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Big Chains Discover Small Is Really Big

Small is beautiful. At least, many large retailers think it could be.

For years, Trader Joe's has reaped in big profits from small, 10,000 square foot stores selling branded products at good prices.

A little more than two years ago, Tesco launched Fresh & Easy in the western US, a chain of small stores providing more variety than Trader Joe's, but without the festive vibe and Hawaiian shirts. "One of the things that we have learned since we've been here is that it just takes longer to get used to a new concept," says Fresh & Easy CEO Tim Mason. The chain slowed plans dramatically, and Tesco estimates it lost $260 million on Fresh & Easy last year. However, Christmas sales were up 35 percent (Tesco won't break out actual numbers), and expansion is ramping back up. The company is opening about one store a week, and published reports say it recently bought land near Sacramento, California, to build a second distribution center.

Suddenly, everyone wants to experiment with small concepts, in part as a defensive move against Tesco's big gamble. Wal-Mart has four Marketside stores in Phoenix, smaller stores which opened to mixed reviews. Safeway has a couple of smaller stores in California, and CEO Steven Burd says the verdict is out on whether this will be a profitable idea. Big Lots has opened four smaller stores—should they be called Small Lots? Finally, SuperValu closed a small concept store in Chicago, the second time it's tried the experiment, and failed.

"We were surprised when people said this is really different," says Fresh & Easy's CEO. By "different", some meant "European". The store is a little more utilitarian feeling than many American markets, yet when Tim Mason tried to be less different, there was some customer backlash. "Why do I want this to be like other people's stores," Mason says customers told him. "I can go there already. What I like about Fresh & Easy is that you are different."

Now, however, these big chains experimenting with small are about to get more competition from small chains experimenting with groceries.

"Traditional convenience stores are moving to fresh," says analyst Andrew Wolf at BB&T Capital Markets. He says companies like 7-11 are adding more fresh foods, "and 7-11 has a stated goal of getting their sales up to something like 40 percent, so they're just beginning to tap into this movement." He especially likes the prospects for Walgreens , which has hired away a Fresh & Easy executive to begin providing fresh, ready to eat meals at its 7,000 drugstores. "Walgreens is really, really well positioned with 7,000 of the most convenient stores across the country."

Why all this emphasis on convenient fresh food?

"A lot of surveys over time, even now, say 70 to 80 percent of households really don't know what's for dinner tonight," Wolf says. Many of those consumers may not figure out their meal plans until they're commuting home. A store with quick access and good food can exploit that dining dilemma.

Who wins and who loses may be one of the biggest gambles in the grocery business over the next couple of years.

"This is a very big game," says Tim Mason. "It's not all going to fall into your lap overnight. Nobody gets that lucky."?

By the way, do you know what you're having for dinner tonight?

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Questions? Comments? Email us at consumernation@cnbc.com

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