"Not good" is an understatement. tar.gz is maximally bad at random access -- there is no way to uncompress a single file, or to list files in the archive, without decompressing the entire gzip stream.
Gzipping each file individually makes the compressor have to start over with a fresh context on each file. This will result in a much worse compression ratio than if a single compressor is used for the whole archive, especially if the archive contains a lot of small, similar files. (Note that this is essentially what PKZIP does, though, so it's not awful.)
Also, there are no tools I'm aware of that will handle that archive structure.
