Business & Economy

Tesco to sell Fresh & Easy stores – including 70 in Southern California – as profits drop 96 percent

Fresh & Easy opened across the southwest in 2007, but has seen profits drop over the past few years.
Fresh & Easy opened across the southwest in 2007, but has seen profits drop over the past few years.
Tesco/AFP/Getty Images

Tesco PLC, Britain's largest retailer by sales which employs about 5,000 people at Fresh & Easy in California, Arizona and Nevada, is to pull out of the U.S., selling off its lossmaking supermarket chain at a cost of 1.2 billion pounds (about $1.8 billion) after it failed to transfer its winning formula from the U.K. to the western states.

It operates 70 stores in Los Angeles, Orange, San Bernardino and Riverside counties.

The writedown from the U.S. misadventure helped send the supermarket group's net profit for the year down 96 percent to $183 million. Fresh & Easy failed to make money for Tesco despite extensive research into what Americans wanted to buy and how they want to shop.

"It's never easy to walk away from something," Tesco chief executive Philip Clarke told the BBC. "The world is so different now from 2004 and 2005 when the research was originally taken. Who was shopping on a smartphone back then?"

RELATED: Fresh & Easy tries to woo customers back to its stores

Clarke hopes to sell the stores as a single unit in the hope of securing jobs. He said there was already interest expressed in the chain, but he did not name a buyer – or price.

Fresh & Easy opened in 2007 – just before the subprime mortgage crisis hit many parts of the chain's target market and dashed hopes for explosive growth.

While Tesco has done well with its range of compact Metro stores in the UK – built close to public transport links so shoppers can grab a few items of food on their way home from work – the idea did not translate well to the U.S.

In the American west, most shoppers drive to supermarkets – sometimes just once a week – and will look for a broader range of products, said Marc Levinson, author of "The Great A&P and the Struggle for Small Business in America."

Levinson added that Fresh & Easy wasn't unique as a store – and Tesco didn't have time to experiment and work through glitches because of shareholder pressure. The company also underestimated the amount of attention needed to deal with the quickly changing American market, he said.

"They clearly had the wrong model for the market they were in," Levinson said.

The decision wraps up a painful expansion exercise for the retailer – but it isn't the first international food chain to have troubles with the vast and diverse U.S. market. Companies from Canada, France and the Netherlands have failed to capture American customers.

There is one notable exception, however – a trust run by the wealthy Albrecht family of Germany owns two successful chains in the US: Aldi and Trader Joe's.

At the same time, some analysts say the Fresh & Easy foray also caused Tesco executives to take their eye off the ball in Britain, the company's core market. More than 60 percent of the group's sales come from the U.K., where the company has 3,000 stores and employs more than 300,000 people.

Clive Black, an analyst who watches Tesco for Shore Capital in London, said the U.S. was just too different and distracting – and the company wasn't adapting to changes in the U.K..

"It was engaging in hubris and that brings arrogance," he said. "You lose touch with your customers."

Since being named CEO in 2011, Clarke has taken several steps to bolster its U.K. business. The company last year announced plans to spend 1 billion pounds to add more staff, particularly in fresh food departments, and improve the customer experience.

The company has also begun to scale back the aggressive expansion policies that made Tesco a subject of protest in many parts of the UK.

"The large stores we have are great and we are doing a lot of work to make them more vibrant and relevant for today's customers," Clarke said. "But we won't need many more of them because growth in future will be multichannel – a combination of big stores, local convenience stores and online." 

To adapt to changing U.K. tastes, Tesco, which started trading in 1924, is trying to create a better shopping experience: Staff will be more attentive, shelves better stocked and bigger stores will have space to sit down and have a coffee or family-friendly restaurants.

Customers will hopefully like their visits more, and stay longer. The store is trying to re-engage with its customers, and do what Shore Capital's Black described as a "lot more that makes it softer and warmer and friendlier."