Living Large

ELLIOT ZWIEBACH

For Meijer, big is still better.

While many operators are pondering the value of smaller formats, Grand Rapids, Mich.-based Meijer shows no signs of moving away from the 200,000-square-foot-plus stores that have been its bread and butter since 1962, when it opened its first Thrifty Acres store.

As the company celebrates its 75th anniversary this year, observers say the company's value proposition should help it weather the current recession, although its commitment to opening massive stores makes it less flexible in finding new sites as it seeks to expand.

Meijer's food prices typically run about 8%-10% below those of conventional operators, which “gives Meijer a strong value image,” David Rogers, principal at DSR Marketing Systems, Deerfield, Ill., told SN, although he added that “the economy could give Wal-Mart the edge in some markets, unless Meijer decides to redouble its focus on everyday low pricing.”

Ed Nakfoor, a retail consultant based in Birmingham, Mich., near Detroit, also said he believes Meijer will do well in the recession.

“It's certainly an economical place for families to load up, because it runs great specials and a lot of promotions,” he said. “And Meijer does a great job catering to the people in the neighborhoods around each store, particularly in its perishables selection.”

Finding adequate sites for such enormous stores could be a problem, some observers said.

“The size Meijer prefers forces it to open stores in growing areas with adequate space for large stores,” said Neil Stern, senior partner, McMillan Doolittle, Chicago. “Though, despite the difficulty of obtaining real estate, there always seems to be room for Meijer to open large stores.”

To Gary Giblen, managing director of Goldsmith & Harris, New York, the fact Meijer is privately held could work in its favor in judging the viability of store size.

“When the growth of rooftops is a problem, smaller stores would be better, because they have a lower break-even point. But if you don't have to worry about short-term profitability and can take a longer view, then a bigger store will work,” he explained.

“However, the fact Meijer operates so many stores in the Midwest's Rust Belt puts it in a more difficult situation.”

Nakfoor said he doesn't see any reason for Meijer to shrink its format.

“You see a lot of retailers trying different footprints and opening what they call fill-in or urban stores. But my feeling is, if it ain't broke, don't fix it,” he said. “I'm not surprised by the trend toward smaller stores in older neighborhoods, but I wouldn't encourage Meijer to open a slew of them. I believe more retailers should grow the businesses they have rather than getting distracted with different concepts or formats, which only confuse customers.

“But Meijer isn't known for its urban locations, and yet it's not missing that customer, because that customer has found a way to get to Meijer if that's where she wants to shop.”

Rogers said he expects Meijer to continue to grow in markets surrounding such cities as Chicago, Cleveland, Detroit, Cincinnati and Louisville, “though opportunities for stores exceeding 200,000 square feet are dwindling,” he noted.

He also said he can see Meijer opting to move into Wisconsin, and possibly Missouri.

Chain officials declined to talk about the company with SN.

Meijer operates 188 stores across a five-state area — 98 in Michigan, 40 in Ohio, 27 in Indiana, 15 in Illinois and eight in Kentucky — with sales estimated to be approaching $14 billion.

Meijer has been opening between five and 10 new stores a year — “a slow, steady pace,” Nakfoor said, “that has not strayed too far from the Great Lakes region, which means most people are familiar with the Meijer name and what it stands for.”

Over the last three years most of the company's growth has been in the area around Chicago, “where it's been easy for Meijer to establish a strong image under the huge price umbrella afforded by Jewel and Dominick's,” Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., pointed out.

The chain has been very aggressive in positioning itself against Chicago's two dominant operators, running ads that claim Meijer is “a better store than the other guys” and playing up superior pricing, produce selection and meat quality, among other attributes.

Meijer has opened 11 of its 15 Illinois stores in a ring around the Chicago area from the south to the west, Stern said, “which are affordable growth suburbs and solidly middle class.”

But those locations — dictated by the need for huge amounts of land — could have negative consequences for Meijer in the current economy, he noted.

“The size of the box, and the real estate needs it requires, push Meijer out to areas where it could get hit hard by a lack of development,” Stern said.

Meijer's Chicago-area stores are located 25 to 50 miles from the metropolitan area, in regions beyond the suburbs where cornfields are being converted into housing subdivisions, Hertel pointed out.

“That's been a good strategy for Meijer so far, because Wal-Mart has had problems moving into the Chicago marketplace, so Meijer is the only supercenter in many of those new areas,” he said.

However, although the housing crisis has not hit Chicago as hard as it has other locales, Hertel noted, people who might otherwise be looking for new housing where the cornfields used to be appear to be sticking closer to the metropolitan area, “and that could spell trouble for Meijer.”

Ron Larson, associate professor of marketing at Western Michigan University, Kalamazoo, said he believes Meijer's success in Chicago and other expansion cities might depend on whether it can get customers to give it a try.

“Everyone in Michigan knows Meijer, because they grew up with it, but in other places it might be a question of whether Meijer can link into the psyche of the local population,” he noted. “And it's never had to go up against two companies as strong as the two chains in Chicago, and that's going to be tough.

“If Meijer can establish itself with the quality of its private brands, which it's promoting very heavily, then that could help, along with the economy. The basic challenge is to get people in there for the first time.”

According to Nakfoor, the size of Meijer stores is a common complaint among some consumers, “especially upper-end shoppers, who have the perception that Meijer caters to a lower-income customer. That may have been true years ago — but the perishables are excellent, probably better than what Kroger is selling.”

As much as he likes what Meijer does on the grocery side, Nakfoor added, he said he's less impressed with the nonfood side, where he feels the quality levels are not as high as what a Kohl's or Target offer.

“Meijer has tried to brighten up that side of the stores to make it more attractive to shop, but the quality of the products is the issue for me,” he said.

First Combo Store

Though Wal-Mart gets the credit for developing the format it termed “supercenters,” Meijer was the first food operator to successfully combine food and general merchandise into a single operation a quarter-century before the first Wal-Mart Supercenter opened.

The two companies staged an epic battle during the late 1990s — “it was like two elephants dancing, and everyone else had better get out of the way,” Stern recalled.

Competing with Wal-Mart may have helped pull Meijer out of a period of lethargy, Tom Jackson, president of the Ohio Retail Grocers Association, told SN.

“There was a period of five to seven years when the company lacked direction,” he said. “It fell behind just keeping the stores up to date; it got a little less sharp in its operations; and it wasn't hitting the ball out of the park as often — maybe because it had that format to itself for so long. But Meijer woke up when Wal-Mart began opening against it.”

Before Wal-Mart moved into its Michigan territory, Meijer was the dominant player there, Rogers noted, “because it could operate at the lowest prices and was able to zap everybody. And because it came from a grocery base, it did a great job merchandising food categories, especially perishables.

“Then Wal-Mart targeted them and caused Meijer a lot of trouble, because Wal-Mart's prices were lower — lower than Meijer could go — which meant Meijer had to cut expenses to stay close,” he explained. “Where Meijer had the edge — and what Wal-Mart couldn't overcome — was its excellent perishables execution, the overall quality and selection and the service offerings, and by 2000 Meijer had found its footing again.

“Since then, it's done very well competing with Wal-Mart.”

According to Stern, “Meijer was definitely an underdog going up against the biggest company in the world, because it didn't have the capital to throw around, nor could it build stores as quickly as Wal-Mart.

“But because Meijer is a perishables-driven model that tries to be one of the best grocery operators in town, it comes at the business from a different direction than Wal-Mart, which is nonfoods-driven.

“In addition, though it can be tough on price, Meijer is not as ruthlessly price-competitive as Wal-Mart, preferring to merchandise on more of a quality-driven basis. So it eventually became clear the two supercenter operators could coexist in the same marketplace.”

Coexistence was a way of life by 2006, when Mark Murray, Meijer's incoming president, told SN his company did not plan to make any adjustments as it took on Wal-Mart at more and more locations.

“We really focus on trying to be Meijer, which means providing the best-quality products at the most competitive prices — very much what Wal-Mart tries to do,” Murray said.

“We've really been deliberate about being the best we can be. We have a strong tradition. We were the pioneers in the supercenter business, and we know others copy from us and we copy from the best practices of others.”

Third Generation

Meijer is run by the third generation of family members — with brothers Hendrik “Hank” Meijer as co-chairman and chief executive officer; Doug Meijer as co-chair; and Mark Meijer as a member of the board.

Murray told SN in 2006 it was unlikely the chain would alter its private status in the foreseeable future.

“I posed that question when I was asked to become president, because I didn't want to be a party to the sale of an important local company,” he said, “and the Meijer family told me it wants to continue in business as a privately held company and to maintain that position under the next generation.”

The chain has been run for the last 30 years with non-family members as president, since Frederik Meijer, son of the founder, moved up to chairman in 1978.

Murray came to the job with a background that did not include any retail food experience: former budget director for the state of Michigan, and subsequently state treasurer; a year as vice president for finance and administration at Michigan State University; and five years as president of Grand Valley State University in Allentown, 12 miles west of Grand Rapids.

Murray was asked to join Meijer's board in 2004, “and when the family began looking for a new president, they did an inventory of the people they had worked with and that led them to have a conversation with me,” he told SN at the time.

“What they saw, I believe, was a set of leadership skills for heading a large organization and the ability to help the company continue to focus its efforts on its existing core strategic goals.

“Retail is a discipline that requires a very clear, consistent focus on execution, and my job [is] to help the organization execute better so it can grow.

“The company is in good shape, and my job is to make it more effective. At Meijer that means continuing to improve store operations, continuing to have the right merchandise mix for customers and making sure we offer a differentiated mix with our line of products.”

Linda Gobler, president of the Michigan Grocers Association, said she's worked with Murray on several boards, “and he's very bright and sees things globally. He has the ability to step back from being a company president and to look for the best solution for everyone.”

There is speculation Murray could someday run for governor of Michigan, she added.

In terms of its relationship with vendors, Meijer has spent years developing formal collaborations to make both sides more successful.

According to Hertel, “Those collaborations give Meijer and its suppliers common measures for judging success in terms of profit growth and return on invested inventories, for example, and enable them to focus on how to increase those common measures in ways that are more productive than having the retailer think about gross margin and the vendor think about unit volume.”

In a 2007 presentation at the Food Marketing Institute convention, Paul Boyer, Meijer vice chairman and Murray's predecessor as president, talked about starting the collaborative process in 1998 with five key vendors — a number that had expanded to approximately 250 companies by 2007.

Boyer said it is important for these relationships to focus on financial goals. “This isn't a feel-good exercise. You have to focus on what pays the bills — sales, margins and inventory levels,” he explained.

“The benefits include improved business results for both parties; the availability of more supplier resources; and the development of strong working relationships that help to resolve issues quickly.

“Clearly, there have been improved business results [at Meijer],” he said, citing sales that achieved 1.5 to 3 times the expected results in some categories when collaboration occurred. There is also a “halo effect,” he noted, that impacts other areas of the relationship — for example, a lot less “finger-pointing” if things go wrong.

Boyer expressed some surprise at the program's success. “The hallmark of good collaboration is that you have to be open and candid,” he said. “For a long time we were under the impression that the less information we shared about ourselves, the better.”