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CAROLINA'S FINEST

CHARLOTTE, N.C. -- The formula for success in the supermarket industry these days is written all over the business plans of regional chains like Wegmans, H-E-B, Hannaford Bros., Hy-Vee and Ukrop's.Here in this booming Southern city that has evolved from a cotton-processing center to a banking and car-racing Mecca, Harris Teeter has earned its membership in that exclusive club of powerhouse regional

CHARLOTTE, N.C. -- The formula for success in the supermarket industry these days is written all over the business plans of regional chains like Wegmans, H-E-B, Hannaford Bros., Hy-Vee and Ukrop's.

Here in this booming Southern city that has evolved from a cotton-processing center to a banking and car-racing Mecca, Harris Teeter has earned its membership in that exclusive club of powerhouse regional banners.

With its upscale positioning, fanciful appointments and careful attention to product selection and quality, the 138-store chain offers consumers an experience sharply distinct from that of its price-oriented competitors.

"I think you have a very strong management team that has carved out its niche," said Chuck Cerankosky, analyst, KeyBank Capital Markets, Cleveland. "It's an upscale niche, and they've really made a prolonged effort to fine-tune it and keep the product mix up to the standards of what their target market expected."

Representatives from Harris Teeter declined to comment for this article.

The chain operates in six states in the Southeast, including 110 stores in North Carolina, and has been aggressively strengthening its No. 1 market share here while trying to expand its premium positioning in the affluent suburbs of the nation's capital. In the last few years it has opened eight stores in the northern Virginia market near Washington, D.C.

In its most recent earnings report, Harris Teeter parent company Ruddick Corp. said it planned to add 16 stores in the current fiscal year, which began this month, including four in northern Virginia. The company also recently closed on the purchase of six Winn-Dixie locations in North Carolina, which it is converting to the Harris Teeter banner.

Harris Teeter generates about 90% of the sales and 93% of the operating profits at Ruddick, which also owns the American & Efird industrial sewing-thread company. Despite an ill-fated expansion effort into Georgia that ended about four years ago, the supermarket chain has added about $1 billion in sales in the last 10 years.

In fiscal 2004 the stores drove average weekly sales of $352,392, up about 5% over the preceding year, which in turn were up more than 4% over results from 2002, according to Ruddick's filings with the Securities & Exchange Commission.

These increasing sales have come as the company has been building bigger and more distinctive stores, often venturing into markets ahead of anticipated population growth to secure strong locations and sometimes securing sites in close proximity to existing Harris Teeters to saturate its core markets.

Harris Teeter has achieved its place as the supermarket of choice among Charlotte's well-to-do consumers with a combination of high-quality offerings, smart merchandising and well-designed stores, analysts said.

BRANDED DEPARTMENTS

In the past two to three years, the chain has rolled out a new store format that includes branded perimeter departments anchored by a dramatic wine section often positioned prominently as a store-within-a-store directly front and center of the building.

"They have always been the leaders when it comes to wine and beer out of all of the supermarket operators in the Charlotte market," said one analyst, who asked not to be identified.

In fact the last major redesign of the Harris Teeter prototype placed a high priority on making wine the chain's signature department, according to Tim Morrison, studio principal at Little Diversified Architectural Consulting, the firm that handles much of Harris Teeter's design work.

In addition to the elaborate wine presentation, Harris Teeter also has created a specialty-store ambiance in several other departments, including perishables - branded as the Harris Teeter Farmers Market - meat, seafood, bakery and, most recently, the health and beauty care section, which has been set off in some stores with low-hanging signs over each gondola labeling it the HT Drug Store. With Harris Teeter also one of the leading pharmacy operators in the market - rival Food Lion, No. 2 in grocery market share, operates few pharmacies - the branding of the HBC/pharmacy area further differentiates Harris Teeter, analysts pointed out.

Even the dairy department, stocked with Hunters Farm brand products produced in Harris Teeter's own 90,500-square-foot dairy-processing facility in High Point, N.C., is often set off with eye-catching graphics like stylized, giant neon milk cartons that exemplify the whimsical design elements in the chain's stores.

Within the perimeter departments, Harris Teeter further solidifies its positioning with branded, high-quality products like its Harris Teeter Rancher beef and Harris Teeter Reserve Angus beef. It also has been a leader in home-meal replacement, analysts pointed out, and generally has a wide selection of perishables, with 700 or more stockkeeping units in some stores and strong organic offering.

Harris Teeter's branding strategy carries through onto the shelves of center store as well with its H.T. Traders line of specialty private label products, which include pastas, sauces, gourmet bread toppings, olive oil, canned vegetables, vinegar and other products.

"It's positioned as private label that has excellent quality," said Cerankosky of KeyBank Capital Markets. "They are selling quality under their own name instead of price under their own name."

The analyst who asked not to be identified likened the H.T. Traders brand to the specialty products offered by Trader Joe's.

"They are unique products that are unavailable in a national-brand equivalent in many cases," the analyst said.

UNIQUE PROMOTIONS

Despite its emphasis on quality and selection and its targeting of upscale consumers, Harris Teeter still manages to keep its price image in line, observers said.

It does so with a promotional strategy that calls attention to both bargain prices on deal items in center store and to sharp pricing on its higher-end, specialty items, often using its frequent-shopper card, called the VIC, or Very Important Customer, card.

"They're not always trying to push the same promotions as everybody else," noted Cerankosky. "They are trying to make some value statements on merchandise that their competitors don't even carry."

Morrison of Little, the architecture firm, noted that Harris Teeter has a fairly broad appeal in the market beyond the upscale consumer.

"They are able to satisfy those in all demographics -- not just the high end," he said, noting that the chain also offers triple coupons.

Harris Teeter also creates a value impression and helps build traffic with its seasonal continuity-type "sweepstakes" programs tied to the use of the VIC card, observers said. A recent promotion observed by SN in the stores offered a metal roasting pan to any customer who spends $40 or more in one shopping trip for 14 out of 16 weeks. The prize can be collected beginning Nov. 16, just in time for the holiday roasting season.

"A lot of people pay attention to what the Harris Teeter prize is, and make sure they buy enough to qualify," said one industry professional in the market, who asked not to be identified.

A recent price survey by Wachovia Securities in Charlotte showed Harris Teeter as being priced toward the high end, with a total ring of $115.61 on a 30-item basket. That was higher than the Wal-Mart Supercenter, which came in at $99.78, but lower than Winn-Dixie, where the total basket was $125.38. Winn-Dixie has since exited from the market.

Interestingly, Wachovia also timed the shopping trips in its purchase of the 30-item list, and found that Harris Teeter was the fastest store to shop at just 14 minutes, less than half the time it took to shop at either Wal-Mart or Winn-Dixie, which both came in at 30 minutes.

Observers pointed out that Harris Teeter stores' lighting, wide aisles and clearly signed departments may help explain the speedy shopping trips.

The chain also offers broad product variety by limiting the selection within each product line, observers said. "They don't go to the point where they offer five sizes of Cheerios," one observer pointed out.

The non-union chain is known in Charlotte for its high-quality service, Cerankosky and others noted. It also has been aggressive in its rollout of self-checkout systems, they said.

NORTH TO VIRGINIA

As Harris Teeter expands rapidly into the Virginia suburbs of Washington, D.C., analysts applauded the company's grab for new growth.

"I think they have an excellent message for the consumer [in that market,]" said Cerankosky, noting that chain leaders have indicated they are happy with the progress there.

"Harris Teeter has the capital to expand where the affluent markets are in Virginia," said another analyst, who noted that the chain has leapfrogged over Richmond, Va., where Ukrop's has a strong following and would present a head-to-head rival for Harris Teeter.

One observer noted that Harris Teeter needs to be cautious in its aggressive expansion in that market, however.

Robert Gorland, vice president, Matthew P. Casey & Associates, Clark, N.J., a firm specializing in supermarket feasibility studies, said that Harris Teeter might have to endure weak sales as population builds in some neighborhoods.

"Some of their stores are in very strategic locations," he said, but competition is growing.

"An area may be high growth, yet 1,000 new homes equals 2,500 new population, times $40 per capita food expenditures, equals $100,000 a week in sales for the marketplace," he said. If 30% of that is siphoned off to nontraditional formats, and there are five new and existing supermarkets left to split the remainder, that leaves only $14,000 per week in sales per store, he calculated.

"The sales gains of housing growth can be overstated," he said.

He agreed with analysts, however, that Harris Teeter is an "excellent operator, with very strong, very consistent operations."

Harris Teeter's exit from outlying markets in 2001 set the stage for its most recent rejuvenation, however. In 2001 the company sold 26 stores in Georgia and South Carolina.

Since then, the company has been locking down its market share in Charlotte by grabbing prime sites, even if they are very close to existing stores, and plotting its expansion in Virginia.

"They have been doing a good job all around," said Cerankosky. "They have gotten better at private label, they have gotten better at real estate, more efficient in distribution, better at prepared foods, pharmacy and nonfoods, and really identified where they could improve their offering in those areas, and I don't think they're done."

Harris Teeter: 10 Years of Growth

Sales; Operating profit

1995: $1.71B; $42.1M

1996: $1.83B; $48.5M

1997: $1.93B; $45.7M

1998: $2.13B; $52.1M

1999: $2.27B; $55.4M

2000: $2.33B; $59.1M

2001: $2.42B; $31.8M*

2002: $2.35B; $88.8M**

2003: $2.43B; $93.6M

2004: $2.57B; $104.4M

* 2001 operating profit included exit and impairment charges of $45 million.

** 2002 operating profit included exit and impairment credits of $710,000.

Source: Ruddick Corp. Annual Report