AT HY-VEE, AUTONOMY AND EMPLOYEE OWNERSHIP SPELL SUCCESS

David Merrefield

On the front page of this week's SN, you'll see a reference to a major news feature on inside pages about Hy-Vee, the supermarket mainstay of the Midwest.

The immediate motivation for the feature treatment of Hy-Vee, written by SN reporter Elliot Zwiebach, is to commemorate Hy-Vee's 75th year of operation. That bit of history is an interesting fact, but another reason to look at the company is to find out how it has remained privately held, successful and growth-oriented for such a long time. Clearly, there must be a lesson or two in that. Let's take a look.

First, Hy-Vee by the numbers: The company operates 221 stores, of which 195 are big-footprint supermarkets -- some are 75,000 square feet -- and 26 drug stores. The operation, headquartered in Iowa, has locations in seven states. Sales volume is approaching $5 billion.

Hy-Vee executives attribute the company's success to two simple, but vital, factors. They are employee ownership and autonomy.

Employee ownership is highly motivating, and has been successfully used by a number of companies, including several in food distribution. The ownership form works because it spreads the notion to many members of an enterprise that every action -- whether a success or a failure -- ultimately impinges to some degree on every plan-member's finances. Employee ownership is generally effectuated by means of an Employee Stock Ownership Plan, but at Hy-Vee, it's managed through a trust, which pegs stock value to book value. An ESOP's value is fixed by an appraiser.

Naturally, the employee-ownership form also insulates Hy-Vee from the pressures of having publicly traded equity. So, instead of being obliged to respond to the vagaries of Wall Street, company managers can make critical decisions -- such as whether to expand, or not, and if so, at what pace -- as they see fit. As it happens, though, Hy-Vee is expanding at about the rate that might be expected for a company of it size. During its most recently completed fiscal year, Hy-Vee spent $220 million to open four new stores and to upgrade eight others.

Hy-Vee's independence from outside pressures has permitted its own version of corporate culture to mature over a space of many years. The culture has been codified into a booklet that offers guidance to employees at all levels. That ranges from obvious truisms such the "smile in every aisle" and "do what is right at every turn" to a citation of the employee-ownership principle that underpins management. Ultimately, the chief feature of the culture hinges on treating customers right. That goes far toward moving any business toward success.

The independence from outside pressures cultivated by Hy-Vee's management doesn't insulate it from competitive pressures, of course. Roughly half its stores compete directly with supercenters and nearly all compete with small-footprint, price-impact operators. In response, Hy-Vee has moved away from the dominant use of high-low pricing to a hybrid approach that puts some EDLP into the pricing mix, but which retains promotional pricing. At bottom, though, Hy-Vee's biggest competitive advantage may be its customer focus.