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Sales at Fresh & Easy, Tesco's first foray into the American grocery market, are 70 per cent below expectations as customers have failed to warm to the business, an analyst claimed yesterday.
As Goldman Sachs downgraded the supermarket giant's shares on the basis of stuttering UK sales, Mike Dennis, a senior research analyst at Piper Jaffray, said that the company's fledgeling US operation was experiencing a “substantial shortfall”.
“Fresh & Easy, Tesco's US West Coast convenience concept is, we believe, based on our checks with suppliers in the US, running 70 per cent below budget on US sales,” Mr Dennis wrote.
Citing sources close to the company, he said that the supermarket had hoped to achieve first-year average sales of $200,000 a week per store but was averaging only about $60,000. Mr Dennis wrote that this would indicate that sales would be about $30 million in the second half, “a substantial shortfall from our initial estimate of $100 million-plus. The issue is very weak footfall.”
Tesco's investment in the United States is believed to be one the reasons why it is struggling to match the sales growth of Morrisons and Asda in Britain.
One industry insider said that about a third of its chilled foods team has gone to America to help to develop the fresh food lines sold in Fresh & Easy.
The Times reported this week that Tesco had moved Jeff Adams, the American-born chief executive of the company's Lotus business in Thailand, to the US to work under Tim Mason, Fresh & Easy's chief executive.
Mr Dennis said that Mr Adams is “tasked with understanding what's gone wrong with the concept and how they are to recover, if at all, their $700 million-plus investment so far”.
Fresh & Easy is based on the Tesco Express format and is an attempt to break the dominance of chains such as Wal-Mart in southern California, Nevada and Arizona. Sir Terry Leahy, chief executive of Tesco, stands to collect an £11.5 million share bonus if the move succeeds. The company believes that there is potential for 1,000 Fresh & Easy outlets on America's West Coast.
Tesco refused to comment on the figures cited by Piper Jaffray. A spokesman said: “We're very pleased with the way Fresh & Easy is going. Where this information has come from I simply don't know. We are bewildered.”
The news came as Goldman Sachs downgraded Tesco shares from “neutral” to “sell”. In a note, analysts at Goldman wrote: “We believe that investors are underestimating the pressures Tesco faces in rebuilding strong sales momentum and managing its margins simultaneously, with the stock continuing to trade close to its all-time peak relative to an expensive food retail sector and also the market.”
Tesco recorded the weakest sales growth of the Big Four supermarkets in February, figures from TNS market research showed. Its shares closed down 13p at 380p. J Sainsbury also suffered, losing 13p to finish at 326p, while Wm Morrison lost 11p to close at 278p.
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Wow, I can't think of any other "new" chain to blow it so badly in launching. These Fresh & Easy guys must assume Americans think of food and eating as a "chore" and something that can be shrink wrapped and sold in a soulless factory-self style setting. Sure Trader Joes stores are no-frills, but at least they have a sense of humor about it and the tacky tropical theme to the stores are endearing and show personality.
Ralph, Los Angeles, CA
Fresh & Easy sends mixed messages to the American consumer. Some of the prices are cheap, but not as cheap as Walmart. Some of the lines they sell are luxurious, but not as classy as Whole Foods. The layout of the stores is all wrong, there's too much space between the aisles: it feels like the store is only in that space temporarily.
It is also impossible to envisage anyone shopping at a Fresh & Easy to get their entire week's groceries for a family. I think Tesco has tried to repeat the format of its' UK Tesco Metro shops, but there's no such thing as foot traffic in most American cities. Shoppers drive to the stores, but not even American shoppers would so readily drive to a convenience store. It only works if Fresh & Easy is next door to another, larger shop that you drove to, and you need to just "pop in" to pick up a couple of things. Look at where Trader Joe's site their stores, because they are Fresh & Easy's real competition here.
Steve, Las Vegas, NV, USA
The supermarket is becoming uncompetitive and their financial services are no better. They charged me £19.50 to change my address for the 3 weeks left on my car insurance policy. £17.50 was a service charge which they refused to wave. They told me to "take it or leave it", the arrogance is amazing...I left it...I will never shop at Tesco again.
Greg Sutherland, Southampton, UK
I no longer use Tesco. Poor quality produce, not so cheap in terms of cost but the worst aspect is the rudeness and arrogance of their staff. Maybe they don't pay them enough - or maybe they pay them too much!
charlie, wolverhampton, UK
I no longer shop at Tesco I think they are expensive.
I go to Asda for my main lines they are great and very helpfull.
Lidl is fantastic for quality and fruit and veg.
I think the big boys need to watch out as the smaller Lidl and Aldi stores have taken a big bite out of them with the straight forward way they sell quality products at low prices!
Phil Hodge, Middlewich, Cheshire
I no longer shop at Tescos. Time and time again I have had to return rotten meat and then had an argument with the manager about refunds. Fruit is either hard and rots before it ripens or nets contain rotten fruits that you cannot see. Tesco set sell-by-dates that equate to rotten-by-dates then complain to you when you expect fuel refunded for returns. Lidl were selling 1Kg of large onions this week for just 19p...try that in Tescos. Lidls quality is far superior. Tesco are greedy for every last penny they can extract from you.
John Luke, maidstone, kent,
I can't comment on the US operation but I no longer go to Tesco stores in the UK. Why? First because I am fed up of taking back rotten fruit and vegetables. Every bag you buy has one rotten item (which you can't see till you get back home). Secondly, the whole ambience of the stores is wrong. They look cheap, dingy and worn out, and there are never enough people on the checkouts. If you want a bargain-basement offer, there is a new breed of stores (eg Lidl) that do it much better. I think one of Tesco's main problems in the UK is that many of their superstores are 1980s vintage - and they look it. T has put all its investment into new smaller stores, so now it will take a massive programme to bring the superstores up to even a basic level. If I were a Tesco investor I'd be looking to exit as soon as possible. Remember what happened to Sainsburys 5 years ago? Or Marks and Sparks?
Frank, London, UK
I have only been to 1 F&E in Forest Hills but it is a bit bleak - rather like a warehouse selling a mixed bag of stuff. All good produce, but not appealing at all and nothing like Tesco express. The self checkout is a nightmare, mine didn't really work it kept asking me to put stuff back into the bagging area whataever that means. I hope they succeed as the competition is not as good as you would imagine, but it's not really there yet
johnl, london, UK
I think Fresh and Easy needs to be in areas of the USA with high British expat populations. I know I would use it (I am in South Florida where even our local supermarkets have a British section). Currently they are in rather obscure parts of western states.
karen, Delray Beach, florida
I tried F&E when it opened several months ago... have not been back since. I prefer Trader Joes and Whole Foods. I drive past F&E several times a day and the parking lot is always empty...there's a lot of competition in the So Cal specialty grocery market. If I were in this stock I'd definitely be shorting it. One thing I don't like is self check out....get some checkers and baggers if you want to make it in So Cal.
Bill H, Arcadia, CA