*British company plans to open grocery stores in area*

By: CHRIS BAGLEY - Staff Writer

Britain's largest retail chain plans to open 100 "Fresh & Easy" grocery stores in and near Southern California, including seven in Southwest County, a high-stakes foray into a domestic industry with thickening competition.

Tesco PLC, which operates hundreds of grocery stores across Europe, said its California stores will have just 10,000 square feet of floor space, less than a quarter the size of most suburban supermarkets in the United States. A spokesman for the company acknowledged comparisons of the planned stores to Trader Joe's, a specialty grocer that has grown markedly in recent years, but said the Fresh & Easy stores will feature a broader range of household items.

The company hasn't decided exactly which products its U.S. stores will carry, said the spokesman, Brendan Wonnacot.

"It's a completely new concept, not only for the U.S., but for Tesco as well," he said.

Tesco will open 30 "Fresh & Easy" stores this year in Hemet, Upland, and other locations from San Diego to Las Vegas, the spokesman said. The company has announced plans to open 29 others in Riverside County, including two locations each in Menifee, Murrieta and Temecula, and one in Lake Elsinore, starting next year.

Wonnacot said Tesco had made firm plans to build new standalone stores in some instances; in others, the company will lease space in existing shopping centers, he said.

Billed as "neighborhood markets," the stores will feature fresh produce and prepared foods, according to the company. Company officials have pledged products with no trans fats or artificial colors and flavors. Nor will the stores sell tobacco products, company officials say.

Trader Joe's stocks its own brands almost exclusively, and most aim at home diners with somewhat discriminating tastes. The brand features quirky labels such as "Trader Giotto's" for its pizzas and pasta sauces.

The stores are generally spaced more than 10 miles from one another, and the Trader Joe's store on Winchester Road in Temecula drew customers from as far away as Menifee and Fallbrook on Thursday afternoon.

Amy Hydock, of Murrieta, said she regularly drives past several
supermarkets to get to the Temecula Trader Joe's.

"I go to grocery stores for stuff I can't get at Costco, Sprouts or
Trader Joe's," she said.

Hydock said she'd consider Tesco's Fresh & Easy stores, but only if they can distinguish themselves from other grocers.

A Tesco executive hinted earlier this week that the first 30 stores will be only the beginning. The company will need "several hundred" across the Southwest to cover the expense of a Riverside-area distribution center, Steve Webb, an investor-relations representative for the Cheshunt, England-based company, said at a conference in London earlier this week.

"We need a substantial number of stores in that area to recover the costs,'' Webb said. The chain's U.S. expansion could eventually add $100 billion to Tesco's revenue, according to analysts for Citigroup Inc.

Much of that represents revenue that would be taken away from
traditional grocers such as Upland-based Stater Bros. and Safeway's Vons subsidiary. Supermarkets are already being squeezed from both ends of the market.

At the discount end, Wal-Mart continues to open "supercenters," which include large grocery sections. The company is poised to open supercenters in Murrieta, Vista, Oceanside and Poway in the next year.

Upscale grocers such as Whole Foods and specialty shops such as Trader Joe's have also grown in popularity.

Merrill Lynch, an investment and research company, recently downgraded Safeway's shares to "sell" from "hold," citing threats from both Tesco and Wal-Mart. Safeway shares have fallen 3.5 percent this year amid an 8 percent rise in the Standard & Poor's 500 Food Retail index.

Warren Buffett, one of the nation's wealthiest and most respected investors, has built up a 3 percent stake in the British supermarket chain since February 2006, when it first announced plans to enter the U.S. market.

To blunt the impact of Tesco, Trader Joe's and Whole Foods, Safeway has invested heavily, renovating many of its stores and adding numerous private-label items.

Safeway Chief Executive Steve Burd said his company is also prepared to copy Tesco's 10,000-square-foot format if it proves successful.

"We could do that and we could do that more effectively, simply because we're a well-known brand," he said.

Bloomberg News contributed to this report. Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or cbagley@californian.com <mailto:cbagley@californian.com>.

*Tesco PLC, the UK's largest retailer, recently announced plans to open 100 small-scale grocery stores in Southern California, southern Nevada and the Phoenix areas. Stores could open at the following locations as soon as next year, according to a spokesman:*

- Lake Elsinore: Lake Street and Mountain Street

- Menifee: Newport and Menifee roads, Newport and Murrieta roads

- Murrieta: Margarita and Murrieta Hot Springs roads, Nutmeg Street and Jackson Avenue

- Temecula: Margarita and De Portola roads, Rancho California Road and Cosmic Drive