Fresh & Easy US failure mars Tesco’s UK success

British retail giant Tesco announced half-yearly profits yesterday which suggested that even in the teeth of recession the chain was remaining buoyant.

Profits rose to £1.42bn for the period to the end of August, up 1.5 per cent year-on-year, while sales at the group - which now offers banking, mobile phones and petrol stations in addition to its core grocery business - had risen more than eight per cent to just over £30bn.

Chief executive Sir Terry Leahy said the chain had out-performed such rivals as Sainsbury and Asda, and expected economic conditions to improve soon. "We're past the low point," he said.

But there was one area of Tesco's global empire that Leahy could not afford to be bullish about - the Fresh & Easy operation in the US. Launched at the end of 2007 with plans to open up to 1,000 stores up and down the west coast, the US arm reported a loss of £85m over the past six months.

Leahy warned that until the economy of the western United States picked up, the chain was not expecting to report any growth or profits. But there are many who say there's more to Tesco's problem on the west coast than the stagnant US economy.

First, there is the 'special case' of California, currently at risk of becoming a failed state as it struggles with massive debts. Tens of thousands of state employees are being laid off and the state is having to issue IOUs for wages to those remaining on the payroll.

Then there is the questionable marketing strategy behind Fresh & Easy. As Christopher Goodwin reported for The First Post in April, the entire Fresh & Easy venture has become an unexpected disaster for a company "that hates failure".

Just ten per cent of the planned thousand stores ever opened, and those that did found themselves making enemies of customers by importing innovative retail practices from Britain without test-marketing them first. Self-service check-out facilities, for instance, were brought in apparently without research. "I'm paying for the groceries - they need to provide a full service check-out," Goodwin reported a shopper saying.

The chain has also been accused of a lack of understanding of its potential customers. "Fresh & Easy is a format muddle, a chain with an identity crisis self-imposed," says freshneasybuzz, a blog which has been following the stores closely. "Instead of promoting berry-flavoured gourmet cheese and Spanish sparkling wines, Fresh & Easy needs to focus on the basics: essential food and grocery items at the lowest possible prices."

The Los Angeles Times reports today that full-year losses for Fresh & Easy could top $250m, almost $2m per store, and that with a price-cutting war raging in the sector, the economic climate is not getting any better. ·