Incoming CEO Eyes Fresh & Easy

ELLIOT ZWIEBACH

EL SEGUNDO, Calif. — Fresh & Easy Neighborhood Market here is moving ahead with expansion plans despite comments casting possible doubt on the long-term commitment of parent company Tesco to the U.S. operation by Philip Clarke, who will become Tesco's chief executive officer in March.

A Fresh & Easy spokesman told SN last week that the chain “continues to expand steadily despite the difficult economic backdrop, and customers have told us they love the unique shopping experience it brings.”

The spokesman also said Fresh & Easy is on schedule to open its first stores in Northern California early next year.

He said Tesco would provide “a progress update” when it releases interim financial results on Oct. 5.

According to an article last week in the Financial Times of London, Clarke said he wants to see the U.S. operation “up close and personal” before making up his mind about its future. “I need the chance to go and look,” the newspaper quoted him as saying. “I look at the plans [for Fresh & Easy], and the plans are persuasive. But there is a big shift required if we are not to get to your doomsday scenario and a billion [pounds] of accumulated losses. Now the plan doesn't say that, so deliver the plan.”

At the end of Tesco's fiscal year last February, the 145 Fresh & Easy stores in operation then had sales of approximately $545 million and a loss of approximately $254 million — a level of loss the company said at the time had probably peaked, though it also said it expected a similar level of loss this year.

According to a former Tesco executive quoted in the article, “[Tesco] relied on research to roll-out the chain, but you only really understand what you are doing once you open the doors to the store. Once Terry has gone, the board [is] going to have to have a conversation about whether it wants to keep going with this.”

The article quoted Leahy as saying he expects Fresh & Easy to be successful and he expects Clarke to continue to oversee expansion of the chain. “I don't think he will close Fresh & Easy,” Leahy said. “I think that business is going to be a big success.”

Tesco originally anticipated sales at Fresh & Easy of $14 to $20 per square foot per week, though the total at the 168 stores currently operating is closer to $10, the article quoted Fresh & Easy CEO Tim Mason as saying.

The newspaper said Leahy blames the slow development of the stores on the U.S. economy.

“In the Western U.S. [the economy] really did collapse,” Leahy told the Financial Times. “It wasn't a recession — it was closer to a depression. So that's why we made a bigger loss. What we have said is, until we see the economy recover, we won't say when we'll get to break-even.”

The Financial Times quoted Colin Smith, the former Tesco trading director who headed the research project in 2004 that helped Tesco decide to enter the U.S. market, saying that Leahy came up with the name “Fresh & Easy” and envisioned a chain of 10,000 stores in the U.S. “on every junction in every major city in the USA.”

As Leahy saw it, those 10,000 stores would have a volume of $1.6 billion over five years.

Under the name Project Aquarius, Leahy had dispatched a research team, headed by Smith, to the U.S. to do a comprehensive examination of the U.S. grocery market. Smith said Leahy saw a gap in the market for neighborhood stores selling fresh, low-priced food — “brilliant fresh food and a shop that offered ease of shopping — not just in terms of its position and locality but also in terms of the range.”