STAUNCHLY INDEPENDENT

CHRISTINA VEIDERS

WEST DES MOINES, Iowa -- Black dirt sold here is one small example of how Hy-Vee has positioned itself as a 21st century retailer in the heart of the Midwest.

It may sound ludicrous, yet the statistic is impressive. Last year, Hy-Vee shipped over 1,000 truckloads of two-cubic-foot bags of Iowa soil to some of its 200-plus stores, according Ron Pearson, who is chief executive officer, chairman and president of the privately held chain.

Pearson proudly cites the item movement of dirt, in an interview with SN, as evidence that Hy-Vee has met its five-year goal to become the largest supplier of lawn and garden supplies in the Upper Midwest. "Last year was huge [lawn/garden sales]. This year will be bigger," Pearson said.

Hy-Vee, which operates in seven states and employs 45,000 people, has distinguished itself over the years by being attuned to its customers' needs. "We have a strong belief that [consumer] lifestyles and what customers want tomorrow is the way to design your business," said Pearson.

As a result, the company has expanded many departments and services, and has introduced new ones like lawn/garden to meet its shoppers' changing needs. These have included restaurants, meat, perishables, fresh produce, frozen, bakery, floral, general merchandise, pharmacy, Health Market, gasoline service, liquor, and banking. The chain recently added a U.S. Post Office branch in one of its stores.

The food retailer now does 20% to 25% of its volume in general merchandise. Pharmacy and the Health Market, introduced five years ago, is a growing business going forward, said Pearson. Hy-Vee has between 160 to 170 pharmacies in its stores, and it will continue to add more, he noted.

"We've worked very hard to build our brand name. Consumers think of us as honest with high integrity. The pharmacy and the pharmacist fits that same standard," he added.

To accommodate the more extensive food and merchandise offerings, Hy-Vee is building bigger stores. Today over half of Hy-Vee's volume comes from stores that are between 55,000 and 75,000 square feet, said Pearson.

"We are 71 years old as a company, yet 54% of our retail assets are brand new," he mentioned.

Another unique aspect of Hy-Vee is its employee-ownership structure. Of the total employees working for Hy-Vee, 20,000 own stock. Profits are shared with employees through the Hy-Vee Employees' Profit Sharing Trust Fund and a combination of bonus, commission and incentive systems. Those qualified to participate in the profit sharing have to be 19 years old and work 1,000 hours per year.

While industry consolidation continues, Hy-Vee's employee ownership has convinced Pearson that it would be difficult for the company to be acquired by an outside party, or be put up for sale. Employees get 100% back on their dividend earnings, according to Pearson, plus they share in the profit-sharing fund. "We run the company for the employees," he stated. "We don't run it for outside stockholders. Therefore, nobody would keep that model up."

In turn, as employee-owners, store personnel are motivated, work harder and embrace the business as their own. They also endorse and practice Hy-Vee's ethical and moral standards -- integrity, caring, sincerity, respect and love for fellow employees and friendliness. "Those basic fundamentals are more than just words," said Pearson.

He credits Hy-Vee's success to the autonomy given to store directors, who operate as true independents. They are given full authority to run their stores and make all decisions, including buying, pricing and advertising. Since they work on a commission basis, they also assume the risk of an independent.

"Our managers are not paid. They operate totally on commission. There is a huge reward system and carrying system that they make their stores successful for their customers. We don't know of another company in the world that operates that way. There is zero turnover and only early retirement," stated Pearson.

Bill Bishop, president, Willard Bishop Consulting, Barrington, Ill., agreed. "You've got the consumer orientation driven by the responsibility and autonomy of the store people. That is a very tough advantage to beat."

For a grocery chain, it is a unique position, according to Bishop. "Today, Hy-Vee is the only large company that has this characteristic. They have the connection and motivation to serve the consumer as a good independent. When you have that combined with the efficiencies of a chain, you are pretty tough," he said.

From the beginning, Hy-Vee has been employee-owned. Founded in 1930 by Charles Hyde and David Vredenburg, Hy-Vee's name is a contraction of the founders' names.

This year, Hy-Vee ranked No. 23 on SN's annual Top 75 Food Stores list, with 213 stores, including 28 freestanding Drug Town drug stores. Sales of $3.6 billion were recorded for the fiscal year ending Oct. 1, 2000. Pearson expects the chain will generate $4 billion in sales this year.

Last year, Consumer Reports rated Hy-Vee among the Top 10 supermarkets in the country, according to a readership survey on supermarkets. The chain scored an overall rating of 75 out of 100. On courtesy, it received the highest rating, a 5. The retailer's motto is: "Where there's a helpful smile in every aisle."

"We are living proof that employee owners care more, do more, feel more and are involved more. They also are rewarded more because of it. We just plain care in detail about our customers. That is part of our basic culture," said Pearson.

Noted Bishop, "When you go into a Hy-Vee store, particularly if you are from a metro area, you are almost self-conscious as to the friendliness and outward style of the employees. They are in continuous touch with their consumers."

The addition of lawn and garden to Hy-Vee's mix is one of the many examples of how the retailer has enhanced the one-stop shopping experience. In this case, the retailer is catering to its consumers' newly discovered enjoyment of gardening, which for many has become a recreational activity, instead of work, Pearson pointed out.

Pearson, age 60, began his career with Hy-Vee as a part-time employee while attending Drake University, where he holds a bachelor's degree in retail merchandising. Like all employees within the Hy-Vee system, he worked his way up the ranks. In 1983, Pearson was elected president and chief operating officer. He became chief executive officer, chairman and president of the company in 1989.

As a store director, about 25 years ago, Pearson witnessed the evolution and growth of Hy-Vee's prepared-meals program with its first restaurant. It was at that juncture that time and convenience began to be important considerations for Hy-Vee shoppers, especially if they were from a two-income family household.

Hy-Vee, as in many other areas, was before its time in prepared foods, said Pearson. He attributes Hy-Vee's success in home meal replacement to 25 years of experience. "Our people learned the food handling, the sanitation, the quality part of the business. A lot of people thought you just put meals together and you didn't have to have any quality or standards. Taste is also very important. We do it all ourselves. It continues to grow."

Today nearly all of Hy-Vee stores have a restaurant, sit-down eating and takeout. The company also operates the largest catering service in the Midwest, hosting everything from black-tie functions to outdoor barbecues. The retailer's ethnic food offering runs the gamut from Chinese to Middle Eastern fare -- proving Midwesterners are not simply a meat-and-potato crowd.

But when it comes to meat, Hy-Vee is known for its Amana beef high-grade cuts, which it sells exclusively. This is beef from the Amana Colonies, a Germanic religious group that dates back to the mid-1800s with farms in eastern and central Iowa.

"We knew the lifestyle was demanding very good quality and value," said Pearson.

In addition to the high-end Amana beef, Hy-Vee consulted with meat experts to come up with a standard for its everyday beef.

Hy-Vee pays extra for hand selection of its everyday beef, said Pearson. It is merchandising pork in a similar way. The retailer has recently partnered with Hormel on prepackaged moisture-added pork.

Hy-Vee also expanded self-service and service meat departments in most stores to again cater to consumers' -- many with more discretionary income -- changing needs.

Over the years, Hy-Vee has invested in many support companies that provide synergy to its overall growth. Among these companies are: the Midwest Heritage Bank, with many branches in Hy-Vee stores; a floral importing company; a construction company; an advertising and public relations agency; a specialty food importing company; and a perishable distributor.

The specialty food importing company has grown in importance over the last 10 years. About 10% of Hy-Vee's grocery products and cheeses are procured through the importer. The company is an integral part of Hy-Vee's latest venture, electricfood.com, Los Angeles. Launched nearly a year ago as a Hy-Vee subsidiary, it is an Internet gourmet food shopping site.

Hy-Vee's specialty food importing company does the procurement and fulfillment of orders generated by the Web site. "This gives us a natural advantage over anybody else in that we were already procuring very fancy foods worldwide and we have our own fulfillment center right here in Iowa," explained Pearson.

The retailer will soon add its Amana beef to the site's food selections and its Hy-Vee premium private label, Grand Selections, as well as its floral offering through its floral importing company.

How has the site performed in a few short months? "Christmas was pretty good. During the first quarter, we did more business than at Christmas, which tells you how fast its growing," said Pearson.

"We want to be ready for lifestyles as they emerge and evolve -- that's our mission. We aren't going to run around the country and build big distribution-fulfillment centers and lose millions like others have. We started it out and have a group of people in Los Angeles operating it. The Web site is super!" Pearson exclaimed.

Besides electricfood.com, there are now 70 stores that offer home-shopping service with pickup or delivery. Although it remains a small portion of Hy-Vee's business, Pearson is convinced it's a service that will grow over time.

"Hy-Vee isn't sitting back," said Dan Brandon, senior vice president, marketing and sales, Adusa, Bedford, Texas, a consulting and systems integration and technology firm. "That is typical of Hy-Vee. They are making an early investment and are trying to move forward in this segment."

Technology, which Hy-Vee continues to invest in heavily, has helped keep the retail operation efficient and well run. Pearson says Hy-Vee was one of the first in the industry to perfect computer-based ordering and to pay its vendors through electronic fund transfers.

Pearson points to computers in every store installed with Windows 2000, electronic kiosks, an extensive Intranet, wireless checkout and a frame relay system that moves data at high speeds as ways it is using technology to improve the shopping experience and the overall operation.

Brandon, who has consulted for Hy-Vee, points to its advanced technology in supply chain, distribution and procurement. "They use EXE commercial warehouse management systems, which is real time and includes radio frequency throughout their warehouse operation. They also deploy and use engineered standards to keep efficiency and effectiveness high in their distribution and warehousing operation," he said.

As far as growth through further acquisition, Pearson said there is no burning desire to do so. However, he doesn't rule out the possibility of picking up between 20 to 50 stores if the right opportunity presents itself. Hy-Vee has been picking up several stores a year. It also acquired between 30 to 50 pharmacies last year, and expects to add another 50 this year, said Pearson. Most are being merged within Hy-Vee supermarkets, he added.

For the future, Hy-Vee will remain independent, Pearson stressed. The chain's success will depend upon how well it reads its shoppers' needs. It will continue to expand slowly and invest in the infrastructure with remodels and bigger stores.

"With specialty boutiques we will continue to expand our fresh, continue to expand general merchandise and add more services. I believe our customers will desire Internet shopping and we expect to fulfill that need," said Pearson.

However, he also sees a social need to shop. "People want to shop and they want to shop in a pleasant atmosphere. Through technology, we'll streamline our retail experience."