BENTONVILLE BATTLEFIELD

Northwest Arkansas is dotted with memorials to the intense fighting that took place between Union and Confederate troops during the Civil War. Another sort of battle is playing out today in the grocery aisles of the region's biggest independent retailer, Harps Food Stores, and Wal-Mart Stores.Harps is not unlike other independents that compete with the Bentonville-based retailer, but with one big

Northwest Arkansas is dotted with memorials to the intense fighting that took place between Union and Confederate troops during the Civil War. Another sort of battle is playing out today in the grocery aisles of the region's biggest independent retailer, Harps Food Stores, and Wal-Mart Stores.

Harps is not unlike other independents that compete with the Bentonville-based retailer, but with one big difference: In northwest Arkansas, Wal-Mart brings to bear not only economic prowess but homegrown pride.

"A huge part of the population here derives their income from Wal-Mart or industries that supply Wal-Mart or service sectors where most of their customers are here seeing Wal-Mart," said Kim Eskew, executive vice president at Harps. "They're not the outside interloper coming in and taking dollars out of the community."

Harps operates 48 stores, all but one of them in northern Arkansas or northeast Oklahoma. Also vying for food sales in its markets are 26 Wal-Mart supercenters and five Neighborhood Markets, not to mention a smattering of other independent and chain supermarkets and alternative channels selling food.

Harps knows it can't win on its family-ownership history or employee ownership alone, so it focuses on driving sales through competitively priced Center Store products and strong perishables. Total store sales have grown with the help of acquisitions since Wal-Mart built its first area supercenter in 1992, but in the past two years, as Wal-Mart has slowed its pace of store openings, Harps has seen an increase in same-store and Center Store sales, Eskew said.

"I think our strategy of trying to differentiate our company on the basis of quality has brought a lot of people in our stores," said Roger Collins, Harps chairman, president and chief executive. "We're trying to convert shoppers from Wal-Mart to Harps on the basis of our no-sodium-added, no-solution-added meat campaign, with our cake-decorating campaign, with our Green Giant produce so that customers will bring their whole shopping experience to Harps."

Wal-Mart's northwest Arkansas stores probably get more attention because of their proximity to HQ, a fact that doesn't help their rivals, said Wal-Mart observer David Rogers, president of DSR Marketing Systems, Deerfield, Ill.

Still, plenty of retailers are thriving in the retail giant's shadow, many of them companies like Harps, Rogers said. "I think some of the best competitors against Wal-Mart are the independents, because they're of fleeter foot," he said. "The ones who do best against Wal-Mart are the ones who stay close on pricing, 3% to 4%, then beat Wal-Mart on service, housekeeping, selection. I think below 5%, people can't tell a difference."

At first, Harps tried to beat the supercenters at their own game.

Harps was the low-price leader in most of its markets when Wal-Mart opened its first supercenter in Springdale, Ark. Wal-Mart used price-comparison signs to knock Harps off its perch; Harps fought back with its own signs. "We just went at it for a year. I would say nobody made any money," Eskew recalled. "We just realized that we were not going to be able to survive on the margins we were going to generate."

The case of Breyers ice cream illustrated just how formidable an opponent Wal-Mart could be. When Harps was buying cartons of Breyers for $4.40, Wal-Mart was selling them for $3. Unable to get the price down far enough, Harps replaced Breyers with Edy's. "There's no argument you're going to make that's going to justify that [price gap] in the customer's mind," Eskew reasoned.

Harps, which says it's gone from No. 1 to No. 2 in sales behind Wal-Mart in most of its markets, based on its own estimates, usually is able to negotiate low prices with suppliers or through its wholesaler, Associated Wholesale Grocers in Kansas City, Kan. Now, its goal is to offer high-velocity items priced no higher than 10% above Wal-Mart year-round, although the ideal spread varies by price point and perceived price sensitivity. Roughly 2,000 items in the stores are called out with "extreme low price" signs.

Chris Coborn, president of Coborn's, an 85-store chain based in St. Cloud, Minn., belongs to a National Grocers Association share group with Collins and is among Harps' many admirers. "In Center Store, you have to become competitive enough that you don't give customers reason to shop somewhere else," Coborn said. "They've leveraged their relationship [with Associated Wholesale Grocers] to a level where they're just better buyers. We all know, the better you buy, the more aggressive, the more competitive you can be."

Harps says it can't afford price-optimization software. Instead, it uses ACNielsen's category business planner, a tool that lets suppliers and retailers work off the same definition of categories and category sales as defined by the retailer. ACNielsen's Homescan panel data, meanwhile, helps Harps compare its performance by category with Wal-Mart's. To estimate Wal-Mart sales data, ACNielsen measures transactions recorded by a shopper panel using in-home product scanners.

Harps also communicates value with Associated's two-tier, private-label system. In many cases, it flanks the national brand with Best Choice, which is marketed as being equal to or better than national brand quality, and Always Save, its value line that compares with Wal-Mart's Great Value store brand.

"We don't think we're going to overcome Wal-Mart's superior price image," Eskew said. "What we're trying to do is negate that as much as possible."

In addition, the retailer tries to offer variety where Wal-Mart doesn't. Thus, Harps carries a big selection of stockkeeping units in key categories like dog food and detergent. "They have done a better job of selling Tide to the consumer than we have," Eskew said. "You have to overcome that mental picture."

Harps' strong perishables remain key to its marketing strategy. The cornerstone is its six-year-old "Where's the Butcher?" program, which uses cheeky TV ads and in-store signs to capitalize on Wal-Mart's move to case-ready meat. It's started developing signature bakery and deli items, such as potato salad, doughnuts and fried chicken. The line bears the name of the late Martha Harp, who was the wife of former longtime company president Don Harp and well known in Springdale. Outside of Springdale, the line is recognized as unique to the chain, Eskew said.

Harps learned the hard way that even if it could match Wal-Mart's famed low prices, it might not be able to overcome the retailer's image as the cheapest.

In an attempt to win back diaper sales, Harps slashed to $6.99 its price on a diaper package size that a conventional Wal-Mart discount store was selling for $9.44. Harps even trumpeted the lower price on road signs. "We significantly increased sales on that, but I would venture to say Wal-Mart was selling more," Eskew said. "It was almost as if people were not comparing prices." Harps tried for years to match Wal-Mart on Tide laundry detergent, one year getting within a penny and displaying it year-round, and "I don't think we grew sales 5%," Eskew said.

With its overall sales trending up, Harps executives express restrained confidence as they see signs that Wal-Mart is stepping up its supercenter expansion this year and sometimes using them to fill in spaces between supercenters.

Rogers said the retailer has adopted that tactic over the past couple of years after finding it could squeeze far more sales from supercenters than from Neighborhood Markets. He believes the self-cannibalization strategy eventually will backfire.

Harps isn't taking that for granted, though. It's stepped up its own expansion, opening two new stores in high-traffic areas in Springdale and Fayetteville this year and remodeling two older stores.

"We have a number of Wal-Mart supercenters that come up against us every year that causes us to lose grocery sales," Collins said. "We have thought we were pretty saturated, but they've added more, and we think they will continue to try to fill in the gaps in between. As we have Wal-Mart open new supercenters, we have to figure out how to replace new sales."

Harps is also trying to leverage another weapon in its arsenal that its opponent to the north lacks -- an employee stock ownership plan -- with the goals of low turnover and associates who take a personal interest in treating customers well. "As part of our culture, we're trying to enhance the meaning of employee ownership," Collins said.

HARPS AT A GLANCE

Headquarters: Springdale, Ark.

Stores: 48 stores under the Harps (34), Price Cutter Food Warehouse (13) and Harps Supermercado (1) banners

Store size: Ranges from 9,000 to 62,000 square feet, with average of 35,000

Locations: Arkansas (38), Oklahoma (9), Missouri (1)

History: Harvard and Floy Harp open Harps Cash Grocery in Springdale in 1930. Second store opens in 1964. Company becomes wholly employee-owned in 2001, when employee stock ownership plan buys outstanding stock from Harp family and management.

Source: Harps Food Stores