How Tesco's Fresh & Easy became Stale & Difficult

http://www.guardian.co.uk/business/nils-pratley-on-finance/2012/dec/05/tesco-fresh-easy

Version 0 of 1.

Many British retailers have flopped in the US but few have done so as expensively as Tesco. Fresh & Easy was meant to be a controlled experiment, a low-risk way to discover whether there was room in the US grocery market for a new style of store.

At launch, in 2007, Tesco spoke about initial startup costs of £250m a year and break-even at the trading level within two years; what has happened is that a cool £1.3bn has been spent on infrastructure and there has never been a sniff of profit. Add up the losses and the capital sunk, and some £1.6bn has been thrown at the venture.

There is no shame in experimenting with new formats and new markets, but persevering so long with an obvious dud takes some explaining. The sum of £1.6bn represents about 15 months' worth of Tesco dividends, and we have yet to see what the "strategic review" can recoup. Shareholders will rightly ask whether management ego got in the way of hard-headed decision-making. Yes, the timing of the launch of Fresh & Easy on the west coast of the US turned out to be wretched: recession arrived and bit hard in Tesco's chosen states of California, Nevada and Arizona. But much of the pain was self-inflicted.

Despite the boasts about extensive market research – executives were sent to live with American families to study their habits and preferences – Tesco was surprised to discover Americans prefer their fruit and veg without the clingfilm. Stark stores also received a thumbs-down, and Tesco was obliged to fit doors to fridges and generally soften the look. Those adjustments were said to help, but Fresh & Easy never got close to achieving the sales densities of veteran west-coast retailers such as Trader Joe's and Whole Food Markets.

As for the supposedly low-risk nature of the experiment, that claim always looked hollow. As losses mounted, Terry Leahy, who launched Fresh & Easy, and Phil Clarke, his successor as chief executive, argued the fresh-food-at-low-prices model would work only if done on a big enough scale. Tesco had to build a massive support network, including two distribution centres and a huge kitchen, before knowing whether the stores would ever earn a dime.

Why wasn't time called earlier on the Stale & Difficult adventure? Disagreements within the boardroom is one obvious theory. Observers of the Tesco politburo will note that Clarke's tribute to the departing Tim Mason, head of Fresh & Easy, was hardly warm. Here it is in its entirety: "Tim Mason, who leaves Tesco today, has played an important part in our success over a 30-year career with the company, and he leaves today with my thanks and good wishes."

OK, that statement ticks a few boxes, but it hardly reflects Mason's lofty status at Tesco. Mason, remember, was the executive in charge of the Clubcard loyalty card at launch, which is generally regarded as being a revolutionary marketing and data success.

Remember, too, Mason was deputy chief executive and group marketing director, taking those roles when Clarke was elevated above him to the top job. Asked whether Clarke and Mason had seen eye to eye on the future of Fresh & Easy, Tesco's finance director, Laurie McIlwee, replied: "That's not relevant."

Not now, it isn't, anyway. The colourful surfboards that adorned Fresh & Easy's Californian boardroom are history. It's a very safe bet that Clarke won't rehouse them in his no-frills Cheshunt head office.