Retail battleground forms as Tesco bows in Southwest

EL SEGUNDO, CALIF. —Tesco is readying its first Fresh & Easy stores for opening in a little more than a month, and the outline of the unit rollout is taking shape. In the meantime, retailers who have a major stake in the Southwest are eying the Tesco debut warily, many concerned less with Fresh & Easy and more with what the British retailer has in store down the road.

According to one Tesco spokeswoman, the company has targeted Oct.31/Nov. 1 for the opening of the first Fresh & Easy unit. Spokesman Brendan Woonacott stated that whatever the exact date, a rollout time frame had been established, although he wouldn’t say exactly where the debut unit would be located. “What I can say is that stores will begin opening in November.”

Tesco has indicated, but never confirmed, that the first Fresh & Easy unit will debut in Los Angeles, but regulatory, construction and union complications have lead some observers to speculate that the first Fresh & Easy will actually open in Phoenix. According to a consumer newsletter circulated by Fresh & Easy, the chain will have about 30 stores in operation by the end of 2007. Previous company statements discussed plans to have 50 units open by February 2008.

As it prepares its Fresh & Easy rollout, Tesco is emphasizing its environmental orientation as a means of gaining publicity and differentiating its operations.

On Sept. 6, Fresh & Easy announced that it had joined the Leadership in Energy and Environmental Design—more commonly referred to as LEED—certification pilot program. Membership will allow Fresh & Easy to certify multiple buildings with the LEED rating system using a streamlined process. The LEED affiliation also underscore Tesco’s commitment to sustainability.

Then, on Sept. 12, Tesco announced that it would work with the University of Manchester in the United Kingdom to establish a Sustainable Consumption Institute that would research climate change and develop initiatives to cut carbon emissions and reduce waste. Tesco, according to a published report, provided the university a grant of ?25 million—or almost $51 million— to run over five years while it conducts research.

The LEED announcement came just weeks after Tesco struck a deal with Resource Management Group to design a recycling and waste reduction program to minimize the volume of waste leaving stores and Fresh & Easy’s distribution center.

Yet, American retailers are putting themselves in position to compete against the strengths Tesco wants to build into its U.S. operation. Tesco spent a reported $13 million putting a solar roof on its Riverside, Calif., distribution center, but now word comes that Safeway has prepared a store that will generate power from rooftop panels. That distribution center is getting attention for more reasons than one. At least one observer has remarked that, even if Tesco does roll out a couple of hundred Fresh & Easy locations as part of its plan, the DC capacity would still be under-utilized, supporting the argument that Tesco will relatively quickly launch additional formats that will be more competitive with supermarkets and supercenters.

Until then, Tesco will be opposed on the convenience-format front, especially by global powerhouse Aldi and its Trader Joe’s banner. Beyond that, Whole Foods has revealed that it will convert an 18,500-square-foot Wild Oats store on Baseline Road in Boulder, Colo., into a new convenience concept called Whole Foods Market Express. The grab-and-go format could give Whole Foods a competitive vehicle to combat Fresh & Easy, which will have a natural food orientation. The two chains could compete heavily in Southwestern states. In California, for example, Whole Foods has nearly 45 locations, which represent about 15% of its store base.

Whatever the competitive situation, observers expect Tesco to take the high-profile U.S. rollout very seriously. In an Industry In-Depth report, Citibank Global Research analysts noted that the firm expects “that in the medium term, Tesco will be focusing all its energy on making the U.S. rollout a success.”

Tesco is arriving on top of its form. Its international business is generating a 15%-plus return on invested capitol, the Citibank report noted, and operating margin in its largest market, the United Kingdom, is at record levels. Additionally, the rising proportion of higher-margin formats Tesco is bringing on-line and its growing non-foods assortments will boost the metric even more in the future, Citibank noted.