• by Sarah Mahoney  @mahoney_sarah, April 22, 2009

British retailing giant Tesco says its Fresh & Easy Neighborhood Markets lost nearly 50% more than it expected for the year, and that it expects those losses to continue for the next 12-month period -- when many had expected it to break even. And it says it plans to continue to follow a slower expansion plan for the year ahead, due to the sputtering economy.

The company also concedes that it is tweaking its format, and the concept -- originally conceived as a high-quality and convenient alternative to larger supermarkets -- is shifting to appeal to consumers who are more concerned about saving money than saving time.

"Given the scale of the economic downturn, we are also seeing increased demand from customers looking to make stretched household budgets go further -- through more affordable products, larger pack sizes and additional range in some categories, such as grocery and frozen food," a company executive says in its earnings release. "We are looking to meet these needs by making further changes to the stores."

But the weak results have some experts wondering if there is anything Tesco executives can do to solve the Fresh & Easy problem. "The concept as they initially launched it has failed," says Jim Prevor, an editor and supermarket analyst, "and the question is, what can they do to change it? They're in a very difficult position.

"Most retailers -- take Wal-Mart Stores' Marketside test in Arizona - start new concepts on a very small scale. But Tesco was adamant that Fresh & Easy wasn't a test, but a launch. Now they've got this enormous distribution center and a very high overhead. Even if the stores they opened were very successful, they'd lose money."

Wal-Mart currently has five Marketside locations open, while Tesco has 115 Fresh & Easy units.

Tesco says its losses -- initially expected at £100 million -- rose to £142 million for the year, primarily because of the adverse movement of the dollar. The company opened 62 stores in the Western U.S., and says it plans to open roughly the same number this year-considerably less aggressive than its initial plans.

Prevor says that for all the posturing large chains have done about smaller format stores, only Aldi -- a limited-selection store -- and Trader Joe's have been "really successful." Part of the problem is F&E's uniform merchandise. "It sells exactly the same product mix in a store in upscale Scottsdale, Ariz. as it does in downscale Compton, Calif.," he says.

And while the chain has done better with college kids, young singles, and older people, "it's a concept that was supposed to be based on convenience, and it just isn't convenient for the average American to shop at a store that doesn't have a big enough selection -- that just means they have to make another trip somewhere else."