A TEXAS-GROWN SUCCESS STORY

ELLIOT ZWIEBACH

SAN ANTONIO -- When H.E. Butt Grocery opened its first store on Nov. 26, 1905, building a chain was not part of the dream.

Florence Thornton Butt invested $60 to open the store in the Hill Country south of here simply as a means of supporting her family -- her husband Charles C. Butt and their three sons.

Charles Butt had been a pharmacist in Memphis, Tenn., but when he developed tuberculosis, the family, seeking a drier climate, made its way to Kerrville, Texas, where they rented rooms above a store that Mrs. Butt turned into a grocery store.

The banner on the 750-square-foot store read: C.C. Butt Grocery Store, Staple and Fancy Groceries.

The Butts' youngest son, Howard, was 10 when his mother started the business, and his first job was delivering groceries in a little red wagon.

By the time he was 16, Howard Butt was managing the store while continuing to attend school. After graduating from high school in 1914, he struck out on his own, hitchhiking to California, where he worked as a grape harvester.

He served in the Navy during World War I -- adding "Edward" as his middle name -- before returning to Texas in 1919 to work with his mother full time.

In 1922, Howard Butt replaced the store's credit-and-delivery system with a cash-and-carry system. Over the next few years, he expanded the basic grocery assortment by adding some meats and unrefrigerated produce, plus toothpaste, aspirin, and a handful of other health and beauty items.

In 1924, the store converted to self-service.

During the early 1920s, Howard Butt tried to grow the family business -- first with a feed store in Kerrville and later with three more grocery stores in surrounding areas -- but all were unsuccessful. "The towns were small, and he was inexperienced," his son, Charles C. Butt, recalled in an interview in 2001 with a Fort Worth newspaper.

Finally, in 1926, he successfully opened the family's second store, in Del Rio, and two years later borrowed $38,000 to acquire three stores in the Rio Grande Valley.

Howard Butt subsequently relocated the business' headquarters from Kerrville to Harlingen, about 300 miles south near the Mexican border, where the company opened its first distribution center. It also established Harlingen Cannery to provide "Texas-grown, Texas-packed" goods to its customers. First off the assembly line was grapefruit juice.

Over the next few years, the company expanded its operation, moving into Laredo in 1929, Corpus Christi in 1931, Austin in 1938 and San Antonio in 1943 -- operating stores of 10,000 square feet.

1930 to 50s

Disaster Spurs Community Service

In 1933, a major hurricane hit south Texas, destroying the company's Harlingen distribution center and leaving many area residents in need of disaster relief. Howard Butt opted to keep his stores open to provide food for disaster victims. A year later, he formalized the spirit of giving by establishing the Howard E. Butt Community Investment Program, through which the company contributes more than 5% of its pretax earnings annually to hundreds of nonprofit organizations throughout Texas in the form of financial and product contributions, volunteer hours from employees and disaster relief, with a focus on hunger relief and prevention, education, diversity, health and wellness, the environment and the arts.

The company also established the H.E. Butt Foundation in 1934 that, over the years, has donated hundreds of millions of dollars to local communities for civic improvement projects.

In 1935, Howard Butt changed the name of the company to H.E. Butt Grocery -- a name he shortened to H-E-B in 1946.

In 1936, the company opened a central bakery in Corpus Christi, and four years later the company moved its headquarters there.

Charles C. Butt, the company's current chairman and chief executive officer, was born in 1938, and began working in the stores at age 8. By the time he was 12, Butt said he was working every Friday afternoon and Saturday. "That's just what was expected of me," he told the Fort Worth newspaper.

After graduating from the Wharton School at the University of Pennsylvania, Charles Butt said he considered a business career outside the family business. "But I got hooked on the excitement of helping shape the company, [and] my dad was good at persuading me to continue in it," he told the newspaper.

He also said he realized the broader possibilities inherent in the grocery industry. "I became personally aware of the possibilities it offered for some real participation in the state. I was a pretty idealistic kid. I saw that a business could be a creative and constructive part of communities."

During the 1940s, H-E-B store openings were very festive events, with giveaways of live chickens and money tossed off the roof of the stores.

In 1952, H-E-B opened its first complete food and drug store in Corpus Christi that incorporated a butcher shop, fish market, bakery and pharmacy under one roof.

In 1954, the company's matriarch, Florence Butt, died at age 89, just a year before the 70-store chain celebrated its 50-year anniversary.

In 1964, H-E-B opened a new six-acre distribution center in San Antonio. Yet it wasn't until 1985 that the company moved its base from Corpus Christi to San Antonio when it opted for a more central location in the state.

1960s

Sons Choose Their Calling

During the 1960s, H.E. Butt's sons, Howard Butt Jr. and Charles Butt, worked alongside their father in the business. However, Howard Jr.'s interests led him to become a lay minister.

According to a newspaper interview earlier this year, Howard Butt Jr. said his father wanted him to remain in the business, while Billy Graham urged him to become a full-time preacher. Graham's arguments prevailed, and when Howard E. Butt stepped aside as president in 1971, Charles Butt succeeded him as president while Howard Jr. agreed to take the title of vice chairman so he could continue to pursue his calling. He also agreed to become vice president of the H.E. Butt Foundation.

Looking back on his initial challenges as H-E-B president, Charles Butt recalled in a newspaper interview, "We needed to build a strong team. We had a lot of good people, but we weren't ready for the changes that were occurring in Texas as it started to grow and urbanize. The character of the state began to change, and the population started to become much more diverse."

Taking over a $250-million business, Charles Butt led the company to its first $1 billion sales year in 1980, coinciding with its 75th anniversary.

Howard E. Butt, who had a strong influence on his sons, also had a strong influence on his grandchildren, Stephen Butt, senior vice president, Central Market, said in a newspaper interview -- teaching each one to check out a grocery order by the time they were 12.

According to Stephen Butt, his grandfather would personally select a basket of groceries worth about $100 for his grandchildren to check out. "He would slip in a few trick items like a newspaper, which isn't taxable, and if you didn't make any errors, he would award you with an 'atta boy."'

Howard E. Butt continued as chairman until 1991, when he died at age 95.

1980s

New Formats Augment Growth

In 1988, the company opened its first limited-assortment store in east Texas, called H-E-B Pantry Foods -- a no-frills format that concentrated on selling basic groceries at everyday-low prices in stores of 24,000 to 30,000 square feet.

Three years later, the chain introduced EDLP at all its stores. The following year, it moved into the Houston market with the no-frills concept. It was operating 35 Pantry Foods locations there in 2001 when it opened its first H-E-B-banner store in Houston; the company currently operates 75 stores in its Houston division, including a single unit of Central Market.

The precursor to Central Market opened in 1991 -- a 93,000-square-foot store in San Antonio called Marketplace, which featured an in-store restaurant and a wood-burning pizza oven from Italy.

According to local newspaper reports, Charles Butt got the idea for Central Market after travelling in France and Italy, and after viewing other U.S. operations, including Harry's Farmers Market in Atlanta.

"We wanted to let our folks see what they could do without the constraints of operating a traditional store," Butt told a Houston newspaper in 2001. "It was an opportunity to give people the opportunity to be as creative and powerful as they could be."

The first Central Market opened in 1994, combining the offerings of a specialty store with the ambience of a farmer's market (see page 39 for more on Central Market). H-E-B selected Austin as the site for the first Central Market, reportedly because it was the home base of Whole Foods Market, where consumers were more likely to be receptive to the fresh concept.

The stores eschew traditional rows of gondolas in favor of a more serpentine, open-air market-style ambience, and they don't sell basics like canned goods, cereals, toilet paper, soaps, shampoos or pet foods -- a concept that gave Charles Butt some initial pause, according to a 2001 article in a Houston newspaper.

The company selected John Campbell, a longtime H-E-B employee with a background as an accountant, to direct the Central Market development, and he reveled in the chance to break rules. According to Butt in the newspaper article, "I panicked [when Campbell said] we were not going to sell Tide, Alpo, all the regular stuff. I wrote him an 11-page letter detailing what I called 'supplemental items' for him to consider. But he was absolutely right in sticking to a very pure concept."

The company subsequently expanded Central Market to San Antonio, Houston, Fort Worth, Plano and Dallas, with a second unit in Austin bringing the total to seven.

According to the newspaper interview, Butt said the company is pleased with its Central Market achievements. "They've raised the standard for the whole company in terms of perishables and helped enhance our reputation as a food leader in Texas," he said.

1990s

Expanding H-E-B's Horizons

In 1997, H-E-B crossed the Rio Grande to open its first store in Mexico, in the city of Monterrey. Local sources said the move was made to take advantage of the availability of lots of real estate south of the border and the low per-capita concentration of supermarkets there.

H-E-B Mexico stocks more basic food assortments than its U.S. counterparts, rather than a lot of prepared foods. It also keeps costs down by buying about 85% of its offerings in Mexico.

The company currently operates 21 stores in Mexico and opened a 300,000-square-foot retail support center in Monterrey last year.

H-E-B opened the first three H-E-B Plus stores last year in San Juan, Texas -- units of 109,000 square feet with expanded product and service offerings, including extensive music and video sections; a larger baby department; dedicated space for grills and outdoor supplies; an expanded card and party product section; lawn and garden equipment; electronic and household items; and designated space for "treasure hunt" merchandise.

Asked in a newspaper interview what his father, H.E. Butt, would think of the company today, Charles Butt replied, "My dad would probably say, 'You should have done more.' He set the bar very high. But he would have been proud of it. He was the entrepreneur, the one with the vision."