October/November, 2007

From the Editor

Tesco's Prepared Foods Challenge

As Tesco unveils its new Fresh & Easy concept, it begins an effort to boldly go where no British supermarket operator has ever gone and succeeded before. Marks & Spencer gave up on Kings, Sainsbury’s gave up on Shaw’s — is Tesco likely to succeed?

By the time you read this, initial reports will be in, but it would be wise to disregard them. The hype is intense and many will check out the concept; besides, Tesco officials will announce they are “exceeding expectations,” regardless of any actual budgets or initial sales.

The centerpiece of the offer — a focus on fresh prepared foods — is unlikely to fail because of any flaw obvious by looking at the products. We can assume Tesco has done its consumer research and, in all probability, won’t do something ridiculous.

Yet fresh prepared foods are always problematic for supermarkets. Whole Foods or H.E.B.’s Central Market can make prepared foods work — but only at high price points allowing for plenty of shrink — and even then only in neighborhoods with upscale demographics. Tesco has promised to come in as a bargain, beating discounters such as Trader Joe’s on price.

Fresh prepared foods work very well in urban milieus; the upscale professional in Manhattan or San Francisco picks up dinner on the way home from the office — but Tesco has not targeted this geography.

Instead Tesco has targeted automobile-based cities and suburbs, and this is likely to make the offer problematic.

First, it is not in line with the way Americans shop. By international standards, Americans have large homes and refrigerators. They stock up. An American shopper confronted with attractive fresh prepared foods will not want to buy a single dinner for tonight; she will want to buy five.

Then, when the neighbors suggest an impromptu barbeque, the boss buys pizza to compensate for a late night or a friend wants to go to dinner to discuss her divorce, the food goes uneaten and the quality becomes questionable. This is why frozen foods are so popular in America!

Second, large arrays of fresh prepared foods that attract customers are complicated to produce and expensive to distribute. Typically only a few of the items — usually the most perishable — generate high demand. Still, the other items contribute mightily to the image of a place to look for dinner.

As the high shrink numbers come in, some clever analyst will note 20 percent of the fresh prepared food items are generating 80 percent of the sales. Eliminate 80 percent of the items, allow for some substitution to other products and sales may drop by only 10 percent — yet think of the production efficiencies! Imagine the savings on shrink!

Of course, without all that assortment, the prepared foods offer no longer beckons as a place for “dinner.” It is now just a store that sells a few prepared food items, so sales wind up dropping much more than anticipated.

Third, fresh prepared foods require frequent delivery. We can extend shelf life on fresh prepared foods by preparing them in “clean rooms” and utilizing modern packaging technologies, but doing so is problematic. These efforts are not equally successful on all types of food. Spaghetti and tomato sauce can last a long time — but it’s more difficult to extend the shelf life of dishes with cream sauce. And extended shelf life is the kiss of death on prepared foods — regardless of quality.

Let consumers, even once, see an expiration date 28 days from the day they are shopping and they will never want to shop there again. They will start to assume something with a 2-day expiration date has been sitting for 26 days.

Tesco will have to deliver fresh prepared food more frequently than anything else in the store. But the cost of that drop-off is substantial, especially in southern California traffic. Sales have to be extraordinarily good to sell enough pieces to sufficiently amortize the cost of that drop-off.

In all likelihood, Tesco will struggle with its fresh prepared food offering as it tries to find a mix that works and come to a compromise with American tastes, production and transport efficiencies.

Ironically, Tesco may be in more trouble if it has an instant success than if it struggles. A struggle will not encourage imitation and, in time, competitors’ attention may wander. Tesco in the United States could grow slowly, under the radar screen, while others doubt its profitability.

But a win out of the gate could stop Tesco in its tracks. When Wal-Mart rolled out its super center concept, supermarkets felt powerless to respond to the competitive threat. They didn’t have the ability or knowledge to handle general merchandise. Wal-Mart, virtually unchallenged by supermarkets, seized the bulk of the nation’s super center market.

It won’t happen that way again. The Fresh & Easy concept is just a small grocery store. There is scarcely a product sold in the store that Kroger, Safeway or Supervalu doesn’t sell in one banner or another. It would be relatively easy for any supermarket chain to roll out small footprint stores.

And the real estate is available. The Tesco concept depends on space in strip malls. One suspects Tesco selected the format precisely because it doesn’t depend on building super centers or finding prime suburban corner centers.

Yet the very ease of getting real estate that attracted Tesco to the concept may be its Achilles’ heel.

The concept will be duplicated in Boston, Cincinnati, Chicago, Houston and Miami before Tesco can think of going to any of them. Plus an assault of new small-scale banners will keep Tesco pinned down fighting for its turf.

So a big challenge to succeed awaits Tesco with a strong likelihood it will be preempted if it does succeed. Not a pretty picture for Tesco.  DB