British retail giant Tesco's ambitious venture in the U.S. grocery market under the Fresh & Easy Neighborhood Market brand could soon end.
Tesco announced Wednesday that it is conducting a strategic review of its money-losing El Segundo-based chain that could result in sale of the unit.
The announcement comes five years after Tesco opened its first store in Los Angeles.
"It is now clear that Fresh & Easy will not deliver acceptable shareholder returns on an appropriate time frame in its current form," the company said in a statement.
Tesco has hired investment bank Greenhill to help review options. The British retailer said that in recent months it has received "a number of approaches" from potential suitors interested in buying all or part of Fresh & Easy or partnering with Tesco to develop the chain.
The company will update investors on its strategic review in April, when full-year financial results are reported.
Fresh & Easy has 200 stores in California, Nevada and Arizona. The chain employs about 5,000 people, with about 300 at its El Segundo headquarters. The company also operates a sprawling food preparation kitchen and central distribution center in Riverside County.
Fresh & Easy said it will continue operations despite the strategic review.
"Our focus remains on our people and our customers. It is business as usual in our stores and we look forward to bringing our neighbors the same delicious, wholesome and affordable food they have come to expect from Fresh & Easy," the chain said in a statement.
Tesco and its CEO, Philip Clarke, have been under fire from shareholders frustrated with Fresh & Easy's drag on the company's profits.
"Whilst the business has many positives, its journey to scale and acceptable returns will take too long relative to other opportunities," Clarke said in a statement.
Tesco also announced that Fresh & Easy CEO Tim Mason was leaving Wednesday after 30 years with the company.
Fresh & Easy had hoped to set itself apart in the hyper-competitive American grocery market by offering a combination of convenience and fresh food. The stores are about 10,000 square feet - roughly the size of a Trader Joe's - with a few even smaller versions having opened recently.
The idea was for busy shoppers to pop in to pick up fresh produce and healthy prepackaged meals and then pay at one of the self-checkout terminals.
While the chain has made inroads with American shoppers, that progress has been far slower than Tesco had projected.
In Tesco's third quarter interim management statement released Wednesday, the company reported that Fresh & Easy's same-store sales rose a slight 1.8 percent year over year.
Depending on what happens to Fresh & Easy, the biggest economic impact would likely be a loss of jobs, said Kimberly Ritter-Martinez, an economist with the Los Angeles County Economic Development Corp.
"It's really bad timing when we are struggling to add every job we can," she said.
If Fresh & Easy starts shuttering stores, that could hurt the fragile retail real estate market by adding "a bunch of empty spaces" on the market, she said.
Of course, the other players in the grocery industry would benefit, although Fresh & Easy was never able to command much market share, she said.
"At Fresh & Easy, they just didn't catch people's imagination or really draw them in. I know they put in a lot of research before building their stores, but this didn't quite work," Ritter-Martinez said. "With Fresh & Easy, you had very spare interiors, at least the ones I visited. It wasn't a very warm, inviting space."
Not only has it been struggling to draw customers, but Fresh & Easy also has had a contentious relationship with labor groups. The chain is nonunion, and has rejected labor groups' calls for talks.
Union activists have staged protests in front of the chain's stores and called for a boycott.
The United Food & Commercial Workers International Union, which represents 1.3 million workers mostly in grocery and retail stores, blamed mismanagement for Fresh & Easy's financial problems and the potential job losses from the strategic review.
"These job losses could have been avoided if Tesco had chosen to engage with community stakeholders and its customers to address the many underlying problems and warning signs of the troubled Fresh & Easy model," the UFCW said in a statement Wednesday. "We call on Tesco and Fresh & Easy executives to include all community and labor stakeholders as the company undergoes this review process."
El Segundo Mayor Carl Jacobson said there is little the city can do to prevent a sale or potential closure of Fresh & Easy since such a decision would be made at Tesco's headquarters in England rather than locally.
"There's not much we can do to influence what England does," Jacobson said.
He noted that the immediate impact on El Segundo, if the chain were to move or close, would be minimal.
"We really don't have many (Fresh & Easy) employees here in El Segundo. They don't have a store here," Jacobson said. "We have valued them as a business in town, but it has only been as a corporate headquarters and they have downsized that quite a bit over the years."
In August, Fresh & Easy cut about 40 employees at its headquarters. The layoffs were in the real estate department responsible for opening new stores, as the chain slowed its formerly torrid pace of expansion to cut costs.
In 2010, the chain announced it would temporarily "mothball" 13 stores until economic conditions in those areas improved. Only one of the targeted stores was in California, the Moreno Valley location in the Inland Empire. Six stores were in Nevada and another six in Arizona.
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