LONDON (Dow Jones) -- Britain's Tesco is halting for three months the expansion of its U.S. operation Fresh & Easy, the food-retailing unit meant to carve out a niche between convenience stores and the massive warehouse-style retailers.

Tesco said the suspension of its expansion of the 59-store chain was planned and that it was "pleased" with its performance.

"We've given ourselves a little bit of time to kick the tires, smooth out any wrinkles, and make some improvements that customers have asked for," the company said in an blog entry.

Improvements made over the last few months include accepting American Express credit cards alongside those of MasterCard and Visa, the company said.

Fresh & Easy operates on the West Coast, with stores in Las Vegas, Phoenix, Los Angeles and San Diego.

It focuses on ready-to-eat meals and fresh products, and its arrival put a scare under firms ranging from Wal-Mart Stores (WMT) to Kroger (KR) to Whole Foods Markets (WFMI).

"Tesco suggested it wanted Fresh & Easy to have the convenience of Walgreens, the value of Wal-Mart, the fresh food quality of Whole Foods, and the differentiated product range of a Trader Joe's," said Credit Suisse analyst Andrew Kasoulis in a note last year.

"We think the format largely seems to have achieved that."

But the Sunday Telegraph, which first published the news about the delay, said there were rumors that the concept had missing internal sales forecasts. The report suggested that Fresh & Easy wasn't getting the customer traffic it needed to drive sales growth.

Shares in Tesco dropped 3.5% on Monday, one of the worst-performing FTSE 100 stocks -- underperforming even Terminal 5-ravaged British Airways.

Clive Black, an analyst at the U.K. brokerage Shore Capital, said the operation needs to be seen in context.

"The business is tiny within the context of the group, and even if it did fail (which we're not assuming), a 1 billion-pound cost within a business that has a market capitalization of over 30 billion pounds needs to be reflected upon," he said.

"Tesco management has consistently said to us that this is a risk-reward equation that is manageable and favorable, and this can remain the case."

  (END) Dow Jones Newswires
  03-31-08 0529ET
  Copyright (c) 2008 Dow Jones & Company, Inc.