With 15 stores, Tesco’s much talked-about US operation Fresh & Easy is gathering momentum, but what are its ambitions for the chain? James Thompson visits to find out

It seems like a normal Thursday afternoon in a large convenience store in Los Angeles. In fact, it is anything but.

Customers are browsing the product offer with greater curiosity than your average shopper – and for good reason, because this is no ordinary shop. This is one of Tesco’s first Fresh & Easy stores in the US and its pricing, fresh food offer and aggressive roll-out plans could change the face of the grocery sector stateside.

Fresh & Easy is unique in many ways. About 300ft from Tesco’s 675,000 sq ft Riverside distribution centre on the edge of Los Angeles is a facility that is also a global first for the retailer. The vertically integrated food manufacturing plant is a sophisticated operation, with multiple rooms where employees cook, prepare and package 120 different ready meals, from pizzas and pasta to salads, that are shipped to Fresh & Easy stores daily.

The 80,000 sq ft facility is one of many examples that illustrate how very different Tesco’s US operation is from anything the grocer has done before. Tesco’s Fresh & Easy Neighborhood Market convenience stores sit firmly at the discount end of the market. The stores bear little physical resemblance to other international Tesco outlets. The product offer is unique in its focus on fresh, healthy and convenient food, and the speed and scale of its aggressive roll-out plans are unprecedented.

So what exactly are Tesco’s Fresh & Easy proposition and expansion plans? What has been the initial response from customers? And what are the UK giant’s chances of pulling off massive expansion to realise its American dream?

Tesco has opened 15 Fresh & Easy stores, in Los Angeles, Las Vegas and San Diego, and will launch shortly in Phoenix, Arizona. The shops measure 15,000 sq ft, comprising 10,000 sq ft of selling space for 3,500 items and 5,000 sq ft for back-of-store operations.

The look and feel of a Fresh & Easy shop is radically different to a Tesco store in the UK, offering a new brand, self-service checkout with assistance available, wider-than-normal aisles, lower shelving and concrete flooring.

While the product offer partially resembles a hybrid of Tesco’s own-label product and those of a discounter, such as an upmarket Aldi, the stores fit into the discounter camp. Shore Capital analyst Clive Black says of the stores he visited last week: “This is much more akin to a hard-end discounter retailing with a high-end participation of food.”

Fresh & Easy chief executive Tim Mason says: “The brand is designed to be as fresh as Whole Foods, with the value of Wal-Mart, the convenience of Walgreens and product range of Trader Joe’s.” Tesco says its pricing is typically between 10 per cent and 20 per cent cheaper than rivals Trader Joe’s and Vons.

The branding and choice of two shades of green, with white letters, on the logo is apposite. The extensive use of green on the walls inside the store helps convey the core proposition of Fresh & Easy: a large supply of fresh food, free from artificial preservatives, colouring and additives at affordable prices.

Every little helps

The discount feel extends beyond the stores’ concrete floor and rudimentary fixtures. Tesco is keeping costs down by employing staff for 20 hours a week, using its back-office infrastructure technology support centre in Bangalore, India, and deploying only self-service checkout technology.

The tills – which Tesco calls “assisted checkout” because customers who don’t want to use the self-service checkout can ask store staff to complete the process for them – are arguably a gamble, particularly in areas with high concentrations of older people. However, if they work, the low costs of the assisted checkouts could lead to them being exported back to the UK.

US consumers’ initial reaction to Fresh & Easy stores appears to have been positive, given that the chain suffered substantial stock-outs when the first stores opened in Los Angeles last month.

Fresh & Easy chief marketing officer Simon Uwins says that the empty shelves were a result of stronger-than-expected sales, particularly of produce, fresh food and ready meals. “People asked if there is a market for chilled, prepared ready meals and buying produce in a package. The amount of sales has taken us by surprise,” says Uwins.

Retail Week spoke to several customers, including couples, who had not been vetted by Tesco, in stores in Los Angeles and Las Vegas and, with the exception of one elderly couple, the feedback is glowing. The old couple, who describe themselves as “pure vegetarians”, do not like the concrete floor and think the store looks and feels cold and does not offer enough vegetarian food. But other customers speak highly of Fresh & Easy’s wide aisles, its overall product offer, such as the salads and organic food, its clean stores and its competitive pricing.

In Las Vegas, Carrie Faulkner, a mother in her thirties with five children, says: “I love it. I have one child with allergies, so I love the fact that there is so much organic product.” In Los Angeles, pensioner Jackie Green says: “I like the packaged vegetables, because too many people come in and finger everything in other stores.”

On the subject of customer numbers, Uwins reports: “For every store we have opened so far, we have had lines of people outside.” He says that one store in Los Angeles had 200 people queuing outside before it opened. However, the stores that Tesco took the UK press entourage to visit had a sparse flow of traffic at the time of visiting.

Certainly, Fresh & Easy president and chief executive Tim Mason is bullish about Tesco’s prospects in the US. “It could become one of Tesco’s biggest international markets,” he says.

Officially, Tesco wants to open 50 stores by the end of February and 200 by February 2009, but its Riverside distribution centre is capable of serving about 500 stores in Las Vegas, San Diego, Los Angeles and Phoenix. And Tesco has already signed a deal on a second distribution centre in Stockton, 60 miles east of San Francisco, which can serve 500 stores in the San Francisco Bay area, Fresno and Northern California.

Mason says he is also considering opening a third distribution centre further north to serve Seattle and Portland, which would give the chain the potential for 1,000 stores stretching from Seattle to San Diego in southern California.

He sheds further light on the scale of Fresh & Easy’s ambitions by revealing that it wants to have a store every two miles on the West Coast, where there is the appropriate population density.

But he is quick to play down the possibility of Tesco acquiring another retail chain in the US to gain wider geographical spread. “I think it is unlikely that we will ever buy a business. It is a very liquid property market, so why would we buy something if we have a very bespoke brand and range?” says Mason.

However, Tesco is unlikely to have things entirely its own way in the US. “At the moment, it [Fresh & Easy] will not even be on the radar of competitors, but when it has between 500 and 600 stores, it will be creating waves and shocks,” forecasts Black.

The calm before the storm

There appears to be no direct competitors on the West Coast offering their product range in 10,000 sq ft convenience stores. Trader Joe’s was always considered to be the closest to Fresh & Easy’s offer, but the rival sells less fresh food, produce and ready meals and has a higher proportion of own-brand products.

However, when Fresh & Easy does gain in scale, it will compete with a host of rivals for US consumers’ grocery spend, including Vons, Pavilions Safeway and Ralph’s, as well as Wal-Mart, whose stores range from about 40,000 sq ft to 225,000 sq ft.

Another potential headache for Fresh & Easy is the legal challenges. In particular, Tesco must contend with a court ruling concerning the environmental impact of the construction of its Riverside distribution centre. Last week, a Riverside district judge ruled that the centre did not comply with the state’s environmental planning legislation. The worst-case scenarios are that Tesco may have to halt its use of the centre or temporarily pause its aggressive roll-out programme.

However, Tesco maintains the case has been going on for months and has not affected its roll-out programme. Health First – a hitherto largely unheard-of body that the United Food and Commercial Workers (UFCW) union helped to establish – launched the legal proceedings against Tesco. UFCW is one of a number of pressure groups determined to give Tesco a hot reception in the US that could eventually make its enemies in the UK seem like the best of friends.

However, as the Tesco juggernaut continues to roll out across the West Coast, it will be the American consumer – and not pressure groups – who will determine its future direction. The world’s third-biggest retailer is clearly playing to win by investing£250 million a year in Fresh & Easy and committing potentially to a 1,000-store-strong estate.

Blue Oar Securities analyst Greg Lawless says: “We thought that the format was targeting a large niche in the market and, given the hugely impressive management team and infrastructure developments, it will not be for want of trying if it does not succeed.”

Mason says the main risk for the US operation is that the local consumer “does not get it”, but he adds that they seem to be welcoming Fresh & Easy with open arms.

The chain has got off to an impressive start and Mason and his team appear to have the passion and drive – after all, their careers depend on Fresh & Easy becoming a success – to continue relentlessly fine-tuning its offer for American taste buds.

It is too early to make a long-term forecast about Tesco’s prospects in the US – although its stores will have to attract more traffic. But Tesco is a company that does not gamble without a firm belief that it can win. As Lawless says: “You would not bet against them in the long term.”