Stew Leonard’s

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Stew Leonard’s

100 Westport Avenue
Norwalk, Connecticut 06851
U.S.A.
Telephone: (203) 847-7214
Web site: http://www.stewleonards.com

Private Company
Founded: 1969
Employees: 2,000
Sales: $300 million (2002 est.)
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores

Stew Leonard’s, which bills itself as “the world’s largest dairy store,” has combined the atmosphere of a theme park with the business principles of a big box store to create a regional marketing phenomenon. Customers drive as much as 50 miles to shop at Stew Leonard’s, where diversions include a petting zoo, robotic singing milk cartons, and employees dressed as farm animals dancing with customers in the aisles. Stew Leonard’s sells an extremely limited list of products (less than one-tenth of the items in an average grocery store), but moves staggering quantities, including 13 million cookies, eight million ears of corn, and ten million quarts of milk per year. Managed by the Leonard family, the company maintains a distinctive corporate culture in which an emphasis on teamwork, slavish devotion to customer satisfaction, and nimbleness in the face of changing business needs coexist with a focus on showmanship that the company calls “The Wow!” In 1993 Stew Leonard’s legions of fans were shocked to learn that the store’s namesake, Stew Leonard, Sr., was convicted of tax evasion. The scandal, however, did not curtail the growth or popularity of the business.

Origins in the 1920s

The precursor to Stew Leonard’s was the Clover Farms Dairy in Norwalk, Connecticut, which was founded by Charles Leo Leonard in 1921. Charles ran the business himself, out of his garage, and delivered fresh milk to local customers by horse and buggy. Leo Leonard, Jr., recalled: “He’d wake up at three o’clock in the morning, drive to the farms to get milk, return and bottle it, then deliver it to his customers.” In later years milk was delivered by tracks decorated with plastic cows that “mooed” for children. Charles’s son Stew graduated from the University of Connecticut School of Agriculture and in 1951 joined his brother, John, in the business. By the end of the next decade, Stew had come to realize that the milk delivery business was in decline. At the same time, he was informed by the State of Connecticut that the dairy was in the path of a proposed highway, giving urgency to his desire to launch a new venture.

In 1969 Stew Leonard turned to retail, opening a 17,000-square-foot store—named simply “Stew Leonard’s”—with seven employees selling eight items. During the first week, the store had 700 customers. By the end of the first year, there were 10,000 customers a week. Stew Leonard’s quickly expanded beyond dairy products, adding meat, fish, produce, and bakery items. Stew’s son, Stew Leonard, Jr., stocked shelves, worked cash registers, and made ice cream. After completing an undergraduate degree in accounting, Stew, Jr., received his MBA from the University of California at Los Angeles. He became president of the family business in 1982 and CEO in 1991, the same year that a second Stew Leonard’s was opened, in Danbury, Connecticut, under the direction of his brother, Tom Leonard.

By that time the company had reached the $100 million mark in annual sales and had become a local landmark, providing a grocery experience unlike any other. Norwalk customers were greeted at the door by a life-sized plastic cow and a three-ton granite boulder featuring the store’s motto: “Rule Number One: The customer is always right. Rule Number Two: If the customer is ever wrong, re-read Rule Number One.” Rather than standard grocery aisles, a single path through the store led past a glass-enclosed milk processing plant, an in-store bakery, a fresh popcorn department, and a variety of diversions including banjo-playing dog robots atop the freezer case.

Secrets of Success

While the number of products offered at each Stew Leonard’s store had grown from seven to approximately 800, this was still dramatically fewer than the 15,000 stocked by an average supermarket, and any item selling fewer than 1,000 units per week was promptly removed from the shelves. According to Stew Leonard, Jr., the limited product list was a key element in the stores’ success, allowing managers to stock only those items generating phenomenal sales and focus on moving them out the door quickly. “By focusing on turnover,” he stated, “profit comes. I’ve repeatedly seen us bring items in at no profit in the beginning. Then, as customers started buying more, we were able to get better deals. Soon we were buying trailer loads. The next thing you knew, we were making money.” Indeed, while customers frequently complained about the limited selection, sales per square foot were approximately five times that of the average grocery store, prompting an entry in the Guinness Book of World Records for the greatest sales per square foot of any food store in the United States. Stew Leonard, Jr., credited his computer system with allowing him to monitor sales with great precision and provide rapid feedback to department managers, who could then react promptly. Equally rigorous attention was paid to customer feedback. Stew Leonard, Sr., commonly wandered the aisles to chat with shoppers, and suggestion boxes were emptied each day, with suggestions typed up and delivered to managers by 11 a.m. the following morning. Regular focus groups also yielded innovations, such as making fish appear fresher by selling it on ice rather than wrapped in plastic—a change that doubled fish sales.

Stew Leonard’s distinctive culture included a strong family orientation. Many Leonard family members held key roles, and more than half the non-Leonard employees also had at least one relative working at the company. (Said the perpetually aphoristic Stew, Sr., “I figure if we hire someone’s daughter, she’ll have two bosses: me and her mother.”) Employees received rigorous training in customer service, the company strove to promote from within as much as possible, and outstanding performance was celebrated on a regular basis with plaques, gift certificates, dinners, and, for managers, profit sharing. Employee satisfaction was so high that turnover of full-time employees was half the industry average, and Stew Leonard’s won a spot on Fortune ’s list of “100 Best Companies to Work for in America.” As Stew Leonard’s growing fame brought a flood of visitors from companies hoping to emulate the retailer’s success, the company set up Stew Leonard’s University, in which store managers held seminars on their corporate culture and customer service techniques.

Stew Leonard, Sr., had become a folk hero. President Ronald Reagan presented him with an Award for Entrepreneurial Excellence. Inc. magazine reported that “probably no singlestore proprietor has been more admired and celebrated than Stew Leonard.” Business guru Tom Peters, who featured Stew Leonard’s in his book In Search of Excellence, stated, “If you really try, you can make any product special. Leonard has proven it better than anybody I know.” And the trade journal Executive Excellence profiled Stew Leonard, Sr., as a “management superhero,” noting that his organization was built “on the concepts of care and trust.”

Scandals in the 1990s

All the more shocking, then, when Stew Leonard, Sr., pleaded guilty to defrauding the Federal government of taxes on $17 million, in the largest criminal tax case in the history of Connecticut. With the help of three other company executives—Frank and Stephen Guthman (who were his wife’s brothers) and Tiberio Belardinelli—Stew Leonard, Sr., had masterminded a decade-long conspiracy to skim profits from the store’s cash registers. The conspirators used a sophisticated software program called Equity to alter sales records for the Internal Revenue Service, but kept a set of accurate figures to inform management decisions. The Equity software, which was designed to overwrite existing records and leave no trace that it had been run, was found hidden in a hollowed-out copy of the Business Directory of New England. Stacks of cash in $10,000 bundles were stashed in a safe hidden in a fireplace. The cash was then smuggled to the Leonards’ vacation home in the Caribbean, packed in suitcases or “even disguised as baby gifts,” according to government investigators. Prosecutors maintained that one of the brothers-in-law, Frank Guthman, embezzled additional money on his own behalf behind the backs of his colleagues.

“Well, I made a mistake,” said Stew, Sr., when the news broke. “I’m very sorry…. And I am prepared to take the consequences.” He agreed to pay $15 million in taxes, interest, and penalties and was sentenced to 52 months in prison and three years of supervised probation. While authorities maintained that Stew, Jr., was aware of the conspiracy and altered records to cover it up, the conditions of his father’s plea bargain guaranteed him immunity from prosecution.

The day after the guilty plea by Stew, Sr., the store faced more negative publicity as the Connecticut Department of Consumer Protection cited Stew Leonard’s for underweight products and a raft of other labeling violations. With 1,232 violations on 2,658 items examined, the store’s violation rate stood at 46 percent, in contrast to a statewide average of 7.2 percent. Stew Leonard’s immediately launched a public relations campaign to control the damage, taking out ads, handing out flyers, and putting Stew, Jr., on a local radio talk show to rebut the charges. According to the Leonards, the violations were greatly exaggerated, and included many overweight products as well as some that were underweight. They maintained that the average discrepancy was a mere one-half ounce, adding, however, that “there’s no excuse for any mistake, and we corrected every one of them before the inspector even left the store.”

Company Perspectives:

Our philosophy is built upon the initials of our name—S.T.E.W. The S stands for satisfy the customer—it is everyone ‘s most important job. The T stands for Teamwork, because teamwork makes it happen! The E stands for Excellence; excellence makes it better and assures great quality and freshness in everything we do. Finally, the Wstands for WOW—the WOWs are all the fun reasons that Stew Leonard’s is a great place to shop AND to work.

Stew Leonard’s loyal customers were shocked, both by the tax-fraud scandal and the weight violations. The company’s most influential cheerleader, Tom Peters, repudiated the business he had previously held up as a model, telling Fortune, “They were selling charm as much as the big rock out front that says the customer is always first. The big rock is hollow.” Industry observers expected sales to suffer; surprisingly, however, long-term effects were not discernible, as Stew Leonard’s continued to prosper, even in the face of additional obstacles. In 1997 a proposed site in Orange, Connecticut, was turned down by zoning officials after bitter protests by citizens concerned about the traffic congestion that could be generated by the $25 million store. That same year, Tom Leonard was indicted by a grand jury on charges that, like his father, he had skimmed receipts and underreported income from 1992 to 1994. Also in 1997, the United Food and Commercial Workers union filed a complaint with the National Labor Relations Board (NLRB) alleging that Stew Leonard’s had illegally opposed attempts to unionize employees. Without admitting wrongdoing, the company reached an agreement with the NLRB to post notices stating that the company would not interfere with attempts to unionize.

In 1999 a third Stew Leonard’s was opened, in Yonkers, New York. The store was the largest in the chain, at 130,000 square feet, and employed 700 people. The Yonkers location expanded on the successes of the Connecticut stores with a sushi bar, kosher bakery, and wine shop. Despite protests by residents of nearby villages over traffic issues, Stew Leonard’s was welcomed by Yonkers, which designated the store “Business of the Year.” By 2003 the chain was serving 300,000 customers a week, sales had reached nearly $300 million, and Stew Leonard’s was planning to open a fourth store, also in New York.

Industry observers debated the reasons behind the success of the Stew Leonard’s chain. While Stew Leonard’s held prices below those in neighboring stores, the price differences were not large enough to explain the volume of sales, and since prices were held down in part by selling larger packages, customers frequently complained that they left the store with more than they needed. Nor was the chain a one-stop shop, due to its limited number of products. The features that made Stew Leonard’s entertaining for children or the occasional visitor could be perceived by other shoppers as a nuisance, along with the single aisle and frequently long drive to the store. Was the secret the store’s vaunted focus on customer service? The “aw-shucks,” folk-hero personas of the Leonards themselves? The mere distinctiveness of the Stew Leonard’s shopping experience, which stood out in a sea of bland mega-chains? While no one could say for sure, observers commented with astonishment on the loyalty of Stew Leonard’s customers—all of whom were always right.

Principal Competitors

Dairy Farmers of America, Inc.; The Kroger Co.; The Stop & Shop Supermarket Company.

Key Dates:

1921:: Charles Leo Leonard founds Clover Farms Dairy in Norwalk, Connecticut.
1969:: Charles Leonard’s son Stew establishes the first Stew Leonard’s retail grocery store, in Norwalk, with seven employees.
1986:: President Ronald Reagan presents Stew Leonard with an Award for Entrepreneurial Excellence.
1991:: Stew Leonard, Jr., becomes CEO; second store opens in Danbury, Connecticut, under brother Tom Leonard.
1992:: Company makes the Guinness Book of World Records for highest sales per square foot of any food store in the United States.
1993:: Stew Leonard convicted of tax fraud; company is fined for labeling products with incorrect weights.
1997:: Tom Leonard indicted for tax fraud.
1999:: Third store opens, in Yonkers, New York.
2002:: Stew Leonard’s named one of the “100 Best Companies to Work for in America” by Fortune.