Why H-E-B is Worried About More than Walmart

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Why H-E-B is Worried About More than Walmart

By Mike Troy - 07/19/2016

H-E-B is regarded as one of the nation's best retailers, but you wouldn't know it from hearing president and COO Craig Boyan talk about the company and its future prospects.

H-E-B has performed quite well since Boyan joined the company in 2005, leaving a role as a consultant with the now defunct Monitor Group to become the San Antonio-based grocer's chief strategic officer and chief operating officer. H-E-B now operates 380 stores that generate annual sales of $23 billion, compared with 315 stores with sales of $15 billion when Boyan assumed his current responsibilities in January 2010. Along with an expanding store base and increased sales, H-E-B routinely ranks near or at the top of surveys that list the best supermarkets, providers of customer service or places employees would recommend to their friends.

Despite the success, Boyan is clearly an adherent to former Intel CEO Andy Grove's philosophy that "success breeds complacency. Complacency breeds failure. Only the paranoid survive." He's more concerned about where H-E-B is going than where it's been, and is really concerned about driving growth in a U.S. economy facing numerous challenges.

"From 1945 to 1975 we had great postwar expansion, great job growth and great median household income growth. A rising tide lifted all boats, and we had a fundamental economic expansion in the U.S.," Boyan told attendees this summer at the United Fresh Produce Association's annual trade show. "We grew based on growth in wages, but in the 1970s we had fundamentally slower wage growth and started to see a slowdown from the postwar boom. When wage growth stopped or slowed in the mid-'70s, we were able to continue to grow our standard of living, not by household income growth, but by household debt growth. Since 2008, unfortunately, we have begun a new period, not of slow growth, but of negative growth."

H-E-B's Craig Boyan is preparing for an economic slowdown.

MURKY FUTURE

What happens for the next 30 years is quite murky in Boyan's view as consumers age and naturally spend less, while those who are in their prime spending years have less to spend and are concerned about paying off debt.

"We think it is possible that we are in a flat to declining industry for the next 30 years. This is the thing that keeps us up at night, the thing that worries us. This is the reason I never get invited back to speak," Boyan said.

If one of the top executives at one of the retail industry's most highly regarded companies is worried about the future, then other less well positioned competitors should be terrified. Boyan contends the supermarket industry is not as recession-proof as is often portrayed and has struggled mightily to grow sales, citing a host of risk factors specific to H-E-B and other supermarkets.

"For the first time ever, restaurants have passed grocery in terms of total sales. Many folks are eating out and looking for convenience. Time-pressed millennials are not cooking as much," Boyan said. "Restaurants have outpaced us in terms of the total share of the average American wallet."

H-E-B's sales grew from $15 billion to $23 billion during Boyan's tenure.

On the competitive front, H-E-B is facing two of the industry's biggest forces in Walmart and Amazon. Walmart already had a lot of stores in Texas when Boyan joined H-E-B 11 years ago, but since then Walmart's expansion in Texas has been dramatic. Its supercenter total increased to 372 units from 253, Neighborhood Markets and other small format stores increased to 83 units from 30, and Sam's Club, which derives 30 percent of its sales from food, added 18 units to end the most recent fiscal year with 88 locations, according to company reports.

More recently, Boyan cites an example in H-E-B's hometown of San Antonio, where the population of roughly 1 million people was served by 23 Walmart stores in 2012. By year's end, Boyan expects Walmart will have 50 stores.

"We've got lots of friends coming our way," he said.

BATTLE COMING

Count Amazon among those friends. E-commerce has underpenetrated the grocery world relative to other areas and currently stands at about 3 percent, but Boyan knows a battle is coming.

"We are at the dawn of that battle. It is a battle in terms of our business model and it is also a battle in terms of the economics and how do you make it work when delivery is free," Boyan said.

Beyond the competitive issue is the challenge of keeping pace with new customer expectations that are being established by Amazon and other digital innovators like Facebook.

"It is one of the things that we really worry about in two ways. First, can we be as good at the customer experience of e-commerce as Amazon and Facebook? Can we interact with people in an electronic way the way we know our focus on the stores can? We have a big opportunity to get better at that," Boyan said. "The second thing we really worry about is the economics of picking and delivering in an industry where that [service] might not be paid for. How we tackle the economic challenge will be as big as how we tackle the customer experience challenge."

Tackling both will require highly engaged employees, and H-E-B took a major step early this year to ensure its employees are invested, literally, in the retailer's continued success. The privately held company gave about 55,000 employees a 15 percent ownership stake in the company through stock grants equal to 3 percent of their salary and vowed to make yearly contributions based on performance.

The morale-boosting move came amid the escalating national debate over income inequality and actions other major national retailers have taken to increase their hourly rates to levels that H-E-B was already paying.

UNDERINVESTED IN PEOPLE

"This is an industry that has fundamentally underinvested in people," Boyan said, asserting that real hourly wages in the grocery industry have gone down almost every year for 30 years. "We say we are a people business, but this does not look like an industry that believes it is a people business."

Between harsh comments about the supermarket industry and a grim economic outlook, Boyan didn't send those who listened to his comments bouncing out of the Chicago's McCormick Place convention center filled with optimism. The points he made about mounting competitive pressures, expense concerns, shifting demographics and restrained spending present real concerns for an industry facing some unfamiliar headwinds.

The prospect of three decades of flat to declining growth, while unpleasant, is also an opportunity for retail leaders to think differently about how to run their business compared to if the downturn was simply a one- or two-quarter hiccup on an otherwise upward trend.

"We think that good companies prepare for what will you do if this is the industry you are faced with. If [economic growth] is better than this then we are all happy," Boyan said.