H-E-B PLANNING FOR EXPANSION INTO MEXICO

JENNIFER L. BALJKO

SAN ANTONIO -- H.E. Butt Grocery Co. here plans to open a supermarket near Monterrey, Mexico, by the end of the year, with another unit to follow several months later, spokesman Mike De La Garza told SN.

The Mexican stores would be H-E-B's first international locations. Depending on those stores' success, the 230-unit chain might consider future expansion in Mexico, De La Garza said.

The two stores planned for metro Monterrey, about 150 miles south of Laredo, Texas, will be about 70,000 square feet each and will operate under the name Supermercados Internacionales H-E-B S.A. de C.V., De La Garza said. One store will open before the year's end, and the other is expected to open by mid-1997.

The stores will feature expanded deli and bakery sections plus a prepared foods department, areas that are emphasized in H-E-B's Texas stores. About 70% of the grocery mix will come from local and regional Mexican manufacturers, and the remaining 30% will be U.S.-made products, De La Garza said, adding that a variety of distributors will be used to supply the stores.

Nearly 600 employees will be hired for the two stores, and store managers will come from the Monterrey area. Howard Butt 3rd, an H-E-B vice president, is overseeing the Mexico development projects.

With about a million people, metro Monterrey is similar to San Antonio in size, population and culture, which helped ease the H-E-B's entry into a foreign market, De La Garza said. Also, many residents of the growing city shop at border H-E-B stores, especially the Laredo store, giving the chain a grasp of the products and service Mexican consumers seek, he noted.

H-E-B may continue to expand in Mexico if the first two stores there do well, De La Garza said. He declined to specify how much time would be used to gauge their success, but said, "We see success occurring eventually, and the potential to grow will be a matter of time as we work through whatever issues come up."

The Mexican venture comes about seven years after H-E-B executives began toying with the idea of entering the growing market, De La Garza said. He noted that the North American Free Trade Agreement between the United States, Canada and Mexico plus the recent devaluation of Mexican peso fueled the company's decision.

"Mexico has been part of a long-term plan for the company in terms of growth for quite some time," De La Garza said. "We have been studying this decision for seven years, and now we feel that the company is in a better position to move forward with those plans.

"NAFTA is one of ongoing [agreements] that made investing in Mexico more attractive. Also, the devaluation of the peso in 1995 has tempered some of the attitudes of investing," he added.

But unlike opening it's first non-Texas store in Lake Charles, Louisiana earlier this year, the decision to go into the international arena was not easy to make, particularly because of challenges it faces from an employee training and distribution standpoint, De La Garza said.

"In Louisiana, that store opening was driven by the growth of our Pantry [Food] stores in eastern Texas. The Louisiana store is just a natural extension into of that," De La Garza said. "Crossing an international border is a different animal all together. It is a major undertaking. It took a lot of thought and planning. To ensure success, we are continuing to work on our plan up to the store opening."

H-E-B is entering Mexico without a joint-venture partner, unlike most U.S. retailers that have opened or plan to open stores south of the border. U.S. food retailers with Mexican operations include Wal-Mart, Kmart, Price/Costco and Smart & Final.

In Monterrey, H-E-B may face its stiffest competition from the well-established Soriana and Groupo Gigantes stores, said Daniel Lerner, a securities analyst that follows the Mexican retail market for Smith Barney, New York. Seventeen of Soriana's 53 stores, which average about 86,000 square feet, are in the metro area. Gigante operates 52 units in 11 Mexican cities, including Monterrey, Lerner said. He did not know how many Gigante stores, which average about 55,000 square feet, were in Monterrey.

"Soriana takes H-E-B very seriously, and they view them as a strong competitor. But Soriana is very advanced on the systems-side. H-E-B is not moving into easy street. Certainly, they will face competition from Gigante, Soriana and Wal-Mart," Lerner told SN. "Also, Soriana has very big name recognition in the north.

What H-E-B will have in the beginning is novelty and that it is a U.S. firm, which people think usually means a higher level of quality and service."