Published on: December 5, 2012Tesco said this morning that it will conduct yet another strategic review of its US Fresh & Easy Neighborhood Market business that "likely" will lead to the sale or shuttering of the division, in which Tesco has invested more than $1.6 billion since 2007. Tim Mason, who has been running Fresh & Easy while serving as Tesco's deputy chief executive, has left the company, Tesco said.
The announcements came as Tesco CEO Philip Clarke conceded that Fresh & Easy "will not deliver acceptable shareholder returns on an appropriate timeframe in its current form." And, they came as Tesco's UK business saw a third quarter in which its same store sales and market share both declined, creating pressure from investors on the company to give up on its American dream and focus on its core market.
"It's likely but not certain that our presence in America will come to an end," said Clarke.
Very likely. The Financial Times this morning reports that "Tesco has appointed Greenhill, the investment bank, to assist with the likely sale of Fresh & Easy ... Tesco’s likely exit from the US is likely to please the grocer’s investors, many of whom have been calling for the company to quit the country and focus on its profitable ventures."
FT also notes that "Walmart, the world’s biggest retailer by sales, has been tipped as a potential buyer of some Fresh & Easy assets – a move that would complement its decision to open smaller stores in the US." But there apparently are other options, as Clarke said that "in recent months, we have had a number of approaches from parties interested in acquiring either all or part of Fresh & Easy, or in partnering with us to develop the business."
The FT story quotes Clarke as saying that while Mason wasn't "pushed out," it was true that "we felt that it was the right time for Tim to leave." Mason has worked for Tesco for 30 years.
In the UK, the Guardian reports on Tesco's moves this way:
"Tesco had hoped to build Fresh & Easy into a business as big as its core UK chain. The first Fresh & Easy opened amid much fanfare five years ago and there are about 200 stores in southern California and Nevada.
"But Tesco's plans were far more ambitious. Within weeks of the first store opening, in Hemet, east of Los Angeles, Fresh & Easy bosses were voicing ambitions to have 1,000 stores across California and then taking Fresh & Easy to the east coast.
"The retailer built a vast warehouse, complete with America's biggest expanse of solar panels to help power it, and a food factory next door to make the ready meals that UK shoppers buy by the million but were almost unknown in the US. The plans came after two years of intensive research that involved Tesco sending senior executives from the UK to live with Californian families, assess the way they shopped and ate, and to build secret test stores.
"But their research proved faulty. Almost every aspect of the shops, from their interior decoration to the pack sizes and self-serve tills have been changed. Fresh & Easy also opened as the subprime mortgage crisis and subsequent economic downturn took hold, hitting US consumer confidence and spending power. The chain has also faced opposition from US trade unions."
From the Wall Street Journal, the coverage included this passage:
"Since taking the top job nearly two years ago, Mr. Clarke has stood firm behind Fresh & Easy. As recently as June he said there was 'great value in the business,' but today faced an embarrassing climbdown. 'I've had a deep, hard look [at Fresh & Easy], and couldn't see how sustainable shareholder returns could be achieved quickly,' he said.
"In June, Tesco admitted defeat in its efforts to break into the Japanese market after failing to turn a profit there in nine years. The closure or sale of Fresh & Easy is bound to ramp up the pressure on Mr. Clarke, who is in the middle of a £1 billion plan to revive Tesco's U.K. business, which accounts for two-thirds of revenue."
- KC's View:
- This is happening. They can couch it in whatever terms they like, but there seems to be no question but that Tesco is unloading Fresh & Easy one way or the other. (Tim Mason being fired - and there's no other way to put this, though the Brits would prefer more civilized language - was just the first step in the process.) Once this door has been opened, it is almost impossible to close ... and besides, it doesn't exactly seem likely that Fresh & Easy is going to see things improve anytime soon.
While Tesco's judgement in the development of the Fresh & Easy format came under question here and elsewhere almost from the moment the stores opened, for a long time I thought that the company had the commitment and deep pockets to get it right. Tesco could blame the economy for some of its problems, but the job of a great retailer is to adjust to market circumstances and get things right. Clearly, Tesco was never able to do that.
I have to wonder if Fresh & Easy would be shut down or sold if Sir Terry Leahy were still in charge at Tesco; he engineered the US entry after years of saying he had no driving desire to go to the US, and so he may have had more skin in the game. But I also wonder what this does to Leahy's legacy; can he fairly be accused of digging a hole that Tesco from which Tesco could not emerge unscathed? (I do feel sorry for Mason, who has been described to me as a very smart and engaging man. I wonder if he'll stay in the US, or return to the UK...)
I'm not an expert on this, so I have no idea whether it makes sense to buy Fresh & Easy, or to just wait for 200 or so locations to become available, and then pick up the good ones one by one.
In the end, this is a shame. Many of us had hopes that Tesco would come up with something really interesting, really different, and somehow move the needle on the grocery shopping experience - just because life and business are always more interesting when new innovations emerge. It moves things forward.
It seems like a Fresh & Easy sale or closure will solve part of Tesco's problems. But not all of them.