Tesco Battles to Stay in Stock

ELLIOT ZWIEBACH

LOS ANGELES — Tesco was reportedly encountering out-of-stock problems in produce and other perishable items last week in the days following the opening of its first six Fresh & Easy Neighborhood Markets in Southern California, according to competitors and some consumers who visited the stores.

There were reports during the stores' opening weekend of out-of-stocks in produce and prepared meals by late afternoon — several hours before the stores' 10 p.m. closing — with customers being told the items would not be replenished until the following day, and retailers who visited the stores said a similar situation existed at midday last Monday.

Asked about out-of-stocks early last week, a Fresh & Easy spokesman declined direct comment, noting, “It was only the first week.”

He said Tesco was “delighted at the incredible response from customers, which was particularly notable in fresh products and prepared foods that were immensely popular with all types of customers.”

Jonathan Ziegler, a Santa Barbara, Calif.-based analyst for Dutton Associates, El Dorado, Calif., told SN, “It's apparent Tesco has some inventory management challenges to work out, but the data generated by its automated checkstands will provide more information on what's moving and what's not to help with replenishment.

“If it doesn't want to keep fresh inventory in the backroom, then it may have to move from a single delivery each day to two or more a day to keep the stores stocked.”

Tesco was scheduled to open six more stores last week — five in Las Vegas and one in Chula Vista, Calif., near San Diego.

In a series of interviews with SN last week, neutral observers seemed more impressed with the Fresh & Easy concept than supermarket operators, several of whom expressed relief that Tesco might not be such a tough competitor after all.

Retailers said the stores lack ambiance and were critical of Tesco's offering of packaged produce and its assisted-check-out policy.

However, others said the concept shows great promise, with one observer, Ed Petrin, predicting the 10,000-square-foot stores could each achieve annual sales of close to $15 million to $18 million — volume likely to come at the expense of conventional operators, he indicated.

Petrin, founder and chairman of FoodChain, an incipient home-delivery business based in Santa Barbara, Calif., said negative competitive reaction to Fresh & Easy “sounds similar to early predictions about Wal-Mart, Costco, Whole Foods and other new formats that, in total, have stolen 30% of the supermarkets' market share over the past 20 years — and that is all good for Tesco, which is focusing on consumers, not on competition.”

Nearly everyone interviewed agreed the stores' pricing is impressive. According to a Fresh & Easy employee, prices are generally 20% below conventional stores, 10% below Trader Joe's — the operator to which it is most commonly compared — and 2% to 3% above Wal-Mart.

Local supermarket executives interviewed last week told SN they were generally unimpressed with what they saw at Fresh & Easy.

Mark Oerum, a partner in HOWS Markets, Pasadena, Calif., said he thought the pricing was good, though he questioned whether the company could maintain the levels at which some items were priced, citing as an example large bags of Doritos for $1.65, compared with prices, according to shelf tags, of $2.98 at Ralphs and Vons.

But he said he was not impressed with the look of the store he visited. “Maybe we're biased when we compare what we're doing with what Tesco is doing, but I expected more, and I think they will have a tough row to hoe.”

Store displays looked “pretty sloppy,” Oerum pointed out, and there didn't seem to be a logic to the way product was displayed, he said. “There were big holes in the shelves, plus lots and lots of out-of-stocks, especially in perishables, at about 1:30 on Monday afternoon, and the store looked more low-end to me — more like a Big Lots or a 99 Cent Store.

“Beyond that, the store didn't have a warm feeling. When you go into a Trader Joe's, you feel an excitement about finding new things to look at, but I didn't feel that at Fresh & Easy. They're going after a broad spectrum of people from low, middle and high incomes, but I think it will be tough for them to attract people from the upper end.

“And I think the self-checkouts will be a huge issue, especially with the aging population in Southern California. It's one thing to give customers a choice, and although the store had plenty of people there to help customers work through it, it will be tough to maintain that level of assistance.”

(In comments to reporters on opening day, Simon Uwins, chief marketing officer for Tesco USA, said the checkstands are not self-service but assisted, with store employees available to scan and bag, simply bag while customers scan, or do as much or as little as customers require.)

Lou Amen, chairman of Unified Grocers here, as well as of his own independent chain, Super A Foods, Paramount, Calif., told SN the empty shelves he observed during opening weekend “made it look like they have an out-of-stock problem. And for a company that's spending $2 billion to develop stores here, I didn't see much organization, despite nearly two years of planning.”

Another retailer said that although he was impressed by the variety of packaged beef cuts, there was no indication of the grade of the meat, he pointed out.

“I'm not sure who would shop there,” he told SN. “If somebody were used to shopping at a 7-Eleven, I suppose these stores would be a big improvement. But I didn't see a whole lot of reason for someone to shop there rather than somewhere else.”

Another industry executive told SN he was not impressed with the grocery offering, “which reminded me of a 7-Eleven — runs of short and tall packages, in a random order, seemingly based on whatever would fit.”

He also said he doubts Southern California customers will be interested in buying their produce prepackaged.

BETTER THAN 7-ELEVEN

Another retailer here offered a similar assessment. “To many Southern California shoppers, packaging is what you do with distressed produce, and if they can't pick it up, feel it, smell it and taste it, they aren't going to want to buy it.”

Despite some misgivings, however, the retailer said he expects Tesco will be successful, “though it may have to fine-tune its model for several years. The hardest part of what it must do will be matching demographics with economics, and those factors change dramatically from store to store.”

According to another retail executive who spoke with SN, Fresh & Easy will probably do well “among customers from conventional chains who are more interested in shopping for price.”

However, he said he felt like the stores didn't live up to the advance hype, adding that what he described as self-checkouts, plus metal detectors at the store entrances, could discourage some potential shoppers.

According to Ziegler, all the advance information he had about Fresh & Easy led him to expect something “that represented a more remarkable change in retailing.

“These stores aren't the earth-shattering, next-generation retail format Tesco had led me to believe it would be. In fact, I think what Safeway has done with its lifestyle stores is more dramatic than anything Tesco has done.”

POINTS FOR LOW PRICES

Among non-retailers, James Anstead, a London-based analyst for Citigroup, New York, expressed positive sentiments about the Fresh & Easy concept, with particular emphasis on the stores' pricing.

“With price points approximately 10% lower than an average U.S. supermarket,” he said, “it makes it very difficult for competition to react effectively. Should they lower prices in the locality of each Fresh & Easy to compete, or should they do nothing in the hope F&E will raise prices a few weeks after opening? Either way, the competition runs the risk of sending out the wrong message to consumers.”

By designing the U.S. operation from scratch, Tesco can build cost advantages into its entire store network and logistics system “that will enable it to price low consistently,” Anstead said.

Among the cost advantages he cited were reduced store lighting; inexpensive racking that features cut-case or shelf-ready packaging displays to a depth of 40 inches “to reduce man-hours, improve availability and save on [backroom] storage space”; and a non-union workforce.

As a non-union operator, Tesco is able to have its employees perform many different functions around the store, “not just one tightly defined, specific role,” Anstead pointed out. “Unionized supermarkets are usually locked into wage agreements that link pay to longevity, [but at Fresh & Easy] a long-serving checkout assistant can be on the same salary as a store manager, which will dramatically reduce labor costs in store.”

To make customers aware of the price differentials, Fresh & Easy posts shelf tags under selected items that compare Fresh & Easy prices with those at Ralphs and Vons, “which is something Tesco has used to its advantage in the U.K. across all products, from food to health and beauty,” Anstead said — though this strategy is used only a spot basis in the U.S., SN observed.

Anstead dismissed the prepackaging of produce, pointing out that “this is one aspect of the Fresh & Easy store that the U.S. consumer will have to adapt to.”

He also said self-service checkouts “help the model without significant inconvenience to the shopper. The packers [at the front end] will also support the security function and generally assist the shopper.”

Petrin said he believes conventional supermarkets are in for a fight.

“I think customers who become loyal Fresh & Easy patrons will go to their preferred supermarket and Wal-Mart less often — progressively, to not at all — and continue to supplement Fresh & Easy with Costco, Trader Joe's private labels and other specialty retailers.

“But if Fresh & Easy maintains a consistently high quality of fresh perishables and private label — and, more importantly, if it can convince customers of that quality — it will win most of its market share from conventional supermarkets immediately and from Trader Joe's over time, because of the fondness patrons have for Trader Joe's private labels.

“It will take less share, if any, away from Whole Foods, and I don't see them competing for market share with restaurants or 7-Eleven and other convenience stores, although they will take some share from them as well.”

Petrin said he bases his opinion on the limited, albeit broad, product assortment at Fresh & Easy, which allows customers the opportunity to fill their complete shopping needs at the stores, with a narrower range in each category making for quicker decisions and a quicker in-and-out.

That's the way Tesco looks at it, Uwins told SN.

The stores carry a limited number of groceries, though the limits are on sizes, not product categories, he pointed out.

“Customers can do their regular weekly household shopping at our stores, despite limited SKUs, because we've carefully selected products. So while there may not be a lot of different flavors or package sizes, we offer enough of a range that customers can get everything they want.”

As for offering prepackaged produce, Uwins said that's a subject Tesco discussed with consumers as it was developing the Fresh & Easy concept. “Shoppers told us they wanted produce in a package, which gives us the ability protect the product throughout the supply chain,” he explained.

“And prepackaging helps us at the checkout, because it keeps things simple,” he added.

He said Tesco was “happy with the distribution center [in Riverside, Calif.], which is ramping up, though it's serving only six stores to begin with.”