Tough times for Tesco

Seems like it’s time once again to play one of the industry’s favorite game shows-“When Will Tesco Leave?”

To some, the final nail in the coffin was hammered earlier this week when a bill banning sale of alcohol at self-service checkouts, nicknamed the “Tesco Fresh & Easy Law” and reportedly pushed by the union, was introduced in the California legislature with the support of Governor Gerry Brown.

Forcing Tesco to man registers at its 126 outlets in California boosts fixed costs at an operation which reported a $307 million loss in its February fiscal year. The deficit was pegged to the acquisition of its Wild Rocket and Two Sisters food suppliers. And although sales are up 42% to $818 million, this year’s results are on the heels of a staggering $253 million loss a year ago.

Having watched Tesco’s operations in the UK and elsewhere, I suspect the alcohol issue is just another speed bump. But the chain’s lack of progress with Fresh & Easy has been a big disappointment to a lot of Tesco watchers, not the least of which is investment guru Warren Buffet whose firm Berkshire Hathaway holds about a 3% share in the UK retailer.

Buffet has already been quoted as saying that Tesco should take a “hard look ” at U.S. operations. Top executives at Tesco are doing just that. But adding fresh bread and coffee to the mix isn’t going to do it. Fresh & Easy seems to have lost it’s way or at least strayed from its original mission. What was supposed to be unique customer experience designed to bring value-priced prepared food to U.S. consumers has become little more than a glorified convenience store.

Will it stay or will it go? Will this affect expansion as it expands north into the hotly contested San Francisco market and bump carts with retailers like Trader Joe’s and Whole Foods?

Naysayers have been speculating about Fresh & Easy’s demise before the first store opened five years ago. Clearly, it’s been a tough market to crack and the recession didn’t help. But Tesco has never been one to put its tale between its legs and skulk off. On the other hand, how long can you send good money after bad?

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