Twelve more Fresh & Easy stores to close as British parent company is accused of failing to understand the US market
When Tesco was planning its foray into the US grocery market five years ago, the unlovely box of a building it took over in Hemet, in the far eastern suburbs of Los Angeles near the Mojave desert, seemed the embodiment of everything it hoped to achieve.
The plan was that Fresh & Easy, the brand Tesco launched in America, would spearhead economic revival in a ruggedly unfashionable stretch of exurban boulevard known mostly for its panhandlers and streetwalkers. The closest competitor was a couple of miles away.
At the same time, Tesco would put itself on the map across the western United States, its chosen market, as a new force to be reckoned with.
It has not worked out that way. Fresh & Easy has since dropped its plans to move into California’s “food deserts”: mostly struggling communities without easy access to food stores. The fanfare the company hoped for became an impossibility as the economy first faltered, then melted down in late 2008.
The Hemet store is now slated for closure. The company announced last week that it was “temporarily” closing 12 stores across California, Nevada and Arizona – to add to the 13 it closed in late 2010 – because they were losing too much money to keep operating.
The news is not all bad. Separately, Fresh & Easy is opening in 25 new locations before the end of March, some of them full-size stores and some Express outlets similar to the Express and Metro stores Tesco operates in Britain. These are, for the most part, in more obviously affluent areas.
One site is Hermosa Beach, a mecca for surfers and young professionals about 10 miles south of Los Angeles airport where such offerings as largegrain couscous, pre-prepared chicken and broccoli alfredo, and $30 (£20) bottles of pinot noir from the Santa Rita hills near Santa Barbara have a more obvious customer base.
The company’s line is that it is fine-tuning its path to profitability and market visibility in what has been an undeniably tough economic environment. “We’re constantly refining and changing,” a spokesman, Roberto Munoz, said.
But the picture is challenged by retail trade analysts and union activists who say Tesco has never properly understood the market, has alienated the communities it seeks to serve and has done a poor job of providing something that is both different and appealing.
They also accuse it of taking a high-handed if not arrogant attitude to its workforce that has prompted a flurry of formal complaints to the National Labour Relations Board (NLRB).
“Tesco has such a strong reputation in England for being an industry leader in workplace standards and overall operations, but you can’t say remotely the same thing about the way they’ve operated in the US,” said Jill Cashen, director of communications for the United Food and Commercial Workers union (UFCW). “They are not leading in terms of standards or operations or even the kind of outlet they’ve created.”
Jim Hertel, a retail analyst with Chicago-based consultants Willard Bishop, said he was surprised at how little Fresh & Easy appeared to have learned from its extensive pre-opening market research.
He found the cellophane-wrapped sandwiches and fruit and vegetables anything but fresh, and was surprised at how little the product lineup varied between neighbourhoods. In many locations, local churches vehemently opposed Fresh & Easy’s extensive alcoholic drink selection but said it was difficult to have their objections heard.
In other words, if Fresh & Easy had half-empty stores, it was not just the fault of the 2008 meltdown on Wall Street.
“I still don’t see what the big idea is,” Hertel said. “I thought they would be about a superior offering at competitive prices. But that’s not what I found, or what shoppers have found.”
Munoz and other company spokesmen say the criticism is outdated. Many branches now have unwrapped fruit and vegetables and fresh bread and flowers up front, Munoz said. He pointed out that Christmas sales were extremely healthy this year, suggesting the corner has been turned, even if the company is still a year or two away from even the most optimistic break-even forecasts.
Labour activists say Fresh & Easy’s treatment of its workforce remains just as problematic, however, and note that the company has responded to a flurry of complaints about relatively minor workplace violations not by fixing the problems but by taking almost all of them to appeal at the NLRB in Washington.
The UFCW has never liked Fresh & Easy and has objected – for example – to its reliance on self-checkout rather than human cashiers. But it has also highlighted how one thriving store near downtown Los Angeles was denied a majority vote in favour of unionisation – which the company ostensibly does not oppose – because several new employees were brought in on 24 hours’ notice who tipped the numbers in the other direction. In the following months, the worker count then dropped back to its original level.
“When the company first came to us, they talked a lot about their values,” said Jeff Ferro, who leads the UFCW’s campaign against Fresh & Easy.
“They said they would do whatever the workers wanted. But when the workers asked for union representation, they changed their tune and said they would follow the law. Since then we’ve seen a repeated breaking of US labour laws, which are not the strongest in the world to begin with.”
Along with the bad feelings have come big losses. A recent analysis by investment bank Shore Capital forecast accumulated losses of around £700m in the US, on capital expenditure of more than £1bn.
And while it remained cautiously optimistic about the long-term prospects – assuming the right formula will be found eventually – the report described Fresh & Easy as a “reasonably sustained drag on Tesco’s earnings” that needed to be addressed with some urgency.
At the Hermosa Beach store opening, Fresh & Easy was clearly on a mission to please, filling the store with customer service representatives, organising a raffle of store vouchers and giving away fabric shopping bags.
In Hemet, meanwhile, employees were told they would be relocated to other stores in the area and customers were reminded the next Fresh & Easy was just in the next town, a short drive away.
But shopper Bob Pratte, for one, felt a sense of loss. “A long stretch of Florida Avenue will be void of a grocery store,” he said. “It is an area of Hemet where retirees and people of limited means reside. Plenty of people walk or ride scooters for the disabled to buy groceries.”
Hertel made the same point even more bluntly. “How can you be a food retailer and not sell food to people who have no other options?” he said. “If you can’t sell food without any competition, that’s a problematic state of affairs.”
Fresh & Easy has been an expensive US road trip for Tesco, with the chain racking up losses of £700m since the first stores opened in the autumn of 2007.
To date Tesco has ploughed more than £1bn into establishing the US venture, a decision considered one of the most daring taken by its former chief executive Sir Terry Leahy during his 14-year reign. For Leahy and Tim Mason, below, the marketing whiz who relocated to Los Angeles to head up the business, it was high risk but also potentially highly rewarding (at least at the start).
In 2009 Leahy received some £10m in pay and cheap or free shares while Mason received about £7m. The payday sparked a row about executive pay with one US investment group accusing Tesco of giving excessive rewards that its performance did not merit.
The row did not go away and iI 2010 the retailer faced embarrassment at the annual meeting when almost half of shareholders failed to back the pay deal.
To avoid a repeat of the showdown, Tesco overhauled directors’ pay last year with Mason’s bonus scheme dropped and new targets set for directors based on wider group performance measures.
Analysts think Fresh & Easy will make a loss of at least £125m in the year to February with Tesco aiming to break even in the coming financial year.
The US chain’s improving performance was a small detail that got lost within last week’s Christmas trading update, which contained its first profit warning in 20 years, wiping £5bn off the company’s stock market value.
Tesco said that unlike its UK stores Fresh & Easy had a very successful Christmas and New Year with underlying sales up nearly 20%. Zoe Wood