What The End of Fresh & Easy Means For Other Grocers' Expansion Plans
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Tesco (LSE: TSCO) may have finally given up on Fresh & Easy. A history of unprofitable operations in Southern California, combined with a weak home market, convinced the British grocer that its resources would serve more effectively elsewhere. Fresh & Easy's exit is not final yet, but it is very likely, reported Sarah Shannon at Bloomberg News. This pullout would end a major supermarket chain's experiment with small box stores that focused on offering fresh food, so it has strategic implications for other grocers that plan to test out new store concepts and add more stores. Fresh & Easy showed weakness in three important areas.
Fresh & Easy set up stores in locations where other grocery stores didn't succeed. In Ventura, one of the Fresh & Easy stores appeared where an independent supermarket failed some years earlier. An Eastsider article provides an example of Fresh & Easy taking over a failed grocer's location in Echo Park. The small store concept offers grocers the possibility of thriving in locations that lack enough traffic to support a traditional supermarket, similar to how convenience stores function, but these stores may still face nearby competitors. Safeway (NYSE: SWY) already had a larger Vons store near Fresh & Easy's store in Ventura, and Kroger (NYSE: KR) had a larger Ralphs store nearby, and both the Vons store and the Ralphs store were located in high traffic locations.
Fresh & Easy might have obtained better results in an actual food desert, but with traditional grocery stores already established in prime locations, location couldn't provide enough appeal by itself. This factor suggests that Kroger and Safeway have sizable advantages in Southern California which could help these mainstream grocers compete with other upstarts.
Fresh & Easy wasn't able to attract enough shoppers away from other Southern California grocers, which is somewhat surprising because parent Tesco has a major loyalty program edge in Britain thanks to its dunnhumby marketing firm subsidiary. Glynn Davis, at the Daily Reckoning via Moneyweek, reported that dunnhumby helped Tesco fend off Wal-Mart's (NYSE: WMT) British Asda operation, and dunnhumby helped Kroger battle with Wal-Mart in the United States.
With dunnhumby's help, Kroger knows exactly what to stock, which helps the traditional grocer stay competitive with discounters like Wal-Mart. Kroger has been doing well recently, surpassing both earnings and revenue estimates for 3Q 2012. The Fool's Seth Jayson reported that Kroger's $21.81 billion revenue beat expectations for $21.54 billion, and Kroger's $0.46 earnings per share beat expectations for $0.42. Kroger's results show that a loyalty program can help an established grocer achieve rising sales, but Tesco's experience shows that dunnhumby might not be enough by itself to help an international grocer break into a new market.
The Fresh & Easy name suggests fresh food and convenience, but the chain lacked a clear brand. Mark Lacter, at LA Observed, notes that most grocers have an appealing pitch to shoppers, such as the wide selection of supermarkets, very low prices at discounters, and difficult to obtain items at health food stores. Without a compelling reason to visit Fresh & Easy, shoppers simply kept going to their regular supermarkets such as Vons and Ralphs. Fresh & Easy could have used import appeal to differentiate its stores, but the chain didn't heavily play up its British background. Private labels, such as Kroger's Simply Truth or Safeway's O Organics, also help supermarkets establish distinct brands.
Fresh & Easy's struggles actually highlight three competitive advantages that Kroger, Safeway, and Wal-Mart possess. Kroger and Safeway have prime locations throughout the nation, not just in Southern California, and Wal-Mart can be the only option for miles around in rural areas. These three major grocery sellers also have clearly differentiated brands, along with loyalty programs that help them hold on to their own shoppers. Since Fresh & Easy couldn't accomplish its expansion goals even with a very strong backer, established grocery stores' markets look a bit more secure now.
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