Tesco Sours On Fresh & Easy
The Brand Republic hed may look sensational but it’s the blunt truth: “Tesco CMO Tim Mason Out As Chain Concedes Defeat In U.S.” The world’s third-largest supermarket chain is bailing on its 199 Fresh & Easy Neighborhood Markets in Arizona, California and Nevada that were described by Mason at launch in 2007 as “designed to draw customers back to their local neighborhoods by offering high-quality, fresh and nutritious food at affordable prices," Marketing’s Daniel Farey-Jones recalls.
“Bad timing was partly to blame for the Fresh & Easy woes, with the chain arriving amid a housing market slump in California and just before the financial crisis struck,” observes Holly Williams in The Independent. “But the team's strategy -- under [former CEO] Sir Terry [Leahy] and … Mason -- also appeared to be flawed from the start.”
To wit, the stores are too small and “its self-service checkout model led to the often-quoted gibe that it was ‘not very fresh and not very easy,’” Williams writes.
“We've now concluded that it is not going to deliver acceptable shareholder returns in an appropriate timeframe in its current form," current Tesco CEO Phil Clarke said during a conference call with reporters. "It's likely but not certain that our presence in America will come to an end."
Tesco spent nearly $1.6 billion “on the loss-making U.S. venture in an attempt to take on its main rival, Wal-Mart,” the BBC reports. All options are being considered and investment bank Greenhill has been hired to assist with a review.
“We have had a number of approaches from parties interested in acquiring either all or part of Fresh & Easy, or in partnering with us to develop the Fresh & Easy business,” according to a statement announcing the “strategic review.”
According to the AP, analysts at Panmure Gordon welcomed the announcement, writing “This hardly represents Tesco’s finest hour, but it is more about what it says about likely changes in management’s thinking.” To the point, it’s a sign that management is “prepared to take difficult decisions.”
Mason, who was CMO of the company and CEO of Fresh & Easy, had been at the company for 30 years. Citing his “important part in our success” over that span, Clarke says that “he leaves with my thanks and good wishes.”
Tesco’s “U.S. growth has slowed to a trickle,” reports Bloomberg Businessweek’s Sarah Shannon. Same-store sales at the unit rose 1.8% in the third quarter as opposed to 6.9% growth in the prior quarter.
“It will be a good relief to withdraw,” CA Cheuvreux analyst Arnaud Joly tells Shannon, saying that interested parties are likely to be local, rather than a major international retailer.
“It was a discount store, and it had high costs, and it just proved too difficult to shift people from their traditional buying habits in big supercenters and supermarkets into a small store,” Clarke said on a conference call.
“Since taking the top job nearly two years ago,” reports the Wall Street Journal’s Peter Evans, “Clarke has stood firm behind Fresh & Easy. As recently as June, he said there was ‘great value in the business,’ but today faced an embarrassing climbdown. ‘I've had a deep, hard look [at Fresh & Easy], and couldn't see how sustainable shareholder returns could be achieved quickly,’ he said.”
Tesco, which trails only France's Carrefour and Wal-Mart in grocery sales globally, has embarked on a six-part plan to “Build a Better Tesco in the U.K.” and a third-quarter management statement issued yesterday claims it has “continued to make good progress.” At the same time, it admits, “our general merchandise performance overall in the U.K. was not good enough….” Clarke said that he was "pleased" with its food business, however.
“Customers believe Tesco is becoming ‘less competitive’ on both price and quality compared with its rivals” according to a story in The Telegraph. Angela Monaghan cites a new Espirito Santo consumer survey that finds that “29% of UK consumers now choose to do their majority of the food retail shopping at a Tesco store or online, down from 34% in the first quarter of 2012 and 35% in 2011.”
Reuters’ James Davey points out that Tesco issued its first profit warning in more than 20 years last January. “Tesco has suffered in the downturn more than its British supermarket rivals, in part because it sells more discretionary non-food goods where shoppers have been cutting back most.”
On the bright side, although “it will be costly to pull out” of the U.S., according to independent retail analyst Nick Bubb, “the stock market has been urging Clarke to make up his mind and he will probably get credit for that.”
You know things are bad when credit is parceled out for “making up your mind.”