December 4 2007: 2:12 PM EST
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Tesco needs a fresh start in the U.S.

Its new Fresh & Easy stores hope to offer a high-end alternative to 7-Eleven's Slurpees and Slim Jims. But it won't be easy, says Matt Boyle.

By Matthew Boyle, Fortune writer


(Fortune) -- As part of the ballyhooed opening of its new Fresh & Easy neighborhood market concept in Los Angeles last month, British retail giant Tesco commissioned a short video to chronicle the grand scope and vision of its risky U.S. foray. Hopefully the clip isn't some kind of leading indicator for the venture's prospects.

Fifteen Fresh & Easy stores are open already, with another dozen or so slated to launch in Southern California, Phoenix, and Las Vegas before Christmas. By February 2009, Tesco plans to have 200 stores open. And by 2011, Fresh & Easy could easily have $4 billion in sales from 500 stores, predicts analysts at consultancy TNS Retail Forward.

Tesco, which reported third-quarter results earlier today, is also optimistic. Same-store sales in the UK rose 4.1% excluding gasoline, while sales outside the UK increased 21% at constant exchange rates. The retailer said it plans to add seven million square feet of store space outside the UK this year, and by 2008 nearly one-quarter of its sales will come from outside Britain.

But back to the video, which was shown to investors and media last week. It began on a high note, as Fresh & Easy CEO Tim Mason explained -- to the opening chords of the Coldplay hit "Clocks" -- how Tesco planned to redefine grocery shopping and "undo the damage" done, ostensibly, by those hapless American retailers over the years.

"This is a launch, not a trial," said Mason, in one of the oft-repeated mantras spouted by the ruthlessly on-message Tesco team, all of them clad in LA-casual jeans.

But halfway through, the video froze, to the chagrin of Tesco's PR staff. A second attempt to show the video was made on the bus the next morning on the way to Fresh & Easy's El Segundo headquarters, but again, the DVD conked out.

Glitches at the start

The dodgy video is an apt metaphor: Despite all the hype, all the planning, and all the expertise of Tesco's management team, it's difficult, at least at this moment, to know if Tesco's California dream will become a reality. Even if the concept becomes a roaring success, as some bullish analysts believe, the journey -- like most in Los Angeles -- will be anything but easy.

Empty shelves are one problem. A Fresh & Easy customer survey found that just three out of four (74%) shoppers were satisfied with stock levels. Chief marketing officer Simon Uwins chalked the shortfall up to unexpected demand for Fresh & Easy's ready-to-eat meals, but Tesco can ill afford such screw-ups. First impressions are lasting, and that one shopper out of four who could not get her shopping done at Fresh & Easy is unlikely to return.

Tesco seems to be fixing things; indeed, there was nary an empty shelf in the stores Fortune visited last week. A larger challenge, however, is Tesco's reliance on store-brand or private-label products, which account for about 45% of all items in the store. Unlike the Brits, we Americans are still a bit wary of store brands -- frightening childhood memories of generic cans of "BEANS" still lurk in our minds.

The efforts of innovative retailers like Target (Charts, Fortune 500), Costco (Charts, Fortune 500), and Trader Joe's have gone a long way towards erasing those prejudices. But no store brand can succeed without a deep reservoir of trust and customer loyalty to the store in question. As a new entrant on the scene, Fresh & Easy has little brand equity to draw upon.

(That's one reason why Tesco chose a new name for its concept the name "Tesco" is as foreign as spotted dick to Americans.) Even for established retailers, such loyalty is rare these days -- a new study from IBM found that 73% of Americans either actively dislike or are ambivalent towards their local grocer.

CMO Uwins says that the Fresh & Easy label accounts for 75% of sales so far, so early signs bode well for its store brands. (A good chunk of those sales come from $1.99 bottles of Fresh & Easy's "Big Kahuna" Australian red wine -- a blatant rip-off of Trader Joe's iconic "Two-Buck Chuck".)

All it takes, though, is one bad experience with a store brand to cast a shadow over all the rest. "The make or break factor determining Fresh & Easy's ultimate success will be how well the private label line gains a compelling brand reputation," says retail consultant Art Turock.

Changing the game

Finally, in its haste to get the stores up and running, Tesco has so far neglected to do much tailoring of individual stores to meet the needs of each neighborhood. Sales have been brisk in Fresh & Easy's store in Los Angeles' Glassell Park, a working class enclave home to a good number of Hispanics. But not a single sign in the store was in Spanish. (Thankfully, the self-checking machine does habla espanol.)

The customers Fortune spoke with didn't seem to mind -- indeed, Glassell Park is the top-grossing store so far. But that has more to do with the dearth of supermarkets in the area since Albertson's closed (Fresh & Easy took over the building). Across the street sits a 7-Eleven, slinging Slurpees and Slim Jims. Despite all the hype and rosy projections, don't expect 7-Eleven, or Trader Joe's, or Whole Foods (Charts, Fortune 500) to quiver in the face of this British invasion.

Instead, existing retailers -- at least the smart ones -- will improve their game, which will benefit shoppers in Southern California and wherever else Fresh & Easy ventures. (Already there are plans for a warehouse in Stockton, in northern California.) And of course, Fresh & Easy will no doubt make some changes for the better.

For starters, it might want to sack whoever made that movie. To top of page

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