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Inside Tesco's New U.S. Stores

The British retailer takes on the Southwest with its chain of Fresh & Easy stores offering healthy food and no waiting. How big a bite will it take out of Trader Joe's?

Just how does British retail giant Tesco (TSCO.L) plan to crack the U.S. grocery market? Executives from the company's new Fresh & Easy Neighborhood Markets division gave reporters guided tours of their stores on Nov. 29, three weeks after opening the first of what the company hopes will be hundreds of locations in the U.S. (, 10/19/07).

If you want to boil down the Brits' strategy, take a look at the Smart Box, a children's snack pack that Fresh & Easy created. It sits in the same refrigerated section as the category leader, Oscar Mayer's Lunchables line, made by Kraft Foods (KFT). The Fresh & Easy folks clearly are betting that more nutritious content will appeal to time-pressed, health-conscious parents. The Smart Box contains crackers, string cheese, raisins, carrots, and a small container of organic grape juice. Nearby, Lunchables offer pizza and nachos.

In the U.S., most retailers treat their private labels as low-cost alternatives to nationally advertised brands, but Fresh & Easy sells its Smart Boxes for $2.99, a good bit higher than the $2.10 it charges for Lunchables. The company also is betting that freshness will sell. The Smart Boxes were dated to expire in just days. "Enjoy by Dec. 2," the packages read. By comparison, the Lunchables were good until the middle of January.

Between Mini and Mega Markets

The package design tells a story as well. Whereas Lunchables come in bright yellow-and-blue boxes with photos of the food on the front, Smart Boxes are made of clear plastic, designed to reveal the contents in all their wholesome simplicity. "Our strategy is to let the food talk for itself," said Simon Uwins, Fresh & Easy's chief marketing officer.

Tesco, the largest retailer in Britain and one of the top supermarket operators in the world, has committed to invest up to $2.5 billion over the next five years in the Fresh & Easy stores, which at 10,000 square feet are about a third the size of a typical supermarket, but four times that of a convenience store. Tim Mason, Fresh & Easy's chief executive, confirmed he's on plan to have 150 stores opened by February, 2009, in California, Nevada, and Arizona. After that he'll open 200 stores a year. Consultancy TNS Retail Forward predicts Fresh & Easy will be a $10 billion operation by 2015.

Private-label products will be a major contributor to the success. About half of the items on Fresh & Easy's shelves are house brands, compared with about 20% at a typical U.S. supermarket. And Fresh & Easy executives say the private labels have been generating 75% of store sales. "That's fantastic," Mason says.

Private Label Beer Here

Fresh & Easy's wide aisles are lined with neatly packed produce and prepared meals such as mango chicken breast with basmati rice for $3.99 and vegetable spring rolls at $2.99. The company has chosen its categories carefully. Fresh & Easy decided not to offer a house brand of soda. "Customers didn't want it," explains Uwins. It did create a private-label beer, a Corona knockoff it calls Taurino, that sells for $6.99 a 12-pack.

Category manager Karen Fletcher said the chain was carrying only 167 different wine labels, vs. 1,000 at many supermarkets. The house brands were labeled as Fresh & Easy exclusives and featured information on the back describing the taste, origin of the grapes, and foods the wine should be paired with. About a third of the labels are house brands such as Boro Hills, a $10 chardonnay imported from New Zealand, and Big Kahuna, a $2 bottle modeled after Trader Joe's successful Charles Shaw ("Two Buck Chuck") label.

Trader Joe's, a 300-store chain owned by Germany's Aldi supermarkets, likely will be Fresh & Easy's nearest rival. An estimated 80% of its products are house brands, often gourmet items available at much lower prices than from rivals such as Whole Foods Market (WFMI). Fresh & Easy aims to compete with Trader Joe's by offering a limited selection of branded items such as Procter & Gamble (PG) Tide detergent and General Mills (GIS) Yoplait yogurt. Uwins says the company is monitoring how much rival supermarkets sell the same items for and pricing the branded items about 15% lower.

Self-Service, No Waiting

Rivals Kroger (KR) and Safeway (SWY) aren't expressing any public concern. Nor, apparently, are convenience stores. Chander Alagh, who owns a 7-Eleven outlet directly across from the Fresh & Easy store in the Los Angeles neighborhood of Glassell Park, said his store saw a slight dip in sales the first two weeks after Fresh & Easy opened but hasn't been affected since. "They're not selling cigarettes," Alagh notes. "They've got self-service cash registers. Our customers like someone to serve them."

Fresh & Easy's Uwins said the company decided selling cigarettes wouldn't be in keeping with its good-for-you image. The self-service registers, he says, were tested extensively prior to rollout. By having as many as nine checkout lanes open at all times, Uwins says there is little customer waiting. Fresh && Easy saves money by having only two or three employees supervising the self-service checkout machines. "This has never been done in the world," Uwins says.

Right now Fresh & Easy's biggest problem is keeping its store shelves stocked, says Chief Executive Mason. The company built an 820,000-sq.-ft. warehouse, including an 80,000 sq.-ft. kitchen, in Riverside, Calif., about an hour east of Los Angeles, to prepare food for the stores. But supplier glitches have meant some products sell out.

An Environmental Hurdle?

That's something Nick and Celia Gielle experienced recently at the Glassell Park store. The couple, retirees who live nearby, came to get some ricotta cheese that Celia liked from a previous visit. "I was sort of disappointed," she said. She picked up some of Fresh & Easy's private-label goat milk yogurt and whole wheat Roti bread anyway. The couple said they're still not sure whether Fresh & Easy will be a regular stop. "We do most of our shopping at Costco (COST)," Nick said. "But this store is closer."

Tesco's expansion plans across the Southwest also could be slowed by a ruling from the Riverside District Court on Nov. 30 that may subject the company's huge distribution center to a stringent new environmental review. The facility—topped by what could be the largest solar panel in the U.S.—is built on the site of a former air base, and Tesco argues its construction was covered by environmental clearances given to the development as a whole. The judge's demand for a special environmental review could force Tesco to delay some store openings or, worst case, to close the distribution center. But the company says that's highly unlikely, and its expansion plans remain unchanged.

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