In a terrible year to be a food retailer, H-E-B’s eye on the horizon shines
In a year where the effects of fast-changing consumer demands, rapidly expanding shopping options and generally rotten conditions in the business of selling food brought some to consider whether the supermarket itself had a long-term future, there was H-E-B to provide a way forward.
It’s not as though H.E. Butt Grocery Co. was at all immune to these threats — indeed, recent remarks by its president and COO paint a picture of a company soaking in them, confronting a long road of flattening demand and increasing competition from entities seemingly unconcerned about selling food at a loss. But H-E-B, sources say, is also a company uniquely prepared to persevere no matter how rough conditions get, in large part because it plays to not win in any one year alone, but over a long, long haul.
“They’re a sensational retailer,” marvels Kelli Hollinger, director of the Texas A&M Center for Retailer Studies.
“H-E-B deserves an A-plus,” says Burt P. Flickinger, managing director of Strategic Resource Group.
“Underappreciated with respect to how stellar a company it truly is,” says Sam Susser, a retired Texas retailer.
“They might be the best staples retailer in the world,” adds Scott Mushkin, an industry financial analyst with Wolfe Research.
Observers say H-E-B earns those honors through adherence to a few basic ideals guiding how it treats employees and communities (well) and they go about operating stores (insanely locally and food-focused), backed up with a ferocious spirit of competition, ambition and innovation designed to win over a long horizon. That has led to enviable strength in its home state of Texas where the idea of H-E-B ceding market share has become nearly unimaginable despite it being a destination for any number of new competitors attracted by its population growth and rebounding economy.
For the foresight that positioned it to ride out the bad years, and the long-term perspective on winning in the years to come, H-E-B is SN’s editor’s pick as Retailer of the Year. This is the second time H-E-B has been named such by SN.
Privately held H-E-B declined to be interviewed for this story. Craig Boyan, the president and COO, rarely makes speaking appearances, and when he does, he jokes that his bleak message around the consumer outlook and prospects for the supermarket industry are the reasons why.
One thing that worries H-E-B President and COO Craig Boyan is long-term median household income decline, which he believes will challenge American businesses for decades to come. (Photo: John Everett)
Boyan came to H-E-B 12 years ago through Monitor, a Boston-based consulting company engaged to help the company manage complexities allowing it to fight off a wave of Walmart Supercenters, which at the time were flooding into Texas. Boyan struck up a close relationship with Charles Butt, the CEO and grandson of founder Florence Butt, who named Boyan chief strategic officer and then president and COO.
Boyan’s decidedly pessimistic posture on the strength of the consumer, not surprisingly, is rooted in a long-term view. Simply stated, he worries that the U.S., including H-E-B’s home state of Texas, has entered a period of long-term median household income decline, which for the first time is now combined with stagnating household debt. Retailers therefore need to develop the skills to run a business in these conditions — perhaps for another 30 or 35 years. “This is the thing that keeps me up at night,” he said in an address at the United Fresh conference last year.
“For those of us who live off that [consumer economic] cycle, the demand curve for the future is a real threat, and we’ve been worried about that for decades,” Boyan said in a separate interview at a National Association of Corporate Directors (NACD) function. “We continue to believe that every good company needs to imagine the economy is going to be struggling, not for the next couple of quarters, but for the next decade or two, and you need to plan your business assuming that you might have declining aggregate demand. And that’s a difficult place to be where margins are really thin.”
For H-E-B to do its part, Boyan believes the company needs to pay and treat its employees well, while keeping food prices affordable. That’s a page out of a playbook the company wrote in addressing the threat from Walmart. Unlike many of its industry peers, H-E-B didn’t cut prices to be in a safe range with Walmart, it went out to beat Walmart on price.
Observers say ‘Fabulous’ merchandising is a key strength throughout the 388-store H-E-B empire. (Photo: Robin Jerstad)
This required a willingness to accept lower margins than most of its peers could bear — particularly publically traded ones — but accompanied decades of market share gains. Boyan has said the difficulty of competing with Walmart as it grew was that to Walmart, food was nothing more than a low-margin subsidizer of a more profitable general merchandise business. But that strategy worked for Walmart too, and in many Texas markets today, H-E-B and Walmart are respective Nos. 1 and 2 in share.
“It’s always difficult to compete against a company using your line of business to subsidize something else,” Boyan said.
Walmart has since seen its business model flip with food today accounting well over half of its stores’ business. That’s required Walmart to give its food department the attention it needed to compete among better food retailers like H-E-B (for which Walmart was named our 2016 Retailer of the Year).
In the meantime, H-E-B is figuring out how to succeed amid the prospect of another unconventional competitor that can afford to lose money on food. “Amazon,” Boyan told the NACD, “is a major concern for us.”
H-E-B has met demand for more convenient shopping options on multiple fronts. It has partnered with “on-demand” delivery options like Instacart and Shipt; is offering “curbside” pickup in a more than three dozen stores and has launched a mail-delivery service for 50,000 dry grocery products, aimed at expatriate Texans or those who want to eat like them.
“They make their curbside service extremely visible,” said Texas A&M’s Hollinger. “Customers see the premium parking spaces for use of the curbside service and dedicated sorting areas in front of the store to make it easy for customers to see they’re devoting such valuable real estate to it. That helps adoption.”
Hollinger noted that as a private company H-E-B has typically been “silent” and “strategic” in its investments, saying she was confident the company would find a way to compete and grow with whatever e-commerce players threaten its business.
H-E-B connects with its customers through food-focused service and close attention to local preferences. (Photo: John Everett)
Neil Stern, managing partner of McMillan Doolittle, called e-commerce “the only area that H-E-B has trailed so far.”
“They have historically responded to threats one by one,” said Stern. “Some has been format evolution: Joe V’s is good example of a format designed to address hard discounters and price competition; HEB Plus addresses Walmart; Central Market can address Whole Foods. So part of what they’ve done is say, we’ll segment that market and give different customers different answers.
“But the market evolves, and facing off against Amazon is tougher: You’re facing an opponent that may not be able to be answered by a store, so that may require further evolution on their part. Everybody is looking at e-commerce as sort of an existential threat. The question is, how will I address that next generation of consumers who may not be store shoppers?”
“The thing that would worry me most if I were the Butt family is the internet threat if it becomes a situation where people just don’t come to stores anymore,” offered Susser, who ran the Stripes convenience store chain in Corpus Christi, Texas, for many years and now works as private investor. “But H-E-B’s strength is in their merchandising, that’s heads and shoulders above better than anybody else. And it’s not just the Central Market and the ritzy locations; they have fabulous merchandising everywhere. It’s in Brownsville, it’s in McAllen, it’s in Harlingen. And as long as they can get you in the store they’ll offer you more selection and higher quality and better service than anyone else is going to offer.
“But if in 10 years consumers decide they don’t want to go to a store, that could take away H-E-B’s crushing advantage and ability to serve customers,” Susser added. “But I think that behavior will change in Seattle and San Francisco a lot faster than it will in Harlingen and Corpus Christi.”
H-E-B’s competitive nature extends even to “Friendly” rivalries that share best practices among its own stores. (Photo: Robin Jerstad)
As competitors have learned the hard way in Texas, H-E-B’s competitive spirit is legendary. Observers credit them for all but chasing Kroger, Safeway and Albertsons from South Texas, markets where H-E-B today has uncommonly large market shares. A move to Houston began in 1990 behind its since-retired low-frills Pantry concept, but within 15 years H-E-B was the fast-growing city’s largest grocer, operating a variety of formats including the Joe V’s discount store and the giant Hispanic concept Mi Tienda. Speculation has followed the company for years around a larger move to Dallas or Lubbock — it owns land in both cities and operates its Central Market concept around Dallas, but has so far resisted a full-scale Houston-style invasion.
“I think the biggest thing that distinguishes H-E-B is that they are competitive,” Stern said. “Historically, and today, they give up nothing. They don’t cede market share, they don’t cede positioning in the market, against any challenger they’ve ever had.”
Stories abound of how H-E-B has put competitors who dared to challenge its price leadership in their place. When lowering retail prices in 20 stores would be more than enough to contain a local competitor flare-up, H-E-B, for example, has been known to do so in 80 stores, delivering a crushing blow to the profitability of its challengers. “Maybe they don’t have to be so ferocious to make a point, but H-E-B does it in a way that no one can miss it,” said Susser.
Susser’s insight into H-E-B’s competitive mindset is generational: His grandfather and founder of his family’s gas and convenience chain, also named Sam, was a neighbor of H-E-B’s namesake, Howard E. Butt, and they used to play tennis together regularly.
“When H-E-B got into the gasoline business, my dad and uncle warned me: They knew about the way they played tennis, what it would be like competing against them in gas. And they were right on,” said Susser with a laugh, confessing to being on the receiving end of a few retail forehand smashes over the years.
“They will do whatever it takes to beat the competition,” he said. ”I have learned that lesson a number of times.”
H-E-B is committed to the well-being of its employees, and it shows: “People will walk on hot rocks for that company.” (Photo: John Everett)
Mark Heckman, a former executive with H-E-B’s Texas rival Randalls and Tom Thumb, said that in his days in Texas, the chain as a practice was careful not to provoke H-E-B into a price skirmish.
“This was many years ago, but the point is still valid today — we never had a notion that we would compete with H-E-B on price,” Heckman, who now runs a consulting firm in Florida, said. “We’d watch them, but let them be the leader. We’d be the fast follower. That was still a profitable position back then.”
Today, with hard discounters exerting more influence, Walmart getting new religion on price and the consumer demand curve looking as it does, that’s no longer the case, Heckman acknowledged. One of H-E-B’s great accomplishments over the years, in his opinion, was usurping the upper-end niche that once belonged to competitors like Randalls, while still maintaining leadership in price.
For H-E-B, that ability to serve Texans all over the economic and social scale is a function of a philosophy that ultimately cedes control of the chain to store managers, who as a rule are encouraged to run their stores as they see fit — a sharp contrast to competitors for whom managers are instructed to carry out a single set of directives from the head office.
“H-E-B does an excellent job at localizing their assortment in whatever way is most successful in their local areas,” said Hollinger. “They are all about their people and the communities they are in.”
Part of this philosophy developed through trial, noted Mushkin. When the company moved to Houston, for example, it took some time before it realized the Hispanic markets there and in its hometown of San Antonio 200 miles away had big but subtle differences, he said.
“They run every single store in a manner that is uniquely designed to fit the needs of that neighborhood and that demographic,” added Susser. “Here in Corpus Christi, they have stores that are three or four miles apart that are hard to believe are part of the same company. The merchandise set and the culture is so very different.”
The chain’s competitive nature even extends to its own stores, which Boyan freely acknowledge are incentivized to compete with one another.
“We want it to be a friendly competition, but we give [managers] tools that show how the other stores sell,” Boyan said at the NACD event. “So if I’m the produce manager in a particular store, I can look up any store at H-E-B and can say, ‘I want to be like these stores’ and they can see what they’re selling every day of the week, what they are beating them on, what can I learn from them. We give them tools and empowerment so they can constantly get better.”
A good relationship with workers and their communities are keys to this success, sources say. “People will walk on hot rocks for that company,” said Susser. “Part of that is depth of their commitment. It’s their marketing and sensational advertising, it’s the programs they have for employees, the care they show to them and their families and the leadership of Charles Butt. Only people inside the business who compete with him directly can appreciate how much better he is than the others, and how wide that gulf is.”
According to Boyan, H-E-B is committed to improving the lives of all Texans in part through making a virtue of their employees’ jobs. “We won’t join the race to the bottom,” he said. About a year ago, the Butt family granted about 15% of the company’s ownership shares to employees in a move the company felt would foster additional loyalty and importantly, enhancing their long-term financial stability.
Jose Tamez, a native Texan and Colorado-based executive recruiter with Austin-Michael, said the H-E-B has also been innovative on the executive hiring front, mixing entreprenerual family founders with experienced professionals. “They were the originators of tapping CPG professionals to work in retail. This started in the mid-‘90s and many have followed suit,” Tamez said. “The quality of hires has continued through the years and they still have some of the best and most revered professionals in their ranks. In the grocery industry, H-E-B still has a bit of gold-standard cache.”
About H-E-B
H.E. Butt Grocery Co. was founded by Florence Butt as the C.C. Butt Grocery Store in Kerrville, Texas, in 1905 on an investment of $60. Her youngest son, Howard E. Butt, took over the business in 1920 and passed it to his youngest, Charles, in 1971. Charles remains CEO; Craig Boyan is president and COO.
Headquartered in San Antonio, H-E-B today operates 388 stores in Texas and Mexico, employs more than 100,000 workers, which it calls “partners,” and had estimated sales of $23 billion in 2016.
H-E-B operates a variety of formats including H-E-B, H-E-B Plus! (food and general merchandise), Mi Tienda (Hispanic superstore); Central Market (a foodie-focused concept) and Joe Vs Smart Shop (a lively take on a discount store).
According to Metro Market Studies, H-E-B owns the largest share of the grocery market in Austin, Beaumont, Brownsville, Bryan-College Station, Corpus Christi, Houston, Laredo, McAllen, Midland, San Antonio and Waco metropolitan statistical areas, and is a close second to Walmart in Killeen, Odessa and Victoria.
About the Award
SN’s Retailer of the Year Award recognizes outstanding accomplishment by a food retailer that boosts its business and serves as an example to the wider industry. SN has recognized the following companies since the award’s inception in 2003.
2003: H-E-B
2004: Kroger
2005: Hannaford
2006: Hy-Vee
2007: Safeway
2008: Kroger
2009: Stop & Shop/Giant-Landover
2010: Publix
2011: Wakefern Food Corp.
2012: Hy-Vee
2013: Sprouts Farmers Markets
2014: Mariano’s
2015: Aldi
2016: Wal-Mart Stores
2017: H-E-B
by Jon Springer
