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Live Long and Prosper

At Hy-Vee, good health is about more than stocking shelves with natural products and erecting in-store pharmacies. The retailer, with 225 stores in seven Midwestern states, strives today to make health an attribute of its brand, further refining a shift that began several years ago.

WEST DES MOINES, Iowa — At Hy-Vee, good health is about more than stocking shelves with natural products and erecting in-store pharmacies.

The retailer, with 225 stores in seven Midwestern states, strives today to make health an attribute of its brand, further refining a shift that began several years ago.

Shoppers are visiting Hy-Vee not just for products today, but for expertise and assistance in leading a healthy lifestyle, according to Ric Jurgens, chief executive officer.

“What we’re trying to do is develop a health mentality in the minds of customers when they think about Hy-Vee,” he told SN in an interview at company headquarters late last month. “We want them to see us as the first place they turn, either on a proactive or reactive basis, regarding health issues.”

But the health of Hy-Vee shoppers is only half the story. By serving them through the efforts of employee-owners, Hy-Vee has worked itself into fighting shape, thriving amid competition from supercenters, discounters and conventional foes alike.

And so for having the foresight to stay ahead of changing lifestyles; for trust in its employee-owners to manage those changes at the local level; and for proving it can be done while growing sales, market share and profits, Hy-Vee is the recipient of SN’s Retail Excellence Award for 2006.

The award, whose previous recipients were H.E. Butt Grocery (2003), Kroger (2004) and Hannaford Bros. (2005), recognizes a retailer that pursues innovative strategies that set it apart from the competition in its markets, that shows deep understanding of its customer base demonstrated by its marketing and merchandising approaches, and that can be described as proactive and a leader. SN editors selected Hy-Vee based on
reader nominations and consultation from analysts and industry observers.

Robust Sales

For the 2006 fiscal year that ended late last month, sales were more than $5.2 billion at Hy-Vee, up around 7.5% over 2005, while comparable-store sales improved by around 4%, according to Jurgens.

The 4% annual comparable growth, Jurgens acknowledged, “is pretty typical” for Hy-Vee, though it was not a typical year. Consumers fought skyrocketing gas prices while Hy-Vee saw more and more competition from supercenters like Wal-Mart and Target, which operate nearly everywhere Hy-Vee does.

“If you look at the competitive environment in which we’ve been operating, the numbers have been dazzling,” Jurgens said. “We feel very good about the sales increases, because they were better than we might have expected at the beginning of the fiscal year.”

The difference, he said, is a chainwide focus on sales from 225 store directors and about 50,000 employees dedicated to increasing their worth as employee-owners of the 76-year-old Midwest icon.

“We always have a focus on sales,” Jurgens said. “Our store directors are always believing they need to get an increase in every department. And they find a way to get through the competitive situations, and the economic situations, that tend to make the company vulnerable to a lesser sales increase.

“Sales is our No. 1 priority, and we try to create profit-and-loss statements on every part of our operation, right down to the department level,” he said.

Hy-Vee is aggressively investing in the business, he added. The fiscal year that just began marks the start of a five-year plan to invest $1 billion in capital expenditures, or around 4% of total sales. Jurgens estimated 60% to 70% of those dollars would go directly toward remodeling existing stores. “We can’t rest on our laurels from a physical plant perspective,” Jurgens said.

The pace of new stores will hold fairly steady, he predicted. “We generally have five stores under construction at any one time.”
Though Hy-Vee has occasionally purchased other retailers, the company is “interested in properties, not stores,” Jurgens explained. Confronted with industry speculation that Hy-Vee could be a shopper for Rainbow, Roundy’s Supermarkets’ Minneapolis banner, Jurgens expressed a desire to grow slowly.

“We wouldn’t comment on any real estate deals until they are final. But I can tell you we are not predisposed to acquire. We do not actively seek out stores to buy,” Jurgens said. “We think a more organic, ground-up road is the best way for Hy-Vee to grow.”

With thousands of employees counting on performance for their pay, Hy-Vee isn’t free of the quarterly result pressure felt by publicly held retailers. “But what we don’t have is disinterested owners or market analysts to deal with. We don’t want to get to put in a situation where we’ve got to close stores or open stores just to get the analysts excited,” Jurgens said. “I don’t envy my friends in the industry who have to do that.”

Innovative Processes

Hy-Vee’s pursuit of healthy lifestyle initiatives at its stores is sparked by the same broad demographic trends retailers have known about for years: aging populations and time-crunched shoppers. Hy-Vee’s edge is the innovative process it brings to addressing the trends.

While the chain debuted “health markets” at its stores several years ago, the strategy continued to evolve in fiscal 2006. The chain now has staff dietitians at more than 50 stores and in-store health clinics at a number of others. Multichannel advertising, as well as efforts at individual stores, is working to position the chain as a source for ideas, suggestions and knowledge about health and fitness, Jurgens explained.

“We’ve taken the health market from being primarily a product-based offering, and are now making it so as to include knowledge,” he said. “In some cases it’s because they want something interesting and exciting, and in others it’s because shoppers have specific disease states they’re addressing. Or they have a general need to address their own health.”

In-store clinics, which are leased out to local health care providers, serve as stops where shoppers can receive fundamental checkups and address minor maladies. “It makes life easier for our shoppers and hopefully, it gets a few more prescriptions through our pharmacies,” Jurgens said.

In-store dietitians in many locations lead cooking and food education classes as part of a new effort among Hy-Vee stores to create “clubs” among its shoppers. Some new and remodeled Hy-Vee stores facilitate these gatherings by including a “club room” with seating and a demonstration kitchen.

“The whole notion of starting the club was to try to find a way to provide services that people need to help with their lifestyle,” Jurgens explained. The type of activity offered is limited only by the imagination of the local store director.

“The club room was designed to be a cooking school, but it’s perfectly suited for wine tastings or other events. A wine and spirit club could be one. It could be a floral design club — anything a store director can come up with to help their customers fulfill their needs. It’s developed into a fun thing for our people as well as our customers.”

Health services and clubs also complement a range of other offerings Hy-Vee provides for shoppers at their stores. With many stores today exceeding 70,000 square feet, they’ve become home to in-store cafes and restaurants — Hy-Vee provides Iowa’s best prepared Chinese food, local surveys say — along with conveniences like drop-off dry cleaning, post offices, video sales and rental, banking and general merchandise. Most recently, the company has added gas stations to some locations.

“Today’s customer is busier than ever,” Jurgens explained. “If we can do something to help them streamline their lives and make it simpler for them, we think we have a chance to win them as a loyal shopper. By offering banking, laundry, groceries, film processing, we think we help them complete 90% of their errands.”

The remaining 10%? “We’re predisposed to want to provide the services people want regularly,” Jurgens said. “An awful lot of the other products shoppers want are seasonal in nature, or they need less frequently. So at this point we’re not leaning toward becoming a full-blown mass merchant.”

Hy-Vee is also rolling out stand-alone drug stores of around 15,000 square feet under the Hy-Vee banner. The newest of these locations feature a unique layout with a diagonal aisle leading to the prescription counter. The chain has found success co-locating its drug stores with
dedicated wine and spirits stores in the 10,000 square-foot range, Jurgens said. These stores work well together reflecting shopper preferences toward making wine and/or drug store trips a separate shop. “People clearly want expertise in these areas,” he said.

Jurgens dismissed the suggestion that an expanding footprint is a reaction to ever-increasing presence of supercenters in Hy-Vee’s trade areas. “It’s not a store size issue. It’s an execution issue and a customer issue,” he insisted. “We try not to put too much energy on our competition. It’s a question of whether you understand your customers and then how you tailor the stores to their needs.”

Local Expertise

Doctors and other high-level health professionals from the nearby Mayo Clinic make up a large part of the client base for the Hy-Vee location in Rochester, Minn., run by Michael Long. But before Long arrived in Rochester, he worked at a Hy-Vee store in Iowa Falls, Iowa, where farming dominated the local economy.

“I have four chefs on my staff now, which is something that might not work in Iowa Falls where a good part of the clients walked in wearing bib overalls,” Long told SN. “What I’ve learned at Hy-Vee is to use my experience with each of the managers I worked for and run my store the way it works best for me.”

A decentralized structure where store directors are free to sell what they want how they want is a key advantage as Hy-Vee battles for market share, Jurgens contended. Store directors are encouraged to share their successful strategies at meetings and through an internal Internet site.

“The most important thing we do as store directors is share information,” Long said. “We meet almost every other week, which takes a lot of time, effort and energy. We go over industry changes, and who’s been trying what new things. Once in a while we have inspirational speakers, but mostly it’s about sales ideas. The store directors who attend these meetings then bring their ideas back to their staffs.

“The Internet has really helped that become a daily conversation,” Long added. “We can prepare an Anaheim stuffed pepper, take pictures of it and share it on the Internet with everybody in the entire company.”
Nate Stewart, a Hy-Vee store director in Lenexa, Kan., said he encourages his staff to contribute ideas “from the newest part-timer on up.”

A sense of cooperation among store directors, as well as the company’s decentralized structure, date back to its founders and are reflected in a code of ethics Jurgens calls “the fundamentals” woven into the Hy-Vee culture.

“We have certain fundamentals that we live and die by. Things like having high integrity. Respecting and caring — not only about employees and customers, but the vendors, the government and anyone we come in contact with,” he said. “We try to make sure our company operates at the highest standards and ethics. That fundamental value system has permeated every employee in this company for 76 years. That’s why we’re different, and that’s why we succeed.”

Maintaining that culture is an aspect of his job Jurgens takes seriously. “We talk about our culture often. I saved every note from every speech [former CEO] Ron Pearson ever gave, and in most of them he included something about the Hy-Vee culture. Most of mine do too. I understand that protecting that culture is protecting our future, and if we move away from it we put our company at risk.

“So it’s not difficult for us to keep our focus on our fundamentals. We believe in them wholeheartedly.”

TAGS: SN Awards