H-E-B Expansion into Mexico
Case Synopsis
Founded in 1905 in Kerrville, Texas, by Florence Butt, H-E-B, named for the initials of her son, is still family owned and today is run by Florence's grandson, chairman and CEO Charles Butt. H-E-B is a rare regional firm that has found a niche where it can beat the giants, making a major push into Mexico, where it plans to double the number of stores within five years (See point 4 on page 4 of the case). In 2002, company wide sales were $9.8 billion, up from $8.9 billion in 2001; sales in Mexico were $571 million in 2002, up from $429 million. In addition, the company doesn't disclose profits, but H-E-B is thought to run profit margins close to the industry average of 1.4%.
The case captures key economics associated with the cross-border synergy (Mexico and United States) that is helping H-E-B to expand sales and profits in both countries. In this sense, the flow of new ideas not only comes from the United States but also from the Mexican operation. That's how “agujas norteñas” (an extremely thin cut of chuck steak popular in Mexico but rarely sold north of the border) found its way to H-E-B meat counters in the United States. Furthermore, H-E-B´s geographic location, it has mastered the understanding of its shoppers (See opening quote on page 1), and continues to research the needs of them, especially the Hispanic population. For example, in San Antonio's Deco-District there are fresh-baked “pan dulce” and “nopalitos” (an edible part of a cactus plant, for the area's many Hispanic shoppers). H-E-B executives have no doubt that customers at its 22 stores in northern Mexico would gobble up the consumption of some Mexican products like tortillas, because Hispanic customers at its 280 stores in Texas had already taken them.
Educational Objectives
This case may be used to teach topics such as the following:
- Implications for the entry of firms looking to expand into Mexico.
- Key economics associated with the cross-border synergy (Mexico and United States)
- Strategy and competition in the retail environment
Teaching Plan
Preparation Questions
Students should be asked to consider the following general questions to prepare before the case discussion:
- What is the evolution of retail in the Unites States?
- What is the Mexican and Hispanic population growth in the United States, especially in Texas?
- How to pursue retail opportunities to serve the Spanish-speaking population living in the United States?
Analysis
The Competition Question
The most telling part about this question was that Charles Butt's nephew, Howard, took Spanish lessons for several years before leading the company's efforts in Mexico. It all starts and ends with knowing the marketplace, and how can a retailer really know a market without speaking the language of the consumer? HEB not only hires great local managerial talent and develops their skills by sending them for training in the US, they enable the cross fertilization of grocery marketing ideas by sending skilled managers from the US to Mexico. This attitude permeates HEB from top to bottom, and that is what it takes to compete effectively with strong competitors such as Wal-Mart.
The Mexican Brands in the United States Question
As Mexican companies become more aggressive in targeting Mexicans in the United States, we have to wonder whether there will be room for some interesting new alliances. Mexican brands - with U.S. manufacturers, or with U.S. retailers. Surely, the Mexican companies could provide extraordinarily good guidance to U.S. manufacturers who are stumbling in their efforts to attract the huge and growing number of Mexicans and Hispanics in the United States. They could also, perhaps, ink some lucrative deals for exclusive distribution with major retailers such as the case of H-E-B.
The Hispanic market is so profitable that it is no longer being ignored. Several American manufacturers are experimenting with various Mexican types of food and beverages like “carnitas”, “albondigas”, “horchata” and vegetables mixes in ready to eat/serve formulas with Mexican names and Mexican style packaging. If Mexican manufacturers have not realized and acknowledged that they need to expand their customer base and broaden their horizon, they will more likely be losing ground to American manufacturers who are aggressively targeting the Mexican consumer and expanding their distribution into the network of independent supermarkets across the country.
In this sense, Mexican companies are in a unique position and at a crossroads as to how best to capitalize on U.S. opportunities. It would seem like partnering with U.S. food companies would offer the greatest and easiest path to success in the short-term. Also, gaining distribution in all H-E-B stores would be a huge success for anyone looking for immediate, wide-spread distribution, but is also very risky unless they have the manufacturing capabilities and distribution infrastructure ready to handle such a challenge.
The Foreign Exchange Rate Fluctuation Question
One way to improve the negotiation capabilities is being on track of the behavior of some economic indicators in order to identify options for improve the company results. For example, one of this indicators is the foreign exchange rate (Mexican Pesos/US Dollar), which in the last two years (2003-2005) has been decreasing.
The revaluation of the Mexican Peso against the US Dollar could be an important indicator in order to increase the margin profit of imported products and a cost reduction for suppliers, especially those that use imported raw materials. In this sense, H-E-B is taking advantage of this situation by increasing the participation of imported products (including H-E-B own brand).
Exchange Rate (Mexican Pesos/US Dollar)
The revaluation of the Mexican Peso against the US Dollar could be an important indicator in order to increase the margin profit of imported products and a cost reduction for suppliers, especially those that use imported raw materials. In this sense, H-E-B is taking advantage of this situation by increasing the participation of imported products (including H-E-B own brand).
Questions for Discussion
The questions suggested to prompt class discussion are:
- What drove H-E-B to expand operations into Mexico?
- What has H-E-B done to successfully compete with strong competitors such as Wal-Mart?
- How successful will Mexican manufacturers be in attacking the U.S. market with brands familiar to Mexicans now living in the United States?
- Could the foreign exchange rate fluctuations (Mexican Pesos/ US Dollar) help H-E-B to reduce costs and increase its profit margins?
Suggested Bibliography
"HEB Buys Five Albertson's Units in Central Texas." Progressive Grocer. September 13, 2007.
Lozano, Gerardo, Carlos Romero and Loretta Serrano (2003). H-E-B Internacional Supermarkets and The Banco de Alimentos de Caritas de Monterrey. Harvard Business School, February 25.
Rangan, V. Kasturi and Mary Bell (2002). H-E-B Own Brands. Harvard Business School, February 5.
Segel, Arthur I. (2002). Note on the Evolution of Retail in the United States. Harvard Business School, July 25.
Sherwell, Philip (2007). "Peso wars at the pizza counter Fast food chain's decision to accept Mexican currency has become focus of anger in US immigration debate." The Sunday Telegraph, February 4, Pg. 29.
Yoffie, David B. and Barbara J. Mack (2005). Wal-Mart 2005. Harvard Business School, January 4.
This note was prepared by Angel Maas, for the sole purpose of aiding classroom instructors in the use of the Case H-E-B Expansion into Mexico. This case was developed solely as the basis for class discussion and is not intended to serve as endorsements, sources of primary data, or illustratinos of effective or ineffective management.
Note: PNA is committed to encouraging intelligent discourse among our members. Comments are moderated by PNA, in accordance with the PNA Comment Policy. PNA does not necessarily endorse any of the views posted below.
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