Ron Burkle, the US billionaire investor who is to take on the bulk of Tesco‘s US Fresh & Easy arm, has said he believes the loss-making business gives his Yucaipa fund a base upon which to build. But it is not yet clear what his plans are.
Burkle’s Yucaipa has acquired 150 of the circa 200 Fresh & Easy stores, as well as the business’s manufacturing and distribution facilities in California.
While the nature of the deal (Yucaipa will not pay a fee for the assets, while Tesco will book another GBP150m in costs) will cause frowns among investors in the UK retailer, industry watchers and suppliers in the US will now turn their attention to what Burkle will do with the business.
After Tesco issued its announcement on the deal, Yucaipa put out a statement from Burkle. “Fresh & Easy is a tremendous foundation. Tesco should be applauded for giving their customers an affordable, healthy, convenient shopping experience. Its dedicated employees and great base of customers give us a solid starting point to complete Tesco’s vision with some changes that we think will make it even more relevant to today’s consumer. We plan on continuing to build Fresh & Easy into a next-generation convenience retail experience, providing busy consumers with more local and healthy access for their daily needs.”
Burkle’s previous investments include controlling stakes in US grocery chains Ralphs and Dominick’s, which he then sold on to Kroger and Safeway Inc. His next task is to improve the loss-making Fresh & Easy chain.
When talks between Tesco and Yucaipa first emerged in June, there was speculation Burkle wanted to rebrand the Fresh & Easy outlets under the Wild Oats banner.
The Wild Oats chain ended in 2007 when the natural and organic retailer was acquired by rival Whole Foods Market. Bloomberg said in June former 7-Eleven CEO Jim Keyes, which now owns the Wild Oats name, would run the new chain of stores owned by Burkle.
However, according to a report from The Los Angeles Times on the day the deal with Tesco was announced, Yucaipa has no plans to rename the Fresh & Easy stores.
“There will be an announcement about Wild Oats in the coming months. It will not be the rebranding of the Fresh & Easy stores as Wild Oats,” an anonymous source told the newspaper.
Yucaipa had not returned a request for comment at the time of writing, so we cannot yet be certain of its plans. Industry analysts in the US have, however, suggested what Burkle could do next.
Bill Bishop, chairman of retail consultants Willard Bishop and “chief architect” of retail technology advisors Brick Meets Click, acknowledges rebranding the stores as Wild Oats is an option for Yucaipa and Burkle but has another suggestion.
“He could rebrand these stores as Wild Oats with the plan to sell them to Whole Foods Market but that, in my opinion, would not be the highest and best use of these stores from his point of view,” Bishop tells just-food.
“I believe that the fastest way to make these stores maximally profitable would be to convert them to hard discount, limited assortment stores like Aldi and Save-A-Lot. The hard discount format can be counted on to win 5% to 10% market share and provide exceptionally high profit per store; i.e. much higher than would be achieved by any other food or drug format. Ron Burkle has a great success record at making money in food retailing and this, in my opinion, is the best route to do it.”
Aldi has been one of the few European grocers to have gained traction in the US with its hallmark discount format, while Save-A-Lot has been one of Supervalu Inc’s better-performing chains in recent years. However, that channel is a competitive one in the US.
Jeff Cohen, grocery retail analyst at US researchers IBISWorld, says the move might be “beneficial” to Burkle but adds: “There are several stores that provide discounted prices and it will be very difficult for Fresh & Easy to establish a place in this market.”
Cohen argues the size of a Fresh & Easy store needs to be expanded for the chain to better compete, which could help it resolve issues that were seen to have meant the outlets did not readily appeal to US shoppers, including too much own label and not enough loose produce.
“The existing Fresh & Easy facilities are about one fifth the size of a conventional supermarket and while there are much smaller stores that thrive in the grocery stores industry, such as Trader Joe’s, Fresh & Easy stores should be expanded. American shoppers typically like going to larger grocery stores where they feel they have a wide selection of grocery items from which to select. New management should provide a broader range of products beyond prepackaged and precooked meals, such as fresh produce,” Cohen says. “However, competition is fierce in this industry and new management will have to find ways to effectively compete against Kroger, Safeway and the big box retailers in terms of price and value.”
Others believe Fresh & Easy has already been trying to make changes to win over consumers and that Yucaipa’s plans will likely involve continuing these recent efforts. Neil Stern, senior partner at retail consultants McMillanDoolittle, says Fresh & Easy was already piloting changes to make it “a more conventional – albeit smaller – alternative to traditional grocery”.
He says: “This would include more bulk produce, stronger assortment in perishables including in-store baking, serviced checkouts, etc. Certain areas, like private label and prepared foods are significant strengths, which would be expected to continue.”
Nonetheless, Stern insists there are some “big questions” facing Yucaipa – including the idea of rebranding the stores and, he suggests, perhaps devising a smaller format.
“Will it operate under the Fresh & Easy name or something new, like Wild Oats? It might well be worth a fresh start with a new name. Will it narrow down geography even after it closes stores? Will it constrain themselves to small boxes? Or go even smaller with Fresh & Easy Express stores?”
However, he adds: “When the bad real estate is eliminated – the number one problem – Yucaipa actually inherits a pretty solid base of stores.”
This week, there were reports staff at Fresh & Easy’s HQ met Keyes, the former 7-Eleven boss said to own the Wild Oats name, and who will, it is said, run the former Tesco chain. We will see what Yucaipa and Burkle (and perhaps Keyes) plan to do with that foundation in the coming weeks.