Winning Proposition

ELLIOT ZWIEBACH

WinCo Foods here may be Wal-Mart's worst West Coast nightmare — a price-driven operator whose prices actually rival its own.

“WinCo is a sleeping giant,” one Idaho retailer told SN. “In fact, I'd rather go up against Wal-Mart than WinCo.”

“WinCo is probably the only competitor Wal-Mart is really afraid of,” according to Jim Hertel, managing partner for Willard Bishop, Barrington, Ill.

Of course, with 56 stores, Boise, Idaho-based WinCo may seem like no more than a pesky flea to Wal-Mart overall, but on a head-to-head basis in five Western states, the two companies are said to be almost identical on price. “They are probably as close as they could be,” one retailer pointed out.

In a move of sheer bravado or, perhaps, folly, WinCo opted to open a 96,000-square-foot store last November about a mile from an established Wal-Mart Supercenter in Lancaster, Calif. — the first time it ever made the first move against Wal-Mart.

“When WinCo opened stores in the past, it was usually before Wal-Mart came to town,” one observer said.

“Opening up where Wal-Mart already had a store demonstrates WinCo's absolute confidence in itself,” according to Doug Sumpter, principal at DPS, a consulting firm in Boise.

That kind of chutzpah has others shaking their heads in disbelief.

“That they would purposely pick a fight with Wal-Mart says a lot about their confidence,” one retailer told SN. “In most cases, Wal-Mart has come into areas where we were already operating, but I'm not sure I'd go into a Wal-Mart market and open a new store.”

Asked what WinCo might have been thinking, one industry observer said, “With 300,000 people in the Lancaster area, the opportunities there are huge and too good to pass up.”

“What that decision tells me is, WinCo believes it's already withstood openings by Wal-Mart near its other stores, and that's probably given management a measure of confidence to make the first move,” Hertel said.

According to an industry veteran, “WinCo has done a better job competing with Wal-Mart Supercenters and warehouse stores than any other operator by keeping prices low and very competitive. They appeal to people at the high and the low end of the income scale, with the same kind of pricing mystique as Wal-Mart but with better selection and better store conditions, and its stores are better organized and more comfortable for consumers to shop.”

New Leadership

Late last year, William D. Long, WinCo's chairman and chief executive officer for nearly 20 years, stepped down as CEO while remaining non-executive chairman of the board, and Scott R. Preece retired as president while taking the title of non-executive vice chairman.

Steven L. Goddard, the company's chief operating officer, was named president and CEO, and Rich Charrier, former vice president of retail operations, was named executive vice president and chief operating officer.

Goddard has been with WinCo since 1998, after working in a variety of produce-related positions at Kroger, Safeway and onetime wholesaler Scrivner. Charrier joined WinCo in 1975 and worked his way up from store-level clerk.

Little is likely to change at WinCo under the new leadership, according to Sumpter. “Long and Preece wouldn't have stepped aside if they didn't feel they had prepared their successors to do the job,” he said.

“The people working there have grown up with the company, and they are fanatical about execution at store level. Maintaining the culture and the well-defined disciplines they grew up with is embedded in every one of them.”

WinCo officials declined to comment for this story.

WinCo is marking its 40th anniversary this year, having grown from a single store — called Waremart — in 1967 to a 56-store company with estimated sales of $2.7 billion for the fiscal year that ended March 31.

WinCo operates 22 stores in California, 16 in Oregon, eight each in Washington and Idaho, and two in Nevada.

Although the first letters of each state correspond to the company's name, the name is actually a contraction of “Winning Company” — the winning entry in an employee contest in 1999 when Waremart was looking for a new identity to avoid confusion with Wal-Mart.

A One-Note Song

The company bills itself as “the supermarket low-price leader” in every area it enters, and consumers seem to agree, Bert Hambleton, president of Hambleton Research, Issaquah, Wash., told SN. Based on ongoing consumer research he's been doing for more than 25 years, “WinCo's price perception among consumers is among the strongest we've ever seen,” he said.

“A lot of operators talk about low prices or some level of service plus low prices, but WinCo is a one-note song — it says it has the lowest prices in the market, it hits that note over and over, and it appears to be effective. Consumers are certainly not grocery experts, but what they're telling us is they perceive WinCo as a store that promises low prices and then delivers on that promise.

“Based on a mathematical formula we use to quantify data in our surveys, where higher numbers are better, WinCo registers the best on price, and it's been registering the best since the late 1990s. If zero is the base line, then WinCo consistently registers anywhere from 105 up to 120 or better, whereas Wal-Mart Supercenters come in at 80.”

WinCo has built its reputation primarily on word-of-mouth, with no weekly advertising to support its message, observers said — typically just a grand opening ad that compares its prices to the local competition, followed by one or two more ads each year after a store is established, all done exclusively on a direct-mail basis.

“WinCo executives never, ever take their eyes off costs,” Sumpter said. “When they opened their first, bare-bones store, they watched Albertsons like a hawk and were determined to underprice them, and they did whatever they had to do to keep their price points below Albertsons.

“And WinCo still knows how to execute, and it knows how to sell and to make money selling. Rather than doing a lot of SKU rationalizations and adding items for customers they don't have, they work hard to keep it simple and focused on selling to the customers they serve.”

One observer said the company's cost structure is among the lowest in the industry, with overhead costs of 14% compared with 25% at conventional chains and approximately 16% at Wal-Mart. “It's all about execution,” he explained. “WinCo is really focused, its executives know the strategy, and its stores are as basic as you can get.”

Growing in California

Most expansion activity over the past few years has been in California, “where the company has had a lot of success,” Sumpter noted. “Having grown up in the Pacific Northwest, WinCo sees more potential in California, though it could still do a few more fill-in sites in other regions.”

“It's a format with a strong blue-collar orientation,” Hertel said, “so it's more likely to look for expansion outside metropolitan areas — in the same kinds of places Wal-Mart puts its supercenters. And while there are probably still plenty of opportunities for growth in California and maybe Las Vegas, it could also find the demographics that meet its requirements in places like Arizona or New Mexico as well — although that might require another distribution center.”

WinCo began moving into Southern California in late 2004 after opening a distribution center — its third — in Modesto, Calif., which cleared the way for expansion south and, possibly, east into southern Nevada.

Most of WinCo's recent expansion has been in Southern California, including stores in Fontana and Visalia that opened in mid-March, and stores set to open in Perris in mid-June, Apple Valley in the fall, and Bakersfield and Indio in 2008.

Outside Southern California, stores are reportedly scheduled to open in Marysville, Wash., in early June and Puyallup, Wash., in July, with openings possible this year or next in Eagle, Idaho, and Pittsburg in Northern California.

The Eagle store typifies WinCo's approach to real estate, Sumpter told SN. “They're very calculated and patient about buying sites,” he explained. “They've probably had that Eagle property since 2000, but they've figured out exactly when there will be enough homes in the surrounding area to support the store, and that's when they'll open it.

“Having waited this long, that store will probably do more than $2 million a week when it opens.”

WinCo stores are big, ranging from 70,000 square feet up to 96,000 square feet, with two stores of 100,000 square feet. At 96,000 square feet, WinCo's current prototype is approximately half the size of a Wal-Mart Supercenter, with a focus on food products.

The sheer size reminds some consumers of Costco, and sources said shoppers often come in asking if they need a membership card to shop there.

With close to 35,000 SKUs, “WinCo is just a grocery store that's bigger,” one industry observer noted. “The stores carry more of everything. Everything is big. WinCo lets the consumer shop.”

Each store has between 16 and 19 checkstands, with customers asked to bag their own orders to cut WinCo's expenses.

Stores are brightly lit, with a combination of conventional grocery gondolas — that run from side to side rather than front to back — and warehouse shelving in just two areas: the “wall of values” as the customer enters and a section for seasonal goods and high-velocity bulk items like paper on the opposite side of the store near the front.

All stores are identical, or at the least mirror images — a circumstance that contributes to the company's ability to keep prices low, observers noted.

“Running a consistent format allows WinCo to be quite efficient in buying and store operations,” Hambleton pointed out, “because each location has the same amount of space allotted to each category and the same space for seasonal merchandise.

“But WinCo hasn't gone the way of Costco or Sam's by getting into large package sizes. It offers traditional consumer packaging, and that also drives a lot of efficiency for its low price point. And if you have the same layouts and the same size stores with a low price range, you can send out more full truckloads for maximum efficiency.”

WinCo has been using identical layouts since 1991, when it began building its own stores rather than taking over existing buildings, observers noted.

Constructing its own stores enables WinCo to fashion the operation to its specific needs. “Bringing in all those truckloads on a direct basis, the stores have massive buying power and the ceilings need to be high enough to accommodate storage for one or two truckloads of each variety of featured merchandise every week,” one observer pointed out.

Cutting Delivery Costs

Besides stocking extra inventory on the warehouse shelving in the store, WinCo stores have backrooms ranging up to 15,000 square feet or larger for excess inventory.

The stores are supplied out of three warehouses: a 900,000-square-foot grocery and perishables facility in Woodburn, Ore., near Portland; a 710,000-square-foot grocery and perishables facility in Modesto in Northern California; and a 110,000-square-foot center for nonfood and gourmet merchandise in Myrtle Creek in southern Oregon.

The Woodburn facility services stores in Washington, Oregon, Idaho and California south to Chico, while the Modesto warehouse services stores in Nevada and in California south of Chico.

One way WinCo keeps costs down is by cross-docking some direct-store-delivery items at its warehouses for subsequent distribution to the stores, Sumpter pointed out. “It's able to buy 15% cheaper than some of the chains by cross-docking specialty items,” he said.

All stores are open 24 hours a day, with perimeter departments stocked throughout the day and grocery categories stocked at night. Merchandise is displayed in cut cases, with virtually no hand-stacking in any category.

One of WinCo's secret weapons may be that it operates under an ESOP — an employee stock-ownership plan — a distinction that's emphasized throughout the stores, with signs over the entrance proclaiming, “WinCo is employee owned,” and buttons worn by associates that read, “WinCo is employee owned and proud of it.”

“The signs and buttons let customers know the people working there care,” an observer told SN. “Shoppers ask about employee ownership all the time and get really excited about it.

“For employees, being part of an ESOP encourages them to strive to make the company better because that means it makes more money for everyone.”

Employees are not unionized, the observer pointed out.

Tough Negotiator

In Sumpter's opinion, “WinCo is tougher than a snake when it comes to dealing with vendors. No one is more fair and more open, but no one is tougher. They look you in the eye, ask for the best deal and then make a decision.”

In the view of an industry observer in Oregon, “Vendors love WinCo because it doesn't ask for much, and it moves a lot of product.”

Dealing with WinCo is a straightforward proposition, according to one Northwestern supplier, who said he has worked with WinCo for more than a decade. “They tend to be tough negotiators because they want to make a big impact on shoppers. But they're dependable, and they execute very well on reduced shelf-price programs and promotional displays at the front of the store.”

On the downside, however, “it's becoming more difficult for them to forecast sales,” he pointed out, “because future consumption is based on what's being promoted now and may change when another, similar product is promoted, so consumer behavior is subject to wide swings.”

Another complication, he added, is that as WinCo has opened stores in areas that appeal to different consumer segments, “it's become a little less dependable in terms of planning because it's sometimes harder to estimate sell-through on promotions. But the company is definitely learning as it grows.”

Having lived and worked in Boise, where WinCo originated, Sumpter acknowledged he's a WinCo fan. “It's got better produce than Wal-Mart, and it's less expensive. And you don't run into the frustrations at WinCo with out-of-stocks and other items you can't find that you do at Wal-Mart. “And the WinCo system is so efficient and fine-tuned that you don't mind bagging your own groceries.”

Speaking as a customer, the Northwestern supplier said he sees weaknesses in some of WinCo's perimeter departments. “Center Store, frozen foods and produce are untouchable in terms of quality and value, and produce turns fast so it'salways fresh.

“But the meat and seafood sections are areas WinCo hasn't quite figured out yet in terms of what it needs to stock, probably because it serves many different consumer segments.”

WinCo's Value Image

BOISE, Idaho — WinCo designs its stores to emphasize its value proposition.

Each of its 56 stores, which range from 70,000 to 100,000 square feet, is laid out almost identically to the others in the chain to maximize efficiency.

Entering a WinCo store, customers move through a canyon formed by the wall of values, a promotional aisle featuring branded merchandise — at prices up to 40% off — that's bought on a direct basis and displayed on two sides of 120 running feet each. Sales items are stacked in cut cases on two shelves, with two tiers of overstock inventory stacked up to the 36-foot-high ceilings.

“This is WinCo's image,” one observer told SN.

The merchandise sold off the wall of values reflects true bargains, said Doug Sumpter, principal at DPS, a consulting firm here. “WinCo is very seasonally in tune — it buys to do high volumes at low prices, and it keeps the section fresh.”

At the end of the “canyon” is a promotional area featuring multiple pallet displays of a high-volume item.

On the store's perimeter is the produce section, featuring three island displays of bulk items, with one case against the wall for packaged items and another for gourmet produce selections.

Each store has the option to place whatever produce items it wants on end displays, with input from division supervisors.

At the back of the store is bulk-bin merchandise — more than 700 items in reach-in bins or gravity-fed dispensers. Of the total, about one-third consists of candy, nuts and other snacks; one-third of pasta and baking mixes; and one-third of beans, rice, cereals, soup mixes and spices.

“WinCo is one of the supermarket operators that made bulk work for them in a big way,” Sumpter said.

According to another observer, “WinCo stuck with bulk while other supermarkets got out of it because it feels that's the cheapest way for consumers to buy these items.”

On the stores' back wall is a service deli, featuring hot foods made in-store and salads shipped from the company's warehouse. There's also a service seafood department, a self-service meat case and a dairy section along the back wall.

WinCo stores feature a large selection of frozen foods, displayed in coffin cases and upright cases with doors. All upright cases had air curtains until two years ago, when the company began adding doors to cut energy costs.

The stores feature 120 running feet of reach-in frozen cases, flanked by 34 uprights with doors on either side, plus 25 more doors for ice cream and novelties on a side wall.

The extensive grocery sections feature merchandise displayed in cut cases, with end displays offering direct buys at reduced prices. “Center Store is an area where WinCo puts a lot of emphasis,” one industry veteran told SN.

Signs above the end displays let customers know how WinCo tries to keep costs down. “Extra Savings means we temporarily received a lower cost on these items and we've lowered our prices to you,” reads one. “The time may be limited, but the savings aren't, so you may want to pick up one or two extras at these low prices.”

According to another sign, “Pre-priced has been re-priced. We discount all our items so when we receive product from a manufacturer that is pre-priced, we discount that price to also save you money. That's Assured WinCo Foods Pricing!”

The stores do high tonnage in the health and beauty care items they sell, though variety is somewhat limited, observers said. “They like the mix they have, and rather than considering expanding it, they're more in a tweaking mode,” one source pointed out — “though with the shift in top management, it will be interesting to see if any changes take place in that section.”

The bakery departments in the front corner of the store offer a combination of bake-off items finished at store level and items baked from scratch at each store, including a variety of breads and rolls, with merchandise displayed on racks.

The stores utilize two-lane checkstands that allow a clerk to check out one order and move that order down one conveyor belt so the customer can bag it while the clerk checks out the next order.

Within the last year WinCo has begun accepting debit cards — “because it had to change with the times,” one observer said — though it still does not accept credit cards.

Incorporated into the store designs are windows on the roof that enable WinCo to regulate lighting during the day to keep energy costs down.
— E.Z.

40 Years of Discounts

BOISE, Idaho — WinCo Foods started life as a modest discount store called Waremart in 1967 here in the direct shadow of Albertsons.

The store wasn't much, recalled Doug Sumpter, principal at consulting firm DPS here and an Albertsons executive at the time. “The store was a bare-bones operation geared solely to price, not atmosphere. Shoppers were required to grab a grease pencil as they entered so they could mark prices on the items they selected.”

Waremart was founded by Ralph Ward and Bud Williams; significantly, they hired William D. Long, the chain's future leader, as a store manager within a year of opening their first store.

“Bill Long watched Albertsons like a hawk,” Sumpter said. “He never, ever took his eyes off costs, and he did whatever he had to do to keep Waremart's price points below Albertsons'.”

After Ward bought Williams out, Waremart grew at a rapid pace — to more than 100 stores at one point, according to industry sources.

After Long was named president and chief executive officer in 1985, the company gradually cut back its store count to concentrate on upgrading and expanding the locations it wanted to keep.

Long led an employee buyout of the company from the Ward family in 1985 after Ralph Ward's death and established WinCo as an ESOP, operating under an employee stock ownership plan.

As Waremart grew, its real estate philosophy was to buy desirable sites and wait several years if necessary before putting a store up while it monitored population and business growth to determine the best time to build.

Through the early 1990s Waremart was supplied by Minneapolis-based Supervalu through its distribution center in Salem, Ore.

By the mid-1990s, however, Waremart was growing anxious to handle its own distribution, and when Supervalu opted to close the Salem facility — after Albertsons, its largest customer there, built its own warehouse in Gresham, Ore. — Waremart switched to self-distribution. (Supervalu continued to hold an ownership stake of approximately 30% in the company until 2004, when it sold its holdings back to Waremart.)

The company opened its first distribution center in 1998 in Woodburn, Ore., near Portland, for groceries and perishables; a second, for nonfood and gourmet items, in Myrtle Creek, Ore., in the southern part of the state, in 2000; and a third in 2004 in Modesto, Calif., for groceries and perishables — a move that enabled it to begin expanding into Southern California.

By 1999, with persistent customer confusion between “Waremart” and “Wal-Mart,” Waremart held an employee contest to select a new name for the company, and the winner was WinCo — a contraction of “Winning Company” as well as an acronym for the first letters of the five states in which it was operating (Washington, Idaho, Nevada, California and Oregon).

After testing the WinCo name at a store in Reno, Nev., the company changed the name on all its stores — although one smaller location, in Independence, Ore., still operates under the Waremart name.

WinCo's two top executives stepped down last October: Long as CEO, though he retained his title of non-executive chairman of the board, and Scott R. Preece as president and chief operating officer, though he remains non-executive vice chairman.

Succeeding them were Steven Goddard as president and CEO and Rich Charrier as executive vice president and COO.

Goddard joined WinCo in 1998 as vice president, produce, after 20 years in a series of produce-related positions at Kroger Co., Safeway and the Food 4 Less division of onetime wholesaler Scrivner. He was named WinCo's executive vice president, retail operations, in 2003; COO in 2005; and president and CEO last October.

Charrier started with WinCo as a store-level clerk in 1975, then managed several stores in the Pacific Northwest before succeeding Goddard as vice president, produce, in 2003 and then as vice president, retail operations, in 2005 before being promoted to his current titles last October.

In passing the torch, Long commented, “I am comfortable that WinCo Foods and its employee owners are in good hands as we look toward a bright future of continued growth.”
— E.Z.