Fresh & Easy Finished

Tesco's Clarke confirms U.S. exit, sale plans for small-format grocery chain (watch video)

Published in CSP Daily News

By
Greg Lindenberg, Online Editor

LONDON -- Its strategic review complete, U.K.-based retail giant Tesco Plc is officially exiting the United States and will sell its financially troubled Fresh & Easy Neighborhood Market Inc. venture, which operates about 200 small-format grocery stores in California, Arizona and Nevada.

CEO Philip Clarke confirmed the retailer's much-anticipated U.S. exit. "Based on our progress so far with our strategic review of Fresh & Easy, including the indications of interest received from third parties, we have confirmed that the outcome of the review will be an exit from the United States," he said in releasing 2012-2013 financial results.

"Fresh & Easy has been treated as a discontinued operation within these results," he said. "We have written down the assets of the business and booked a provision for ongoing liabilities."

The total impact to profit after tax is 1.2 billion pounds ($1.83 billion U.S.), including 169 million pounds ($257.7 million) in trading losses and 1 billion pounds ($1.52 billion) in noncash items, mainly "the impairment of fixed assets and provisions for onerous leases," he said.

"As part of the strategic review, we've been talking to other parties about whether they'd like to buy Fresh & Easy from us, and we've found quite an expression of interest, and that has prompted the board to decide that we would like to sell, and so we are going through that process now," Clarke said in internally produced video detailing Tesco's overall current financials (watch embedded video; Fresh & Easy portions at approximately the 1:10-1:40 and 6:05-6:55 marks).

German supermarket chain Aldi--which operates the Aldi deep-discount grocery chain in the United Stares, as well as owning the Trader Joe's upscale, small-format U.S. grocer--is a favorite as a potential buyer for Fresh & Easy, although many industry observers expect a piecemeal selloff.

Fresh & Easy stores will remain open during the sale process. The company, with U.S. headquarters in El Segundo, Calif., posted a statement on its website and Facebook page: "As many of you have heard or read today, our parent company Tesco updated on the future of Fresh & Easy. While we don't yet know who our new owner will ultimately be, Tesco has already received interest from a number of parties including groups looking to purchase Fresh & Easy as an operating business. We appreciate all the support and love we've received from our loyal customers and even though our parent company plans to leave the U.S., we're pleased to confirm there are no plans to close any portion of Fresh & Easy."

The Fresh & Easy story began in 2005, when Tesco dispatched an advance team of senior managers to the United States. Hoping to keep their plans secret from rivals, the Tesco executives posed as Hollywood film producers making a movie about supermarket. The operatives set up a secret trial c-store in a West Coast warehouse.

Under Sir Terry Leahy, Tesco--the third biggest retailer in the world--built successful businesses in countries ranging from Ireland to the Czech Republic, South Korea and Thailand. But Fresh & Easy will go down as one of Sir Terry's and Tesco's biggest failures, joining the likes of J Sainsbury and Marks & Spencer, British retailers that tried and abandoned U.S. ventures.

The chain launched in 2007 and expanded for a couple years before inability to reach breakeven prompted a hold on opening more stores.

Clarke has been under pressure to turn around the loss-making Fresh & Easy since taking over from Leahy in March 2011. Last October, he halted new store openings and then announced two months later that Tesco would begin a strategic review.

Despite its James Bond-inspired U.S. market research, Fresh & Easy's failure is attributed by many industry observers to a misreading of the American market.

Tesco entered the United States with the idea that it could revolutionize shopping for Americans with smaller stores of approximately 10,000 square feet, about one-fifth the size of a standard supermarket.

"Our team went over to live in the U.S. We stayed in people's homes. We went through their fridges. We did all our research, and we're good at research," Leahy told The Wall Street Journal in 2007. He said the result would be "the perfect store for the American consumer in the 21st century."

While it attracted a few loyalists, Fresh & Easy largely failed to capture the imagination of American consumers unaccustomed to British-style ready meals, self-service cash registers and unorthodox store layouts.

Many of Tesco's ideas--which found great success in Britain--were lost in translation. For example, the stores featured a large portion of Fresh & Easy private-label products, even though American shoppers are far more brand-conscious than their British counterparts. The shops also opened in cities where people drive, meaning larger supermarkets were easily within reach with wider selections.

"The main thing is that they underestimated how Americans shop," said Natalie Berg, global research director at Planet Retail. Fresh & Easy stores are "too clinical," with too much automation for American tastes. "They didn't have a very clear proposition," she said. "Are they a convenience store? Are they a discount store?"

A report by Morgan Stanley & Co. analyst Edouard Aubin outlined other shortcomings: Fresh & Easy stores had too narrow a product range; they initially did not have bakeries, which American shoppers like; the stores were physically too cold; the flower departments were not prominent enough; and the marketing was too focused on price. The report also noted that Tesco did not roll out its U.S. loyalty-card program until recently.

[To read CSP Daily News guest columnist Gerald Lewis' take on Tesco's U.S. misadventure, including his 2007 column predicting Fresh & Easy's failure, click here.]