Retail
Two brothers
How Tom and Jeff Heinen compete in the era of the mega-chain
By Todd Shryock
Smart Business Cleveland | March 2004
Tom Heinen holds up both hands in front of him. One mimics holding a softball-sized object, while the other mimics a tennis ball-sized object.
"Go to Wal-Mart and look at their produce. They buy little oranges," he says, holding the small, invisible orange in front of him.
"We buy big beautiful oranges," says Heinen while holding up the other hand. "We don't sell the little ones. They are not a good value and it is not what we stand for. It is not what we believe our customers want."
Tom Heinen, along with twin brother Jeff, has carved out a niche for their 15-store chain that's based on quality and customer service, the same principles their grandfather founded the business on in 1933. It's no accident that Tom mentions Wal-Mart -- more than any other business, Wal-Mart has taught consumers to shop on quantity and price.
In the commodity business of the food merchant, buy-one-get-one free, triple coupons and three-for-a-dollar offers fill weekly ads and in-store signs and dominate consumer buying decisions.
But the Heinen brothers have survived in the era of the mega-chain by counting on the fact that there is still a market for a community grocer who can deliver service, quality products, clean stores and fair prices.
"Jeff and I believe that customers are not stupid," says Heinen. "We think they are smart."
In a market dominated by Giant Eagle and Tops, both with hundreds of stores and a huge marketing budget, the family-owned Heinen's chain is carving out a niche that aims for the educated consumer. Price is important, but the Heinen brothers think there is a market segment that is not driven by price alone.
Humble beginnings
Joseph Heinen was working in a butcher shop in the late 1920s when, dissatisfied with the quality of the product being sold and thinking that the wave of the future was to offer multiple grocery items and not just meat, he struck out on his own.
He opened his own butcher shop in 1929, and by 1933, opened Cleveland's first supermarket on what is now Chagrin Boulevard.
Heinen had decided to go into business for himself at the beginning of the Great Depression. A hundred people lined up for every job, and customers who didn't have the currency to pay for food could barter.
"He was very committed," says Tom Heinen. "He always wanted the best quality, and he always understood people. He understood that treating people right was the best thing to do when dealing with customers, but he also understood that your employees were the ones that could really make or break you."
By 1964, Heinen's had grown to four stores, and the second generation came into the business and focused on growth.
"My dad (Jack) was really very focused on economies of size," says Heinen. "We were one of the first companies to build a warehouse with just four or five stores."
The company still distributes its own groceries as a way to control more of its supply chain.
Tom and Jeff joined the business in 1978 at age 23, and by 1981, Heinen's opened its 11th store.
"We were one of five family-owned chains in Cleveland at the time," says Heinen, 48. "There were no big chains that dominated the market. In fact, Cleveland was a city that the big chains had left. The market was dominated by pretty successful family chains."
By 1990, Tom had been brought up through the ranks in the meat, bakery and deli departments, while Jeff had overseen produce, dairy and the grocery departments.
"Dad's theory was you have to learn the business at the stores, because that's where we earn our money," says Heinen. "He was very focused on that."
In 1994, Jack died. Tom and Jeff took over as co-presidents and continue to share that role today.
"Fortunately, and unbeknownst to the rest of the company, my brother and I had really been running the business for about four years," says Heinen. "We had started forming the direction of the company from the mid-'80s."
The perfect store
One area Tom Heinen exerted influence over was store design. Working with a 90-something-year-old architect -- a friend of his grandfather who provided invaluable feedback on how his grandfather viewed different aspects of the business -- he came up with a new concept for Heinen's store design.
The concept was aimed at being more appealing to Heinen's target customer, someone in the middle to upper income bracket. By focusing on this small slice of a demographic, the company is able to keep its products very targeted to its market.
"We want to be able to streamline what we do and leverage what we do wherever we can," says Heinen. "If you have to have a highly different format and product mix (for each store), it adds to the complexity of our business. Just like the big guys like to streamline their business, we like to streamline ours, too. The ability for us to learn about these different pockets and demographics is important for us to do a better job.
"Supermarkets have different customers. Wal-Mart sells those little tiny oranges, and somebody is buying them -- they are not throwing them out. Look, that's fine, and that may be all that their customers care about, but that's not our customers.
"We are all about fine foods and quality foods. We need to be in a market that is educated and understands the difference."
In 1989, the new store concept was put into practice with the construction of the present day Pepper Pike store.
"We went out there with a radically different upscale store than anything else we had ever built before," says Heinen. "It had a different decor, it was organized differently, and it worked. It had a huge restaurant-style kitchen in it and European-style display fixtures.
"We looked at it and said, 'Instead of this being a one-time only store, let's make it the prototype.'"
By 1995, when the Aurora store was built, a cafe had been added to the concept.
"Now there was not only a full restaurant kitchen in the back, but a cook line in the front," says Heinen. "It allowed us to prepare food that could compare and compete with any family-style restaurant."
As the Heinens further refined their niche, they added and enhanced products and services to meet the demands of the targeted demographic. A health division featuring vitamins and food supplements, coffee roasters with whole-bean coffee and an enhanced wine section with its own wine consultant became part of each store. The size of the average Heinen's store increased from 35,000 square feet to between 50,000 and 55,000 square feet.
"It's all about variety and services," says Heinen, but everything is always targeted at the company's niche customer.
The growth of the chain is entirely dependent on finding the pockets of upper income demographics that will support the company's focus on quality and understand the difference between price and value.
When the right demographic emerges, Heinen's considers building a store there. There isn't a goal of X amount of stores by a certain date.
"Our growth is dependent on being aware of where these pockets are," says Heinen. "We never thought we needed to be the biggest. We are really focused on our target market."
For example, the Avon store was opened when Heinen's saw that people from Westlake were moving across the county line to take advantage of lower taxes. A suitable space was available in Avon Commons, a shopping center that featured stores that were attractive to the same demographic Heinen's targets, making it a solid opportunity for expansion.
Being focused also means realizing when the demographics of a location have changed and no longer match the target market or there are other issues that threaten the profitability of a store.
"We have closed some stores because of real estate or size issues," says Heinen. "We had 11 stores in 1981. In 1997, we still had 11 because of closing some and opening others. Now we've built four stores since 1998. That's high growth for a company like ours, but the opportunities presented themselves."
Being careful about growth is vital to the survival of a small company; a few bad investments can threaten the entire organization.
"We never build a store until we have a management team that is ready to take over," says Heinen. "The demand on them is way higher than it was in the past. We are asking them to make many more decisions than they used to. The whole idea is that it is their store and that they are autonomous.
"We are building market share one department at a time and one store at a time. The payout for a new store is not immediate, so it is difficult to build new ones. Years ago, you could make money the first year a store was open. That doesn't happen for anybody anymore."
Heinen declined to say how many years it takes for a Heinen's store to become profitable, but said the industry average is three to five years. Targeting a high-end demographic has helped propel the company's growth from about $150 million in 1981 to $300 million today. He estimates its marketshare is about 10 percent.
"From a real estate perspective, I think we are more attractive (to a developer) today. If you want a Heinen's style store, there isn't anybody else. Giant Eagle believes they are a suitable replacement for Heinen's, but I don't think that's the public perception.
"If you want local service and quality, we are the only one left, literally."
Quality control
There was a time when buyers from all the local chains jostled for the best fresh fruits and vegetables at the Northern Ohio Food Terminal in Cleveland. But consolidation and mergers in the grocery industry have left Heinen's as the last chain that still buys locally.
"Food companies are focused on the system and how to be profitable," says Heinen. "They have chosen not to really differentiate themselves in product quality and differences. We try to get local products. The reason they don't do it is it isn't efficient. They buy truckloads of produce.
"We're in six days a week buying 60 percent of what we need on the market every day. If it's not good enough, we don't carry it. We buy trucks, too, but (the competition) are not putting the same attention into quality."
Another example is Plainville Farms Turkeys, a smaller producer that has complete on-site control of its production process to make sure its birds are of a consistent quality.
"Much like we are, they are a smaller guy in the industry," says Heinen. "If you can find some of those type of people, you get a better product and a better commitment. They also treat us like important customers. We cultivate a lot of relationships like that. For our beef and pork, we partner with the ranchers so we know everything that happens to our product -- it's scripted. It allows us to control quality and costs.
"These programs cost slightly more. Like most things, if you want them done well, it's going to cost you more."
The controls Heinenn's has on its meat, for instance, mean that it doesn't have to worry about mad cow disease. The disease starts in cows that are at least 30 months old; Heinen's beef is slaughtered at an average age of 18 to 19 months and no later than 24 months.
"We do everything we can to be sure we are delivering the best product," says Heinen.
In some cases, the quality standards may mean higher prices, but that's the difference between the Heinen's customer and the average grocery store customer: The Heinen's customer appreciates the quality and is willing to pay slightly more for it.
If you want to get Tom Heinen riled up, just tell him his stores are expensive.
"If there is one misnomer that exists today, it's that we are expensive," says Heinen, who in his blue Heinen's shirt and black zip-up Heinen's sweater vest looks ready to step out of the corporate office and back behind the store counter at a moment's notice. "It is no secret in our industry where we are priced. Anybody can run five items out of 40,000 on sale. Those items don't determine anybody's food bill. We are very comfortable -- and even today, on the heels of a perceived price war by our competitors -- that if you shop our store, you will save 5 to 10 percent.
"I remember asking my dad as to why everyone thinks we have high prices. He said that when you have great quality and clean stores, people don't want to believe they are not paying for it. If there is one challenge we have, it is to drive home the fact that we are not more expensive, it's that we are actually less expensive. If you pay more at Heinen's, then there is a value proposition as to why you are paying more. You are getting something better."
Without the demographic that understands that proposition, Heinen's would not be successful. But reaching that demographic can be challenging.
"One of the major drawbacks of a company of our size is the inability to mass market anything that we are doing," says Heinen. "It's a function of an economy of size. But do they deliver on what they promote? If they get the message across but are doing nothing to support it, what good is it?
"We typically see our market share return. We are seeing it return now after the perceived price war. Customers can leave, but if someone isn't doing something to keep them and truly delivering a different value proposition to them, then they won't be back."
People power
Doing something different in the grocery business means delivering something that others talk about but few deliver on: Customer service.
"Big companies in our business, no matter what they say, they look at labor as an expense to be minimized," says Heinen. "Labor is clearly an expense, but we look at it as an expense to be leveraged."
With public companies, everything is driven by the quarterly report. CEOs have 12 weeks to show results, or they put the stock price and their job in jeopardy.
"Their reality is committed to 12 weeks at a time," says Heinen. "It costs money to invest in people, and the return is not there in 12 weeks. That's one of the advantages of being privately held: Companies couldn't be committed to customer service the way we are and still make it work."
Some of that commitment to service comes from the values of the neighborhoods Heinen's serves and from which it draws its employees. They come predominantly from families with good work ethics and values, but the rest of the equation is nothing fancy.
"For years, we had no formal (employee training) program," says Heinen. "It was simply about treating customers right. The other people around them would not let bad things happen. About seven years ago, we finally did formalize it into five sessions of customer service."
Heinen says the program's aim is to give people the tools to succeed in personal development; it just happens to be wrapped around a customer service focus.
"When you come to work, you have a choice as to whether to be in a good mood or a bad mood," says Heinen. "Stop being a victim. You may have a crappy manager, but that still doesn't control how you should deal with the customer."
Being a family business for three generations makes the customer service pitch easier, simply because the family has set the tone from the beginning.
"For three generations, we have been nice, respectful and helpful to people," says Heinen. "If you go to Heinen's and ask for something, it is pretty much firing squad death if you say, 'That's not my department,' but that's standard fare in tons of retail outlets."
Probably the most important aspect of investing in people is keeping today's most valuable currency -- knowledge -- in place.
"You have got to have people that are knowledgeable about the product and really be able to help the customer," says Heinen. "People simply don't know about the tons of food that is now available. There is less understanding today about cooking than 25 years ago. Shoppers today know less about cooking, but it is because they are cooking so many different foods.
"It used to be there was just ocean perch and cod at the seafood counter. Now there's salmon, perch, cod, grouper and a bunch of other stuff. It puts a lot of pressure on the person behind the counter."
The 1,300 full-time and 800 part-time Heinen's employees now have to be what Heinen calls sales merchants.
"They have to be able to sell across the counter," says Heinen. "They have to be able to build a display."
This means having someone from the meat department slicing ham in the aisle, talking to people and educating them about the product. It means having people from the prepared foods department giving holiday tips and ideas on how to use the available products.
"It's not just a demo woman saying, 'Try the product,' but giving the customer information that may entice them to buy now or later," says Heinen. "Each person needs to be very knowledgeable about the products they sell in order to be a sales merchant. That is our future. The rest of the people, despite what they say, are not committed to that."
Tom Heinen laughs at the fact that Tops offered a buyout to some of its senior people, something Heinen wouldn't even consider doing at his company.
"(The senior people) are our backbone," he says. "They are the ones that know everything. People ask me about a buyout, and I say, 'No, you have to stay, I have a lot invested in you.' It's a different environment."
Big competitors focus on squeezing better results out of the systems. Heinen's, which lacks those economies of scale, has to focus on people to get better results.
"The competition views customer service as working faster," says Heinen "Their message and incentives are all about controlling those costs, not developing people and teams and setting goals and improvements for people. Their goals are to go from stocking 100 cases to 125. The people side is where Heinen's is. We will either survive or fail based on our people. We aren't big enough to get the same cost efficiencies they do.
"Wal-Mart doesn't sell poor quality, they just sell good quality. They are selling items of a different price and grade. Their product isn't going to kill you, but do you want the big orange or the little orange?
"My guess is that if we get to the point where there aren't enough people that care about the size of the orange, then we'll cease to exist." How to reach: Heinen's, (216) 475-2300
