IGA OK FOR HOUCHENS

ELLIOT ZWIEBACH

BOWLING GREEN, Ky. -Houchens Industries here finds itself at a crossroads.

Not only is it contemplating a major rollout of its self-designed Crossroads IGA format, but - given the perceived power of the IGA name in its Kentucky-Tennessee operating area - it's also moving aggressively to boost its connection with IGA by converting its Houchens-banner stores to Hometown IGA and converting its Jr. Foods convenience stores to IGA Express while increasing the number of IGA Super Savers it operates.

"We feel our stores fit well with what IGA is trying to do," Jimmie Gipson, chairman and chief executive officer, told SN, "and we think we can give customers the best value with the IGA formats. IGA has a really good following in our territory, and we believe it has a good selection of private label."

Houchens has been licensed to use the IGA banner for two years.

Houchens is a diversified company that operates 147 conventional supermarkets across the mid-South and South - including 27 Houchens stores and 23 IGAs in Kentucky and Tennessee; 97 stores in Missouri and Arkansas operating under a variety of names, including Food Giant and Mad Butcher; and 35 Piggly Wigglys in Mississippi, Alabama, Georgia and Florida - plus 40 Jr. Foods convenience stores in Kentucky and Tennessee and 214 Save-A-Lot limited assortment stores across 13 states, giving Houchens the distinction of being the largest licensed Save-A-Lot operator in the U.S., with roughly 16% of all non-corporate-owned Save-A-Lots.

The company anticipates overall sales for the year ending this month to be approximately $2.5 billion, Gipson said, with food and convenience store sales accounting for approximately $1.5 billion, or 60% of the total, and the balance coming from a diversified portfolio of other businesses.

Gipson said he expects most of Houchens' food sales growth to come through acquisitions. "We think there are enough stores in our operating area for us to grow by acquisition," he said. "In the past we haven't gone out and aggressively pursued anyone - most companies just came to us."

He said Houchens is not looking to grow simply for the sake of growth, "but only if it makes economic sense. We have no master plan to be as big as Kroger, for example. But we believe there are more companies like Food Giant out there."

Houchens acquired 90 stores from Food Giant, Springfield, Mo., in 2003, and it acquired eight Mad Butcher stores in eastern Arkansas last year.

Crossroads IGA is a hybrid format Houchens developed two years ago that combines a convenience store with a basic supermarket under the same roof, with gas pumps out front - all funneling through a single checkout.

Houchens has two Crossroads IGA stores operating in Bowling Green, and if the third location it intends to open there next year is as successful as the first two, it expects to begin converting or building between 200 and 300 more locations in the Kentucky-Tennessee area over the next few years, Gipson said.

"Ideally, we'd like to see two or three locations in every county in the state of Kentucky alone, which would give us at least 120," he told SN.

Value Is Key

The two Crossroads IGA stores each cover 10,000 square feet and are located at major intersections in the city - "intersections that would have been considered major crossroads, or gathering places, in the small towns of earlier years," Gipson pointed out.

Value is key to the Crossroads concept, he said, "and no one can deliver the same value in as timely a manner."

Each store is located in a county-seat area within a few miles of every home in the county, "which is something neither Kroger nor Wal-Mart can offer," he pointed out.

"The stores are designed for people on their way home from work who need $25 worth of groceries for tonight's meal," he explained. "They're not necessarily designed to enable people to do their full week's worth of shopping but to fill their needs between weekly shopping trips."

Consumers understand the concept, Gipson noted. "Those two stores have gotten the most positive customer comments of anything we've dealt with since I've been here," he said. "People are most appreciative, and that's rare, but they like the idea they can buy any grocery items they need for tonight and tomorrow, get gas, cigarettes or beer, be in and out quickly and still be home in only a few minutes.

"And the stores are priced lower than what consumers are used to paying at convenience stores - they have the same prices as our conventional IGA stores - so there's no reason not to shop there."

Each Crossroads IGA store has a parking lot on one side, with an entrance that leads into the grocery portion at the rear of the store, while the front entrance, opposite the gas pumps, leads into the convenience section.

The grocery section has produce in one corner, frozen and dairy cases against the back wall, and meat along the side wall opposite the entrance, with grocery shelving and additional frozen cases in between.

The convenience section at the front has prominent displays of prepared foods-to-go, plus traditional assortments of snacks and candy, with refrigerated soft drinks and beer in a beverage cooler along one wall.

Each store has a circular checkout counter for the convenience portion, plus two small checkstands adjacent to the counter that can be opened when a customer needs to have a grocery order processed.

Of the two Crossroads IGA stores, one was formerly a convenience store and the other was formerly a small supermarket, Gipson noted.

"The former convenience store continues to have more success in the convenience portion of the store, while the former supermarket has been more successful on the grocery side," he acknowledged, "but we believe they will both develop along similar lines as people get more comfortable with the combination."

Gipson declined to pinpoint the stores' volumes because of fluctuations in the sales totals, but he said the company is satisfied enough that, if the results are comparable when it opens the third store, "then we will be diligently seeking additional sites in Kentucky and in Tennessee, even if that requires us to build new stores, acquire stores or do extensive expansions or remodelings of existing stores."

He said he believes the IGA connection has helped attract business to the hybrid stores. "We were looking for more from those stores as we designed them, and we felt they meshed well with what IGA was trying to do," he explained.

IGA Conversions

Houchens plans to incorporate the IGA name in a major way on other formats over the next few years, Gipson said, beginning with the conversion of its 27 Houchens-banner stores in Kentucky and Tennessee to the Hometown IGA name; it also expects to add gas pumps as those stores are converted, as an experiment, he added.

Houchens already operates 23 Hometown IGA stores, with 10 more scheduled to be converted this year, Gipson said. "They will be virtually unchanged, other than the name, but we expect to see a noticeable improvement in sales because of the intensive training program that will be required to put the IGA name on them," he pointed out.

The company is also about to begin converting its 40 convenience stores in Kentucky and Tennessee from the Jr. Foods banner to IGA Express and to start selling IGA private-label products through those stores, Gipson said.

It's likely to be a three- to five-year process to convert the conventional and convenience formats to IGA, he indicated, with the process expected to be completed by 2010.

"Converting the convenience stores to IGA Express and the Houchens to Hometown IGA - plus operating the Crossroads IGA stores - will enable us to develop a single marketing plan within each area that covers all units, and it will also simplify management," Gipson said.

Houchens operates a single-price-format store under the IGA Super Saver banner in Portland, Tenn., "and we'll probably conduct a couple more tests [with that format] before we decide if we want to proceed with it," Gipson said.

Houchens is already highly involved in a value format, with 214 Save-A-Lot stores across 13 states.

The rapid growth of Wal-Mart Stores in the early 1990s helped push Houchens into the Save-A-Lot business, Gipson said. "Given Wal-Mart's growth at that time, Save-A-Lot seemed like a concept that made sense to explore," he explained.

The company acquired its first Save-A-Lot in January 1990 from a licensee in Hardinsburg, Ky., who was looking for a buyer. A few months later, it acquired and converted a four-store group in eastern Kentucky to the Save-A-Lot banner when the owners couldn't agree on an operating strategy.

"When word got out what we had paid for those stores, we began getting calls from other retailers who were having a hard time, so we began acquiring additional stores and converting them to the Save-A-Lot format - at the same time we began converting some of our existing stores - and once Kentucky and Tennessee were saturated, we began moving into other states."

In addition to Kentucky and Tennessee, Houchens' Save-A-Lots are located in Texas, Missouri, Virginia, West Virginia, North Carolina, South Carolina, Georgia, Alabama, Indiana, Ohio and New York. Gipson said he does not see any regional differences across such a wide geography. "The demographics of western New York are a lot like those in Kentucky," he pointed out.

"And we still see opportunities out there for more Save-A-Lots," he said. "Although finding locations is a challenge because we're looking for profitability, not just growth, we believe we can add 20 Save-A-Lots a year."

Diversification

The growth of Wal-Mart also provided the impetus for Houchens to diversify into other businesses, Gipson said. "Wal-Mart was making it really difficult for independents like us, and we felt it made sense to start diversifying our assets."

Houchens' portfolio has expanded to include cigarette distribution, construction, insurance, suntan lotion distribution, asphalt, trucking, manufacturing and recycling - usually when the owners of those businesses were looking to sell.

The company almost got into the underwear business a few years ago when the Fruit of the Loom factory down the street from its headquarters in Bowling Green shut down, "but we let that one get away," Gipson said; instead, it settled for buying the building and moving its main office there, he noted.

Gipson said Houchens is generally satisfied with the amount of food business it does, "even though every store competes with Wal-Mart. What creates havoc is when another independent tries to put Wal-Mart out of business by trying to underprice them. That forces us to get involved."

Houchens tried being more price-aggressive in the mid-1990s, but the results only prompted it to back away from the competitive battlefield, Gipson told SN. "Our stores were doing very well at the time, even though Wal-Mart was coming into most of the towns we were in, and as competition got stiffer, we decided we needed to grow sales, and we spent two years trying to do that with a lot of promotions and price adjustments.

"But it didn't pay off, and we felt that wasn't the right road to continue on."

The company prefers to operate conventional stores in small towns, he noted. "That's the ideal for us because that's where we've been most successful."

It also prefers conventional stores "because we think they're easier to shop."

At 65, Gipson said he has no plans to retire. However, there is a succession plan in place, he told SN. "We have someone ready to take over," he said.

That someone is Spencer Coates, chairman of the company's cigarette division, which accounts for about 20% of Houchens' total volume - the second-largest portion of the company's sales base, Gipson pointed out.

Coates isn't part of the company's headquarters management team, Gipson explained, "because we wanted to separate the supermarkets from the cigarette operation so we wouldn't want to run into any potential legal problems that might hurt the parent company. But he knows more about this company than anyone out there."

Houchens is an ESOP - a company that's 100% employee-owned through an employee-ownership stock plan.

The company has been an ESOP since November 1988 - five years after it was sold by the Houchens family to Red Foods, the onetime Chattanooga, Tenn.-based chain that was owned at the time by Promodes in France. "But by 1988, Promodes decided the smaller Houchens stores didn't fit their U.S. niche," Gipson said, "and when they decided to sell, they suggested that we put together a management group to acquire the chain."

Gipson, who was chief financial officer of Houchens, engineered a transaction where Houchens utilized funds from a 25-year-old profit-sharing plan to help finance the sale to the ESOP.

Coates came to Houchens from the accounting firm that put the ESOP together, Gipson noted.

Houchens has a multitude of wholesalers, with Associated Wholesale Grocers, Kansas City, Kansas, as the principal supplier for the Houchens stores and most of the Food Giant-run banners; Supervalu, Minneapolis, servicing the Save-A-Lot stores; and Piggly Wiggly Southern, Memphis, Tenn., providing merchandise for the Piggly Wiggly stores and some of the Food Giant banners.

The company also operates two warehouses adjacent to its offices for IGA products, convenience store merchandise and special buys - a 280,000-square-foot dry grocery and perishables distribution center and a 60,000-square-foot center for frozen foods and equipment, both in Bowling Green.