"Accelerating profitability for food businesses" Producers, Retailers, Caterers

What happened to the so-called British Invasion? You know the one where Tesco’s Fresh & Easy small-format food stores were going to sweep across America and turn this country’s food retailing industry on its head. The end of October will see the one-year anniversary of Fresh & Easy’s first store opening in Hemet, California. Since that time, Tesco has opened approximately 50 more stores in California, Arizona and Nevada. The results, by just about any industry accounting or reporting, have been less than stellar.

In a conference call sponsored by New York-based Citigroup, industry consultant Jim Prevor said that sales volumes for the stores opened since November 2007 were far below Tesco’s stated goal. As reported in Supermarket News, Mr. Prevor estimated that the sales volumes of the existing stores equated to about $5 a square foot compared with Tesco’s projected $14-$22 in sales per square foot.

This is not all that surprising to us. In January 2008, we visited stores in San Diego and Phoenix. At the time, we opined in our white paper, Tesco’s Fresh & Easy Neighborhood Market: How Fresh? Does Easy Matter? that one of the fundamental misunderstandings regarding globalization in the contemporary era is the mistaken belief you can easily export your successful brand or business model to foreign shores and expect similar successes.

Our most recent series of site visits to several Fresh & Easy locations in Pasadena and North Los Angeles reminded us of this phenomenon. Which is to say, despite Fresh & Easy’s comments and protestations to the contrary, the stores are still veritable ghost towns — empty, customerless husks generating bareley a whiff of compelling retail experience. These findings corroborate our original Fresh & Easy observation work documented in the aforementioned white paper. Now we can just as easily add the Fresh & Easy Pasadena and Los Angeles stores to the chorus: where are all the customers?

We won’t rehash the gory details here — those interested can check out our previous publication on the subject — other than to reconfirm and reiterate our overall conclusion from our earlier work. Namely, that whatever metrics Fresh & Easy may be using to judge initial success, the stores as they exist today pose absolutely no competitive threat in the marketplaces we’ve studied.

To be fair, none of us on the outside truly know what metrics Fresh & Easy may need to generate in order to be deemed a success within their organization. Heck, the convenience store up the street from my house — where we seldom encounter more than a few teenagers fiddling with the Slurpee machine — has somehow managed to limp along for the past 10 years. Maybe small footprint retail doesn’t need to generate much volume to turn a modest profit for Tesco?

What we can suggest, however, is that given our observations and learnings, this brand’s current retail experience and shopper draw poses little threat in the ever more competitive grocery marketplace.

More to the point, though, we reckon much of the analyst chatter generated by Fresh & Easy’s arrival on US shores really has to do with a looming battle between small footprint retailers.

The coming small footprint retailers and the redefinition of the convenience store

We have long predicted the rise and success of smaller format stores competing effectively in the food and grocery arena. After years of unbridled “square foot” creep, smaller footprint formats make a lot of sense on many levels. Besides the obvious benefits (i.e., small footprints are easier to navigate), reduced square footage also means it is much easier to guarantee a high quality experience throughout. Likewise, an abridged set of well-chosen higher quality SKU’s reduces shopper fatigue. Perhaps most importantly, smaller spaces promote greater intimacy, which leads to more immersive, compelling retail experiences.

Not surprisingly, the most successful small store formats appear to be those that cast the retailer as a specialist rather than those that portray themselves as simply a smaller version of a more generalist grocery or mass retailer. In other words, consumers appear to be most receptive to smaller footprint retailers who manage to position themselves as experts at a particular task, category or subject matter.

To wit: Bristol Farms (gourmet specialty retail), Trader Joe’s (private label gourmet), the former Wild Oats and food coops (natural & organic), Dean & Deluca (gourmet), Murray’s Cheese (or a local cheese shop), the local florist, the local butcher and so forth.

Yet, as the larger competitors are plotting their strategies for the looming small footprint war, we find a surprising lack of variation and focus among the entrants. Supervalu has announced their Urban Fresh format which will focus on “fresh, prepared foods, ready-to-eat/heat entrees and convenience items.” Walmart describes its new small-format Marketside stores as designed towards “the needs of a time-starved, higher-income consumer that is interested in convenience and premium fresh, natural and organic offerings.” And not to be outdone, Safeway recently tipped their hat into the ring with The Market, which is described as “designed with a simple layout, so it’s easy to find what you’re looking for….The perfect place for your ‘fill-in’ shopping or to grab a quick and delicious meal or snack.”

Do you sense a theme emerging here? Can you say…uh…convenience?

From our perspective the critical unanswered question regarding the looming small-format war is this: Is a scaled down generalist format with slightly enhanced fresh offerings significant enough to differentiate yourself in an already crowded marketplace?

No doubt many analysts and marketers will be quick to chime in with a chorus of convenience platitudes. “Today’s time-starved consumer….blah blah” But here is the issue that few analysts and marketers have stopped to consider.

Most households already utilize the most conveniently-located traditional, large format grocery retailer as their “go to” store for emergency, fill-up and mid-week trips. These large stores offer a vast selection of branded CPG goods, household supplies, personal care products, pharmacy, gifts, prepared foods, floral, as well as a variety of services, yet they are “conveniently” located (typically within five miles) of the consumer’s residence. This makes these retailers ideal choices not necessarily for the “regularly scheduled” (1x-3x monthly) large shopping trips (which can justify significant commutes to the likes of Walmart or Costco), but for the quick trips that pop up unexpectedly during the routine unfolding of one’s life.

In essence, mainstream, large-format grocery brands (Safeway, Publix, Kroger, Albertson’s, et al.) have become the new de-facto convenience stores for today’s so-called “time-starved” consumers.

The portrait that emerges is something akin to the following: Households that utilize…

a) One large-format or mass retailer for infrequent, stock-up shopping where “value” is king (e.g., Costco, Walmart Superstore, Super Target). Location and proximity are less critical here.

b) A series of small-format, specialist retailers to shop for specific categories (cheese, fresh meats, wine, specialty foods, natural foods, etc.) that are often triggered by unique occasions (dinner parties, Sunday dinner, book club, etc.). Here, too, location and proximity are relatively insignificant (i.e., consumers will (occasionally) drive quite far for the right cheese.

c) A conveniently-located, traditional, large-format retailer to supply all of their household needs not covered by items b & c above.

So all of this finds us asking the question few have yet to really address. Namely, in a world where most consumers live within five miles of one traditional major grocery retailer — and many in large metro areas such as Atlanta often find 3 or more major retailers within a single mile — what value, precisely, are these proposed smaller-footprint grocery formats really offering? Put another way, are the experiences generated by the current incarnation of these large-format retailers so uninspiring that consumers are looking for a condensed version that promises a 45 second quicker visit?