Tesco finally confirmed Wednesday (April 17) what rumors galore had already telegraphed: that the chain was pulling out of the U.S., leaving its Fresh & Easy chain in limbo. Tesco said that potential buyers are talking, but nothing has been solidified. That prompted one California newspaper to candidly ask if any of the chain's 200 stores are likely to survive.
The pullback follows a rare profit drop for Tesco, which is the U.K.'s largest retailer, but the reasons for the failure of the U.S. grocery effort are many. "Some analysts have suggested the brand's emphasis on self-service checkout drove away consumers, while others say its metro-area locations weren't suited for the U.S., where most consumers drive to grocery shop," said a report in The San Francisco Business Times. "Others speculate that Fresh & Easy simply launched at an unfortunate time—in November 2007—right before the market crashed, which sent Americans retreating back to familiar brands, such As Walmart, Whole Foods and Trader Joe's."
It may not be that simple. Yes, the grocery chain was losing shoppers to Walmart, Whole Foods and Trader Joe's, but it wasn't because a market crash sent grocery shoppers to more familiar brands. Walmart's grocery penetration was simply because it sold those same groceries for less—and then added the convenience of one-stop shopping for tons of nonperishable items that Fresh & Easy didn't stock. As for Whole Foods and Trader Joe's, that was simply a customer service issue. Those happen to be two of the best customer-service oriented chains throughout retail. Shoppers didn't leave the Tesco stores for comfort food brands. They left because they wanted to be treated better.
The revenue drop that mattered was back home and Tesco was getting beaten up by U.K. including Aldi and Waitrose. That meant global cost-cutting and the ineffective U.S. chain was an easy target.
"All the writedowns were pretty messy. Let's hope it's to just get all the bad news out at once and clear the decks," said Paul Mumford, a fund manager and Tesco shareholder. "It's going to be a long slog."
Some other financial folk were a bit more optimistic. "The market is a bit spooked but that's not really warranted," said Richard Marwood, who helps manage 554 billion euros ($730 billion) at Axa Investment Managers in London and holds Tesco stock. "Tesco is doing a bit of a clearout and with the aim of freeing up cash and that could be good news."
Bloomberg reported that the form of the U.S. exit is still being worked out. Tesco has official labeled Fresh & Easy as a discontinued unit. "Buyers have shown a 'lot of interest' in the chain and Tesco is most attracted to those who want to take over Fresh & Easy as a going concern, Chief Financial Officer Laurie McIlwee told reporters on a conference call," Bloomberg reported. "He said it will take 'at least another three months' before the withdrawal is complete."
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