USA Today's take on Fresh & Easy

Here is a link to USA Today coverage of Fresh & Easy's American venture. The story comes off less gloom and doom than many we have seen, though the Pundit's "downbeat" assessment is noted. Look for this quote in the story from one of those "test consumers" Tesco closely studied before their launch. "We're arrogant enough to think we can set them straight." Right on.

From the story:

Backing Fresh & Easy is U.K.-based Tesco, the world's third-largest retailer. Tesco's audacious plan is to change the way Americans shop and, in the process, take on rivals from Whole Foods to Wal-Mart. Instead of megamarkets, it's opening small Fresh & Easy stores that offer quality food and low prices. They're about the size of a Trader Joe's with lots of Whole Foods-type natural foods and prices that can seem Costco-esque.

But the unfamiliar combination — and a rather sterile store décor — seem to have left American shoppers confused about just what the chain is. As a result, Tesco is finding it harder than expected to make its mark on the nation's $500 billion grocery business.

Fresh & Easy's early U.S. sales are below expectations so far, and Tesco has paused its once-rapid store expansion until July to regroup. In the past year, however, 59 Fresh & Easys have popped up in Southern California, Las Vegas and Phoenix. Plans for Northern California were revealed last month. And few doubt that Tesco's aim is to give rivals all the way up to Wal-Mart a run for the grocery dollar in a very un-Wal-Mart way.

The stores are simple, bland and tiny by supermarket standards at about 10,000 square feet. The Fresh & Easy name signals the two things it wants shoppers to think of it for: freshness and convenience. All fresh food is dated — even the produce. And the stores are easy to shop.

Perhaps more important, however: price. They're up to 30% cheaper than conventional market chains, reports TNS Retail Forward, a research firm.

Fresh & Easy store-brand goods account for about half the products on the shelves — and have been created to contain no artificial ingredients or preservatives. But the store also carries name brands from Coca-Cola to Kraft.

"We've created the 21st century market for the 21st century American," says Tim Mason, CEO of Fresh & Easy, who is overseeing the chain's U.S. expansion from offices in El Segundo, Calif.

Results lag behind projections

Sales to date have been a letdown. Tesco won't reveal results, but a report by Piper Jaffray analyst Mike Dennis estimates weekly sales per store have been $170,000 instead of the projected $200,000. Analyst Jim Prevor is more downbeat, saying in a report that his research indicates weekly sales may be averaging less than $60,000.

Prevor cites lack of cultural understanding as one major problem, and that must be enough to drive Tesco crazy. It has invested more time and money trying to understand Americans than just about any other outsider entering the market.

Mason says sales aren't what Tesco had hoped — particularly sales of major brands, he says. "There's been some surprise and some disappointment."

But analysts say Tesco is a company that fixes its mistakes and will only grow stronger.

"If it's not performing to expectations, it will make all the changes to assure that it does," says Jennifer Halterman senior consultant at TNS Retail Forward, which projects Fresh & Easy will have U.S. sales of $10 billion by 2015, putting it in the top 10 grocers.

While it may take U.S. shoppers awhile to embrace the Fresh & Easy model, by 2020 the company could have 5,000 U.S. stores with sales of $60 billion, projects Bryan Roberts, global research director at planetretail.net. That would be larger than Safeway.

Food retail guru Kevin Coupe, founder of MorningNewsBeat.com, minces no words: "There isn't a place in the world where Tesco has gone one-on-one with Wal-Mart and Tesco hasn't won."

While they may not yet be familiar, some of Fresh & Easy's distinguishing concepts are turning heads. Notably different — and cool: Shoppers are encouraged to taste before they buy. They may take almost any product to the "Kitchen Table" area of the store — be it chips, pizza or soup — and a staffer will open it or cook it and dole out samples.

Other Fresh & Easy features:

•Natural products. Fresh & Easy brand items have no added preservatives, artificial flavors, colors or trans fats. Eggs are from cage-free chickens; milk does not contain the growth hormone rbST.

•Low prices. An analysis by TNS Retail Forward found the total for a basket of eight Fresh & Easy products beat market chain Vons by 30%, Albertsons by 32% and Ralphs by 23%.

•Produce expiration dates. Fruits and veggies are mostly locally sourced — and come wrapped in plastic trays with expiration dates. The packaging, however, pleases some shoppers and seriously bugs others.

•Limited inventory. Fresh & Easy sells about 3,500 items vs. 60,000 at a typical supermarket.

•Low shelves. You can see from one end of the store to the other.

•No loyalty cards. No swiping cards for the price breaks.

•Wide aisles. Aisles are wide enough for three carts to pass.

•All self-checkout. To cut costs, there are no cashiers.

•Limited advertising. The chains buy no TV or newspaper ads. When it enters a market, it mails $5 coupons to area residents.

•Green design. Stores are designed to use 30% less energy than typical grocery stores its size, and recycling is a priority.

•Show the food. Most Fresh & Easy brand products are packaged so shoppers can see what's inside.

•Wine guru. The chain employs an accredited Master of Wine (one of 265 in the world).

For all of Fresh & Easy's planning, it's had some glitches in the early going, such as its distribution system failing to prevent some stocking shortages. The chain also has taken heat from Los Angeles activists, who say it has opened fewer urban stores than promised, and faced union anger over its non-union stance.

Studying how we live

While some problems are to be expected in such an ambitious rollout, some misjudgments about U.S. consumers are more surprising — given how much it studied them in their natural habitat.

Before the first U.S. store was built, Tesco hired a specialty research firm to help it peer into the lives of 60 American families in Southern California and Denver.

It spent hours in their homes. It took video of them cooking. It took video of them shopping in grocery stores. It even shot video inside their refrigerators and pantries.

Still the store design has confused some shoppers. "It's not as organized or as customer-oriented as I'd hoped," says Rick Sanchez, who was disappointed by what he saw at the Long Beach store's grand opening. When the first U.S. store opened, it didn't sell milk in gallons — something quickly corrected, says marketing chief Simon Uwins.

One of its most surprising issues so far — given its research — is that while it learned early on that natural foods are a major draw for U.S. shoppers, it underestimated how much Americans want their grub ready-to-go. Sales of prepared foods have been twice what it expected, Mason says.

That's one reason the company hired chef Michael Ainslie. He figures he's created 110 grab-n-go products over the past year, roughly one new product every three days. A point of pride: Mac 'n Cheese. "This was not easy to create with 100% natural ingredients," he says.

The families Tesco observed — who were paid about $300 each — were not initially told who was watching them.

"We didn't have a clue," says Sharon Catlett. The Burbank mother of twins and law firm administrator and her stay-at-home husband "thought it was a couples counseling service, because they kept talking to us separately." Catlett shops at whichever of six grocery stores has the best deals. The observers shopped with her, then went home with her and watched her cook dinner with what she'd bought.

She says she now has slight misgivings about giving too much information to the Brits. But she concedes, "We're arrogant enough to think we can set them straight."

Which is what Tesco — known for testing and retesting — wants her to do.

Touring the model store

Tesco also built a mock Fresh & Easy store in a warehouse in Hawthorne, Calif., long before the first real store. Focus groups were paraded in to help tweak everything from the logo to operation of the self-checkouts.

Some non-grocery products were tested — and died — there.

"People just didn't think Whiffle balls belonged in the store," says spokesman Roberto Munoz.

While a reporter was shown the mock store, access was denied to the super-secret, 820,000 square-foot distribution center in Riverside, east of Los Angeles, where Tesco creates and packs most Fresh & Easy brand foods.

Tesco brought key U.K suppliers to its Riverside fortress. A second such facility is planned in Northern California.

Competitors are eagle-eyed but closemouthed. Wal-Mart would not comment on Fresh & Easy, but it plans to test a similar store dubbed Marketside near Phoenix. Whole Foods had no comment. Ditto for Trader Joe's.

Safeway CEO Steven Burd has said, "We'll watch the entry of Tesco closely."

Opening day lessons

Fresh & Easy tries to make a grand entrance. At openings, top executives (in casual dress) show up to hand out free tote bags. They work the floor, as they did at the Long Beach opening last month when 250 shoppers rushed in when the doors parted.

One arrival, Jennie Kwan, a retired grandmother from Hong Kong, mistook Uwins for a local store staffer and asked the marketing chief where to find coconut extract. He couldn't find it — but found almond extract. It wasn't what Kwan had asked for, but she snatched it up anyway, saying, "That's a very good price."

Uwins smiled at a small victory. On his blog last week, however, Uwins said Fresh & Easy would take a break from opening stores for three months "to kick the tires, smooth out any wrinkles and make some improvements that customers have asked for."