H. E. Butt Grocery Company

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H. E. Butt Grocery Company

646 South Main Avenue
San Antonio, Texas 78204-1210
U.S.A.
Telephone: (210) 938-8000
Fax: (210) 938-8169
Web site: http://www.heb.com

Private Company
Founded: 1905 as C.C. Butt Grocery Store
Employees: 60,000
Sales: $11.5 billion (2005 est.)
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores

H. E. Butt Grocery Company (H-E-B) is the nation's 14th largest grocery chain in revenue terms and is the second largest chain in Texas (trailing only Wal-Mart Stores, Inc.), with number one positions in Austin, Corpus Christi, and San Antonio. The largest private company in Texas, and the 11th largest in the United States, H-E-B has been owned and operated by the Butt family since its early 20th-century founding. Of the company's 300-plus units, most are large-format, combination food and pharmacy stores. Approximately 120 of the company's stores feature gasoline outlets. About 80 of them are H-E-B Pantry Stores, which are smaller-sized, feature extra low prices, and are designed to be particularly convenient; these are mainly located in rural areas in southeastern Texas. Through the end of 2006, the company had also opened eight Central Market stores; located in major metropolitan areas, these outlets are around 70,000 square feet in size, offering a combination of fresh foods and gourmet items aimed at "foodies." The company is also rolling out a new format called H-E-B Plus that includes a much wider selection of nonfood items in larger format stores encompassing anywhere from 109,000 to nearly 200,000 square feet. In addition to its units in Texas, H-E-B runs more than 20 stores in Mexico, mainly in that nation's northeastern states bordering on the United States with a large concentration in the Monterrey metropolitan area (Mexico's second largest metro area after Mexico City). Among the products that the company makes or processes itself for sale in its own stores are milk, yogurt, sour cream, cottage cheese, ice cream, baked goods, tortillas, and meat.

EARLY DECADES: FROM KERRVILLE TO SAN ANTONIO

H-E-B started out as a single store in Kerrville, a small town in the Texas Hill Country. Charles C. and Florence Butt moved to Kerrville from Memphis, Tennessee. Charles was suffering from tuberculosis, and they hoped that the drier climate would improve his condition. Once the family was settled in Kerrville, Florence was faced with supporting the family herself. She decided to open a grocery store. The family purchased a two-story house, planning to live upstairs and operate the store downstairs. With investment capital of $60, the family opened the C.C. Butt Grocery Store on November 26, 1905. They began selling food in bulk as a charge and delivery operation. Florence's young sons delivered the food via baby carriage until they could afford to buy a little red wagon.

By 1908 the Butt store had established itself within the local community as "dealers in staples, fancy groceries and fresh meats." The boys had even been able to buy a horse and wagon to make deliveries. Also, Florence was building a profitable fresh-baked bread business as a sideline. She arranged for bread to be delivered by train from San Antonio and then immediately delivered to residences by her sons. The market for fresh bread was relatively new at the time because many women were hesitant to buy bread for fear of being considered too lazy to bake their own. Nevertheless, bread deliveries increased, initiating what would become a legacy of innovation at Butt Grocery.

All three of the Butt brothers—Charles, Eugene, and Howard E.—worked in the family business while they were growing up. However, it was Howard who took an early liking to the business, and was even described in company annals as a "grocery man" from the beginning. At the age of 22, in 1917, Howard was still working in the grocery store. Shortly after the United States entered World War I, however, Howard joined the Navy. After a two-year tour he returned to Kerrville to take over the store. He had a lot of ideas and was eager to implement them. His first move was to relocate the store to a busier corner in the burgeoning downtown area. In the new location, Butt installed the first in-store meat market and delicatessen. He also began a policy of constantly offering new and different items to patrons.

Importantly, Butt also tried a risky new experiment. Traditionally, customers had delivered or phoned in their orders, and the grocer had gathered and delivered the groceries along with a bill due at the end of the month. By the early 1920s, though, a growing number of people had their own cars and were able to more easily transport their own groceries. Butt believed that those customers, and maybe many others, would be willing to wait on themselves, pay cash, and transport their own groceries if they could save money. The savings would come from reduced labor and equipment costs at the store, and from the elimination of unpaid grocery bills. In December 1921 Butt sent out handwritten penny postcards to his customers, explaining the change. On New Year's Day the store opened under the new name of C.C. Butt Cash and Carry.

The cash-and-carry experiment was an instant hit. In fact, Butt decided in 1924 that it was time to expand. He opened a new store about 60 miles from Kerrville in a town called Junction. Although other stores were already established there, Butt's innovative cash-and-carry system and superior inventory allowed his store to thrive. Meanwhile, Butt continued to tweak his formula by experimenting with new services and products. Most importantly, he began to question why a housewife should not be able to get common household items other than food and staples from a grocery store. Throughout the 1920s he slowly began adding to his inventory: everything from pots and pans to tools and textiles.

In 1926 Butt discovered a new avenue to growth. Piggly-Wiggly, a grocery store chain that had become well-known in the region by utilizing many of the same tactics that Butt was using, began selling franchises. Butt purchased some of the franchise rights, reasoning that he could successfully combine his views about customer service, as well as his experience with cash-and-carry, with the recognized Piggly-Wiggly name. Butt opened his first Piggly-Wiggly in Del Rio in 1926. The success of that venture led him to open two more stores in 1927 in Brady and Gonzales, purchase three additional Piggly-Wiggly's in 1928, and build two more new outlets in San Benito and Harlingen. After roaring through most of the 1920s, Butt moved the company's headquarters to Harlingen in 1928 to get closer to his Piggly-Wiggly stores. By that time, Butt's first Piggly-Wiggly store in Del Rio was serving 5,000 customers each day.

The stock market crashed in 1929, spawning the Great Depression. Fortunately, Butt was relatively well positioned for the downturn in comparison to many other businesses at the time. His stores were geared for value, and grocery items were among the last goods that people stopped buying during the Depression. In fact, rather than slowing down, Butt continued to grow during the late 1920s and early 1930s, opening stores throughout the Rio Grande Valley and remodeling existing stores. By 1931 Butt Grocery was operating a total of 24 stores, and plans were being made for new outlets.

COMPANY PERSPECTIVES

H-E-B's commitment to excellence has made it one of the nation's largest independently owned food retailers. Yet H-E-B's success has not changed its commitment to giving the customer exceptional service, low prices and friendly shopping.

Butt suffered a major setback in 1933, when a hurricane swept from the coast into the Rio Grande Valley and damaged many of Butt's stores and warehouses. Interestingly, Butt's Piggly-Wiggly in Harlingen was the only grocery store in its area to open immediately after the hurricane. Despite the bad luck, Butt quickly restored his businesses and even managed to pursue a charitable venture. In 1934, when he was still in his 30s, Butt formed the H. E. Butt Foundation, a charitable organization created to aid the community. That effort was the first of many charitable acts that would earn Butt a reputation as a dedicated philanthropist. In 1935 Butt changed the name of his company to H. E. Butt Grocery Company.

H. E. Butt began to integrate vertically when it opened its own bakery and purchased a canning company in 1936. By that year, Butt was generating about $2 million worth of business annually from 31 stores. A new outlet built in Kerrville sported a parking lot with 100 spaces, quite a step up from the horse hitching post stationed in front of the original Kerrville store. In 1938, moreover, Butt expanded into the 75,000-person Austin market, the largest metropolitan area that it had entered. The company was also doing business in San Antonio by 1942, where it entered the market using the banner H-E-B for the first time, and was increasing its presence in its established markets. Meantime, headquarters were moved again in 1940, this time to Corpus Christi.

POSTWAR ERA: EXPANSION OF SCOPE AND FACILITIES

Butt Grocery contributed to the World War II effort during the 1940s by supplying canned vegetables and fruits from its canning facility to troops overseas. In addition, many company employees served in the armed forces. At the same time, the company continued to progress. It opened the first air-conditioned grocery store and also began offering frozen foods, which were considered a novelty at the time. Shortages of many food items continued after the war, but by the late 1940s Butt's business was back to normal. Encouraged by the success of the air-conditioned store, Butt opened one of the first truly large grocery stores in Texas in 1949. The Corpus Christi store had 22,500 square feet of space and was the first to have a separate drug department, cosmetic area, and lunch counter.

The large grocery store was a hit, and H. E. Butt focused on the concept from that point forward. In 1950 the company opened a large store in Waco, the company's 53rd outlet, that featured an unheard of 12 checkout stands, two parking lots, and a self-service meat counter. Within two years several similar stores had been built, and H. E. Butt's chain had swelled to 58. The company continued to push for more growth. To increase sales at existing stores, it began operating the Texas Gold Stamp Company as a subsidiary in 1955; the promotion gave customers stamps for each purchase, which they could then exchange for household items. Butt continued to add new stores during the late 1950s and early 1960s. One store even featured spectacular "magic carpets" (automatic doors), parking for 300 cars, and 12 separate departments.

KEY DATES

1905:: Florence Butt opens the C.C. Butt Grocery Store in Kerrville, Texas.
1921:: Howard E. Butt, son of Florence, begins experimenting with a cash-and-carry format.
1935:: H. E. Butt Grocery Company name is adopted.
1936:: Vertical integration begins via new bakery and canning facility; company generates sales of $2 million.
1942:: Company enters the San Antonio market under the H-E-B banner.
1949:: The chain's first truly large grocery store, with 22,500 square feet, opens in Corpus Christi.
1971:: Charles Butt, son of Howard, assumes the helm as president; sales reach $250 million.
1980:: Revenues surpass $1 billion.
1981:: First superstore, with 56,000 square feet, is opened in Austin.
1985:: Headquarters shift to San Antonio.
1988:: First H-E-B Pantry Foods store opens.
1994:: First Central Market store opens in Austin.
1996:: James F. Clingman becomes the first non-family member to be named president.
1997:: Company expands into Mexico, opening its first store in Monterrey.
2001:: First Houston-area Central Market debuts; H-E-B enters the Dallas/Fort Worth market through a Central Market in Fort Worth.
2003:: Sales reach $10 billion.
2004:: Company opens its first H-E-B Plus stores.

By the end of the 1960s, H-E-B, as it had become known, was ready for a change. The dynamic and innovative Howard Butt officially passed the torch to his sons, Howard E., Jr., and the younger Charles. After Howard, Jr., took over management of the H. E. Butt Foundation, Charles Butt, a Wharton graduate, assumed the helm as president in 1971, a year in which sales of $250 million were recorded. He restructured the company's management and recruited several experienced grocery executives to help him make H-E-B a force in the 1970s and 1980s. To that end, H-E-B opened its own ice cream plant, a new bread bakery, a large pastry bakery, and new offices and warehouses during the early and mid-1970s. The new president in 1976 abandoned the firm's long-outdated policies that barred the sale of alcohol and kept the chain's stores closed on Sunday. In addition, H-E-B gained dominant shares of its major markets by drastically lowering its prices, forcing a number of competitors out of business. Butt also began designing the company's first "Future-market," which would incorporate a gourmet deli, flower market, and in-store bakery among other features. Such initiatives helped push sales over the $1 billion mark by 1980. Meanwhile, Howard E. Butt, Sr., fulfilled a longtime dream when, in 1974, he opened the H. E. Butt Camp, an 1,800-acre camp in the Texas Hill Country where nonprofit and Christian groups could hold retreats.

NEW STORE CONCEPTS

H-E-B opened its first superstore, or Futuremarket, in Austin in 1981. The then massive store had 56,000 square feet and was considered a one-stop shopping center. Also in the early 1980s, H-E-B began selling generic goods and added a photo-processing plant to support in-store photo departments. Going into the mid-1980s, H-E-B was operating nearly 150 stores throughout central and south Texas and serving more than one million families. It continued to expand its store offerings with an array of new departments ranging from seafood shops and salad bars to nutrition centers and fast-food, take-home departments. Furthermore, Charles Butt was branching into new markets outside of the grocery store industry. Most notably, H-E-B opened its first H-E-B Video Central/H-E-B Video Superstore outlet in 1987 to capitalize on the booming home video industry; within a few years, H-E-B would tag more than 20 additional video stores onto that division. Another headquarters shift occurred in 1985, when the company moved into San Antonio's Arsenal Complex, the renovated U.S. Army Arsenal; H-E-B had purchased the arsenal from the U.S. government in 1981 and maintained its historical landmarks as part of the renovation.

A secondary benefit of H-E-B's foray into the video store business was that it gave the company an inroad into the massive Houston and surrounding east Texas markets, which it still had not entered by the late 1980s. Indeed, in 1988 H-E-B entered the east Texas market with a new store concept called H-E-B Pantry Foods. These stores were smaller than the superstores and featured only four departments: grocery, meat, produce, and health and beauty. They also focused on value, attempting to minimize operating costs by eliminating nonessential, low-profit departments. H-E-B quickly added to the chain and by 1991 was working to build 22 more Pantry stores in Houston within a year. Debuting in San Antonio in 1991, a year in which the company reached $3 billion in sales, was a much larger format, the H-E-B Marketplace, which spanned 93,000 square feet and included restaurants and a coffee shop/ice creamery. Also in 1991, H. E. Butt, Sr., died. Among his legacies was the successful Howard E. Butt Foundation that he had established in 1934. By the time he died, the foundation had built libraries, swimming pools, charitable food centers, and other amenities in the communities in which Butt stores operated. It had also reached out to the needy in other parts of Texas and even Mexico, among other initiatives. In 1993 H-E-B sold its 33-unit video store chain to Hollywood Entertainment.

At the same time that H-E-B was expanding with smaller stores, it was also engaged in the development of a new venture that would lead to the chain's biggest store yet. In the late 1980s, the innovative Charles Butt dispatched a team to study the great food merchandisers of the world in London, New York, Atlanta, and other places. He used the ideas they brought back to create the unique Central Market, a superstore that threw out the concept of one-stop shopping and emphasized perishable goods. The company opened the first Central Market in Austin in 1994. The store boasted 60,800 square feet and a large, tree-shaded parking lot. In contrast to conventional superstores, the Central Market offered a plethora of fresh foods and flowers, including many exotic goods, while it shunned common items such as detergent, packaged baked goods, and ordinary sodas and cereals. Although the store still emphasized value, it was geared more toward upscale buyers with a greater amount of disposable income.

VENTURING SOUTH OF THE BORDER

By the mid-1990s, the H-E-B chain included 230 stores, 65 of the Pantry format. Sales surpassed $5 billion in 1995, when the company celebrated its 90th anniversary. Growth remained on the agenda, and H-E-B took its first step outside of Texas in 1996 with the opening of a Pantry store in Lake Charles, Louisiana. (This store closed in 2003, however.) Also in 1996, Charles Butt retired as president of the company, remaining chairman and CEO; James F. Clingman then became the first non-family member to assume the title of president.

The following year H-E-B ventured south, entering Mexico with the opening of a store in Monterrey. By the end of 1999 the company was operating six stores in Mexico, five in Monterrey, a prosperous city with a population of 3.5 million, and one in Saltillo, a town located about 60 miles southwest of Monterrey; one of the stores operated under the name EconoMax, and was similar to the H-E-B Pantry stores. The retail food industry in the United States was becoming increasingly competitive, with H-E-B feeling pressure from retail giant Wal-Mart's move into the grocery trade and from the entrance of the country's number four grocery chain, Safeway Inc., into the Texas market through its 1999 acquisition of Houston-based Randall's Food Markets, Inc. There thus appeared to be more opportunities for growth in Mexico than in the United States. H-E-B succeeded in its first foreign foray by catering to the local consumer, offering only Mexican-made products, which had the additional benefits of lowering transportation costs and eliminating any duties. Meanwhile, back home, H-E-B opened a second Central Market in Austin in 1999.

By the end of the 1990s H-E-B held commanding shares in two of its major markets: 61 percent of the $2.1 billion market in San Antonio and 56 percent of the $1.7 billion market in Austin. In Houston, the company was the number four chain, with 10.1 percent of a $5.4 billion market. Thus, the company began looking both north and south for expansion and began laying the groundwork for a move into the $4.8 billion Dallas/Fort Worth market. In Mexico, where H-E-B was finding the competition less severe and the profit margins higher than at home, the company was planning aggressive growth, with additional stores slated to land in Monterrey; in the border towns of Nuevo Laredo, Reynosa, and Matamoros; and further afield in the south central Mexican towns of Aguascalientes and San Luis Potosí.

EARLY 21ST-CENTURY GROWTH INITIATIVES: NEW MARKETS, H-E-B PLUS, MEXICAN EXPANSION

The year 2001 was a key year for H-E-B's multipronged expansion plans. In Houston, the company gained a much larger footprint in two ways. First, H-E-B opened its first Central Market (and fourth overall) in the Houston area. Second, the company began replacing its Pantry stores in Houston with large-format H-E-B outlets ranging in size from 50,000 to 80,000 square feet. H-E-B also moved into the Dallas/Fort Worth metro area with the opening of another Central Market in Fort Worth. By this time, the average Central Market was pulling in $50 million a year, and while the number of outlets remained small, these innovative quasi-farmer's markets were the object of much publicity, thereby raising the profile of H-E-B; the original Central Market in San Antonio had even developed into the second largest tourist attraction there, after the state capitol. The company was also using the Central Markets as test labs for ideas that might later be rolled out to the core H-E-B stores. To the south, meantime, the company's aggressive Mexican expansion continued with the opening of seven more stores in 2001. The Mexican H-E-B operations turned profitable for the first time that year as well. Revenues for 2001 were just short of $9 billion.

In 2002 H-E-B opened new Central Markets in Dallas and in Plano, a Dallas suburb, and also opened its 300th store overall. It also opened a quality-assurance laboratory in San Antonio for testing the safety and quality of food products. Early the following year, Clingman retired from his post as president and COO. Replacing him, in the position of COO, was Robert D. Loeffler, who previously had served as a senior vice-president in charge of information services and had headed store operations in Houston. Sales surpassed the $10 billion mark for the first time in 2003.

Seeking an additional avenue for boosting sales, H-E-B in 2004 unveiled another new format, H-E-B Plus. Conceived as a one-stop-shopping venue, the first such unit, a 109,000-square-foot store in San Juan, Texas, included 30,000 square feet for an expanded selection of nonfood items, including electronics, household items, outdoor grills, lawn and garden equipment, furniture, and party supplies. Two more H-E-B Plus stores opened later in 2004, in Austin and Waco. These stores were from 20 percent to 40 percent larger than a typical H-E-B outlet and offered more than 10,000 items not found in a traditional H-E-B. Later, second-generation Plus stores, such as one opened in Corpus Christi in late 2005, were much larger, their size approaching 200,000 square feet (nearly as large as a Wal-Mart Supercenter). Other developments from 2004 included the openings of a new 114,000-square-foot bakery in Houston, capable of producing 153 loaves of bread and 750 buns per minute, and a $30 million, 300,000-square-foot retail support center south of the border in Monterrey.

By 2005, when the company celebrated its centennial, Central Market had become well enough known as a brand that H-E-B began introducing Central Market-branded products into its traditional H-E-B outlets. These included lines of organic and all-natural products as H-E-B worked to meet the burgeoning demand for more healthful food. Although Wal-Mart surpassed H-E-B as the leading grocer in Texas by market share in 2004, H-E-B was nevertheless growing smartly, with sales reaching approximately $11.5 billion in 2005, enough to make the company the 11th largest private company in the United States and the 14th largest grocery chain. Late in 2005 H-E-B opened its first Plus store in San Antonio.

Late in 2006 H-E-B opened a Latino-focused store called Mi Tienda in Pasadena, Texas, a city with a growing Hispanic population (70 percent of the residents living within three miles of the store were Hispanic). A company spokesperson called the Mi Tienda, Spanish for "my store," the "Latino version of Central Market." Plans were already in place to open four more Mi Tiendas in Texas, as the company increasingly targeted the state's large and burgeoning Hispanic population. At the same time, growth continued on several other fronts. In Mexico, H-E-B had plans to open a handful of additional stores through about 2010. H-E-B Plus, meanwhile, had expanded into a nine-unit operation by the end of 2006, with the openings of four more Plus outlets—in the Texas towns of Leander, Mission, Laredo, and Kyle—scheduled for the spring and summer of 2007. In December 2006 H-E-B opened the first of its next-generation Central Markets in the Dallas suburb of Southlake. The eighth Central Market overall, the Southlake store included a number of new features, including a café serving breakfast, lunch, and dinner with outdoor seating for 200; a stage for entertainment; a housewares section; and a playground complete with a castle and a friendly dragon. While H-E-B continued to see plenty of room for growth in Texas—the company having not fully tapped either Houston or Dallas and still absent from such markets as Lubbock, Amarillo, and El Paso—the new Central Market was envisioned as potentially providing a format that the company could take into suburban locales outside of Texas. Whether or not this grow-slow firm was ready for such a leap, H-E-B had surely earned its reputation as one of the more creative grocery companies in the nation.

Dave Mote

Updated, David E. Salamie

PRINCIPAL SUBSIDIARIES

Supermercados Internacionales HEB, S.A. de C.V.

PRINCIPAL COMPETITORS

Wal-Mart Stores, Inc.; The Kroger Co.; Randall's Food & Drugs, LP; Whole Foods Market, Inc.; Target Corporation; Organización Soriana, S.A. de C.V.; Albertsons LLC.