberts said Tesco's apparent decision to invest in its own distribution facilities is "good news" because it's similar to the approach the company has used as it's expanded into other parts of the world outside the United Kingdom. "Using a third party outs it at the mercy of someone else's service levels, whereas Tesco prefers to do it themselves worldwide."

With the group of Fresh & Easy stores expected to open in mid-2007, Tesco has reportedly begun running ads for a human resources director who would "develop, implement and administer the Tesco Fresh & Easy culture," according to the ads, which describe the stores as "a Fresh & Easy place to shop, [where] we keep things simple."

Roberts said Tesco has the wherewithal to experiment as it moves into the U.S. "It's expecting to break even by 2008 or 2009, but it has sufficient cash for the short-term and it can afford to burn money to see if this concept has long-term potential."