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Howard E. Butt ( H.E.B Food Stores)

Established in 1905 as a small family business, H. E. Butt Food Stores (H-E-B) has

grown into one of the most successful food retail businesses in the United States with

sales of $6 billion. What began as a small mom-and-pop store in Kerrville, Texas has

become a complex operation with 245 grocery stores in Texas, Louisiana, and Mexico,

yet H-E-B retains its ability to blend the ever-changing concept of grocery marketing

with the needs and tastes of the local communities that it serves. The company's growth

over the past 93 years reflects both the history of Texas and the evolution of the

supermarket concept.

Company History

Mrs. Florence Butt opened the door of the Mrs. C. C. Butt Staple and Fancy Groceries in

Kerrville, Texas in 1905 with a $60 investment. Mrs. Butt's store was probably like most

grocery stores of the time, with merchandise stored in open barrels or cans on shelves

cooled by ceiling fans. Customers carried merchandise in wicker baskets or wooden

wagons, and most probably purchased goods on credit with the store. The small store

thrived enough to sustain the family.

In 1919, Mrs. Butt's son, Howard, fresh from World War II, took over the family

business. Howard E. Butt began his tenure with the idea of expanding the business

beyond Kerrville. After four unsuccessful attempts, a second store was opened in Del

Rio, Texas in 1928. The following year, Howard Butt decided to move the base of

operations to Rio Grande City in south Texas. He borrowed $38,000 (think what this kind

of money would represent in 1928!) to acquire three similar stores, thus initiating the first

expansion of the business.

During the tough years of the Great Depression and through the late 1930s, the

company continued its expansion with new stores in the central and coastal regions of

Texas. During those early years, the company adopted many practices that continue to be

part of its strategy today. For example, with the acquisition in 1936 of its own bakery in

Corpus Christi, Texas, the company began a process of vertical integration that

eventually included milk, ice cream, and meat processing plants, as well as a photo

processing lab. This process of integration led to the concept of one-stop shopping,

turning the simple grocery store into a comprehensive supermarket with a drugstore, fish

and flower markets, a butcher and delicatessen shops, all under the same roof. Along with

this successful expansion, the firm moved to San Antonio, Texas, renovating a historic U.

S. Army Arsenal complex for its current headquarters.

Company Philosophy

H-E-B's business philosophy is based on three principles. First, the entire organization is

committed to offering superior customer service. Second, the company pledges to offer

the best quality and freshness in its products. Finally, the firm aims to offer the best

overall buy experience along with great value.

H-E-B's mission statement reflects the elements by which these principles

become a day to day reality. The mission statement opens with a "Bold Commitment " in

which the organization pledges to build what it calls, "The Greatest Retailing Company, "

a phrase that provides a sense of direction , yet leaves room to adapt the concept to the

configuration of the retailing industry itself. The mission statement also provides

guidance regarding members of the organization whom the firm refers to as partners.

Partner promises are also incorporated into the mission's pledge with specific

commitments in the areas of customer service, product quality and value for every dollar

spent in the stores. The mission statement concludes with a phrase that could only be the

product of the partner's view on the statement itself: "We promise...to keep our

promises."

H-E-B: A Regional Business?

There are several characteristic traits innate to the H-E-B concept of business. The first is

the fast adaptation to the markets its serves. This adaptation extends beyond the mere

allocation of shelf space to local products and food staples. For example, the company's

73 Pantry Foods stores are smaller in size, offer a wide variety of name-brand

merchandise and fresh meat and product, and are known for their convenience and low

prices, which appeal to the citizens of east Texas, where the stores are primarily located.

In 1991, the company launched a new supermarket concept in San Antonio under the

name Marketplace. The larger size of this store and its product variety and availability

made it a benchmark for other food retailers. The concept turned out to be so successful

that the firm soon opened more Marketplace stores throughout Texas. In 1995, the

company introduced another version of a modern store, the Central Market, in Austin

Texas. This upscale concept brings a wide assortment of fresh products and ready-to-

cook prepared items under the same roof and features an eclectic arrangement of

shopping and entertainment alternatives to appeal to local tastes. The store has been

generating positive comments since its opening and plans are under way for two more

Central Markets.

A second distinct feature is technological innovation. The company has instituted

a state of the art computer-based Point-of-Sales systems, satellite communications and

video surveillance and is an industry leader in testing electronic shelf labels. According to

Fully Clingman, H-E-B's president and COO, "If technology can improves the quality of

life for our partners (employees), improve the quality of our products for consumers, help

deliver products in a more cost-effective manner, then whether it's smoke signals,

satellites or infrared, we don't care." This attitude has generated praise from both

industry analysts and competitors who see H-E-B's approach to technology as a

benchmark for the entire industry.

Another interesting characteristic of the H-E-B operation has to do with its

distribution system. Since its inception, the company has held to a strict regional

expansion trend. This focus has allowed the company to build a comprehensive 1,000

truck transportation network operated from a large distribution center in San Antonio.

The delivery system is further supported by warehouses in San Marcos, Corpus Christi

and Houston.

Despite its regional scale, H-E-B has capitalized on its 93 years of experience to

rack up some impressive industry records, such as double the average weekly sales of

other national grocery chains, three times the average of industry leaders in same store

sales growth, and a sales volume that has tripled in 10 years, all of which have propelled

the firm to the rank of 12th largest food retailing chain in the United States. But not

everything is on the bright side: The company is presently undergoing a period of

expansion amidst increasing competition, some technological overturns in the retailing

business, and changing customer demands for better value and more services. Given

these circumstances, the company must carefully decide on the strategies that will not

only assure its current standing but also guide future developments.

H-E-B's First International Market

The boldest expansion move taken this far is the opening of a store in San Pedro Garza

Garcia, an upscale suburb or Monterrey, in the northeastern state of Nuevo Leon,

Mexico. Open to the public in 1997, the 70,000 square foot store has elicited favorable

comments from customers , many of whom were already familiar with H-E-B from

shopping trips to neighboring cities on the Texas border such as Laredo, McAllen and

Brownsville. The company had already announced plans to open a second store in the

southern part of Monterrey. Monterrey was a logical choice for expansion, given its status as an industry and

services capital and its location just 150 miles south of Laredo Texas. The city's large

population (3.5 million), income per capita above the national average, and increasing

economic activity make it an appealing market for H-E-B. Monterrey represents a

primary market for both national and international firms willing to consolidate operations in the country.

Of course, H-E-B will face challenges in the Monterrey market. Among its most

significant local competition are Gigante, a national chain with many outlets throughout

Mexico and within Monterrey, and Soriana, a supermarket chain with 90 outlets in the

northern region of Mexico and 30 outlets in Monterrey. Wal-Mart already has two stores

in the area, as well as two Sam's Club stores. The French chain Carrefour opened a

hypermart in 1997 and Price Costco, another shopping club chain has started operations

in the market. Moreover, Monterrey, like most Mexican cities, is still feeling the

lingering effects of a severe economic crisis that nearly collapsed the Mexican economy

in 1994. As current CEO Charles Butt commented, " we have found it very challenging

to do business in another country. It is even more complex than we expected: Different

laws, a different culture. It has been really stretching for our company."

Supermercados H_E_B S.A. de C.V. ( the name the company adopted for its

operations in Mexico) is a long term project based on the strong belief that the company

is moving into Mexico as part of a natural evolution process that can be traced back to the

early days when Howard E Butt moved the business to the Rio Grande Valley, a region

with a distinct Mexican influence. H-E-B's commitment to the Monterrey market is best

explained by CEO Butt, " We have had a relationship with the people of Northern

Mexico for decades in our company, going back to the 1930's when my father

established stores in the Rio Grande Valley. It is our real desire here to be a part of this

nation in a strong way. Many people have talked to us about our timing in Mexico. My

father used to say to me, 'Son, the border will always go up and down, but it will always

come back.' I have never been terribly concerned about whether we hit things here on the

downturn or in the upswing. We are in this game for the long haul. Yes, I think Mexico is

coming out of the crisis, as they refer to it here. So maybe our timing is ok, maybe it is

not. That is not the major part of our concern. We want to serve the people here (and

elsewhere) in a way that will build customer relationships for the long term."

Options for Expansion

H-E-B faces three options for long term growth. The first option is to expand north within

the state of Texas. The company already has a dominant position in the Rio Grande

Valley , central Texas and in the coastal ear that stretches from the Mexican border to

Houston. However, the company has no presence in the north and northeastern regions of

the state. This would include attractive markets such as the Dallas - Ft Worth area,

Wichita Falls, Lubbock, Waco, Tyler and Abilene. The H-E-B name would be well

known in these areas.A second option for expansion is into neighboring U.S. States. Demographic

tends indicate that strong population growth in the Sun Belt states will continue , so a

natural route for expansion would be into the promising markets of states such as New

Mexico, Arizona, Louisiana and Mississippi. Arizona has an 11% annual growth rate in

population forecast for the next ten years and New Mexico has a 14% annual growth rate

forecast for the same period. These states have similar sociodemographic consumer

profiles as the firm's current markets and have the additional advantage of geographical

proximity. In 1996 , the company tested this strategy when it open its first store outside of

Texas with the inauguration of a pantry-type store in Lake Charles, Louisiana, a growing

city of 70,000.H-E-B's third option for expansion would be to continue expansion south of the

Texas border in Mexico, however the marketing environment is quite different there. Yet,

such factors as geographical proximity, ethnic composition of the indigenous market, and

the shopping habits of the Mexican middle class make the prospects of further expansion

into Mexico feasible and appealing. There is the problem of how well a North American

company would be received in Mexico but other American retailers have done quite well

there in recent years. Another problem is the demographics of Mexico. Per capita income

in Mexico is roughly $8800 about one fourth of the average per capita income in the

U.S. ($36,000). Can the company thrive in a market where the economy , culture ,

language, and laws are different? Will it be able to build an attractive position to

capitalize on its experience in the states and to continue aggressive expansion?

The CEO, Charles Butt, needs to make a decision on which route to choose to

continue the expansion he feels that his company needs to stay viable. Which route

should he choose?

State The Problem

Relate concepts in the text above to the case at hand. Please do not summarize the case.

List alternatives that will solve the case. Please be specific, not vague.

List criteria to evaluate alternative. Is it acceptable to employees? Is it acceptable to shareholders? Is it acceptable to customers? Is it acceptable to top management?

What would be the cost to implement? (Expensive or not?) What would be the time frame? (How long?)

Will this alternative affect stock price? Feasibility of implementation?

Take each alternative generated to solve the problem and talk about in terms of your criteria.

How expensive to implement? Is it a long term solution or short term solution? Would shareholder's be happy?