Golden Anniversary: Retailer Committed to Quality

JON SPRINGER

There are food retailers that preach the gospel of keeping their best customers close at hand, and then there's Harris Teeter.

View down from a two-level store in Raleigh, N.C.

At the newest Harris Teeter store in Raleigh, N.C., shoppers drop in anytime — literally — via elevators from any of the 400 apartment residences above it. The store and its accompanying neighbors, known as the Park & Market apartments, are the newest component of the North Hills mixed-use project, which transformed a former shopping mall into a dense, upscale urban corridor including homes, offices and shopping.

Featuring specialty offerings including an Asian bar, a pizza bar and typical Harris Teeter signatures like a well-stocked wine selection, Harris Teeter has loaned the Park & Market project an image of quality that's resonated with residents and other tenants, according to John Kane, chief executive of the project's developer, Kane Realty.

“It's very out-of-the-box, and it's been very well received,” Kane told SN in a recent interview. “There are not many grocers I know who would do something like this. I think it showed a lot of creativity on Harris Teeter's part to buy into the whole mixed-use-style program we are promoting.”

For Harris Teeter, the store can be seen as a manifestation of its commitment to quality and a testament to the imagination and pioneering spirit that has marked its first 50 years in the business. Its golden anniversary has arrived amid difficult times for an upscale food retailer. Consumers of all financial strata are seeking more value, and challenges are mounting from lower-end competitors even in its home market of Charlotte. But, observers say, Harris Teeter is persevering through strong financial discipline, subtle (and some less subtle) shifts in merchandising and promotion to meet the needs of customers, and through leaders who combine long-range vision with attention to detail.

“Harris Teeter has been on the leading edge of a lot of trends you see in the industry today,” Paul Weitzel, managing partner at Willard Bishop, Barrington, Ill., told SN. “They do a good job around prepared foods, the fresh side is the best in town, and they were early into natural/organics and health and wellness.”

Harris, Teeter and Dickson

Harris Teeter officials, who declined to be interviewed for this story, cite Feb. 1 as the company's 50th birthday, referring to the opening of the first store under the Harris Teeter name in Kannapolis, N.C., on that date in 1960. But its roots go back further than that. The story begins in the 1930s, when independent grocers W.T. Harris and Willis Teeter — both former A&P workers — separately set out to create their own stores.

Harris, based in Charlotte, made his first real splash in 1949, when he relocated his original store a few blocks away and adorned it with amenities competitors did not offer — including air conditioning and free parking — and kept later hours, including until 9 p.m. on Fridays, which was unheard of at the time.

Although that store has been frequently renovated since then, Harris Teeter still operates today at the same location — 1704 Central Ave., in Charlotte.

Teeter, along with his bother Paul, had meanwhile set up shop some 30 miles north of Charlotte in Mooresville, N.C. By the late 1950s, Harris and Teeter operated 15 stores between them and combined efforts — first by pooling their buying and warehousing functions, and finally by formally combining into a single company and brand name in 1960.

Riding the wave of shopping center development and Charlotte's booming population, the company had grown to No. 2 in market share there by 1965, trailing only A&P, according to David Gwynn, a North Carolina-based retail historian. It was also expanding its market area with acquisitions of Tilman's Grocery, Shelby, N.C., and various independent stores.

The growth of Harris Teeter in the 1960s caught the eye of Charlotte-based investors Ruddick Corp., a publicly traded holding company founded by the sons of Rush “R.S.” Dickson. The Dickson family had become successful with investments in local textile companies including American Yarn Co. and Efird Manufacturing Co. — later combined under the name American & Efird. Run by brothers Alan and Stuart Dickson, Ruddick in 1969 purchased Harris Teeter — then a 32-store chain. Ruddick still controls both American & Efird and Harris Teeter today. Stuart's son, Thomas W. “Tad” Dickson, is chairman, president and CEO. Both Stuart and more recently Alan Dickson have retired from the business in recent years.

The early years of ownership under Ruddick saw Harris Teeter experimenting with its identity. Gwynn recounted how the company for a spell in the 1970s was caught up in the discounting craze of the times and rebranded a handful of its stores under the discount Big M banner. But by the end of the decade, it had overtaken A&P for the market share lead in Charlotte.

The 1980s were a time of geographic growth for Harris Teeter and marked the beginnings of a noticeable leaning toward an upscale positioning in markets where it operated. It added more than 100 stores through acquisitions of competitors (Food World in 1984 and Big Star in 1988), expanding its coverage to four Southeastern states.

In Charlotte, the chain focused on prosperous neighborhoods to the city's south, and also to once-neglected locales within the city that showed signs of new gentrification. Developing this skill would serve the company well for future expansion, and provide an advantage that many competitors still haven't mastered.

“That impresses me in retrospect; they saw that urban trend long before most other chains did, and actually opened something of a showplace store in Charlotte's Dilworth neighborhood in 1989,” said Gwynn. “They've also maintained their very first supermarket location, opened in 1950, in the also gentrifying, also inner-city Plaza-Midwood area. It's been expanded beyond recognition and now they want to tear it down and start over, but they've stayed very committed to urban locations where they saw potential.”

‘Taj Ma-Teeter’

The 1990s and the growth of the banking industry in Charlotte brought waves of wealthy new residents to Charlotte and, ultimately, to Harris Teeter. Its well-appointed and strikingly designed new stores were referred to locally as “Taj Ma-Teeters.” These stores tend to be especially clean and well staffed, observers note.

“Why has Harris Teeter dominated Charlotte so? I'd guess it's because they staked out their corner of the market and served it really well,” Gwynn concluded. “They left the low end — and even the middle, some would say — to Food Lion and concentrated on the growth areas in Charlotte.”

The company in the 1990s was also looking to new markets for growth, entering Atlanta and South Carolina, although that expansion would eventually fail.

In 2001, Harris Teeter sold 15 Atlanta-area stores and one under development to Kroger Co. Ruddick officials said the stores were not profitable; analysts said the company had trouble expanding at the same time as Publix Super Markets invaded Atlanta from the south.

Karen Short, an analyst at BMO Capital Markets, told SN that Harris Teeter made the mistake of expanding behind a “preferred developer” program that occasionally resulted in compromises for the best real estate sites. The mistakes led to an overhaul of the company's real estate practices, Short said.

Observers note that Harris Teeter has thrived in part by not suffering the corporate meltdowns and other issues that plagued its competitors from Bi-Lo to Winn-Dixie Stores over the years. And to its credit, the company has exploited its openings.

“I think this company took great advantage of competitive openings in the market,” Chuck Cerankosky, an analyst at Northcoast Research, Cleveland, told SN last year. “Their price competitors — namely, Food Lion and Wal-Mart Stores — were very focused on the price-sensitive niche in the Carolinas while Winn-Dixie vacated the market and Bi-Lo went through a problematic period. Where a lot of companies could have gotten complacent, these guys took full advantage of the opportunity by improving the look of the stores and expanding their base.”

Aside from a handful of stores in the Nashville, Tenn., area — and a single remaining store of a one-time outpost in Jacksonville, Fla., Harris Teeter has looked northward for expansion. It opened its first store in Virginia in 1988 and now operates more than 20 stores in the D.C. metro area, including a flagship in the Adams Morgan district of Washington that served as the model for its recent Raleigh project. Although expansion has slowed due to the economy, Harris Teeter said it expects to open 13 new stores in the fiscal year, which would bring its total to 201 by its fiscal year-end in late September. Harris Teeter opened 15 new stores in each of the two prior fiscal years and 19 new stores in fiscal 2007.

Short said she expects the company will continue to gallop up the East Coast, with Philadelphia likely to be next on the agenda.

“New markets are definitely part of their plan,” Short said. “There is definitely opportunity in the D.C. and Virginia markets, and I know they were looking at [buying] Ukrop's [in Richmond]; there were legal expenses on due diligence for it. I think they'd be interested in entering Philadelphia. The economy has curtailed their growth for now, but I wouldn't consider that a permanent adjustment.”

Looking Up in the Downturn

The economy has also affected sales and sales growth at Harris Teeter, although analysts give the chain credit for battling through the tough times without completely surrendering the profit margins that traditionally have made Ruddick a desirable investment.

This was possible in part as a result of entering the downturn behind a strong foundation of proprietary store brands. The company has turned more attention to these items during the downturn, and also rolled out extended discounts on other items and promotes with triple coupons where the competition is hot, observers said. Discount offers are almost exclusively tied to its VIC loyalty card.

The own-brand focus is a traditional strength of Harris Teeter, which features not only an extensive line of sharply priced but quality-focused private brands like H.T. Traders, but has branded service and specialty departments within the store that support its quality image and distinguish it from competitors.

Recent television ads use humor to reinforce the notion that Harris Teeter's private brands are on par with their national-brand counterparts. In one spot for Harris Teeter's Homegoods aluminum foil, UFO expert Art Bell compares homemade space helmets made of Homegoods foil vs. a national brand. “Harris Teeter's Homegoods brand controls those pesky alien mind waves as well as the leading brand,” a voice-over says. “The difference is in the savings.”

While the company enjoys the benefits of its image for style, it has also been quick to adjust to calls for more value, Short noted. “They are an exceptionally strong competitor,” she said.

“What Tad would say is, if you ask a customer what we can do better, they're always going to say price,” Short added. “You can adjust the prices, go back to them and ask the same question again, and they're still going to say price.”

And while increased promotions and lower sales due to deflation and discounting hit the bottom line in recent quarters, Harris Teeter has rebounded by adjusting expenses to sales, particularly with regard to labor, analysts said, and getting more shopping trips — if smaller than average rings — from its core customer base.

“Despite the difficult market conditions, particularly for high-end grocers, we consider Harris Teeter to be executing at a high level,” Andrew Wolf, an analyst following Ruddick for BB&T Capital, said in a report following the company's most recent earnings release. BB&T issued a “buy” recommendation on Ruddick stock, noting that the company had exceeded analyst projections in the first quarter and was approaching relatively better conditions in the months ahead.

Like Kroger, Harris Teeter is particularly interested in gaining expense leverage behind strong market shares, often referring to growth of households that use its VIC card as a proxy for that. Recent Nielsen data, however, reveals the company losing its Charlotte-area market share lead for the first time to Wal-Mart.

“That's a concern,” Short said. “On the other hand, there are people who think the high-end grocer will never come back, and I don't agree with that.”

Observers speak highly of Fred Morganthall, Harris Teeter's president, and of Tad Dickson.

“One of the distinguishing things about Harris Teeter is Fred Morganthall,” said Weitzel. “He's a very hands-on president. He knows his business, he knows his numbers. You won't see many senior guys who are as in tune with the stores as he is. And he's as knowledgeable as anyone in the room when it's time to talk details. He's not looking to a group to tell him the answers.”

Dickson, observers said, developed financial chops watching the family thread business, and brings a passionate but analytical approach to running Ruddick. When a visitor remarked upon the cleanliness of a bathroom at a Harris Teeter store, one source related, company officials were quick to note that was a likely end result of Dickson having appointed a task force to determine the materials and cleaning schedule that was most efficient, then going back and measuring the results once the store was opened.

With both officials in their 50s, there is no rush to turn over the company, although analysts said if Harris Teeter were for sale, buyers would line up.

“There is no reason you wouldn't want to buy Harris Teeter,” Short said. “They're non-union, they're self-distributing, they're differentiated and they have dominant market shares. They hit every item on the checklist.”

AT A GLANCE

HARRIS TEETER

Founded: 1960 in Charlotte

Stores: 189 in eight states and the District of Columbia

Annual Revenue: $3.8 billion

Average Weekly Sales Per Store: $405,356

Gross Profit: $1.17 billion

Gross Profit as % of Sales: 28.7%

SOURCE: Ruddick Corp. annual report. Figures as of fiscal year-end, Sept. 27, 2009