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| Self-service checkout at Fresh & Easy Neighborhood Market. |
News/Analysis/Commentary
California Governor Jerry Brown signed AB 183 into law on Sunday, as we predicted he would.
The legislation authored by California Assemblywoman Fiona Ma that becomes law January 1, 2012 bans the sale of alcoholic beverages at self-service checkout stands in all format retail stores in California.
We nicknamed AB 183 the "Son of Tesco Fresh & Easy Law" because like the previous two other legislative attempts in 2008 and 2010 (which we nicknamed the "Tesco Fresh & Easy Law") to ban alcohol sales at self-service checkouts in retail stores in the Golden State, AB 183 will have the most immediate and direct affect on Tesco's Fresh & Easy Neighborhood Market because it's the only grocery chain in California that offers self-service checkout only in its stores, rather than the option of full or self-service.
The "Tesco Fresh & Easy Law" is now a reality for United Kingdom-based Tesco, which has 133 of its 182 small-format fresh food and grocery stores in California. The other 49 units are in Arizona (28 stores) and Nevada (21 units).
All but one or two of the 133 Fresh & Easy stores in California offer wine and beer for sale. A number of the stores also offer spirits for sale on the shelves, along with the wine and beer offering.
AB 183 amends California's offsale beer, wine and liquor license code to require retailers that have existing permits and licenses and who apply to offer alcoholic beverages for sale at future store locations, to sell the adult beverages at full-service checkouts, where there is a face-to-face transaction between customers and store employees.
Therefore, as we've said in our extensive coverage of the legislation, based on the current language of AB 183, Tesco's Fresh & Easy Neighborhood Market is going to have to at a minimum operate one full-service checkout stand in its stores in California in order to comply with the new law banning sales of alcohol at self-service checkouts come January 1, 2012.
The other alternative is that Tesco could stop selling alcoholic beverages completely in its stores in California, thereby leaving its self-service checkout system as it is. That, however, is highly unlikely in our analysis and opinion because alcoholic beverage sales, particularly its proprietary brand wines, is an important merchandising element for Fresh & Easy.
We first suggested in early 2008, before any legislation banning alcohol sales at self-service checkouts was ever introduced in the California Legislature, that one of the key operational mistakes Tesco has made with Fresh & Easy Neighborhood Market is to offer self-service checkout only in its stores. Doing so limits consumer choice and limits the potential universe of customers for Tesco's Fresh & Easy stores, thus limiting sales for the chain.
We continue to believe offering self-service checkout only in the Fresh & Easy stores is a very poor management decision.
On Wednesday (October 5, 2011) Tesco reported a 23% reduction in losses for Fresh & Easy for the first six months of its current fiscal year, compared to the same period last fiscal year.
Tesco lost $112 million (on sales of $470.5 million) on Fresh & Easy for the 2011/12 fiscal year, which ended August 27, 2011. That's compared to a loss of $151 million for the previous fiscal half year. Tesco had 177 Fresh & Easy stores opened at the August 27, 2011 half-year end, compared to 159 units for the same period a year ago. There are currently 182 stores.
The 23% reduction in the half-year loss for Fresh & Easy is a significant one for Tesco. But it's still a very long road to Tipperary. Tesco CEO Philip Clarke says the global retailer will break even with Fresh & Easy by the end of its 2012/13 fiscal year, which is about 16 months away.
Clarke has made numerous changes, mostly cosmetic ones though, at Fresh & Easy since becoming CEO of Tesco in March of this year. These include adding in-store bakeries and a few other design and merchandising additions and changes.
But ironically, in our analysis, the one change Clarke hasn't made but that has the potential to dramatically increase business at Fresh & Easy has just been mandated by the Governor of California.
Were we running Tesco and Fresh & Easy, we would move rapidly to offer shoppers the option of self and full-service checkout not only in the 133 Fresh & Easy Neighborhood Market stores in California, but in all 182 stores in California, Nevada and Arizona, which is something we would have done from the start, as we've noted more than once in Fresh & Easy Buzz.
We would offer both full-service and self-service checkout in the stores and, using Fresh & Easy's new loyalty points card which it's rolling out to all the stores next week, give customers who use the self-service checkouts bonus points for doing so, thereby encouraging them to scan and bag their own grocery purchases.
Offering both full and self-service checkout in this way at all the Fresh & Easy stores not only would comply with AB 183 in California where all but 49 of the stores are located, it would also serve to increase the potential universe of shoppers - those many who hate self-serve checkout and don't shop the stores now because of it - for the Fresh & Easy stores. The result: A stronger customer base and added sales.
Additionally, giving customers loyalty points they can redeem for savings on the new digital loyalty cards Fresh & Easy is introducing chainwide this week would encourage the use of the self-service checkouts, which are a labor-saving tool for the grocer.
The addition of the full-service checkout option chainwide will also allow Fresh & Easy Neighborhood Market to accept paper WIC Vouchers in all its stores, something it currently does in only one store, a unit in South Los Angeles, with plans to also do so at the store in San Francisco's Bayview district.
One of the reasons Fresh & Easy hasn't rolled out WIC chainwide is because of the difficulties the chain has had processing the paper vouchers under its self-service checkout only system. With the full-service checkout option in the stores, accepting WIC would be an easy process, as grocery checkers can simply process the vouchers like it's done at other grocery stores.
The potential sales boost for Fresh & Easy if it accepts WIC at all its stores is considerable. For example, according to the California WIC agency, about 7 million mothers receive the vouchers used to purchase healthy foods like infant formula, fresh milk, whole grain cereals, produce and other similar items in California. Therefore, by accepting WIC at its 133 Fresh & Easy stores in California, Tesco would expand its potential customer universe even more. Currently these 7 million potential customers in California are off the table for Tesco's Fresh & Easy.
Another benefit of accepting WIC in all the stores is that most of the items purchased by customers using the vouchers are at full margin.
This fact could potentially help Tesco with its gross and trading margin problems at Fresh & Easy. For example, on Wednesday Tesco reported a negative -24% trading margin for Fresh & Easy for the first half of its fiscal year. That's an improvement of about 10 basis points over the previous period but remains a serious problem for the retailer in its quest to break even by February 2013. It must get that negative margin into positive territory.
The full-service checkout option will also allow Fresh & Easy to accept paper personal checks and to cash customer payroll checks, which it currently doesn't do, in large part because of the same technical difficulties involved in processing the paper WIC Vouchers at the self-service checkouts.
Just like with WIC, grocery checkers could cash payroll checks and process paper personal checks at the full-service checkouts, thereby adding needed shopper choice and expanding the potential universe of customers for the Fresh & Easy stores.
We first pointed out in 2008, as we did with the self-service checkout only system, how not accepting WIC, paper personal checks and payroll checks is a serious operational flaw for Tesco's Fresh & Easy. [For example, see these two stories - September 7, 2008: Analysis & Commentary: Should Tesco's Fresh & Easy Put An Asterisk Next to its Motto? Yes; Unless it Corrects Four Operational Omissions; and March 7, 2009: Analysis & Commentary: The Seven Retail Operations Changes Tesco's Fresh & Easy Neighborhood Market Needs to Make to Help it Get On the Success Track.]
From where we sit, closely covering and analyzing Tesco's Fresh & Easy Neighborhood Market for over four years, the passage of AB 183 into law in California is actually an operational blessing in disguise for Tesco if it offers the full-service checkout option, accepts WIC Vouchers in all its stores and invites shoppers to use paper personal checks and cash payroll checks at the checkouts if they so choose to do so as another option in paying for their grocery purchases.
Tesco went with self-service checkout only and the acceptance of plastic debit, EBT (food stamps) and credit cards only for payment at Fresh & Easy Neighborhood Market because it believes the labor savings from not offering a full-service checkout option and processing paper - the WIC Vouchers, personal and payroll checks - trumps the added business Fresh & Easy might get from offering the options.
However, we suggest the last four years of performance by Fresh & Easy since the first stores opened in November 2007 - a loss of about $1 billion - demonstrates the opposite is the case.
Shoppers like options and choice, which is something every experienced grocer knows, particularly in California. By expanding those options and choices like we've suggested in this piece, Tesco will find itself adding customers and sales to its Fresh & Easy stores, which is an option that in our analysis will exceed the labor savings benefits the retailer thinks it's getting currently by limiting customer choice.
Related Stories
September 9, 2011: 'Son of Tesco Fresh & Easy Law': Self-Service Checkout Booze Ban Bill Passes California State Senate; Headed to Governor's Desk For Action
September 7, 2011: Self-Service Checkout Booze Ban Bill Fails in California Senate First Time Around; 'Missing Seven' Dems Hold Key to Passage By Friday
September 6, 2011: California State Senate Set to Vote on Self-Service Checkout Booze Ban Bill This Week
August 20, 2011: 'Son of Tesco Fresh & Easy Law': Self-Service Checkout Booze Ban Bill AB 183 Passes Out of California Senate Appropriations Committee; Headed For Senate Floor
July 27, 2011: 'Son of Tesco Fresh & Easy Law' Moving Through State Senate: Will California Determine Fresh & Easy Neighborhood Market's Checkout Scheme?
June 4, 2011: 'Son of Tesco Fresh Easy Law': Self-Checkout Booze Ban Bill AB 183 Sails Through California State Assembly; State Senate Next Stop
May 11, 2011: ‘Son of Tesco Fresh & Easy Law' - California Assembly Appropriations Committee Passes Self-Checkout Ban Bill AB 183 By 12-4 Margin
May 6, 2011: 'Son of Tesco Fresh & Easy Law': California State Assembly Appropriations Committee Hearing For AB 183 Cancelled
May 4, 2011: 'Son of Tesco Fresh & Easy Law': Strong Chance California Legislation to Prohibit Alcohol Sales at Self-Service Checkouts Could Pass This Year
September 30, 2010: Fresh & Easy Neighborhood Market Hopes Governor Schwarzenegger Can Find His Veto Pen Before Midnight Tonight
September 28, 2010: Fresh & Easy Neighborhood Market Hoping Governor Schwarzenegger Prefers His Veto Pen When it Comes to AB 1060
September 25, 2010: Future of Fresh & Easy Neighborhood Market's Self-Service-Only Checkout in California Up to Governor Schwarzenegger
August 24, 2010: California State Senate Sends Bill to Governor That Could End Self-Service-Only Checkout at Fresh & Easy Neighborhood Market
August 15, 2010 piece : Bill to Ban Alcoholic Beverage Sales at Self-Service Checkouts Would End 'Self-Service Only' at California Fresh & Easy Neighborhood Market Stores
July 14, 2008: Breaking News & Analysis: CA Assemblyman Introduces 'Tesco Fresh & Easy Law' to Ban Stores With Self-Checkout-Only From Selling Alcoholic Beverages.
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