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The Tesco US empire starts to take shape out West: will Tesco's US operation succeed? Fiona McLelland flew to LA and found Fresh & Easy Neighborhood Market is winning over the locals.

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In the ultimate show of faith, it wasn't until this week--a month after the first Fresh & Easy Neighborhood Market stores opened--that Sir Terry Leahy flew out to inspect them.

Sir Terry believes the franchise, led by CEO Tim Mason, the former UK marketing director, will see the US overtaking South Korea to become Tesco's biggest international market within as little as two years. "This is the largest single project carried out by Tesco," Mason told The Grocer when we visited Eagle Rock Store in LA. "My feeling is Terry has total trust in what we are doing out here he has been leaving us to get on with it. It's been incredibly rewarding starting from scratch and we have achieved a hell of a lot."

Trading prospects certainly look good so far with 19 Fresh & Easy stores, a 675,000 sq ft central distribution centre, 1,500 employees and plans for a further 200 stores by March 2009. Mason wants an outlet within a mile of every person along the west coast, from San Diego to Seattle, and believes he can even outstrip UK sales in time.

With the aid of chief commercial officer John Burry and chief marketing officer Simon Uwins, Mason believes the quality discounter concept is a winning one, claiming to offer 'Whole Foods Market-quality food at Wal-Mart prices'.

The evidence so far is compelling. The Grocer carried out a survey of a basket of 10 items at different retailers in Los Angeles (see news story, p6). Fresh & Easy was able to match or beat most prices at Trader Joe's, Kroger-owned Ralphs Fresh Fare and Wal-Mart. Tesco is working on a 15%-20% price mark-up, which is 1025 percentage points lower than other grocery retailers and is convinced it can achieve gross margins of 25%-40%.

To do this, the chain has lower operating costs than any other grocery retailer, claims Mason. HR, IT and finance costs have been reduced by using Tesco's Bangalore service centre. Wage bills are low. A store typically employs 30 people, who work 30 hours a week on average. Labour has been cut by using shelf-ready packaging throughout.

Fresh & Easy outlets also have concrete floors, which British shoppers may regard as an eyesore, but not US consumers, says Burry.

However, US analyst Ron Margulis believes Fresh & Easy may need to change that. "Wal-Mart Neighborhood Market stores started out with concrete 10 years ago, but quickly changed," he says.

To wean shoppers on to Fresh & Easy products, stores have a 'kitchen table' for tastings--the "crux of the store", says Burry. Products on tasting are merchandised next to the table and appear in hi-weekly fliers. But will own label tempt US consumers? The average 10,000 sq ft Fresh & Easy offers only 3,500 SKUs, of which 45% are own label. The own label count in a typical US supermarket is 15%-20%.

Early signs have buoyed up hopes, however. In the first month of trading, own label lines made up 75% of sales.

But though initial trading exceeded expectations, only 74% of customers in a Tesco survey said they were satisfied with availability. Burry is unconcerned.

"You need sales history to get sales forecasting right and our systems need time to settle," he explains.

One shopper we spoke to at Eagle Rock, Elaine Lee, said she put been disappointed by empty shevles, but she's a convert all the same. "I've already been six times and do my whole weekly shop here," she says.

Mason has other challenges to tackle in these early weeks. A court order has ruled in favour of an environmental group claiming the land for Fresh & Easy's distribution depot was sold without regard for environmental planning rules. Mason thinks it unlikely Tesco will have to remove the depot altogether.

The distribution depot is adjacent to an 80,000 sq ft site where Fresh & Easy makes 40% of its own-label food. Half the ingredients for these products come from the 2Sisters and Wild Rocket plants that sit on the same campus. "Fresh food is all about short supply chain," says Burry.

Orders arrive from stores to suppliers at 2am for products that arrive in stores that night, a speedy process by US retail standards.

There is enough land to double the capacity of the Riverside depot to 500 stores. Fresh & Easy is also close to finalising a deal to build a second depot in Stockton, North California, with the capability to service another 500 stores. A third is on the cards for Phoenix.

All that is just for starters. There's plenty of fresh thinking, but Tesco clearly has no intention of taking it easy out West.

* FACTS AND FIGURES

675,000 sq ft Riverside--Fresh & Easy's distribution centre

400,000 sq ft is dedicated to ambient product

240,000 sq ft is dedicated to chilled and frozen

3,500 SKUs Each store also has 160 organic lines

270 The number of signed letters of intent for new stores, in addition to 19 now open
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Title Annotation:analysis
Publication:Grocer
Date:Dec 8, 2007
Words:834
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