Progressive Grocer's RETAILER OF THE YEAR: Hy-Vee

Every October senior executives from Hy-Vee, Inc. host a series of dinners to recognize employees who have completed another five years of service. This year there were 1,934 honorees, among them 926 who reached the five-year mark, 138 who hit 25 years, and even one 45-year veteran. Their jobs ran the gamut from stock clerk to driver to corporate executive.

During the ceremony, recipients come to the stage one at a time to shake hands with c.e.o. Ron Pearson, pose for a photo to be affixed to a service plaque, and receive a gift from Pearson. At the other end of the stage, they're congratulated by each of the company's eight directors of operations.

Hy-Vee executives agree that a lot of time and effort goes into these dinners, but they want it that way. "All the excuses in the world could be made for not having our top officers and executives tied up for seven nights during the month of October, and every one of them would be understandable," says president and chief administrative officer Ric Jurgens. "But we resisted that, and I think rightfully so. It's worth the effort. Ron [Pearson] and the rest of the leadership have protected the culture, and in particular things that relate to the employees--like our awards dinners--at a time when it would be very easy to turn away from it."

Jurgens knows what it means to be a dedicated employee. He's spent the last 34 years working for West Des Moines, Iowa-based Hy-Vee. In fact, just about everyone in the corporate ranks who's reached v.p. level or higher has at least 30 years with the company. "And we have zero turnover in corporate," Pearson says. "And when I say zero, I mean zero."

Hy-Vee's leadership has tremendous faith in the chain's employees. After all, it's their company, too--literally. All full-time employees hold stock in the chain, through both direct-purchase and profit-sharing programs. "All the regular full-time employees are stockholders, in that we have a trust that holds 15 percent of the company's stock that's given to the employees, and pays 100 percent dividend," Pearson says. "So they get the growth but don't pay for it--it's given to them by the company."

And Hy-Vee is growing impressively. At the end of the fiscal year in September, its 220 locations--including 28 Drug Town pharmacies--had reached $4.2 billion in sales, with an average comparable-store growth of 3.5 percent, even in markets with Wal-Mart supercenters. "We have Wal-Mart supercenters in the markets of almost 70 percent of our stores," Pearson says. "And we've had record sales increases for the last four years."

Employee ownership extends beyond the literal holding of company-issued stock. Hy-Vee employees know that they each play an important part in the day-to-day running of the company, and that their input counts.

Pearson is quick to point out that it's the autonomy of its employees that's made the company so successful. "The autonomy does several things," he says. "It rewards people for making decisions. It makes them feel good about the ability to make decisions, because it's not only the store director, it's everyone throughout a particular unit. Employees at the store level are responsible for making decisions on pricing, procurement, selling, merchandising, marketing, human relations, who they promote, or how much they pay people."

Everything about Hy-Vee centers on the stores and the store directors, who are empowered to make all decisions about store operations. Only projects that require large capital expenditures, like new equipment, need approval from corporate. Store directors don't have to buy from the warehouse, and corporate never mandates projects and strategies companywide. Six store directors sit on Hy-Vee's board of directors. "When one of our executives is speaking with a store director at a meeting and tells him about an idea that worked well at one of our stores, we'll say that you might want to try it," Jurgens says. "We don't say that you have to try it."

Having this autonomy at the local level helps Hy-Vee quickly adapt to the individual communities it serves, and allows stores to react to changes in the market in a matter of hours or minutes, instead of days or weeks. (For examples of how store directors have successfully exercised this autonomy, see sidebar.)

Two heads are better

Autonomy also means that more brainpower is devoted to making each store a success. Daryl Kruse, store director of the West Des Moines No. 2 Hy-Vee, boosted his seafood sales 22 percent simply by handing over decision-making authority to seafood manager Corey Stringer. "All I did was let him start thinking on his own and being himself," Kruse says.

This autonomy is a big factor in retention, according to Jane Knaack-Esbeck, v.p., human resources. The average tenure of a full-time employee is nine years and five months; the annualized turnover for full-timers as of September was 11 percent. For part-timers, average retention is a year and five months, with a turnover rate of 57 percent.

Another factor that keeps people with the company is the potential for growth. "Ron Pearson and Ric Jurgens both started [out] sacking groceries at the front lines," Knaack-Esbeck says. "For all Hy-Vee employees, there's the implied promise that if you work hard and take care of the customers, there are many opportunities available. All promotions are from within the ranks, and once someone is an assistant store director, we'll never bring in someone over them from outside the company."

This year Hy-Vee gained 14 new executive staff members through promotions and handed out 892 other promotions to employees.

Of course, getting paid well doesn't hurt. "Clearly that autonomy is rewarded by financial gains that the employees make," Pearson says. "We have many opportunities to reward our employees through bonuses at every one of our operating units, whether it's distribution, trucks, or at the store. Plus we have the 401(k) and the match the company puts in. Our store directors, for the most part, do not get paid [a salary]. They're on a pure commission basis. The better their store does, the better they do. Autonomy with rewards stimulates people to do an outstanding job, and as a result it attracts the brightest and the best."

Corporate ties it together

Having such a high level of freedom throughout the company doesn't mean that corporate is completely hands-off. "I don't want to paint the picture that there's not a corporate structure, because that's what ties it all together," Pearson says. "The corporate structure provides the financing and direction, the communications, accounting--all the behind-the-scenes stuff, whatever we can do to take the burden off the stores, including handling big-picture capacity stuff like store design, equipment, and approving budgets."

Corporate also provides the continuity of the Hy-Vee culture. "That's extremely critical," Pearson says. "We have a definite operating philosophy. If you're going to have a Hy-Vee or a Drug Town, the stores are going to be clean and neat and bright, they're going to have a clean parking lot, and the employees are going to be friendly. The 'Helpful Smile in Every Aisle' slogan is for real. Store directors are to treat their employees with respect and continue to reward them, find ways to pay them better. That's the basic operating philosophy. Pricing and those kinds of things, they do on their own."

Although corporate executives let the store directors take the reins when it comes to store-level decisions, they still keep well informed about what's happening on the front lines.

All Hy-Vee executives, including Pearson, spend a great deal of time at the stores, visiting with everyone from cashiers to stock clerks to the store director to the customers, exchanging ideas and getting feedback. "The most important thing we do to stay connected with the employees and customers is visit the stores," says president Jurgens. "All of the top officers are charged with the responsibility of visiting the stores on a regular basis to keep abreast of the retail operations and stay connected with the employees. You can't find out what's going on in the trenches any better than by being there in person."

Corporate also provides a forum for sharing ideas among store directors and management, which occurs during regular meetings at the company's conference center. There are also regional meetings several times a year. "During these meetings at the Hy-Vee Conference Center, we work hard at imparting new ideas," Pearson says. "We discuss things we've seen, philosophies we know are good, and everybody's on stage from nine until four sharing things that have happened, best practices, new ways of doing things, anything that can help Hy-Vee to stay ahead. That's one of the reasons why I agreed to be chairman of the Food Marketing Institute: to be closer to the development of ideas within the industry, ideas that I can bring back and share with our company."

It's at these meetings where store directors get some of their best ideas. "I steal ideas from other stores," says Ken Butcher, store director in Ankeny. "When I go to the corporate meetings, if I see something another store is doing that I think will work for us, I take it."

Sharing ideas

Butcher's not the only one. Mike Kueny, director of Des Moines store No. 2, says half his ideas come from these meetings. "Every store director's always trying something new, and this is how we find out about it," he says.

According to v.p. of general merchandise Jon Wendel, it's the combination of experienced staff and willingness to try new ideas that makes the chain a breeding ground for innovation. "We don't have to hire experts," he says. "They're already working at Hy-Vee."

The communication, the sharing of ideas across all levels, and the innovations serve one common goal: making sure Hy-Vee does everything it can for its customers. "We've never lost the focus that the only reason we're in business is our customers," Pearson says.

"Meeting customers' lifestyle needs" is a key phrase one hears in the stores as well as at corporate headquarters. "It's a fairly simple equation we follow, and that's to study the world around us and respond with what we think are stores and services that meet the needs of consumers' lifestyles," Jurgens says. "We've found that there are a variety of services and products we can give people that make their life easier, walking that tightrope of not trying to be everything, but creating that balance to give people a store that will be their store of choice. The autonomous nature of our stores allows us to be flexible in that regard. We can adapt aisle by aisle, if necessary."

No cookie-cutter format

All one has to do is visit a handful of Hy-Vee stores to see that the chain has accomplished exactly this. No two stores are identical; there's no cookie-cutter format. There's only one mandate that every store must follow, and that's to fulfill the needs of its customers. If the customers of one store want apparel with logos of local sports teams, it'll be there. Price is the name of the game for stores in low-income areas. Photo, video, banking, takeout, national brands, private label, check cashing, any product or service—all it takes is a customer request, and Hy-Vee will find a way to provide it.

"We'll do anything to get what a customer wants," says general merchandise v.p. Wendel. "Everyone in the company is trained to look for sales. If an employee anywhere in the company finds something that looks like it'll be a hit with customers, we'll spend our resources to be the first to get it for our customers, even if it means having everyone in the company chasing after that item. I'd jump on a flight across the world if that was what I had to do to get a product first."

Among the newer customer-driven services offered or expanded by Hy-Vee this year:

--Gasoline. The chain increased the number of gasoline stations to 29, installing them at new locations and retrofitting them into existing ones.

--Bakery. The bakery manufacturing facility was expanded, with new equipment added to accommodate customer demand.

--Deli. Departments were expanded to offer more ready-to-serve products.

--Branded departments. Krispy Kreme doughnuts are offered at some locations, and Hy-Vee just opened its first Starbucks Coffee operation last month.

--Wine and spirits. In-store sections have been expanded, with more fixtures and better layouts. Some supermarkets have satellite wine and liquor operations built either onto existing stores or nearby. Wine clubs have been established at many Hy-Vee stores.

--Health Markets. The Health Market store-within-a-store concept has seen explosive growth from customers seeking healthy and organic meal options. Some are managed by registered dietitians.

--Pharmaceutical. Not only has Hy-Vee expanded the number of its in-store pharmacies, it's also boosted the number of offerings found at each one, such as flu shots, cholesterol testing, and bone-density measurement. In addition, the chain has built satellite health clinics and vision centers where it saw the need. Hy-Vee Care, a subsidiary, buys medical supplies in bulk and distributes them to health care facilities.

Hy-Vee subsidiaries

To enhance its retail operations, the chain has found it beneficial in some cases to own subsidiaries, such as Hy-Vee Care, that deal with various aspects of the company's products and services. Among the other Hy-Vee subsidiaries are D&D Foods, Inc., a meat and perishables distributor; Florist Distributing, Inc.; Hy-Vee Weitz, LC, one of the country's largest construction companies; Lomar Distributing, for gourmet and specialty foods; Perishable Distributors of Iowa, Ltd.; The Meyocks Group, Inc., which is an advertising and public relations firm; and Midwest Heritage Bank.

The intense focus on an in-person, customer-driven approach could make it seem that technology isn't a priority. That couldn't be further from the truth; the grocer is at the forefront of the latest technology advances. However, just as customers dictate what Hy-Vee sells and how the chain sells it, customers dictate the right technology. "Within Hy-Vee we're all retailers first and specialists second," says Ron Waldbillig, assistant v.p., management information systems. "We don't want to be the most modern store in the world, we want to be the most customer-centric."

Since most of the IT staffers have moved up from in the stores, they're very familiar with what's happening in the trenches and how technology can support it. "They understand retail," Waldbillig says. "They know what it's like to be face to face with a customer. They also visit stores regularly and talk to the people who use the technology to find out what's working, what issues they may have, what technology they think will be valuable for the stores to have."

This is especially important because most of the ideas come from the stores in the first place. For large projects there's a formal approval process, but nothing happens if there's no consumer benefit to be seen from implementing a technology.

Among the top IT projects underway:

--New POS installation. Hy-Vee is rolling out new point-of-sale systems to all of its stores to offer better customer service and simplify training and support. "Some of our old POS software was old and no longer supported," Waldbillig says. "Plus we needed a modern, flexible system that would allow us to accommodate new functionality and respond quicker to new requests."

--Wireless. Wireless registers are available at many stores for added flexibility, such as allowing outside sales during the summer and providing extra checkout lanes during busy times. The company is testing wireless notebook computers for its inventory managers, as well as wireless scales. "This lets us take the machines to where the business is," Waldbillig says. "It gives employees mobility, and we don't have the cost of hard-wiring these devices."

--Biometrics. The technology is being used for check cashing at some stores, and Hy-Vee is testing other uses, like time and attendance monitoring.

--Pharmacy automation. The chain is using robotic prescription dispensers at some locations, as well as signature-capture and interactive voice response technology, to better comply with the federal Health Insurance Portability and Accountability Act and to free up pharmacists to serve customers.

--Computer-assisted reordering. The computer-assisted reordering system, or CARS, was developed to make it easier for store personnel to place orders. "It's been very successful in reducing out-of-stocks and reducing inventory," Waldbillig says.

--Hy-VeeNet. The company continues to add functionality to its intranet, which is primarily used for communication among employees. Accounting information, human resources forms, phone lists, and calendars can be found on the system.

--Internet shopping. More than 100 stores offer online shopping. Customers receive the same product selection, pricing, and weekly specials as in the stores.

Hy-Vee has a steering committee, composed of operational officers and key IT staff, that meets four times a year to explore potential new applications. The grocer isn't afraid to try something new if it may benefit its customers.

Sometimes new applications don't work out, but rather than seeing wasted time and effort, Hy-Vee views it as a learning experience. "We experimented with loyalty programs in the past, because the notion of rewarding customers who are loyal had some appeal to us," Jurgens says. "We experimented with it in several markets but didn't find dramatically different results in sales and profit growth.

"Plus it just felt wrong to us. It was a situation in which technological advances were being used to develop loyalty, which is almost contradictory to what we believe in. I want it to be you and me. We don't want a computer system saying that we love you because you spend x number of dollars with us, when in reality we'd love you if all you bought was a pack of cigarettes—and that was all you ever bought. So we decided not to continue the program."

With growing sales, comps well above average, happy employees, and satisfied customers, is there anything that worries c.e.o. Pearson? Not much. "I don't have anything that really worries me," he says. "Competitors are always a concern, particularly those we don't focus on enough. Wal-Mart has required so much attention from everybody during the last five years, but there are a number of other viable competitors, such as the dollar stores, specialty stores--any channel that carries something we sell is a competitor. You go somewhere to get a haircut, they're a competitor, too.

"The other area of concern is, how do we grow as a company and still remember the importance of our customers and service? You can get caught up in operating a big company. The key is keeping the group stimulated to remember that the only reason we walk through the door is that customer. But we have a great culture which is 73 years old, and it's still viable. And that's what makes us successful. As corny as it might sound, friendliness, honesty, and integrity--that's what we're about."