Tesco's Fresh & Easy Debuts Soon What's Next?

This is the big week many have been looking forward to, or dreading.

This Thursday, Tesco, the largest food retailer in the United Kingdom, is to open its first of several Fresh & Easy Neighborhood Markets, with many more to follow in short order.

As you'll see in the news article on the front page, Tesco has big plans — and many others have big expectations for Tesco.

We'll consider some of those expectations later, but for now let's dwell on what can be quantified: On Thursday, Tesco is slated to open a dozen Fresh & Easy stores, six around Los Angeles, five in Las Vegas and one in San Diego.

Tesco intends to open 20 more locations in those areas, plus Phoenix, by the end of this year and projects 100 more for next year, which means it would have 131 locations by the end of next year. Fresh & Easy stores are to be 10,000 square feet. The product mix is to include produce, prepared meals, snacks and a limited line of groceries.

Now let's turn to expectations about Tesco. Some predict Tesco will have U.S. sales of $2.3 billion at the end of 2008 (with 131 stores) and sales of $4.5 billion at the end of 2009 (relying on rough proportionality, that would suggest about 300 stores at that time).

Moreover, some predict that Tesco will tromp with its tiny footprint all over the supermarket industry and become widespread across the nation in two or three years.

Do any of these predictions seem likely? Let's look first at the predicted sales volume for the end of 2009. Should that be achieved, Tesco, at that point, would be roughly the size of Trader Joe's, Associated Wholesale Grocers, Kansas City, and Nash Finch. It would be larger than industry stalwarts such as Wegmans, Roundy's, Stater Bros., Raley's and a host of others.

Building a business from scratch isn't that easy, and Tesco is doing it in a particularly risky way, namely by prefacing store openings with the buildout of captive distribution. Should Tesco's concept fail, the cost of failure will be much higher than if it had used third-party distribution to test it.

Indeed, Tesco's method is reminiscent of that used by Food Lion some 15 years ago when it jumped from its home territory in the Southeast, past a couple of states and into the Southwest. When a cultural fit with shoppers there failed to materialize, Food Lion retreated, closing stores by the score, plus its distribution apparatus. Tesco is jumping across an ocean and a continent with its concept.

Predictions that Tesco will quickly spread its format across this nation seem even more dubious. A small format has a small catchment area, so it would take many thousands of stores to make much of a dent on a national scale. By comparison, each Wal-Mart Supercenter could enclose about 20 Fresh & Easy stores, and Wal-Mart is only now nearing anything resembling market saturation — and that after 45 years in the discount-store business, two decades of supercenter rollouts and more than 4,100 stores in this country.

Finally, will Fresh & Easy challenge supermarkets? It's more likely convenience stores and restaurants will feel the heat.