Picture Of Health

Hy-Vee's commitment to store brand innovation in the health and wellness arena has made the retailer a destination for Midwesterners looking to improve their quality of life.

Until recent years, "store brand innovation" was as oxymoronic of a phrase as "alone in a crowd" or "free with purchase." Traditionally, retailers left R&D to the national brands, opting to be fast followers with their store brands instead of taking a first-to-market approach.

But as the retail landscape became increasingly competitive, some retailers stopped relying so much on the "me too" approach and started embracing private label innovation to develop products that differentiate themselves from the competition. Many of these retailers that embraced store brand innovation early in the game are prosperous today.

Hy-Vee Inc. is one of those retailers. Jay Marshall, senior vice president, merchandising for the West Des Moines, Iowa-based retailer, says his company simply used to watch what the national brands were doing, then follow suit with their own brands.

"That philosophy has changed completely," he says. "Today, we are looking at it much more from the customer's perspective, finding out what our customer wants and pursuing all avenues to bring those products to market."

And nowhere does Hy-Vee demonstrate this customer-centric approach to product development better than in the health and wellness arena. Andy McCann, senior vice president, retail health, notes that Hy-Vee's customers have become quite loyal to store brand health and wellness items.

Here comes the HealthMarket

Perhaps the most well-known health-and-wellness initiative Hy-Vee has undertaken is establishing its HealthMarket department, a store-within-a-store that houses a wide assortment of health-and wellness-minded foods and non-foods. The company opened its first HealthMarket department in 2001 in a store in Columbia, Mo., notes Ruth Comer, assistant vice president, media relations.

"It was popular from the outset and soon expanded to other stores," she explains, adding that while almost all Hy-Vee and Hy-Vee Drugstores locations contain a HealthMarket section, 138 stores boast a larger, "full-fledged" HealthMarket department.

In terms of layout, most HealthMarket departments contain grocery, frozen, refrigerated and non-food sections, Comer says. The department is set apart from the rest of the store with a dropped grid ceiling and warm wood tones on shelves and flooring to give the area a more natural look.

To develop product selection and merchandising strategies in the HealthMarket department, in-store dietitians work together with the department's managers, says Helen Eddy, assistant vice president, health and wellness. These partnerships have proven to be quite effective.

"We use our in-store dietitians to highlight the health benefits of new private label items throughout the stores," Eddy explains. "Our dietitians have a tremendous following; when they label a new item as a 'Dietitian's Pick' or include it in a recipe or talk about it on TV, we see an immediate increase in sales on that item."

And when it introduces a private label product to HealthMarket shelves, Hy-Vee takes the same approach as it does when it rolls out such an item anywhere else in the store: Hy-vee aims to "offer quality at a value, and give prominent shelf position to private label products," Comer says.

Moreover, Hy-Vee merchandises a number of its own brands in the HealthMarket department, including products under the Hy-Vee brand, which is the retailer's "most important and recognized brand — and the one that has the greatest following," says Tim Erceg, purchasing specialist. However, special attention is given to two other private brands: Hy-Vee HealthMarket and Full Circle. Full Circle, which is supplied by Skokie, Ill.-based Topco Associates, offers a number of natural, organic and diet-specific products.

Steve Jensen, director, private label product procurement, says Hy-Vee's relationship with Topco helps set the retailer apart from the competition.

"Working with Topco has allowed us to take giant steps forward in private label," he explains. "We've been a member for 11 years, and we count on them to source products for us and monitor product quality."

Where the action is

The HealthMarket department is the fastest-growing department in Hy-Vee's stores. And within the department, gluten-free is the "fastest-growing segment," Eddy explains. She notes that the retailer already provides a number of gluten-free offerings under the Hy-Vee HealthMarket and Full Circle brands, and plans to introduce many more.

On the non-food side of the HealthMarket department, Erceg says he has seen major recent growth in the store brand vitamin category, which boasts 264 SKUs.

"We've seen double-digit growth in private label vitamins, helped by new items like liquid vitamins," he explains. "We're always looking for new and innovative items in HBCs and OTCs." (Currently, Hy-Vee offers 584 OTC SKUs.)

Among the most popular SKUs merchandised in the HealthMarket department are Hy-Vee HealthMarket Organic Tortilla Chips and the gluten-free Full Circle Spice Cake Mix, Eddy says. She notes that the cake mix isn't a new product, but has been a strong seller for quite some time.

To source the private brand SKUs featured in the HealthMarket department, Eddy says Hy-Vee works with its own specialty foods subsidiary, Lomar Distributing.

"The buyers at Lomar do the work of finding new products, so our stores have the variety and consistency of stock presence that's so important in this department," she points out.

Brokers also play an important role in brand development. Erceg says Hy-Vee works with Stamford, Conn.-based Daymon Worldwide, which "does a great job" with its health and wellness product lines.

Erceg values the connection he has with his purchasing team. He believes Hy-Vee boasts an autonomous sourcing system like no other, noting that category managers aren't placed at the corporate headquarters — they're actually placed within each store.

"I have a lot of latitude as a buyer to make purchasing decisions, and the stores have the responsibility of pricing and merchandising private label," Erceg points out. "If stores have a problem or a question, they can call me directly, and I can go directly to the supplier to handle it. Our purchasing team is small compared to that of other companies, so we value that personal connection."

A big role in R&D

Hy-Vee also gets deeply involved in product formulation, working closely with its 500 private label suppliers — and Topco — to develop high-quality store brand products, Jensen says.

"We rely on Topco to assist us with setting specifications and evaluating products to be sure they meet those specifications," he says. "What we do in-house — in our test kitchen — is more subjective. Here, we're doing taste tests and comparisons with the major labels to find out what customers think about the product."

Although some product development does not require a ton of innovation, the retailer does get downright creative in certain areas, Erceg notes.

"With some items — candy is an example — we have been moving in a more innovative direction with flavors and packaging," he explains.

Hy-Vee's store brand executives invest a lot of time and thought into private label packaging, too, traveling to various trade shows and visiting retailers in every channel for inspiration. But without a doubt, Marshall says the greatest ideas come from customers — especially when it comes to making a package easier to use.

"We listen to their feedback and challenge ourselves to think about it from the customer's perspective," Marshall explains. "Where and how do they use the product? Would it be more useful to them if it came in a gusseted bag or if it had a zipper closure?"

Hy-Vee executives also are working to make store brand packaging more informative. Jensen says the retailer is adopting Facts Up Front, a nutritional labeling system designed by the Food Marketing Institute and the Grocery Manufacturers Association. The system summarizes important information from the Nutrition Facts panel on the front of food and beverage packages.

Store brand executives also take the environment into account during the package development process.

"Sustainability is one of the top factors we look at every time we bring a product to market," Marshall says. "Can we reduce the amount of packaging or include more recycled or postconsumer content in our packaging? It's an ongoing goal for us. Also, how can we reward manufacturers for doing it?"

Where difficulties lie

It might sound like Hy-Vee has the private brand development process down pat. But even experts have their share of challenges.

For Marshall, perhaps the most significant of these lies in innovation. It's not easy to maintain a balance between "the desire to take risks" and "the need to protect brand integrity," he notes.

"We have to be very cognizant of the fact that our name is on the product, and we don't want to do anything to jeopardize the tremendous trust we've built in our brand," Marshall says. "At the same time, we're willing to take more risks than we've taken in the past to identify and bring innovative products to market because that is what our customers want. However, they're calculated, strategic risks based on careful study and evaluation."

Maintaining a sufficient supply of products also is a difficult task, Jensen says. He notes that the economic downturn has created a bigger demand for store brand products. But at the same time, hard-hit manufacturers are either cutting inventory to tighten their belts or closing shop altogether.

"So we end up with a manufacturing capacity issue, which can lead to product shortages and delays," Jensen explains.

The retailer's growing footprint also poses a challenge on the supply side, Marshall adds.

"We operate in eight states and cover a large geographical area here in the Midwest," he says. "So getting the customer the freshest product possible is something we have to continually improve."

For McCann, the greatest challenge is in keeping the consumer educated.

"Our challenge is always to learn more," he says. "Our customers want help and direction from us in managing their own health, so we need to learn more about these products and what they can do."

Healthy growth

Despite the challenges, Hy-Vee has big private label plans for this year and beyond. In 2012, the retailer plans to introduce at least 300 store brand SKUs and increase unit penetration by 1 percent, Marshall says.

And in the HBC and OTC categories, Erceg says Hy-Vee plans to grow private label sales by 10 percent in 2012.

"We want to be innovative and be able to fill the voids left by national brands with store brand alternatives," he explains.

Much of the growth in HBC will come from natural products, Eddy explains.

"We'll be expanding our Full Circle line to include shampoos and lotions," she says. "We know that many customers get their first introduction to natural and organic products through concerns about what goes on their bodies. Later, that translates to concerns about what goes in their bodies."

On the food side, McCann sees demand for natural and organic products continuing to grow. And the gluten-free segment will keep blossoming.

"Gluten-free as a category is exploding," he says.

Hy-Vee also will keep searching for ways to reformulate products to increase NuVal scores, Jensen notes. The retailer introduced the nutritional scoring system — which was developed under a partnership between Topco and Griffin Hospital of Derby, Conn. — in 2009, and it has been a big hit with customers.

Jensen adds that all of these new products will communicate the same message Hy-Vee's products have always communicated.

"We want our brands to communicate three things to our customers: quality, savings and health," he says,

Hy-Vee Inc. at a glance

Headquarters: West Des Moines, Iowa

Top Executive: Ric Jurgens, chairman and CEO (retiring June 1)

Grocery Retail Banner: Hy-Vee, Hy-Vee Drugstore

No. of Stores: 235 in eight Midwestern states (212 supermarkets and 23 drugstores)

No. of Store Brand SKUs: Approximately 4,500

Store Brands: Baking Stone Bread, Full Circle, Hy-Vee, Hy-Vee HealthMarket, Hy-Vee Home Helpers, Hy-Vee Kitchen Helpers, Hy-Vee Mother's Choice, LeTechniq, Midwest Country Fare, Paws Premium, World Classics Trading Company and more