Fresh & Easy: Tesco's great American disaster

Tesco hates failure. But behind the supermarket giant's recent announcement of a stunning £3bn gross profit from its worldwide operations, is one surprising bad egg - its new American chain of Fresh & Easy 'neighbourhood markets'. The small-format stores, opened in California, Nevada and Arizona, lost $208m during the year ending in February. That's more than double what the fledgling operation lost last year.

Although Tesco can easily swallow the loss, retail pundits believe the problems will increase and that Tesco may not be able to sustain its ambitious and aggressive push into the US retail market, the biggest in the world.

When it launched Fresh & Easy at the end of 2007, with plans to open as many as 1,000 stores on the west coast, Tesco projected that the chain would break even by the end of this year or early next.

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Tesco’s distribution centre in southern California is bigger than Disneyland

But poor sales have forced Tesco to put a hold on many store openings. By the end of February 2009, only 119 of those 1,000 projected stores had opened. In northern California, the company has, at the eleventh hour, chosen not to open stores that have been fully built and even contained cash registers.

Not only is Tesco paying out massive overheads on these still unopened outlets, it is also having to pay for the lease of a huge area of land it had earmarked as a distribution centre for the northern California operation. To give an idea of what's at stake, its southern California distribution centre is bigger than Disneyland.

Tesco blames the economic crisis for its Fresh & Easy woes. "The industry is in a very different place than when we came out and did the feasibility research three years ago," says Tim Mason, chief executive of Fresh & Easy.

But retail analysts say that Tesco has completely misjudged the American market and has arrogantly tried to impose British retail models, including such innovations as self-service checkout, on reluctant and conservative American shoppers.

"I'm sorry, but only offering self-serve checkout is a complete non-starter," said one Fresh & Easy shopper recently. "I'm paying for the groceries - they need to provide a full service checkout."

Consumers have also complained about portions that are too small for American appetites and short expiry dates on many food items. Fresh & Easy has been forced to offer discount coupons of as much as 25 per cent to attract shoppers.

American consumers seem baffled by what kind of store Fresh & Easy is

"The finished stores sitting empty in Northern California tell the whole story," says Jim Prevor, a US food industry analyst who believes Tesco will eventually be forced to abandon the US market. "Blaming problems on the recession here is just a cover. There is no reason to think that if the economy suddenly got better, people will stream to Fresh & Easy."

In fact, many product prices at Fresh & Easy are 15 per cent cheaper than those of its competitors, which should be helping in a recession - but isn't.

American consumers seem baffled by what kind of store Fresh & Easy is. While many of the outlets - which are much smaller than most American supermarkets - have been opened in upper working-class areas, products and marketing seem to be aimed at more affluent shoppers.

"Fresh & Easy is a format muddle, a chain with an identity crisis self-imposed," says freshneasybuzz, a blog which has been following the stores closely. "Instead of promoting berry-flavoured gourmet cheese and Spanish sparkling wines, Fresh & Easy needs to focus on the basics: essential food and grocery items at the lowest possible prices."

Which you'd have thought they'd have known at Tesco.