Fresh & Easy markets, already troubled, face a new difficulty

It’s been anything but easy for the Fresh & Easy Neighborhood Market grocery chain.

Already grappling with a soft economy and its own strategic missteps, the El Segundo-based supermarket chain suddenly has to deal with a burst of pressure being applied to its British parent company, Tesco.

Large shareholders are calling for the British retail giant to take dramatic action to turn around its own recently poor performance, including pulling back from Fresh & Easy, its ambitious 5-year-old start-up that is trying to blanket California with midsize supermarkets.

The company’s third-largest shareholder was quoted in a British newspaper Sunday saying Tesco should focus on its core supermarket business in Britain. Other investors were more blunt in their assessment of the U.S. foray, with one anonymous shareholder labeling Fresh & Easy a “disaster.”

Tesco shocked investors in January with its first earnings warning in two decades. The company has suffered unexpectedly deep troubles in its British supermarket business, which has ramped up pressure to either improve the fortunes of the still-unprofitable Fresh & Easy or unload the chain.

Tesco opened Fresh & Easy to enormous fanfare in late 2007, boldly announcing plans to spend $2 billion to open hundreds of midsize grocery stores throughout California and the Southwest. The stores sell a variety of fresh organic foods and prepared meals at reasonable prices.

Fresh & Easy has 151 stores in California and 45 in Nevada and Arizona.

The grocery chain’s early results fell short of expectations, and despite improvements, some analysts say it has a long way to go.

In part because of the competitive California grocery market, it’s doubtful Fresh & Easy will ever generate enough profit to validate the $2 billion in sunken costs, said Jim Prevor, president of Perishable Pundit, a website that follows the fresh food industry.

“There’s no question that it’s a disaster,” Prevor said. “Even if they manage to turn it around and make a few pennies … they have bigger problems because the UK market is in big trouble, and a lot of shareholders are saying it’s time to cut bait and take care of business” in its much larger British market.

Among other problems, said Jim Hertel, a managing partner at food retail consulting firm Willard Bishop, is that the company rolled out Fresh & Easy stores so quickly that it didn’t give itself leeway to gain its bearings in a new market.

“There is nothing that I have seen personally or heard that would lead me to believe they’ve turned the corner sufficiently that you’d characterize what they’ve accomplished as a significant success,” Hertel said.

Fresh & Easy counters that sales have been rising solidly, and it says it’s on target to break even by the time its fiscal year ends in February 2013.

“We have a clear target for break even, and in January we reported that we have continued our strong run of form,” a company spokesman said in a statement.

Fresh & Easy has run into various obstacles, including California’s weak recovery from the national recession and sales practices that are commonplace in Britain but occasionally have dumbfounded American consumers.

For example, Fresh & Easy initially wrapped much of its produce in cellophane to preserve freshness. But skeptical U.S. shoppers — accustomed to examining their broccoli and lettuce up close — mistook the wrapping as a subterfuge to hide inferior products.

Among other missteps, an early snafu with its computerized ordering system caused product shortages at many stores, and some of Fresh & Easy’s private-label products were costlier than their brand-name counterparts.

Some analysts say that Fresh & Easy has made strong progress overcoming its challenges and that the venture will pan out.

“It was bad and it moved to mediocre,” said Burt Flickinger, managing director at retail consulting firm Strategic Resource Group. “It is now good and potentially could be great.”