“Long before Walmart starting pushing into South Texas, H-E-B began studying the company’s success, and it adapted the productivity loop to its own business. They anticipated Walmart’s arrival and they cut the advantage that Walmart has over every other retail chain. H-E-B is six steps ahead of everybody else. South Texas is the only place that Walmart hasn’t been able to just roll into and dominate.”
- Leigh McAlister, marketing professor at the University of Texas and co-author of Grocery Revolution: The New Focus on the Customer
I fear that sometime in the near future small owners and managers will be uncompetitive with companies that are actively looking to build new competitive advantages on owner profitability and guest experience, unless there is a concentrated push towards innovation in operations and guest experience that improve owner profitability and value delivered to guests.
There is surprisingly strong similarities between the competition and consolidation of the grocery industry and the increasing competition and consolidation in the VR space that’s happening now. If you are a smaller scale VRM and believe in limited edition companies, and the VRMB ethos, I think you will find the story of HEB and how they defended themselves against Walmart’s scale and industry consolidation an inspiring story that you can take actionable insights from.
What is happening and how is it similar to the grocery industry?
The VR industry is facing a wave of new entrants, investment and overall competition for the most profitable guests and owners. Consolidation is one of the most prominent strategies in play, with hundreds of millions being invested in companies for “scaled advantages.” How effective the approach of trying to gain advantages through size scale is yet to be determined, but the advantage they seek will likely happen one way or another by some companies of the future. The result is increased competition for the most profitable owners that is derived from more efficient and innovative operations. Well, the grocery industry went through something similar back in the 80’s and 90’s and continues even today, where a fragmented grocery industry was consolidated as Walmart scaled to a certain size and started rolling into markets and squeezing out smaller players by competing for the local, and previously thought, loyal customers that local companies built around serving.
The companies getting tons of investment dollars are attempting to create scaled advantages to capture market share through acquisition, undercutting management costs, owner acquisition marketing spend, and operations scale. The advantages of scale they seek are not dissimilar to what Walmart achieved (as well as a handful of other regional players). Regardless, if its via economies of scale that result from pure size or just more innovative companies figuring out how to build those advantages without economies of scale, the result is very likely to be the same as in the grocery industry, and that’s the companies who aren’t structured to compete with the profitable value proposition the advantaged companies can deliver will slowly but surely become less relevant and profitable, eventually resulting in exit of the companies that can’t keep up.
The tactics will change on how advantages are realized and used to capture market share of profitable owners, and currently the big box players seem to be aiming at using geographic and capital depth and diversity to compete for market share of the most profitable owners. For example, you’ve probably heard things like “we guarantee you will earn 30% more!” from large companies, well I am betting that’s a marketing strategy they don’t need to live up to on actual revenue generation, it can be subsidized by temporarily eating into things like management fees, which a large company can tactically do if it means gaining market share. The point is that companies, large and small are and will increasingly seek to create competitive advantages in competing for the most profitable owners out there by increasing value to their customers (reducing costs to owners to either capture new inventory or convert existing inventory to their company).
Walmart leveraged their scale to drive other companies out of business in similar ways, but fortunately for South Texas, HEB decided to change the game adapt and innovate so that they could compete against what was thought to be an insurmountable disadvantage on distribution and pricing scale that Walmart wielded.
How the (South) West (Texas) was won
Thankfully, Walmart didn’t focus in San Antonio until the late 1990’s, and in the meantime, HEB figured out the strategies needed to win against a competitor that had competitive advantages on cost due to how they had innovated their go to market strategies around operational efficiencies created from economies of scale. If I had to summarize what Walmart’s advantage was, it would be to say that Walmart had realized with a combination of more sophisticated inventory management techniques and systems, large store footprints and a huge number of unique stores, that they could reduce their cost per unit, which they passed to shoppers in the form of everyday low prices, in such a way that they could be more profitable than competition selling the exact same item cheaper. That was an advantage that no local competitor could replicate, and so they slowly but surely forced consolidation of competition and many smaller, local, competition simply went out of business.
Then they tried to roll into South Texas, and HEB was ready. Everything that Walmart threw at them, HEB was prepared for or adapted to. They have tried beating HEB on price by selling things effectively at a loss to drive traffic conversion (a strategy large scaled VR companies already are using), but HEB created a business capable of matching them on value to customers, making it a company rule to never be beat on price/value.
Walmart has tried out maneuver them on real estate, HEB again has won that one by being highly strategic and forward thinking on real estate acquisitions, a random strength the developed that no other grocer though far enough ahead to do. Walmart basically follows the strategy of buying real estate where HEB buys it now because they just don’t have the capability to understand the local conditions well enough to make the best decisions as HEB does.
Walmart was able to attract premium talent and pay lots to their corporate employees, but HEB hired innovative corporate employees and empowered them to make decisions and innovate in ways a large company like Walmart never would.
All of those characteristics were built into the DNA of growth at HEB as competition really ramped up, and it paid off in ways that can only be achieved with that type of mentality.
To summarize HEB’s winning strategies, I’d say there are 5 key themes for how HEB managed to not only defend itself against advanced competition, consolidation and scale, but to beat competition on value to the customer. I believe these are themes we should all aim at integrating into our own businesses as competition ramps up in our industry.
To demonstrate this competitive thinking, I want to quickly explain my favorite example of HEB’s outright brilliance in out smarting their competition.
As I mentioned before, Walmart used their size and distribution strategies to create operational efficiencies that let them sell items at a lower cost but just as profitably as competition selling at a higher cost. While most competitors tried to replicate Walmart efficiencies and systems (an impossible task without having huge scale, large store and investment in infrastructure), HEB instead realized the weakness in the entire model the advantage Walmart created was built on…the necessity for the same assortments to be sold everywhere vs. deciding what should be sold where based on local needs.
They didn’t have as much shelf space as walmart, or scale to reduce distribution costs or product costs, so they changed the game and created a distribution system that could profitably allow them to distribute optimized assortment at every store depending on the shopper purchasing patterns and trends. They even empowered store managers to be able to change their distribution if they knew a shopper need in that specific store wasn’t being met.
By changing the game to put the customer needs first, Walmart had their scaled “advantage” in distribution not only erased, but actually used against them, because they had no conceivable way to do have the same customized variety and guest experience HEB was able to deliver, because their model was basically built to do the opposite of that. HEB could now carry things Walmart couldn’t while improving profitability of their assortment, because if they had an item that was only important in certain areas they could ensure it was only taking up space in the relevant stores, while Walmart’s entire distribution system was made for any item in distribution to have nearly 100% presence in all stores. When Walmart and everyone else was zigging, HEB zagged and focused on what’s important to the shopper other than price (variety and experience in store) and then built out and leveraged the capability to deliver on those differentiators profitably, which ended up ensuring the actually wouldn’t be beat on price for the items they carried that were in common with Walmart.
What Did HEB do That VRs Can Replicate?
HEB tested and developed innovative strategies over time. It took patience and small incremental changes and tactics aimed at a larger goal to ultimately win. So while I love staying high level sometimes, I think to replicate the success of HEB against a similar aim the right direction in delivering value to guests (which this community does represented by what I call the VRMB ethos at this point) and deliver best in class value to owners (meaning you’re the most profitable option for your owners on management of their assets) then get to work on innovation. Start thinking about what is needed for your company to compete in an environment where you have competition that can charge lower management fees and better guest experience capabilities. What might that look like? How will you ensure you deliver the best value to your customers?
Keep in mind we have TWO customers, owners and guests. So as a starting point, I propose we break it up into those two categories and take a few small, incremental steps to being the player in your market with the advantages of delivering value, and not someone else. I think the following action plan may do wonders for how we think about growing and evolving our businesses for the future.
Owner Profitability – competing for the most profitable owners
Guest experience – Deliver more value to guests than competition at market best prices (highest prices)
I hope these initial “planning exercises” will set up the strategies needed to thrive in the competitive environment of the future. Just as HEB did in the 90’s and the proceeded to embarrass Walmart in the new century, I am hopeful many local VRMs will do the same to so called “scaled competition” or any other competitors that develop in the wake of this industry boom.
One more important thing to note is that HEB is one of the most community minded companies out there. They donate 5% of pre tax earnings to charity, an enormous amount compared to other companies like Walmart, and has been doing so since the 1990s. Every year they have a fundraiser that raises millions for various local charities and literally builds houses for disabled veterans. Their dedication to helping the community is deeply engrained in their culture and they don’t compromise on it ever. Not bad for the 9th largest privately held company (Forbes 2020) and 13th largest grocery retailer in North America (they only operate in Texas, making that even more impressive).
If HEB didn’t have the leadership they did back in the 90’s/2000’s, then the hundreds of millions that HEB has donated directly to the local communities in one way or another wouldn’t have been possible, and one of the potentially most successful companies in a very large industry would have been snuffed out by 2005 by consolidation driven by the size scale of large companies.
I am hoping in 10 years that there are a bunch of “HEBs” out there beating up on the big guys and bad hosts, all with different brands, but the same dedication to being local, smart and competitive in how they deliver the valuable experiences to our guests that I think we all seek to deliver.
Alex Cruz
- Leigh McAlister, marketing professor at the University of Texas and co-author of Grocery Revolution: The New Focus on the Customer
I fear that sometime in the near future small owners and managers will be uncompetitive with companies that are actively looking to build new competitive advantages on owner profitability and guest experience, unless there is a concentrated push towards innovation in operations and guest experience that improve owner profitability and value delivered to guests.
There is surprisingly strong similarities between the competition and consolidation of the grocery industry and the increasing competition and consolidation in the VR space that’s happening now. If you are a smaller scale VRM and believe in limited edition companies, and the VRMB ethos, I think you will find the story of HEB and how they defended themselves against Walmart’s scale and industry consolidation an inspiring story that you can take actionable insights from.
What is happening and how is it similar to the grocery industry?
The VR industry is facing a wave of new entrants, investment and overall competition for the most profitable guests and owners. Consolidation is one of the most prominent strategies in play, with hundreds of millions being invested in companies for “scaled advantages.” How effective the approach of trying to gain advantages through size scale is yet to be determined, but the advantage they seek will likely happen one way or another by some companies of the future. The result is increased competition for the most profitable owners that is derived from more efficient and innovative operations. Well, the grocery industry went through something similar back in the 80’s and 90’s and continues even today, where a fragmented grocery industry was consolidated as Walmart scaled to a certain size and started rolling into markets and squeezing out smaller players by competing for the local, and previously thought, loyal customers that local companies built around serving.
The companies getting tons of investment dollars are attempting to create scaled advantages to capture market share through acquisition, undercutting management costs, owner acquisition marketing spend, and operations scale. The advantages of scale they seek are not dissimilar to what Walmart achieved (as well as a handful of other regional players). Regardless, if its via economies of scale that result from pure size or just more innovative companies figuring out how to build those advantages without economies of scale, the result is very likely to be the same as in the grocery industry, and that’s the companies who aren’t structured to compete with the profitable value proposition the advantaged companies can deliver will slowly but surely become less relevant and profitable, eventually resulting in exit of the companies that can’t keep up.
The tactics will change on how advantages are realized and used to capture market share of profitable owners, and currently the big box players seem to be aiming at using geographic and capital depth and diversity to compete for market share of the most profitable owners. For example, you’ve probably heard things like “we guarantee you will earn 30% more!” from large companies, well I am betting that’s a marketing strategy they don’t need to live up to on actual revenue generation, it can be subsidized by temporarily eating into things like management fees, which a large company can tactically do if it means gaining market share. The point is that companies, large and small are and will increasingly seek to create competitive advantages in competing for the most profitable owners out there by increasing value to their customers (reducing costs to owners to either capture new inventory or convert existing inventory to their company).
Walmart leveraged their scale to drive other companies out of business in similar ways, but fortunately for South Texas, HEB decided to change the game adapt and innovate so that they could compete against what was thought to be an insurmountable disadvantage on distribution and pricing scale that Walmart wielded.
How the (South) West (Texas) was won
Thankfully, Walmart didn’t focus in San Antonio until the late 1990’s, and in the meantime, HEB figured out the strategies needed to win against a competitor that had competitive advantages on cost due to how they had innovated their go to market strategies around operational efficiencies created from economies of scale. If I had to summarize what Walmart’s advantage was, it would be to say that Walmart had realized with a combination of more sophisticated inventory management techniques and systems, large store footprints and a huge number of unique stores, that they could reduce their cost per unit, which they passed to shoppers in the form of everyday low prices, in such a way that they could be more profitable than competition selling the exact same item cheaper. That was an advantage that no local competitor could replicate, and so they slowly but surely forced consolidation of competition and many smaller, local, competition simply went out of business.
Then they tried to roll into South Texas, and HEB was ready. Everything that Walmart threw at them, HEB was prepared for or adapted to. They have tried beating HEB on price by selling things effectively at a loss to drive traffic conversion (a strategy large scaled VR companies already are using), but HEB created a business capable of matching them on value to customers, making it a company rule to never be beat on price/value.
Walmart has tried out maneuver them on real estate, HEB again has won that one by being highly strategic and forward thinking on real estate acquisitions, a random strength the developed that no other grocer though far enough ahead to do. Walmart basically follows the strategy of buying real estate where HEB buys it now because they just don’t have the capability to understand the local conditions well enough to make the best decisions as HEB does.
Walmart was able to attract premium talent and pay lots to their corporate employees, but HEB hired innovative corporate employees and empowered them to make decisions and innovate in ways a large company like Walmart never would.
All of those characteristics were built into the DNA of growth at HEB as competition really ramped up, and it paid off in ways that can only be achieved with that type of mentality.
To summarize HEB’s winning strategies, I’d say there are 5 key themes for how HEB managed to not only defend itself against advanced competition, consolidation and scale, but to beat competition on value to the customer. I believe these are themes we should all aim at integrating into our own businesses as competition ramps up in our industry.
- Be the best at delivering on the needs of the customer
- Don’t get beat on price, and overdeliver on value
- Build operations and organizational structures needed to deliver 1 & 2
- Have competitive, but compassionate leadership that’s empowered to lead
- Do the right thing for employees and the community
To demonstrate this competitive thinking, I want to quickly explain my favorite example of HEB’s outright brilliance in out smarting their competition.
As I mentioned before, Walmart used their size and distribution strategies to create operational efficiencies that let them sell items at a lower cost but just as profitably as competition selling at a higher cost. While most competitors tried to replicate Walmart efficiencies and systems (an impossible task without having huge scale, large store and investment in infrastructure), HEB instead realized the weakness in the entire model the advantage Walmart created was built on…the necessity for the same assortments to be sold everywhere vs. deciding what should be sold where based on local needs.
They didn’t have as much shelf space as walmart, or scale to reduce distribution costs or product costs, so they changed the game and created a distribution system that could profitably allow them to distribute optimized assortment at every store depending on the shopper purchasing patterns and trends. They even empowered store managers to be able to change their distribution if they knew a shopper need in that specific store wasn’t being met.
By changing the game to put the customer needs first, Walmart had their scaled “advantage” in distribution not only erased, but actually used against them, because they had no conceivable way to do have the same customized variety and guest experience HEB was able to deliver, because their model was basically built to do the opposite of that. HEB could now carry things Walmart couldn’t while improving profitability of their assortment, because if they had an item that was only important in certain areas they could ensure it was only taking up space in the relevant stores, while Walmart’s entire distribution system was made for any item in distribution to have nearly 100% presence in all stores. When Walmart and everyone else was zigging, HEB zagged and focused on what’s important to the shopper other than price (variety and experience in store) and then built out and leveraged the capability to deliver on those differentiators profitably, which ended up ensuring the actually wouldn’t be beat on price for the items they carried that were in common with Walmart.
What Did HEB do That VRs Can Replicate?
HEB tested and developed innovative strategies over time. It took patience and small incremental changes and tactics aimed at a larger goal to ultimately win. So while I love staying high level sometimes, I think to replicate the success of HEB against a similar aim the right direction in delivering value to guests (which this community does represented by what I call the VRMB ethos at this point) and deliver best in class value to owners (meaning you’re the most profitable option for your owners on management of their assets) then get to work on innovation. Start thinking about what is needed for your company to compete in an environment where you have competition that can charge lower management fees and better guest experience capabilities. What might that look like? How will you ensure you deliver the best value to your customers?
Keep in mind we have TWO customers, owners and guests. So as a starting point, I propose we break it up into those two categories and take a few small, incremental steps to being the player in your market with the advantages of delivering value, and not someone else. I think the following action plan may do wonders for how we think about growing and evolving our businesses for the future.
Owner Profitability – competing for the most profitable owners
- START USING DYNAMIC PRICING SOFTWARE. If you aren’t using dynamic pricing and becoming educated on how to use revenue management tactics and tools, start NOW. Wheelhouse, Price Labs and Beyond Pricing, check them out, and start using one of them and reach out to the community with questions on how to set up and monitor to optimize profitability for owners – because this is an advantage that Vacasa commonly points to (dynamic pricing algorithms being a competitive advantage)
- PLAN TO CAPTURE THE MOST PROFITABLE OWNERS. Be able to answer these three questions: 1) What do the most profitable listings for owners look like in this market? 2)What do the most profitable owners look like in this market? 3)How would I market to the potentially most profitable owners with most profitable listings? That’ll be the start of a very competitive owner acquisition plan.
- PLAN TO REDUCE YOUR TOTAL MANAGEMENT FEES TO 25% OR LOWER. This is the tough one, because to do it, you likely need to become more efficient in overhead. Only someone who truly understands the current cost structure of your business can tell you how to do this, so its up to you to just move the ball forward and despite how impossible of a goal this might seem if your management fee is much higher than 25%, ask yourself “well how WOULD I do it?” Just start problem solving what would be needed, because I am certain that if you can’t profitably compete at that low of a management fee because of structural issues, you aren’t in a position to win against the competitive environment that’s coming.
Guest experience – Deliver more value to guests than competition at market best prices (highest prices)
- IDENTIFY A COMP SET ON OTAS THAT SHOW UP EARLY IN BLANK DATE SEARCHES AND HAVE THE SAME CHARACTERISTICS AS YOUR LISTING. BE SURE THE ARE HIGH PRICED, AND HAVE LOTS OF GOOD REVIEWS. These are your best in market comps. Study the reviews, and understand how you would “win” that established demand if a potential guest saw both your listing and their listing. Make a plan that would ensure you win that most of the time and with higher prices than them.
- INNOVATE ON GUEST EXPERIENCE. Make a list of ideas of how you could theoretically improve guest experience on the property AND outside the property. Once you have a list, start problem solving how to profitably check items on that list off.
- BUILD A PLAN FOR EACH LISTING THAT WOULD IMPROVE GUEST EXPERIENCE BUT REQUIRE INVESTMENT FROM THE OWNER. Use your insights from #1 to build an investment plan for your owner that will deliver ROI. Meaning anything you recommend to add, needs to be potentially very valuable to a guest.
I hope these initial “planning exercises” will set up the strategies needed to thrive in the competitive environment of the future. Just as HEB did in the 90’s and the proceeded to embarrass Walmart in the new century, I am hopeful many local VRMs will do the same to so called “scaled competition” or any other competitors that develop in the wake of this industry boom.
One more important thing to note is that HEB is one of the most community minded companies out there. They donate 5% of pre tax earnings to charity, an enormous amount compared to other companies like Walmart, and has been doing so since the 1990s. Every year they have a fundraiser that raises millions for various local charities and literally builds houses for disabled veterans. Their dedication to helping the community is deeply engrained in their culture and they don’t compromise on it ever. Not bad for the 9th largest privately held company (Forbes 2020) and 13th largest grocery retailer in North America (they only operate in Texas, making that even more impressive).
If HEB didn’t have the leadership they did back in the 90’s/2000’s, then the hundreds of millions that HEB has donated directly to the local communities in one way or another wouldn’t have been possible, and one of the potentially most successful companies in a very large industry would have been snuffed out by 2005 by consolidation driven by the size scale of large companies.
I am hoping in 10 years that there are a bunch of “HEBs” out there beating up on the big guys and bad hosts, all with different brands, but the same dedication to being local, smart and competitive in how they deliver the valuable experiences to our guests that I think we all seek to deliver.
Alex Cruz
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