Little-Known H-E-B Shows the Way

As the post-recession era drags on, the dynamics of retailing are changing, adjusting to the new normal.

As we’ve seen lately in the pages of the Robin Report, some retailers that didn’t fare any too well in the recession are circling the wagons and shedding retail units. Opportunistically, those sites are being picked up by resiient retailers that survived the recession. What we’re seeing is the classic case of the big getting bigger and stronger, and the weak continuing on a downward trajectory. Is it simply survival of the fittest? Or poor strategic planning?

There’s another path to growth that’s increasingly being considered by clever American retailers, namely international expansion. Some retailers have long had a presence beyond America’s borders; McDonalds and Starbucks have led the way. Others are making the leap for the first time or expanding into more countries, including Bloomingdale’s, Urban Outfitters, J. Crew, Ralph Lauren, and Gap.

Yet, one strange anomaly persists in the world of retailing — and stranger still, it concerns the largest and most widespread retailing of all — food retailing, or, to be more precise, conventional supermarkets.

Americans Stay Home

Unlike their counterparts in other retailing sectors and their European peers, American supermarket operators are a stay-at-home bunch. Food retailers are also distinctly regional. There is no true national super-market chain, and virtually none have a store presence across America’s closest borders, let alone overseas.

By contrast, numerous European conventional-supermarket operators are spread across national frontiers, including Ahold, Tesco, Delhaize, Metro, Rewe, and Leclerc.

The reason for the contrast between American and European supermarket operators is obvious; geography. European nations are far smaller and tend to be fully stored. So there’s not much avenue for growth apart from expanding abroad.

American supermarket operators have long held the growth strategy that because America is such a big place, it is relatively simple to expand close to home, or creating divisions in other parts of the nation. For a long time, supermarket operators could build stores in greenfield spaces of high-growth states such as Texas or Florida with the realistic expectation that “build it and they will come” when the population would eventually fill in around the new location. That was a relatively inexpensive way to grow.

But the recession was a disrupter: America’s population is now far less mobile, making it more difficult to gamble on the future of new-store locations. Not to mention the fact that so many areas are now overstored.

Some Retailers Do Cross Borders

Many retailers that sell a lot of food, but aren’t considered conventional supermarkets, do have a store presence outside the US. Walmart, Target, Costco, Whole Foods and IGA are success stories.

It’s not as though American supermarket operators lack the financial wherewithal to make a cross-border leap. Kroger has annual sales of $61 billion; Publix, $23 billion; Safeway, $36 billion. Full disclosue: Safeway tried Canadian expansion, but sold its Canadian stores to Sobeys.

But surprise, there is one American conventional supermarket chain with stores outside the nation. H-E-B of San Antonio, Texas has about 45 stores and two distribution centers in Mexico. H-E-B is is something of a stealth company; it is privately held, has no apparent interest in publicity, and issues no financial data. Established more than 100 years ago in southeastern Texas, it was named for a founder, Howard E. Butt.

Now, H-E-B is a substantial company. In all, it has some 400 stores in Texas and Mexico. Its three main banners are H-E-B (conventional stores), H-E-B Plus (food and nonfood) and Central Market (predominantly produce and other fresh products). H-E-B’s sales volume is $15 billion-plus annually. The brand is well positioned in the minds of its Texas customers, and boasts a stellar reputation. Just two other major supermarket chains in the nation rate so well with the public: Wegmans and Publix.

All this prompts two questions: why did H-E-B make the leap to Mexico over 15 years ago, and why haven’t other chains done so? H-E-B is driving some $1.2 billion or more in sales from stores in Mexico, under the H-E-B banner plus a few deep-discount stores under the Mi Tinda del Ahorro banners.

Coincidentally, or not, H-E-B Mexico’s president is Howard E. Butt III, a descendent of the chain’s namesake.

Geography Tells The Tale

As to why H-E-B went to Mexico, geography provides the key. Historically, H-E-B filled in a vast territory in southeastern Texas, an area larger than all of New England. Its way for further expansion in Texas was blocked by the behemoth Kroger chain. Establishing new divisions in nearby states was too dicey a prospect.

So, expansion south to nearby Mexico looked like the best bet. The distance from its headquarters to Monterrey, Mexico, where it has a large store presence, is closer than the distance from headquarters to Dallas.

On top of that, H-E-B has a close cultural connection to Mexico because of its geo-graphical proximity and its many Spanish-speaking employees. Mexico is a desirable expansion market because it has a young population and incomes are rising through the growth of manufacturing jobs. So, what’s the prospect for other American retailers considering growth by expanding across borders?

H-E-B has the advantage of location and empathy with the Mexican culture. But most retailers will need to forge a partnership or ownership position with an incumbent retailer in the target country to pave the way and avoid running afoul of cultural differences. Walmart has long relied on partnerships to expand elsewhere. Walgreens is doing the same. Retailers also need to realize they can’t import an American sensibility to another country expecting it to resonate. Many developing and developed countries are amenable to American retailing brands, but the incoming brands must know how to cater to local tastes. To be successful in food retailing, you have to be especially customer-centric in the product and service mix — as well as store design.