H-E-B Honored as Winsight’s 2020 Grocery Business of the Year

Beloved retailer admired for its dedication to slaying giants
Photographs courtesy of H-E-B

You needn’t take our word for it.

There was the dunnhumby Retail Preference Index, which uses customer attitudes about the attributes of food retailers that are most important to them and then compiles their responses to rank grocery brands by value perception, reflecting both an emotional connection to customers and superior financial performance.

In dunnhumby’s 2020 report, released in January, H-E-B ranked first overall, up from No. 4 in 2018.

In third-quarter 2019, when WGB, in conjunction with Toronto-based BrandSpark International, asked shoppers to rate their own stores based on perceptions of their overall value and quality on one side and specialty and supplementary stock-up destinations on the other, combining to reveal the stores shoppers trust the most, H-E-B topped the list, with the highest penetration of shoppers citing it as their most trusted retailer. The Most Trusted Retailers study, published in November 2019, noted that H-E-B’s rating increased 3 percentage points from 2018 and that it emerged at the top of the heap in five other key survey categories in the third annual research.

The leading job and recruiting site Glassdoor asks employees of 900,000 different employers to submit reviews rating their approval of the company’s leadership, among other things, and publishes those results in an annual listing of the top CEOs in the country. The average CEO attains a 69% approval rating. H-E-B’s CEO, Charles Butt, scored 99% in Glassdoor’s most recent survey, announced last June. That’s good enough to be No. 2 on the entire list. A separate ranking of employee reviews, which Glassdoor presents as the best places to work in the country, placed H-E-B 17th this year.

Here Everything's Bigger

H-E-B holds the leading grocery market share in 11 Texas areas, according to Metro Market Studies, and is a narrow No. 2 to Walmart in three others. The combination of strong shares and the tight geographic range between them provide cost advantages sources say allows for superior financial performance. Here are the top three grocers in the markets in which H-E-B leads.

(Hover over each dot to reveal H-E-B’s market share.)

Source: Metro Market Studies

Overall Ranking: First Quartile

Source: dunnhumby Retail Preference Index

The American Customer Satisfaction Index is a national economic indicator of customer evaluations of the quality of products and services available to U.S. household consumers. Its Retail and Consumer Shipping Report, released in February, ranked a range of retail categories,  including supermarkets.

H-E-B shared the lead in that survey with counterparts Wegmans and Trader Joe’s, increasing its score by 2% since the 2019 report. Its ranking of 84 on a 100-point scale was higher than the winners in any other category in the survey, including Amazon.

And then there was the Austin Business Journal, which late last year ran a reader poll to determine what they felt was the “coolest office” in Austin, Texas. That honor went to H-E-B’s new Eastside Tech Hub, beating such Silicon Hills giants such as Google, Facebook, Oracle and South by Southwest.

And there you have it. Best value, most trusted, highest approved, most satisfying and coolest, all in the past 10 months.

There’s hardly room on H-E-B’s broad chest to pin another medal, but allow us. For earning each of the accolades mentioned above and for demonstrating how a relatively small, regionally focused private company can handily beat its larger scaled rivals at their own game during an intensely difficult period to be a food retailer, H-E-B is WGB’s 2020 Grocery Business of the Year.

Charles Butt

Doing the Impossible

Based in San Antonio, operating fewer than 350 U.S. stores and with annual sales of $28 billion, H-E-B is admired by more than just its customers and employees.

“They’re the best consumer staples retailer in America,” says Scott Mushkin, a financial analyst with R5 Capital, New Caanan, Conn. Mushkin’s research on stocks such as Kroger and Walmart—rivals with respective sales about five and 12 times more than H-E-B, and with tenfold the U.S. stores—consistently shows them looking up at the competitive pricing muscle and retailing pizzazz of their Texas competitor.

“They do almost everything right,” Mushkin says. “Their customer service is fantastic. Quality and pricing, fantastic. Private label, fantastic. Merchandising, local and specialty goods, fantastic. And now they’re doing omnichannel and that’s fantastic. You know, they just hit all the right notes.”

“Clearly, H-E-B is doing the seemingly impossible in a low-margin business,” adds Corey Chafin, a principal with the consumer practice of global strategy and management firm Kearney in Chicago. “They’ve done so by prioritizing their investments and allocating resources to capabilities that bring a better return. While as a Texan myself, it would be a matter of pride to say only H-E-B could have achieved this, a handful of other smart, privately held grocers have been able to carve out a unique niche for themselves, so they are living proof that it can be done.”

Emotional Loyalty

Conventional wisdom in the grocery business holds that smart retailers are typically the ones who pick their battles. You can’t be everything to everyone, especially not today, when efficient specialists devoted to picking off slices of the industry—such as Aldi—or giants using grocery as a traffic and frequency builder but who don’t actually rely on food sales for profits—such as Amazon—are determined to be influential players. So, the thinking goes, they choose aspects in which they can be the best and aim elsewhere only to be in the consideration set: One might aim for the best deals in the market; another the best customer service; a third might tout assortment; a fourth could excel at the in-store experience.

H-E-B differs in that there are very few of those aspects they aren’t actively trying to win. An everyday low price approach—backed by a legendary reputation for competitiveness and a reputation for fun promotions—helps establish the lowest price in its markets, even vs. Walmart. It excels as an operator, with well-staffed, well-trained workers, attentive service and clean and modern stores. Merchandising and assortment are well-regarded for quality and uniqueness and reflect a particularly deep understanding of the shopper preferences and demographic makeup of every store. The retailer is also addressing convenience through curbside pickup, delivery and heavy investment in digital.

“All of those things together make for a differentiated experience for the customer,” a former H-E-B executive, who asked not to be identified, says in an interview. “So if you have many choices but you find that the assortment is right for you, then you favor H-E-B. If you have many choices but price isn’t an advantage anywhere else, you choose H-E-B. If you’re looking for unique and differentiated products that you can’t get anywhere else, H-E-B is for you. If you want service and people that care about the fact that you’re in their stores and take care of you all the way to your trunk, then H-E-B is for you. And if you want convenience and drive up to the store and have them put the groceries in your trunk, then H-E-B is for you.”

Most Trusted for Grocery by Own Shoppers

H-E-B garnered the highest proportion of shoppers who selected it as their most trusted grocery retailer.

Source: WGB/BrandSpark Most Trusted Food Retailers in America, November 2019

That’s not to suggest H-E-B doesn’t have a point of view, the former executive says. In fact, the combination of those aspects are in service of a rather simple mission: to feed Texans and provide opportunity for employees, which the company calls “partners,” reflecting a 2015 move by its family owners to transfer 15% of the company ownership to employees over time. H-E-B, for its part, touts it is “in the people business. We just happen to sell groceries.”

Ed Fox, a professor of marketing at Southern Methodist University in Dallas, says that approach engenders an emotional loyalty to the brand that is a distinct differentiator and is reflected in the results of surveys mentioned above.

“Loyalty is a funny thing,” Fox says. “We talk about brand loyalty, and it’s one of those things you know and appreciate when you see it, but it’s harder to measure than people think. In grocery, people often go to the same store all the time because that store is convenient or close by, because they’re familiar with the store and its layout, or because there are specific brands at that store or a private label products that they prefer.

“So they’ll do that, but they may actually have no loyalty,” he continues. “They may just be loyal in their behavior because they’re being consistent and because it’s efficient and easy for them, but they really may not appreciate or be satisfied with the brand. We often see repeat purchase as a form of loyalty, but it doesn’t always mean that people really appreciate the brand.”

The surveys showing that customers aren’t just shopping H-E-B habitually but are actual advocates for the brand “says a lot,” Fox continues. “And that’s what H-E-B is going for.”

Jose Gomes

The Power of Big Shares

A fanatical devotion to understanding Texas’ diverse shoppers and the things they want to buy has rendered no two H-E-B stores exactly alike. The company runs various formats, including H-E-B Plus, a larger Walmart fighter; Joe V’s, a discount specialty store one might compare to Trader Joe’s or Aldi; the groundbreaking Central Market specialty units; and flagship H-E-B stores, many of which today are built with the idea of being neighborhood gathering places with barbecue restaurants and bars, as well as outdoor seating. H-E-B also runs 62 stores in Mexico.

“They don’t build a lot of stores each year, but when they build a new store, they put an incredible amount of effort into understanding the customers in the market and the appeal and the competitive nature of the market and building a store that is truly tailored to the market. I think they do that as well as anybody and better than most,” says the former H-E-B executive.

A management philosophy at H-E-B encourages store managers to order and merchandise as they see fit to free up them and their workers to solve problems for customers—offering further contrast from the top-down game plans and cookie-cutter stores of competitors.

These stores are concentrated in a few central and south Texas markets—its U.S. stores are all within a 500-mile radius of its San Antonio headquarters—where it’s not uncommon for H-E-B to achieve massive market shares relative to the industry. According to Metro Market Studies’ 2019 Grocery Distribution Analysis and Guide, H-E-B holds a share of 45.8% in Austin; 46.8% in Brownsville; 51.9% in Laredo; 42.3% in Bryan-College Station; 60% in Corpus Christi; 23.4% in Houston; 51.9% in Laredo; 47% in McAllen; 36.5% in Odessa; 48.1% in San Antonio; and 35.5% in Victoria—leading share in all of those metropolitan statistical areas.

Only in Dallas-Fort Worth, where the company operates a handful of its Central Market specialty stores, is H-E-B a share laggard: It’s a narrow No. 2 to Walmart in the Beaumont, Killeen, Midland and Waco metropolitan statistical areas. Popular and long-standing speculation around Dallas and Lubbock is that they could be H-E-B’s next physical horizons, in light of a number of property acquisitions it has made around those cities.

Dense shares in markets that are relatively near one another is one indicator that H-E-B—which does not share profit or same-store sales figures publicly—is exceptionally strong financially. One source estimated comps “are easily double the industry average.”

According to Mushkin of R5 Capital, heavy shares bring with them massive efficiencies in marketing and other fixed costs, while their high sales volumes presumably reduce the waste in fresh and prepared items that bedevils typical grocers. “As long as you’re turning it, your shrink goes down, and I think they have the velocity to make that fresh and prepared area be quite profitable,” Mushkin says. He also points out that with its merchandising, “they’re headed in two areas that’s suggestive of profits: private label and specialty. You walk down the pasta aisle at H-E-B or the salsa aisle, you’ll see a national brand and a private brand and some local brand from Texas that no one’s ever heard of outside of Texas, and that’s it. Consumers love that, but usually it’s good for profitability too.”

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, cites a heritage of efficiency from the company’s hardscrabble family roots that could “take a penny saved and squeeze it into the size of a silver dollar.” Flickinger admiringly decribes Charles Butt quietly taking in an industry financial conference from a seat in the back of the room. “A mild-mannered guy, you know, who you might mistake for part of the hotel staff,” Flickinger said. “No entourage—nothing.”

H-E-B is named after the initials of Butt’s father and predecessor, Howard E. Butt. Charles was appointed president of the company in 1971 at age 33, when H-E-B had $221 million in sales, 6,000 employees and 125 stores. But as Charles said at the time, “Our company’s most important assets are the goodwill of our customers and the loyalty and enthusiasm of our personnel.” Sales today exceed $28 billion, and H-E-B employs more than 120,000, but the mission hasn’t changed.

Satisfaction With H-E-B Attributes

H-E-B exceeds average satisfaction on every measure except selection of nonfood products. Value of private label products, selection of new products and impact of the mobile app, in particular, are ahead of competitors.

Source: WGB/BrandSpark Most Trusted Food Retailers in America, November 2019

Charles is said to prefer owning stores vs. leasing them. H-E-B controls its own distribution, truckers and warehouses and manufactures to high standards nearly all of the private label items it sells. It has internal teams doing the work competitors typically farm out, including store design and construction; worker training, such as a wildly successful butcher school; and notably today, technologies such as its mobile application. At some level, all of these practices enforce a competitive moat that ultimately benefits customers and partners.

The company’s Poteet strawberry ice cream—named for the berries that grow in Poteet, Texas, and bought in large quantities by the retailer—is one example among hundreds of H-E-B products that nobody else can do. “If they were doing a third-party ice creamery, you wouldn’t get that kind of uniqueness,” one source says.

“One thing H-E-B does so well that enforces their brand perception is their private brands are so darn good; it’s become a halo,” agrees Jose Gomes, president of North America for dunnhumby. “It’s a kind of virtuous cycle where the overall brand impacts the private brands, and the private brand impacts the overall brand.”

Ferocious Competitor—to All Comers

Although it has a long heritage as an efficient and sharp competitor, sources say H-E-B has developed a deeper commitment to an everyday low price philosophy as a means of withstanding a competitive intrusion from Walmart in the 1990s. Its Supercenters today hold market share leads in most every Texas market where H-E-B is not—and is second to H-E-B nearly everywhere it operates.

“They just decided they weren’t going to let price be the reason that customers would choose to shop at a Walmart,” a former employee says.

H-E-B’s adherence to price leadership is legendary. Competitors tell of provoking H-E-B by setting prices lower in some stores, only to see the grocer respond by beating them not only at the affected stores but also at several dozen others to send a message.

To add to this, H-E-B has unique promotions, many offering free add-on products with the purchase of specific items, as well as in-store coupons now augmented on a mobile app.

“On overall value perception, they are killing it,” says Gomes. “There are certain things you might see walking through the store that you might question the true efficacy of, like those tear-off coupons. But when you’re a high-performing regional with a good price perception, the brand strength makes a lot of things that should be a weakness into a strength.”

Flickinger says another key advantage of H-E-B has been what he calls a “transition from a food retailer to a family retailer,” or the idea of expanding assortments and values with an eye toward reducing the temptation of shoppers to turn to growing alternatives for anything they need, including gasoline, convenience foods, pharmacy, specialty items and general merchandise.

“Customers would jump from one of the three H-E-B formats to Fiesta, or to Walmart. And in Texas, it was not unusual to see five, six, sometimes eight family members pulling from one Costco membership and splitting up the several hundred dollars they bought in the parking lot,” Flickinger says. “Charles made a Costco membership a redundant retail expense for families, by letting them stock up and save.”

Scott Mushkin

Mining for Digital Gold

H-E-B President Craig Boyan—a Harvard graduate like Charles—likes to joke that he doesn’t often make public speaking appearances because his message tends to be bleaker than audiences can bear to hear. He worries about the long-term economic health of households that H-E-B serves—many today with medium to low incomes—and about the specter of competing in a world further influenced by emerging forces such as Amazon: an entity using H-E-B’s main grocery business to subsidize a flywheel having nothing to do with groceries.

H-E-B’s response can be seen in the work happening at that cool new office in Austin, headquarters of Favor, the crowdsourced delivery platform acquired by H-E-B in 2018 and from where Chief Technology Officer Jag Bath emerged. The retailer’s Eastside Tech Hub delivery is all a part of a substantial—although H-E-B won’t reveal how substantial—investment in digital.

The company broadly defines three goals of its digital operations: “translating brick-and-mortar magic into digital gold,” or building digital applications as compelling as the store; “challenging multinational competitors and winning,” which involves blunting whatever advantages larger companies possess, a key H-E-B strength demonstrated in its defense of share from Walmart; and building “a technical foundation to power the next 100 years,” with a focus on automation to enable new innovations and ensure services are fast, reliable and scalable.

 “I think because they’re private and have always had a long-term orientation, I think they’re better positioned to do this than the vast majority of their competitors,” says Fox of Southern Methodist University. “So I would be bullish on their ability to recognize and respond to changing consumer expectations driven by technology in general and Amazon in particular.”

A Peek Inside H-E-B’s Magnificent Meyerland Store in Houston


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