After a challenging year, the Lone Star State’s love for hometown grocer H-E-B is even stronger.
On the list of things Texans love the most, San Antonio-based supermarket chain H-E-B probably falls somewhere between barbecue and football. Ranked second among the nation’s 56 largest grocers in dunnhumby’s 2021 Retailer Preference Index, “H-E-B is almost a religion in Texas,” says Don Stuart, managing partner at Wilton, Conn.-based Cadent Consulting. “It has formed an incredible bond with customers, associates and communities, which have rewarded the chain with their loyalty.”
‘In a category like single-serve frozen entrees, H-E-B can have 160 different schematics.’
H-E-B’s commitment to its stakeholders was on full display during the recent winter storm and subsequent power outages. Although it was forced to close more stores for more time than ever before — leading to lost sales, spoilage and cleanup costs — the chain reportedly tried its best to keep stores open as long as possible, if only to serve as warming and power stations for customers going without. And then there’s this story from a manufacturer partner whose colleague lives in Texas: “With the storm bearing down, he was 15th in line at his local H-E-B when the power went out, meaning credit cards wouldn’t work. But instead of sending customers out into the weather in search of a working ATM, the manager told everyone to go ahead and take their groceries and just get home safely. What other retailer would do that?
My friend went back a few days later with a $200 check — well over the value of his groceries — and vowed never to shop anywhere else.” That’s why Texans love H-E-B.
LOCAL ON A DIFFERENT LEVEL
While genuine caring for its customers is clearly one of the retailer’s biggest assets, there’s a lot more to love at H-E-B, starting with stores that feel more like local supermarkets than a big chain. The 115-year-old family-owned company operates more than 420 stores in Texas and Mexico. And although it reportedly segments them (value, core or upscale), every H-E-B is uniquely tailored to the community it serves — in terms of assortment, services, layout, etc. “You could drive a 30-mile stretch of highway and walk three different H-E-Bs along the way, and none would be the same,” reports one manufacturer partner, who says the chain does local on a completely different level than competitors. As a result, “In a category like single-serve frozen entrees, it can have 160 different schematics” — unheard of for a company H-E-B’s size but part of the secret to its success.
“H-E-B is not run from the center,” explains Neil Saunders, managing director of retail at New York-based GlobalData. “Individual store managers have a lot of discretion to flex ranges and merchandising so they align with what shoppers want,” which drives consumer engagement and affinity.
Because its owners are “Texas born and bred,” the chain understands better than competitors that the Lone Star State has very distinct markets and communities, making the cookie-cutter approach a no-go, adds Pamela Goodfellow, director of retail insights at New York-based Kantar. “H-E-B knows Texas, and it knows its customers. I don’t think any other grocer operating in the state can celebrate the connectedness with Texans that H-E-B can.”
The chain’s deep understanding of its consumers’ wants and needs is all the more impressive given that it’s one of very few grocers that doesn’t have a loyalty card program through which it can collect shopper data (even Publix, the other major holdout, debuted one last year). But Goodfellow doesn’t see it as a problem — at least not yet — since most retailers with loyalty cards aren’t doing much with the data they gather, making them little more than vehicles for discounts. And that would never fly at H-E-B, which is committed to giving every shopper the best possible prices.
LACK OF SHOPPER DATA A DISADVANTAGE?
Long-term, however, says Stuart, the chain could be at a technological and competitive disadvantage versus competitors like Kroger that can create targeted offers for the right customers at the right time. “It’s great that H-E-B knows its customers so well, but a little technology could go a long way toward strengthening its position,” he says.
H-E-B aims to match Walmart on prices, an objective it achieves by buying direct, insisting on the same terms as the retail giant, taking significantly lower margins than competitors and then passing the savings along to customers. But its EDLP approach is supplemented by a promotional strategy Stuart describes as “old school”: literally stacks of simple yellow coupons on a silver ring at the point of sale. The approach clearly works for H-E-B and changing it up now might upset loyal shoppers, “But it’s really hard to track on syndicated data as a discount and to evaluate the efficiency and effectiveness of marketing spend,” he explains.
Manufacturers looking to gain trial for a new item may find the infrequency of promotions at the retailer to be a drawback as well, but they give the chain high marks for its commitment to cross-promoting items from different categories through its customer favorite “Combo Locos” and “Meal Deals.” The buy-one-get-some-free promos (also offered via yellow coupons) often include at least one H-E-B private label product, so manufacturers with complementary items have another vehicle for promoting their brands.
DISTINCTIVE ASSORTMENTS WITH TEXAS FLAIR
While there’s nothing particularly noteworthy about the configuration of H-E-B’s frozen sections, “The assortments include a lot of distinctive products — especially private label — as well as exclusive lines developed in partnership with small suppliers like George & Rubie’s,” says Saunders. And although the carefully curated assortments vary by store, there’s never any doubt that you’re in Texas. In fact, H-E-B sponsors a “Quest for Texas Best” contest every year that’s resulted in the addition of hundreds of unique new items manufactured in the state. Special shelf tags help highlight Texas-made products.
The assortment is also heavy on private label, which spans multiple tiers and also includes dedicated own brands in key categories like pizza (Midtown Pizza) and ice cream (Creamery Creations). “H-E-B’s private label program is very strong, especially in frozen meals,” says Saunders, citing a range that includes everything from classic dishes like lasagna to Tex-Mex favorites to international offerings.
The only problem with the program, according to one manufacturer partner, is that “H-E-B does a good job of picking off key flavors of branded items for private label,” which can be a difficult pill to swallow. He adds that every category manager also handles private label for their category, so they’re keenly aware of which products they might poach.
On the fresh side, H-E-B offers an extensive selection of ready-to-heat or -eat prepared meals, both single- and multi-serve, under its Meal Simple brand. During the pandemic, the chain also partnered with local restaurants to create pre-packaged versions of some of their signature dishes. The move not only bolstered the retailer’s assortment at a time when shoppers were hungry for meal solutions, differentiating it from competitors, “It’s also another example of H-E-B digging in to help its community,” says Goodfellow.
“The chain really goes above and beyond in its efforts to create a strong local connection,” adds Stuart.
Does that goodwill extend to its relationships with suppliers? Most of the vendors we talked to said it does. Yes, the chain demands Walmart prices (don’t even think about trying to fudge the numbers), but it’s a great partner — once you get in. “The challenge is getting in front of H-E-B, especially now,” says one supplier. Like many retailers, he adds, H-E-B scaled back its assortment during the pandemic in order to focus on best sellers. But he believes the 10% to 20% SKU reduction is likely to persist for at least the next several years, which means suppliers are fighting for even fewer slots than before the pandemic.
PREPARED FOR THE PANDEMIC
Industry observers say H-E-B was better prepared for the COVID crisis than many of its competitors, thanks to a disaster plan that’s been in place for years. “I don’t know how, but H-E-B had the virus on its radar long before others,” says Saunders. So when it turned into a full-blown public health emergency last March, “The chain was a step ahead of most grocers.”
After reaching out to suppliers about the surge it saw coming, “H-E-B did a fantastic job of loading warehouses early so it didn’t get caught short like many retailers,” reports one manufacturer partner. “It wasn’t afraid to take a holding position on inventory — similar to when it knows there’s a hurricane coming. Its disaster team was definitely ahead of the curve.”
The company was also one of the first to respond to the needs of its most vulnerable customers. In conjunction with Favor, the app-based home delivery company it acquired in 2018, H-E-B launched a unique Senior Support program that provided free same-day delivery of a select list of groceries and essentials for those age 60 and up. In addition, says Goodfellow, the chain offered step-by-step online ordering via a dedicated website or by phone, “helping senior citizens navigate a process that might have seemed daunting without extra assistance.”
‘H-E-B hits the trifecta of competitive pricing, curated assortment and quality.’
Aside from the Senior Support program, however, H-E-B’s e-commerce offer has been described by some as “a bit behind the times” and “not a leader.” But Saunders, for one, believes that, for a smaller chain, “H-E-B is remarkably innovative in the online space where it’s reportedly testing technologies such as automated in-store micro-fulfillment and autonomous vehicles.” Currently, he says, online orders are largely filled in stores, though the chain has some dedicated e-commerce hubs for online delivery orders.
The company is also reportedly working to improve its apps so customers who shop online can find interesting new products not on their grocery list, similar to the way they would if they were shopping in store.
In a recent interview with The Dallas Morning News, Stephen Butt, president of H-E-B’s Central Market division, said he expects digital shopping to level out at somewhere between 10% and 15% of sales post-pandemic.
MOVIN’ ON UP
H-E-B has been going head to head with Walmart for years, and it’s defended well against newcomers from out of state looking for a piece of the Texas pie. Clearly, the chain isn’t afraid of competition, but it’s been slow to enter new markets. Industry observers say that’s by design. “Expansion is slow but deliberate,” says Saunders. “H-E-B seems to take the approach of opening new stores when it sees an opportunity rather than setting a strict target that it has to meet.”
“Cautious, measured expansion fits with H-E-B’s goal of localization,” adds Goodfellow, who says it takes time to really get to know a new community. “New stores aren’t an easy cut-and-paste of one another because each one is unique.” That said, H-E-B announced late last month that it will enter the Dallas-Fort Worth Metroplex in 2022 with stores in Plano and Frisco. The company has been in that community for two decades with Central Market, and Favor Delivery already serves 29 cities across the metro area. But these will be the first H-E-Bs in that part of Texas, underscoring the fact that the chain still has plenty of room for growth in its home state.
“H-E-B almost has a monopoly in parts of Texas, with a focus on San Antonio, Houston and Austin,” says Stuart. But except for a new store in Lubbock, “It currently has little to no presence in West Texas and Dallas.”
However, he has little doubt the chain will be successful in new markets. “H-E-B hits the trifecta with competitive pricing, curated assortment and quality,” says Stuart. And it treats all of its stakeholders right — from shoppers to associates to communities — creating the kind of loyalty other chains can only dream of. “It’s a model regional monopoly.”