Harps Food Stores Contemplates Online Expansion

Kim Eskew knows that Harps will eventually have to dip its toe into the e-commerce waters, but he isn’t necessarily excited about it.

Eskew, the CEO of Harps Food Stores Inc. of Springdale, said the privately owned company will probably announce its online strategy within a year. The problem is figuring out what kind of e-commerce strategy can be profitable.

“The reason we are slow to get into stuff is it is really hard for me to be excited about doing something that costs money and I can’t figure out how we can make money doing this,” he said. “I don’t think anybody has quite figured out how they are going to make money. The grocery business is really hard. There are so many things coming at grocers. Some of it is the online stuff that is hard to figure. Everybody is jumping in with both feet.”

Eskew said he understands the importance of being online, but Harps has survived since 1930 by avoiding mistakes. It isn’t going to rush into anything.

One strategy that Harps is considering is called Click and Collect: A customer places an online order, a store employee fills it and the customer drives to the store to pick it up. Eskew said the model might be growing in popularity but it eats into profit: Harps would collect more money if a customer comes to the store to shop than if it an employee fills the order. That’s because Eskew would have to pay someone to do what shoppers now do for themselves.

“I’m paying my person to do that for you,” Eskew said. “Currently, no one is charging to do that, but it costs something to do it. I’m not charging anything but let’s say it costs me $8 to select that order. Then I’m going to make $8 less on that order. What does that begin to look like? It looks like your profits are beginning to go down. The more of your business that transitions to that, the less you’re making on each one of those orders.”

Grocer Growth
Harps has not just survived since Harvard and Floy Harp opened a grocery store in downtown Springdale in 1930.

Survival, while no small task in the ferocious world of retail, would imply that that Harps has limped along. Instead, it has grown and stabilized as a regional grocery force with 88 stores in Arkansas, Oklahoma and Missouri, and one lone location in Kansas.

In fiscal year 2017, which ended in August, Harps reported revenue of $730 million, a 6.25 percent increase from 2016. This year, Harps has opened six stores, four of them newly built and two acquired in Oklahoma and rebranded as Harps.

Eskew said the company will continue to judiciously expand despite all the “turmoil” in retail. Building or acquiring brick-and-mortar stores, once the hallmark of a growing, thriving business, has become a nerve-wracking task, he said.

He points to the demise of the once-booming electronics industry, which saw Best Buy, Circuit City and CompUSA stores sprout like mushrooms. The boom faltered, and the sector underwent a bloodletting.

“For a while, electronic stores were golden,” Eskew said, citing figures suggesting that such stores have dropped from 9,000 to 1,100 in the past few years. “That is what scares everybody.”

As shoppers discovered Amazon, many stopped buying TVs from stores and started ordering them online. The internet shopping boom has put the same fear into the grocery industry, though Eskew believes the Amazon effect on supermarkets will be much less devastating.

His reasoning is simple: If Joe Public orders a TV from Amazon, he’s not likely to order another one anytime soon, so Amazon doesn’t have to foot the shipping bill as frequently.

Groceries are generally a weekly purchase, and they currently account for just 3 percent of online orders. If a typical grocery order costs Amazon $10 to ship, that adds up to $520 annually — much more than its annual Prime membership dues, which recently increased from $99 to $119.

“Grocery is a hard nut for Amazon to crack because grocery doesn’t have a high margin,” Eskew said. “Their formula doesn’t work with low margins and frequency of delivery. If I have to deliver to you every week for free, that $99 isn’t going to cut it.

“The thing we worry about is what happened to electronics. That’s the worry you have as a grocer: Could that be me at some point? It is going to be hard to make that model work, but everybody is worried.”

Weight Class Competition
Harps’ business model for store location is similar to weight classes in boxing. It wants to be big enough to make its investment worthwhile but not so big that it bites off more than it can chew.

So Harps looks for gaps in Walmart Inc.’s coverage in small towns and underserved areas of cities. Its competition increasingly comes from dollar stores — notably Dollar General — that have the same model, with convenience-grocery items that draw customers in.

Eskew said Harps opens smaller stores of 22,000 or 32,000 SF rather than larger 60,000-SF stores because it can manage its balance of revenue-profit best at that size. In addition, Harps’ business plan includes the assumption that whenever it opens a store, a Walmart or Dollar General will open nearby, generating competition, he said. “One store may not clip you that much, but they put a store here and a store there,” Eskew said, specifically referring to Dollar General. “Maybe they have four stores around you, cumulatively. They’ve done that to Walmart, too. All that makes it really difficult to grow same-store sales, which indicates how your business is doing.

“Between e-commerce and the expansion of Dollar Generals, it is making our business really tough. I think everybody has come to the conclusion you have to get into e-commerce to continue growing.”

Eskew said he has heard predictions that 20-30 percent of grocery sales will eventually move online, and he thinks that might be a possibility in major cities. He doesn’t think it will happen in Harps’ footprint.

“We’ve proved to be really resilient in the face of everything we have had to face,” Eskew said. “I don’t know how e-commerce is going to shake out. In rural America, which is largely where we live, that number is not going to be that great. That’s what one side of your brain tells you, but the other side says, ‘What if it is not?’ We have to be in the game.”