British retailer Tesco Plc.’s decision to sell or scrap its failed Fresh & Easy Neighborhood Market Inc. unit leaves an uncertain fate for nearly four dozen of its stores in Los Angeles and more than 150 others throughout the Southwest.
Tesco announced last month that it is exploring strategic alternatives for the El Segundo chain, including selling it in whole or in pieces, or shutting it down altogether.
Analysts and retail experts say leading contenders to purchase some or all of the stores include Wal-Mart Stores Inc., the world’s largest retailer, and Dollar General Corp., which runs more than 10,000 dollar stores in the United States. A spokeswoman for Wal-Mart declined to comment on any plans to buy stores. Executives at Dollar General declined to comment.
With a strict zoning law that severely limits sites where Wal-Mart can open big stores in Los Angeles, Fresh & Easy’s flop might open an opportunity for the chain here. The company has managed to get around the roadblocks by setting up shop in real estate vacated by other retailers, as the Business Journal first reported in 2011.
“I would expect Wal-Mart to take a look at it,” said Ian Gordon, an equity analyst at Standard & Poor’s in New York who covers Wal-Mart. “They might be interested in cherry-picking in terms of location and size.”
Dollar General in Goodlettsville, Tenn., has also been floated as a potential buyer, Gordon said.
Wal-Mart is best known for its supercenter stores, each of which is about 182,000 square feet, but the Bentonville, Ark., company has been experimenting with smaller stores.
Also, the chain is expanding the number of its Neighborhood Market grocery stores, which typically run 38,000 square feet, about the size of a traditional supermarket. Wal-Mart is opening Neighborhood Markets in Altadena and Chinatown soon.
In both places, the chain has met resistance from labor and neighborhood organizations. Some residents have claimed the stores would threaten the identity of their neighborhoods. Labor groups have so far failed to get the city of Los Angeles to halt the construction of the Chinatown store. The grocery stores are much larger than Fresh & Easy locations.
A possible use would be Wal-Mart’s experimental Express stores, which are small and made for quick shopping. Express stores, which the company has been testing in urban areas since 2011, include groceries and a pharmacy, and typically run 15,000 square feet. That’s larger than the Fresh & Easy average of 10,000 square feet. Still, analysts say, locations in Los Angeles and elsewhere might be attractive.
Fresh but not easy
With its Fresh & Easy experiment, Tesco found there’s nothing easy about breaking into the L.A. grocery business.
Tesco started Fresh & Easy in 2007 with small-format stores specializing in ready-made meals. The stores struggled to find their identity.
Fresh & Easy has 199 stores in three states. The chain’s website locator shows 44 of them in Los Angeles County. Tesco, Britain’s biggest grocer, invested about $1.6 billion into the venture.
Tesco made major mistakes with Fresh & Easy. The stores opened in both high- and low-income areas and couldn’t satisfy either customer base as a result. The stores also launched in cities that were hit hard by the housing market’s collapse. In addition, they had a confusing product mix and drab store design, said Steve Stallman, president of Santa Clarita food retail consultancy Stallman Marketing. They improved over time, but it was too late.
“Their offerings from the start were extremely muddled, offering a lot of lower-end off-brands,” he said. “To try to get a second first-impression is a really difficult endeavor.”
Fresh & Easy closed 25 stores in the last two years and laid off employees. Tesco recently said the chain’s revenue growth has slowed to a trickle. The unit’s failure led to the recent ouster of its head, Tim Mason, after 30 years at Tesco.
Philip Clarke, Tesco’s chief executive officer, said last month in a conference call with analysts that the company has been approached by parties that might buy all or part of Fresh & Easy.
“This might lead to us selling Fresh & Easy or closing it or partnering with somebody else,” he said. “What is certain is that the business will not continue in its current form.”
Norris Bernstein, a food retail consultant in Long Beach, said Southern California might be ripe for a corner grocery store concept from a trusted name such as Wal-Mart.
“I would think SoCal is a place Wal-Mart would like to get a better toehold in terms of the grocery business,” Bernstein said.
Wal-Mart’s Express format pilot program has about 10 locations in Arkansas, North Carolina and Illinois. While the company is continuing the experiment, the stores might not be ready to expand, according to a research report by S&P.
The Neighborhood Market grocery stores have seen success and are becoming a more important part of the business. The company has 215 such stores in the United States currently, 16 of which are in California. The company plans to open 95 to 115 of these stores in the next fiscal year, including some in Los Angeles.
However, the L.A.-area Fresh & Easy locations are less than one-third of the 38,000-foot average.
“There are ways where we are trying to do a better job of listening to communities in terms of what they need,” said Wal-Mart spokeswoman Rachel Wall, adding that the communities’ responses to the Neighborhood Market stores already open in Southern California have been positive.
A representative for Fresh & Easy did not respond to requests for comment.
Chuck Cerankosky, an analyst at Northcoast Research Holdings LLC in Cleveland, cautions that poorly performing food retailers will have a difficult time wooing potential suitors, especially as the economy continues to grow at a slow pace. Struggling supermarket giant Supervalu Inc. in Eden Prairie, Minn., is having similar difficulties as it tries to find buyers.
He added that at 10,000 square feet, the Fresh & Easy stores might be too small to sell. Wal-Mart could be interested, he said, but not in the whole chain, especially because there’s no room for a pharmacy.
Fresh & Easy was an experimental concept that failed, he said, and it’s difficult to see who would be willing to pick up the fragments. They don’t fit the obvious profile of any competitors’ efforts.
“The buyers would be looking for stores on a site-by-site basis,” he said. “I would expect it to be sold in pieces. Some of the stores would very likely go dark.”
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