April/May, 2013

From the Editor

Lack Of Service Deli Key To Fresh & Easy

Among the myriad of reasons Tesco’s Fresh & Easy has failed in the U.S., one not commonly recognized is the key role of the deli department in the fiasco, or put more precisely, the lack of a service deli department. Unless Tesco can pull a rabbit out of its hat and gain a sale nobody expects, total losses for the Fresh & Easy venture will approach $2 billion U.S.

This is astounding; Tesco is a well-regarded retailer and Fresh & Easy was such a priority concept. Yet it speaks volumes to the American consumer’s attitude toward fresh and the crucial role of the deli/retail foodservice arena in food retailing, now and in the future.

The great error Tesco made in rolling out Fresh & Easy — the error that sealed its fate — was the decision to invest heavily in infrastructure, both the large distribution center in El Segundo, CA, and the large staff of expatriate executives brought in to head the management team. The reason this was the crucial decision was it deprived the Fresh & Easy management of one of a retailer’s most valuable assets — time. The minute the infrastructure was in place, the venture began hemorrhaging money, so the urgency became opening enough stores so there would be enough business to plausibly offset the overhead.

This, predictably, led to the acceptance of lots of poor locations and to the roll-out of a concept that was not making money. Add in a good dose of arrogance and a group mentality that thought itself destined to succeed, and you have a clear recipe for failure.

Though this is all true, to some extent, it still begs the question: Why was the store concept not profitable?

As always, there are a lot of reasons. The small format itself was a key problem; small formats work well in specific circumstances such as urban or university venues where consumers don’t drive to the store. They also work with specific formats such as Aldi or Trader Joe’s, where the concept is built around specialty assortments — say a deep discount or epicurean model. These stores, however, were built in the car-centric southwestern U.S., not Manhattan, and Tesco always viewed them as broad concepts designed to serve the full range of consumers.

Tesco’s adventure just adds to our experience that this doesn’t work. In suburban USA, a small store can’t carry the range expected by consumers with copious trunks who drive to the store to stock up. This means consumers have to go to mainstream supermarkets for most of what they need, transforming the visit to Fresh & Easy into a not very “easy” annoyance or converting it to a lower volume “fill-in” convenience store.

The fact the stores opened so heavy to private label was a big problem as well. Private label succeeds when consumers trust the retailer. Fresh & Easy was an unknown name with a parent company unknown to most Americans. It just didn’t have the reputational equity among consumers to succeed.

Tesco’s decision to launch Fresh & Easy with uniform assortment in all stores was always odd. Tesco doesn’t operate that way in the U.K.; it seems a triumph of the logistics team over the merchandising team to say stores in upscale Scottsdale, AZ, should carry the same assortment as stores in Compton, CA. In the U.S., offering a standardized assortment against a diverse population base is a guaranteed loser — and lose Tesco did.

Yet the place Tesco hung its hat in America was to make the consumer a promise of freshness. A reasonable explanation of Tesco’s failure to generate a profitable store concept is to note that, in the American perception, Tesco failed to deliver on that promise.

Yes, the produce was wrapped excessively, detracting from the farmstead atmosphere Americans enjoy and, yes, the stores had no butchers to do custom cuts and no effort was made until the very end to make consumers think anything was being baked fresh in-store. But the big differentiator was the lack of a service deli.

What does a fresh rotisserie chicken mean to an American? It means a hot bird rotating before one’s eyes, heavenly aroma drifting through the store — the rotisserie experience one gets at almost all American supermarkets, not the cold chicken in a plastic bubble cooked in a distant commissary that Fresh & Easy offered. What is a fresh sandwich? One made to order, where the consumer can ask for extra tomato or Provolone instead of Swiss, or deli mustard instead of yellow, for a roll rather than bread or rye rather than wheat. Not a pre-packaged, take-it-or-leave-it sandwich that, to American eyes, looks as if it could be sitting in a vending machine.

Tesco made a point of emphasizing its extensive research of the American consumer before launching Fresh & Easy, and few doubt it was onto something in recognizing the primacy consumers place on fresh. In the end, though, Tesco was unwilling to develop a concept that had the labor quotient required to do things fresh, and so its insight had no value, the stores failed to deliver, and the fate of the chain was sealed.       DB