The Fresh & Easy grocery chain will purchase two large U.S. suppliers, 2 Sisters Food Group and Wild Rocket Foods, and take over the companies' Inland operations, a move the company said will create an integrated campus at its distribution center off Interstate 215 near Riverside.
Fresh & Easy, a division of U.K.-based Tesco, entered the U.S. market in 2007 with small, neighborhood markets that offer quick-service shopping and take-home, heat-and-serve meals.
Tesco brought both companies to the U.S. as its primary suppliers of meat, fish, poultry and produce.
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2007 / The Press-Enterprise
Grocery suppliers Wild Rocket Foods and 2 Sisters Food Group have been purchased by the Fresh & Easy market chain.
Now, the grocery chain will take over the suppliers' operations, transferring all of their 750 employees to the Fresh & Easy payroll.
Fresh & Easy spokesman Brendan Wonnacott declined to disclose the purchase price but said the deal, which is subject to regulatory approval, would enable the company to expand its meals-to-go options, a component of the business he said has "exceeded all targets" despite having fewer stores than originally planned.
Tesco launched the Fresh & Easy chain in Hemet in November 2007 with a plan to open at least 48 stores in 33 Inland-area cities by the end of last year. More than 300 stores were planned throughout Arizona, Nevada and California.
Since then, the recession has slowed those plans. The company has held off on entering the Northern California market and postponed a plan to build a second distribution center there. It has opened 159 U.S. stores so far, although Wonnacott said it continues to expand at a rate of about 50 stores per year. There are 29 Fresh & Easy stores in the Inland region, with more in the works.
Wonnacott said their size enables Fresh & Easy to reach neighborhoods that didn't previously have close access to fresh fruits and groceries. "It's really just about, at this point, being prudent, which given the economy is an important thing," Wonnacott said. "The bottom line for us is we're continuing to open stores."
STREAMLINING
Wonnacott said the acquisitions also will help to create a global sourcing hub in California, from which local produce and other goods could be distributed to other Tesco operations. The company operates in 13 countries.
Bruce Cohen, a retail strategist with Kurt Salmon Associates in San Francisco, said the deal is not unusual; retailers often own their critical suppliers, and Tesco has a long history with both of these companies.
Dmitry Kopylovsky, an analyst for industry research firm IBISWorld in Santa Monica, said grocery-industry profit margins are "paper thin," so efficiency is vital. This deal will help Fresh & Easy streamline its operations, cutting transportation, administrative and other costs, he said, and that should help alleviate operating losses incurred in the last couple of years.
For its most recent fiscal year, the company reported a loss of about $200 million on its Fresh & Easy division. Kopylovsky said Fresh & Easy is fortunate that, with Tesco's resources, the operation can continue to expand aggressively despite those losses.
Further expansion is imperative for the company's success in the U.S., he said, because the business model of a small neighborhood market doesn't apply as effectively here as it does for Tesco in the UK, where consumers will typically walk to the nearest market for groceries.
Here, Kopylovsky said, people drive to supermarkets and buy in large quantities, so they might as well drive someplace with greater selection or an established brand name. Like Trader Joe's markets, Fresh & Easy stores have the advantage of offering a small, neighborhood feel, but they need brand-name recognition to go with it, he said.
PROGRESS PLAN
In an e-mail statement Tuesday, Wild Rocket Chairman Robert Langmead said the company is "pleased we have been able to take part in this venture with Tesco in the U.S. -- it has been a remarkable and rewarding experience. The Fresh & Easy campus is an extraordinary fresh food facility and there is nothing quite like it in the world."
He said Wild Rocket would continue to work with Tesco in other markets.
Efforts to reach representatives for 2 Sisters Food Group were unsuccessful.
Cohen said it's far too early to say whether the Fresh & Easy concept is a success. "Tesco has invested overseas before, and they know that it is a long-term investment to get to know the customer," he said.
Wonnacott said the company is "very pleased with how things are progressing. ... It's really just a matter of continuing to do what we're doing, listening to customers and opening more stores."
By TIFFANY RAY
The Press-Enterprise