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HEB IN TEXAS: A BENCHMARK FOR MARKET DOMINATION

The grocery pie may be carved up into a half-dozen pieces in any given market, but rarely does any single operator get to feast on more than a couple of healthy slices.

Yet one regional chain is gobbling up nearly two-thirds of the local supermarket dollar in two Texas metro areas, in the process offering some encouragement to grocers that have resigned themselves to living in Wal-Mart’s lengthening shadow.

Modest little family-run HEB, established a century ago as Staple and Fancy Groceries, in Kerrville, Texas, all but owns hometown San Antonio, with a whopping 64.5 percent market share. The chain dominates Austin too, with just a sliver less than 60 percent of the market there, according to data from Wilton, Conn.-based Trade Dimensions International.

Low price points, varied formats and a customized product mix coupled with broad selections of private-brand products that outsell many national brands, give the edge in south central Texas to the privately held firm, which operates as H.E. Butt Grocery Co.

“Their private-label products are just incredible,” said David J. Livingston, managing partner of DJL Research, a retail consulting firm in Pewaukee, Wis. “The people who work there really come up with great ideas and unique ways to merchandise their stores. Management listens to its front-line people, not Wall Street.”

Many national chains remain mired in obsolete formats, but nimble HEB can quickly affect change without having to navigate through a bureaucratic maze. “They are so competitive and so efficient and so quick to respond,” said Kevin Holland, director of Texas acquisitions at Equity One, a REIT that owns more than 100 neighborhood shopping centers in the South, including several with HEB as an anchor. “If [CEO] Charles Butt decided today to change the name to BEH, the signs would be up by tomorrow.”

For Equity One, the HEB name has come to mean “value added,” Holland says. “On the acquisition side, if there’s an HEB present, a premium will be paid on that property,” he said. “The other in-line tenants just love them.”

HEB has two other distinct advantages, Holland says: It does not have to deal with unions, and it is “very good at the real estate game.”

With more than 300 stores, $11 billion in annual sales and 56,000 employees (“partners,” the chain calls them) HEB is not only the region’s top food retailer, it is also the state’s largest private company.

HEB manages to juggle several different formats: from the HEB Marketplace and HEB Fresh Foods supermarkets (50,000-90,000 square feet) to the mostly rural HEB Pantry Foods (27,000 square feet), as well as its 75,000-square-foot specialty gourmet offering, HEB Central Market and some new hybrids that promise to push the ball forward. All are painstakingly tailored to the demographics and ethnicities of their immediate neighborhoods. “They have different formats that cater to Hispanics and to young professionals and to rural markets,” Holland said. “That’s what makes them so much better than those plain old generic supermarkets.”

HEB’s Own Brands line, which includes Hill Country Fare, Harvest Moon and HEB Classic Selections, constitutes nearly a quarter of all branded items sold in stores, the company says. Customer Jocylin Patrick, who lives just east of Austin, says the HEB brands “are just as good as brand-name products.”

HEB declined to comment for this report, but their shoppers had much to say. “The store brand is a sound choice at the end of the month, when my budget is tightest … plus the food tastes great and has fewer preservatives than other choices,” said Jennifer Brownlee, a junior at the University of Texas. “They have wide selections and consistently offer coupons next to the product, so you don’t have to do all that searching through the Sunday paper.”

Nick Nichols, a financial services executive who shops at HEB in San Antonio and Austin, routinely makes hourlong trips from his rural home, bypassing competing grocers en route. “Prices and selection are better across the board compared to Albertsons,” said Nichols, who was loading beer, ice and party trays of food into his SUV outside an HEB Fresh Foods on his way to an office party.

Aside from its 20 stores in northern Mexico, HEB is a Texas-only chain, though that has not stopped it from getting plenty of national attention. The Harvard, Wharton and UCLA business schools do case studies on the HEB private-brands program, using it to illustration how some grocers could keep Wal-Mart at bay.

Right now HEB is duking it out with Wal-Mart for Houston market share and has raised its stake there from 10 percent to 14 percent over a five-year span, behind Wal-Mart’s 24 percent and leader Kroger’s 27 percent, according to Trade Dimensions.

Part of that Houston push, through which the company hopes to gain a 25 percent share, includes yet another format: a hybrid in the upscale Woodlands area called HEB Woodlands Market. This combines Central Market specialty items and its Central Market Café on the Run concept with national and HEB brand items, 2,000 varieties of wine, 900 types of fruit and vegetables, catering services, one of the largest seafood sections in the area and more. In supermarket-saturated Dallas-Fort Worth, HEB has kept its upscale Central Market concept, the first three of which opened there in 2001. Another, slated for the upscale northern suburb of Southlake, is scheduled to open next year.

But the HEB lab continues to percolate. This year promises to yield the largest, most ambitious HEB yet: a 161,000-square-foot HEB Plus store in south Corpus Christi, Texas, complete with standard and gourmet grocery items, a sushi bar, a pharmacy with a drive-through window, a music and entertainment section and a Texas Backyard section featuring flora, barbecue grills and other backyard accessories and decorations. The store is slated for completion this fall.

In rare interviews, CEO Butt has said HEB’s constant tweaking of products and formats is spurred by an undercurrent of “restless dissatisfaction” that runs through the company.

That is a plus, Holland says. “They never quit improving,” he said. “That’s why they’re winning.”

  — SM