*Tesco To Ease Fresh & Easy Concerns With New Opening* June 16, 2008: 10:49 AM EST


SAN FRANCISCO -(Dow Jones)- Tesco PLC (TSCDY) reaffirmed its commitment to its U.S. store expansion Monday and said the Fresh & Easy business was thriving, despite fears the retailer had misjudged with its first foray into the U.S. market.

Tesco is due to open its first U.S. store in three months on July 2 after suspending its store opening program in March - a move that sparked fears the U.S. venture had run into a trouble.

A Tesco spokeswoman dismissed these fears Monday and said the business was " thriving." She also reiterated Tesco's commitment to opening 200 U.S. stores by February 2009.

A new store on in Manhattan Beach, Los Angeles, will be the company's 62nd store in the U.S. when it opens on July 2.

The opening marks an end to the three-month hiatus in the rollout of the U.S. venture. Tesco, the U.K.'s largest grocer, began launching the small-format stores, in the southwestern states of California, Nevada and Arizona, in November 2007, but in April the company halted the store-opening process, fueling fears that the process wasn't going as smoothly as planned.

While analysts on both side of the Atlantic agreed Tesco's U.S.
experiment had opened up a promising new market, they said the store formats had not met all of American consumers' needs. The company appears to have taken advantage of this pause in growth to take stock of the situation and address some issues.

The company's U.S. chief Tim Mason laid out the changes in an interview with the Financial Times Monday. The company has increased its focus on price, introduced more discounts, stepped up its leafleting and marketing and introduced more ready meals into its stores, he was quoted as saying.

Shore's Clive Black said the comments should help to "calm investor apprehension on the U.S., suggesting control, calm reflection."

Whether Tesco has eliminated all of its perceived teething problems remains to be seen. Analysts in the U.S. had complained Fresh & Easy needed to build a better relationship with U.S. suppliers, improve its market positioning and make more use of the abundance of fresh produce available in the American southwest.

"I think the Fresh & Easy premise is sensible, but the execution has so far been lacking," says U.S.-based Jim Prevor, founder and editor in chief of Produce Business and Deli Business Magazines, who also acts as a retail consultant.

Tesco hasn't yet broken out any sales figures for Fresh & Easy. The lack of hard financial data has disappointed some analysts. In April Tesco did reveal higher than expected sales densities per square foot, which provided some comfort to the market, according to analysts at Citi, but some fears remain.

"We remain cautiously optimistic on the U.S. business," Citi wrote, but added "we still struggle to interpret the three-month planning hiatus as anything other than slightly concerning."

The fact Tesco has identified a promising market isn't in dispute. TNS Retail Forward estimated last year that the stores could generate $4 billion in sales for Tesco by 2011. Mike Griswold, a retail analyst with Boston-based AMR Research, says Fresh & Easy has "shone a spotlight on a significant opportunity for U.S. retailers," attracting the interest of the competition.

Supermarket giant Wal-Mart Stores Inc. (WMT), has also said it plans to launch small-format stores called Marketside, the first of which will launch in Phoenix, Arizona. Safeway's southern Californian subsidiary Von's has also opened a slightly larger store in Long Beach, California, close to a planned new Fresh & Easy store.

Retail analysts say it remains to be seen whether, having identified this market, Tesco can build a leading position. Initial indications, according to retail analyst Jim Hertel, a managing partner at Illinois-based Willard Bishop, are that in the weeks after launch sales were around the $50,000 per store per week level. Hertel noted, however, that he believed these sales figures were now rising to around $70,000 to $80,000 per store per week.

Tesco's initial sales targets are ambivalent. Analysts say they were told unofficially that Tesco hoped to achieve sales of $200,000 per store per week, but the timescale by which they hoped to reach this target is unclear.

Hertel points to initial impressions that the Fresh & Easy stores, typically 10,000 square feet, don't always chime with the U.S. consumer experience. "The store formats in the South West tend to be larger and have a different store orientation. Fresh & Wild appears to have been designed for a more frequent, urban shopper and the experience is more utilitarian than Americans are used to."

Jim Prevor says he has identified key failings, which, he says, suggest that despite extensive research, Tesco hasn't fully understood the U.S.
consumer.

He points to the fact that in the U.S., and especially in the southwest, zoning laws mean shopping tends to take place in commercial areas, rather than residential districts. With lower population density than in the U.K., and with more people driving to shops, this may be a failing, he says.

But, he adds, "Where they really fall down is on the 'fresh' part.
Almost every U.S. supermarket has a deli counter. Even in a small-format Safeway there's typically a butcher, a baker and a sandwich-maker. When you go into a Fresh & Easy you see a rotisserie chicken served in a plastic bubble stone cold. This isn't what Americans understand as fresh." He also believes that Tesco, which in the U.K. is known for very sophisticated market segmentation, has so far failed to bring this approach to the U.S. and, notably, has yet to deploy its successful loyalty card, which allows it to gather large amounts of customer data in order to fine-tune merchandise and promotions, in the U.S.

"The stores in the U.K. are very diverse, but here they have a virtually identical product range, everywhere from very upscale areas such as Scottsdale, Arizona to virtual slums such as Compton, Los Angeles, so in effect this means they're targeting everyone and pleasing no-one."

But AMR's Griswold says its too early to write off Tesco's American experiment. "They have some core competencies, particularly in supply chain management, which have served them very well in international expansion and which are very transferable to the U.S."

"If successful in the far West, Fresh & Easy can be expected to move east," said Shore Capital's Clive Black, "something that we have factored into our expectations since day one."

Chicago and the Midwest are rumored to be the next territories for Fresh & Easy's expansion. The Tesco spokeswoman refused to comment on the speculation that Fresh & Easy would launch in the Midwest.