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Fresh & Easy expansion to continue despite red ink

The British grocery chain will open its 64th store in the region today on the heels of reporting an annual loss of about $200 million.

April 22, 2009|Jerry Hirsch

At a time when Southern California supermarket chains are closing stores and laying off workers, Fresh & Easy Neighborhood Market continues to buck the trend, opening its 64th store in the metropolitan area in Corona today.

It is part of an aggressive expansion by the division of British retailing giant Tesco to gain a foothold in the United States, even as it incurs losses that would drive less ambitious companies back across the Atlantic.

On Tuesday, Tesco said Fresh & Easy lost about $200 million on sales of about $300 million for its fiscal year ended Feb. 28. The chain of small-format grocery stores has 119 markets, including 55 in Las Vegas and Phoenix.

"The U.S. is the biggest market in the world," said Andrew Wolf, an analyst at BB&T Capital Markets in Richmond, Va. "But breaking into it is a big undertaking with large start-up costs."

Although the losses at Fresh & Easy are "not inconsequential," Wolf said they were still digestible for a company that posted about $87 billion in sales during the same period and wants to be a player in the U.S. grocery industry.

Other analysts believe that Tesco's goal of opening hundreds of small grocery stores under the Fresh & Easy banner in the Western U.S. is doomed to fail.

Fresh & Easy's small stores and limited selection have trouble siphoning families, and their big grocery tabs, from the larger, entrenched supermarkets, said Jim Prevor, a food industry analyst who edits PerishablePundit.com, a website about perishable food retailing. And the stores don't offer enough ethnic and specialty foods to be competitive in the diverse neighborhoods of big cities, he said.

"The problem is that they don't have the right concept of what will work in the United States," Prevor said.

Back in London, Tesco executives are making no prediction as to when their U.S. invasion might turn a profit. But they plan to stick with Fresh & Easy.

"We are in this for the long game," Tesco spokesman Jonathan Church said. "The problem is that we have opened into one of the worst recessions the States has seen."

Even so, the chain is starting to gain customers, Church said. Sales at stores open at least year are 30% above last year, he said.

The Fresh & Easy stores are opening when traditional grocers are cutting back as cash-strapped consumers migrate to Wal-Mart and other discounters.

Albertsons has closed nine stores in Southern California this year, reassigning several hundred employees and laying off about a dozen workers. The chain expects more workers will lose their jobs because of the closures.

Ralphs demoted more than 150 meat cutters to clerks, slashing their pay by more than a third to $13.47 an hour. Vons recently fired 97 workers and reclassified almost 200 full-time workers as part time, a move that could slice their wages as much as 40%.

When Fresh & Easy first opened, executives said the Trader Joe's-sized stores -- heavily dependent on house-brand goods and prepared foods -- would shake up the local supermarket scene. Originally, the stores carried about 3,500 products, barely 10% of what's found in a traditional grocery store.

But after sales failed to meet initial expectations, the company has had to tweak the format, offering more discounts and promotions. Fresh & Easy also is adding larger package sizes and more selection in frozen foods and branded grocery items.

The company doesn't plan to change the basic concept of a stripped-down grocery store that people can get in and out of quickly. It doesn't accept coupons or checks or offer a loyalty or club card program. All check-out is self-service.

Fresh & Easy will continue to open stores at a pace of about one every two weeks this year. Each new store creates about 23 jobs, most part time.

Still, the combination of the recession and the losses has had its effect.

Tesco has delayed a planned expansion into Northern California despite having announced leases for 38 sites and, in many cases, having built out the stores complete with empty shelves and working cash registers.

This has added to the gushing red ink at Fresh & Easy, which opened its first stores in late 2007. Tesco has poured hundreds of millions of dollars into building an infrastructure, including a distribution center in Riverside that is the size of Disneyland that could support many times the number of stores it has opened or has in the pipeline.

In its financial report, Tesco conceded that Fresh & Easy has "high overhead" and not enough stores to offset expenses.

Analysts are divided about how long Tesco will stay with Fresh & Easy.

"The finished stores sitting empty in Northern California tell the whole story," Prevor said. "Blaming problems on the recession here is just a cover. There is no reason to think that if the economy suddenly got better, people will stream to Fresh & Easy."

Prevor believes that Fresh & Easy will become an increasingly expensive distraction for Tesco and that the British company will eventually abandon the market.

"What's gone wrong is they underestimated how long it will take for shoppers to understand what their stores are all about," said Willard Bishop, a retail strategy and marketing consultant in Barrington, Ill.

But Bishop believes the company has correctly recognized that some shoppers in the U.S. prefer smaller grocery stores.

That preference is on the rise, and that's why Wal-Mart and Vons owner Safeway Inc. also are experimenting with smaller stores, he said.

"We are going to see a lot of growth in small stores over the next five years," Bishop said, "and it may be a race between Fresh & Easy and Wal-Mart to capture that market."

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jerry.hirsch@latimes.com

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