Fresh & Easy Grocery Stores File Chapter 11 Bankruptcy

Fresh & Easy Neighborhood Market Inc. filed for Chapter 11 bankruptcy protection on Monday.

Tesco PLC, which owns the largest grocery store chain in the United Kingdom, is the parent company of Fresh & Easy.  Tesco entered the United States grocery store market by opening the Fresh & Easy chain in 2006, investing over $600 million to get the stores set up and running.

Since founding the stores, Tesco has expanded to 167 Fresh & Easy stores located primarily across the southwestern United States.  However, according to the bankruptcy filing, although the grocery store chain grew to have annual sales of over $1.2 billion, the chain was never able to make a profit because of increasing real estate costs and tough competition, especially from grocery store leader Wal-Mart.  During the past 12 months, Fresh & Easy lost over $20 million per month on average.

Under the Chapter 11 bankruptcy filing, Tesco is proposing to sell 150 of the Fresh & Easy stores to Yucaipa Companies, a private equity firm in the business of investing in grocery store chains.  Tesco will close the remaining 17 Fresh & Easy stores and effectively exit the United States grocery store market.  The proposed sale to Yucaipa will allow approximately 4,000 of Fresh & Easy’s 4,200 employees to keep their jobs.

“[The proposed sale to Yucaipa] offers us an orderly and efficient exit from the United States market, while protecting the jobs of… colleagues at Fresh & Easy,” noted Philip Carke, the Chief Executive of Tesco.

By declaring bankruptcy, Fresh & Easy will have the option of renegotiating any leases in areas where real estate values have declined, thus allowing the chain to reduce its operating costs with the goal of becoming profitable.

“Many of Fresh & Easy’s leases are substantially above market, relative to its competitors,” noted Fresh & Easy’s Chief Financial Officer James Dibbo.  “The effect of the real estate market was especially pronounced.”

Bankruptcy Filing Details and Timing

As part of the purchase of Fresh & Easy by Yucaipa, Tesco will lend $120 million to Yucaipa, allowing Tesco to maintain an almost 23 percent ownership stake in the grocery store.

The United States Bankruptcy Court in Delaware will officially oversee the auction of Fresh & Easy to the highest bigger, with the purchase offer from Yucaipa being the initial bid that any other purchasers would have to exceed.  The auction is scheduled to take place on November 11.

Fresh & Easy reported assets of $500 million.  The chain owes approximately $19 million to its credits.  Tesco is the single largest creditor of Fresh & Easy, with the company owing almost $750 million.  Tesco has written off a $1.6 billion loss on the Fresh & Easy chain.

A Tesco representative noted the bankruptcy filing will have no effect on the daily shopping experience customers of Fresh & Easy have come to expect.

Not the First Recent Negative News for Tesco

The Fresh & Easy bankruptcy news is not the first involving Tesco in recent months, as Tesco also announced withdrawal from the Japanese grocery store market.  In addition, Tesco was one of several European retailers found to be selling meat products containing horse meat.

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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.