Cheap (36 page)

Wegmans is not a new company; far from it. Founder Jack Wegman got his start in 1916, peddling fruits and vegetables from a pushcart, while his brother, Walter, hawked groceries out of the front room of the family home. The Rochester Fruit and Vegetable Company grew into a full-scale grocery operation, and in 1930 the brothers opened a twenty-thousand-square-foot self-service showplace, complete with refrigerated food display windows, a water vapor spray for produce, and a three-hundred-seat cafeteria. Walter died in 1936, and his son, Robert, a Marine Corps veteran, built the business into a regional empire. He is credited with, among many other things, being one of the first to introduce optical scanners and bar coding to the supermarket sector in 1974. A tireless innovator, he assiduously avoided competing on price. In a 1967 speech he said,

Wegmans was phenomenally successful. In 1994 a supermarket industry analyst told the
Wall Street Journal:
“We consider them the best chain in the country, maybe the world.” This sounds extravagant, but it is hard to argue. Entering a Wegmans market is not unlike strolling into the vaunted Harrods Food Halls in the posh Knightsbridge neighborhood of London. Like Harrods, Wegmans is a tourist attraction. I know this because my mother, a resident of upstate New York, took out-of-town visitors on tours of the store near her home. But unlike Harrods, Wegmans is no luxury emporium. Writer S. S. Fair once compared the chain to Whole Foods by writing in the
New York Times
that it was a “corporate behemoth branding itself as a phenomenon: the largest chain of natural food stores in the world. The other [Wegmans] consists of regional supermarkets that quietly satisfy persnickety tastes with mellow prices. Both hawk designer apples and pluperfect oranges, and both excel at leading us into temptation, where so many of us have permanent lockers. [But] one stinks of Zen, the other doesn’t.”

The Wegmans mystique is that it has no mystique at all. Loyalists are of the salt-of-the-earth variety, the sort inclined to throw tailgate parties in the store parking lot wearing “Wegmaniac” T-shirts. The chain gets thousands of mash notes each year from smitten customers pleading for a store to be built closer to their homes. In Internet chat rooms Wegmans gets almost nothing but accolades. A typical entry in the We Love Wegmans blog begins: “Is it possible to be obsessed with a grocery store? If you live in the Northeast, you know it is. People who move away miss it: friends and family who come to visit want to see it. We are four friends who love Wegmans, and this blog is where we write about all the things we love most at the store we can’t live without.”

Robert Wegman died in 2006, thirty years after his son Danny had taken the reins. Like his dad, Danny got his start in the meat department. Also like his dad, he is borderline obsessed. Every year between Thanksgiving and New Year’s he makes a pilgrimage, dropping in on every one of his seventy-two stores, most of them in the suburbs of New York, Pennsylvania, New Jersey, Virginia, and Maryland. Each store is distinctive, with a mural along the back wall representative of the region. In Manassas it is the Shenandoah Mountains, cherry blossoms, and the Battle of Manassas, known to some as the Battle of Bull Run. George Lawrie, a principal analyst for Forrester Research, explained that Wegmans, in sharp contrast to discounters, builds an individual persona for each of its stores. “Rather than fill all the stores with the same cheap stuff, they build a portfolio of products that’s intriguing for the customer,” he said.

Danny says that’s true, but it’s not the whole story. Each Wegmans store is individual, he says, because the people are what make it. “We build the stage,” he said. “Our people (employees) perform on those stages. They bring in the products that the customers want—our job is to give them the freedom and opportunity to know what the customer wants.”

Danny majored in economics at Harvard, where he once wrote a paper on the economics of a large store. Like IKEA, he builds very big stores—80,000 to 130,000 square feet—but unlike IKEA, not all of them have the same floor plan or the same game plan. As an example, Danny points to his outpost in Ithaca, New York. Ithaca is a college town, home to both Cornell University and Ithaca College, and perhaps as a consequence has more than its share of vegetarians. Wegmans hired cookbook author Julie Jordan, a pioneer in the American vegetarian movement, to create a huge array of exotic and everyday vegan and vegetarian selections and a Wings of Life salad bar. Also apt for a college town, the store carries something like six hundred different varieties of beer.

“Coming from western and central New York, high prices are not something our customers can afford,” he told me. In 2002 the chain switched from the “high/low” pricing model common to most grocery stores, in which products are priced high until put on sale, to what Danny calls “consistent low prices.” Rather than offering the lowest possible price on selected items at selected times, Wegmans negotiates with suppliers to offer consistent prices across its inventory, accepting that it will sometimes be undersold. Wegmans pursued this policy partially in response to a threat from Wal-Mart, but company spokesperson Jo Natale claimed the company adopted it for reasons Wal-Mart might have difficulty understanding. “Some of our own employees were finding prices on some items too high,” she said. “This was not acceptable to us.” Still, it took nearly nine months for Wegmans’ customers to adjust to the change. Sales dropped by roughly 4 percent, and the company lost between $30 million and $50 million, which took time to recoup. “If this were a public company, I would have been fired for making that change,” Danny said. “But since we don’t have to worry about stockholders, we can concentrate on what we care about, which is our people.”

In 2005, Wegmans snagged the number-one spot on
Fortune
magazine’s “100 Best Places to Work,” and it has remained fairly close to the top ever since. The company spends $4,000 per employee on training—about twice what other retailers spend—and offers a panoply of benefits that includes health insurance (even for part-timers), a generous retirement plan, and tuition remission and a college scholarship program. For this it is rewarded with an attrition rate of roughly 6 percent, compared with an industry-wide employee turnover of more than 30 percent. (Wal-Mart is a bit coy on this point, but industry experts put Wal-Mart employee attrition at between 50 and 70 percent.) Souha Ezzedeen, a business professor at York University in Toronto who specializes in human resource issues, said that Wegmans’ track record with employees is extraordinary. “Supermarkets are generally ruthless, not a great place to work,” she said. “Wal-Mart symbolizes that, with poor wages and low benefits. Wegmans takes the opposite approach, putting its employees first and its customers second, knowing that if you take care of your employees, your employees will take care of the customers.”

Wegmans runs cooking classes, nutrition seminars, and wine tastings at its stores, on the theory that broadening customer palates will grow demand. Education is an integral part of the company mission. Employees are empowered to figure out what customers want and need, and to provide them with what Danny calls “telepathic service.” But Wegmans’ outreach goes beyond its own stores into the community. When Robert Wegman learned that entry-level employees in Syracuse and Rochester were quitting within a year, he found that the quitters were mostly high school kids from the inner city. “The only models of success these kids had were pimps, prostitutes, and drug dealers,” Danny said. “We knew we had to do something.” Wegmans launched a “work scholarship connection” program through which high schoolers who earn decent grades are awarded scholarships. Wegmans hired some of these kids to work in his stores, hired a full-time advocate to supervise their progress, and paired them up with adult employee mentors. Roughly 80 percent of participating students graduate from high school, compared to less than 50 percent for students not participating. “We got the kids to stay in school and, in some cases, stay working for Wegmans,” Danny said. “Many of them have careers with us now. Instead of paying thousands of dollars to train new people, we spend money on the people we have, with what we think are pretty good results.”

Knowing full well that its customers can’t afford to be wide-eyed idealists, Wegmans nonetheless identifies with the local food movement. For more than two decades the store has quietly sourced as much local produce as possible, buying from eight hundred small farmers throughout the northeast. Danny Wegman, who grew up on a farm in Greece, New York, said he would prefer to source all his food locally, not because it is politically correct but because it is so simple. “These guys have the most sophisticated ordering systems. No paper is exchanged at all except for a check,” he said. “I wish my other suppliers—Proctor and Gamble, Coca Cola—had such a clean and simple system.”

The right-leaning Cato Institute once characterized Wegmans as a “Living Poem to Capitalism.” This was before Danny banned the sale of tobacco in his stores, but, still, the Cato scholars were onto something. A true follower of Adam Smith, Danny does nothing he believes won’t result in a payoff. “Profit is critical,” he said. “It’s essential for everything we want to do, everything we can do. But for us it is a measure, not a goal. If we don’t make a profit, we feel we’ve done something wrong for our employees and, therefore, for our customers. We prefer to focus on our employees and let profit take care of itself.”

 

 

 

IN 1986
stock speculator Ivan Boesky declared, “I think greed is healthy. You can be greedy and still feel good about yourself,” and his audience at the University of California Berkeley School of Business Administration cheered. Money is what makes the world go around, they say, and at the time the world was spinning wildly. But a year later, when Boesky’s comment was echoed in the infamous “Greed . . . is good” line uttered by Michael Douglas in the movie
Wall Street,
the audience booed. By then the market had crashed. Boesky was on his way to prison for insider trading. Yes, greed motivates us to push the limits, take risks, and aim high. But greed is also a distraction. In business as in sports, focus is everything. Wegmans succeeds because it remains keenly fixed on its mission—a mission that starts with treating even pimply, gum-snapping sixteen-year-old grocery store clerks as valued colleagues and potential customers.

Wegman argues that his philosophy—and his business model—is eminently scalable, and there is evidence that he is right. Costco Wholesale Corporation of Issaquah, Washington, now the fifth largest retailer in America, pays employees an average wage of nearly $18.15 an hour, 68 percent more than its main competitor, Wal-Mart. It covers 88 percent of employee health care costs and has a generous dental health plan and an optical plan that pays for eyeglasses. Costco works on anemic profit margins (1.75 percent versus Wal-Mart’s 3.34 percent), and makes most of its money on membership fees. But it also keeps costs down the old-fashioned way by retaining its employees and by keeping executive compensation in check.

Neither of these institutions is perfect. Wegmans has come under criticism from some suppliers who decry what they describe as unreasonable demands, and its practice of building fewer but larger stores means customers must drive more gas-burning miles to reach them. Costco offers a far smaller assortment than traditional retailers, sells some brand-name items at inflated prices under its own model numbers, and forces consumers to buy many things—even fresh produce—in bulk, thereby contributing to waste. Yet the success of both companies gives evidence of the power of enlightened self-interest to bolster the bottom line.

In November 2008, two days after Wal-Mart CEO Lee Jones announced his retirement,
New York Times
language columnist William Safire announced his “hot” word of the year: frugalista. Frugalista is defined by the
New Oxford American Dictionary
as “a person who lives a frugal lifestyle but stays fashionable and healthy swapping clothes, buying secondhand, growing own produce, etc.” Safire traced the term back to 2005, but had he searched a bit more, he would have found that it is not a new word at all but a form of the very old “frugalist.” More than a hundred years ago, economist Simon Nelson Patten, chair of the Wharton School of Business at the University of Pennsylvania, made lavish use of the term. Patten is best known for predicting the national shift in emphasis from production to consumption, contending that as the American economy advanced from scarcity to abundance, workers freed from degrading factory work would enjoy both more leisure and more opportunity to consume. This, he argued, would not only enhance our quality of life but encourage the growth of a more cohesive, less class-bound society. Patten assumed in his optimistic prediction that business interests would eventually be reined-in to serve the worker as well as the consumer and that unbridled capitalism would be outdated by a pragmatic “frugalism.” In 1899 he compared the two worldviews: