Key ingredients Featured

7:00pm EDT November 24, 2006

Years ago, before Etienne Snollaerts came on board, Smart and Final Inc. was attempting to spread its nationwide presence. The Commerce-based chain, which, among other things, specializes in supplying restaurant owners and caterers with food and cookware, was trying to expand to points east.

Way east, says Snollaerts. Florida, to be exact.

It was an idea big in scale but small on feasibility. In trying such an ambitious expansion plan, Snollaerts says the company was spreading itself too thin, both in terms of geography and its marketing budget. To continue like that would have meant losing ground to big-box retailers like Wal-Mart. “I understand what they were trying to do in the past,” he says. “But it’s very far from your base. Considering the amount of energy you have to put in because the new stores are so far away, it’s a mistake you can make.”

Under Snollaerts, a foodservice industry veteran who joined the company in 2003 and became its president and CEO in 2004, Smart and Final embarked on a new growth strategy, one anchored in building up as much muscle as possible in its main western U.S. markets and carefully choosing new markets to broach.

It is a growth strategy that has allowed the company to build strong, steady growth in recent years. With 250 stores in six Western states and Mexico, the chain exceeded $2 billion in systemwide sales in fiscal 2005 compared to sales of $1.7 billion in 2003. In that same time period, the company posted net income of $21.4 million compared to a net loss of $60.2 million in 2003.

Close to home
Every business in a competitive market or industry needs a value proposition — the reason customers should come to it instead of the competition.

Snollaerts says he knew there was no way Smart and Final could jump into a battle royale with the national big boxes and come out standing. So he quickly figured out that the best method for Smart and Final to grow was to play it close to the vest and concentrate on saturating the Los Angeles market.

The strategy had a one-word goal: Convenience. “We’ve found that when you have a competitor that is in a 150,000-square-foot building, it creates an attraction from quite a long distance,” he says. “Smart and Final is just the opposite, a convenience format in which you have to have a store close to your home to really find it attractive.”

Snollaerts steered Smart and Final back toward its roots as a cash-and-carry store. He said the concept has worked well in Los Angeles because of the traffic jams that frequently clog the city’s streets. “The convenience factor of getting in my car, go in the store for two minutes and go home is really a huge advantage over the big boxes,” he says.

With that in mind, Smart and Final’s goal is now to place a store every two to three miles throughout the Los Angeles area.

Snollaerts is also planning the same growth strategy for other large Western cities. At the Smart and Final corporate headquarters, senior managers have constructed a large, detailed map of the West Coast, down to individual streets. The company’s managers frequently refer to the map when plotting the best places for new Smart and Final locations.

They are looking for densely populated, heavily traveled areas. “The West Coast has some huge metropolitan areas like San Diego, San Francisco and Seattle,” he says. “There are some very crowded and jammed areas, and we love that, because it means we can open up a lot of stores.”

But not every Western market is identical. Snollaerts says one of the first things the company has to do when deciding to move into a new market is to tailor an expansion plan to that market. Much of it has to do with the population dispersal and geography of the area.

He points to Phoenix as an example. Smart and Final has been spreading into the area, but it is starkly different from the hills, valleys and traffic snarls Angelinos deal with. Phoenix is a wide metropolitan area, spread across a number of large suburbs. “It’s a flat land, a lot of freeway,” he says. “Exactly the opposite of Los Angeles. You can go from one end of the city to the other in 25 minutes. For that, the convenience factor is a lot less important, and we need fewer stores in the area.”

Snollaerts says correctly calculating the number of stores needed to adequately saturate an area is critical. Oversaturating a market can quickly burden a company’s resources, especially when it comes to marketing the brand to people who might never have heard of it. As it is, Smart and Final’s leaders must commit a large portion of the company’s marketing budget to a new market and accept initial losses. “The buck we spend on advertising in Los Angeles is going to be a lot more effective than in Phoenix or Las Vegas because of the number of stores in the area,” he says. “When you come in to a new market, you start from scratch, you have a huge investment to make to get your new customers ready for this new idea, this strange animal that is Smart and Final. It definitely takes longer than opening new stores in a highly concentrated area.”

Smart and Final divides new stores into three types: fill-in stores, fringe stores and frontier stores. Frontier stores are those that blaze a trail into new markets, and those pose the biggest financial risk.

When opening a frontier store, Snollaerts says the company’s leaders try to assess how much patience they should show with regard to financial losses. “We know how many marketing dollars we’re going to have to overspend and the amount of patience we’re going to need before those stores should become profitable,” he says. “The art of this job is really to balance those three categories of stores and make sure the company is not hit by too much growth in frontier areas.”

Evolving the concept
The heart of Smart and Final’s customer base are commercial entities and organizations. When Smart and Final first arrives in an area, Snollaerts says company representatives make sure they visit frequently with restaurant owners, caterers, churches, concessions managers for Little League baseball organizations and others that will likely need bulk quantities of food and foodservice supplies. “We push very hard in a 3-mile radius” around a new store, he says. “We make frequent visits to restaurants, caterers and leagues in the small radius around the store and begin a very heavy advertising campaign that lasts a year or year-and-a-half.”

In that time, Smart and Final tries to build a reputation among foodservice businesses and organizations in the focused area. Through those channels, it tries to reach household customers, a fast-growing segment that now shops at the stores.

It’s a customer base Smart and Final did not tap originally but which has become increasingly important as the company — and the competition — grows.

Snollaerts says increased competition from grocery chains has caused Smart and Final to evolve its concept over the years to stay a step ahead.

As much as business leaders want to remain in control of their company’s destiny, sometimes all they can do is adapt and hold on for the ride. “You don’t really have any choice but to evolve,” he says. “Supermarkets are opening club sections for bulk quantities now. Grocery chains are advertising themselves as the place with everything you need for entertaining. Basically, when you have a good idea, everybody is going to jump on it.”

Relying solely on restaurants and organizations as a customer base was not a reliable way to grow the company. Smart and Final’s leaders needed to tap households as a grocery chain would, or risk losing the household market entirely.

Snollaerts says the key was to add a grocery section to the stores. They added perishables, including a selection of meats, followed by a produce section, beverage section and eventually, cook-ware and janitorial supplies.

From the basic concept of supplying restaurants with dry goods, Smart and Final has grown with the goal of becoming a one-stop shop for commercial chefs and kitchen cooks. “If you don’t change and make your concept move, you just get passed by,” Snollaerts says. “That is the essence of business.”

Growth through culture
Evolving a company is dependent on the culture a CEO cultivates. At Smart and Final, Snollaerts tries to foster a culture that emphasizes a desire to learn. “It’s almost a mood in which you have to keep your team,” he says. “We have a strong opinion in our company that we have to be very passionate about food and innovation.”

Snollaerts sends associates around the world to absorb retail and foodservice trends on other continents. “Our buying teams are taking two and three and four trips a year to the Far East and catching new ideas from there,” he says. “I’ll have a meeting with them every three months to see what they’re bringing to the company.”

Snollaerts says he wants employees to feel like they can, within reason, try new things and not fear punishment for making a mistake. In a way, it’s getting back to the roots of the company. “The history of Smart and Final, when they were a cash and carry, was really that the store manager was the entrepreneur of the store,” he says. “You had the freedom to test new things to try and please the customers. They don’t have as much freedom today because there are a lot of regulations now, but you still want to have your store managers being entrepreneurs as much as possible. “Through the ideas they implement, ideas we can observe and optimize and generalize across the chain, that’s where you really see the spirit of innovation.”

Snollaerts has set up an incentive program called “Smart Associates,” through which the company rewards the best ideas. He also creates contests among stores to see which managers can come up with the best display and merchandising ideas.

Employees, both on the store and corporate level, are encouraged to contact Snollaerts himself if they have an idea that could benefit the company. “Each store has a note coming from me telling them that they can contact me through e-mail or voice recording and propose to me ideas that either make economic sense for the company or can bring in customers,” he says. “We record all of them and dispatch those ideas to the executive team, which analyzes them and comes to me with a proposal.”

Ideas are ranked and the best ones rewarded. “It’s just creating all this excitement within the company and making sure people know they are going to be rewarded for their originality and what they do better than others,” he says. “That’s how you communicate an entrepreneurial spirit to your employees, by rewarding what they do.”

HOW TO REACH: Smart and Final Inc., www.smartandfinal.com