Wegmans: The Best of Four Worlds
Wegmans has earned a loyal customer base through its four-pronged business model that combines the best attributes of its competitors into a unique shopping experience. But, how has Wegmans been able to deliver this all-around winning experience when other grocers have failed?
Wegmans Food Markets is the 46th largest U.S. private company, with $7.4 billion of annual sales.[1] It is a regional supermarket with only 86 stores. Despite this small footprint, Wegmans has a loyal customer following and a value proposition that helps it disrupt every new market it enters.
BUSINESS MODEL
Wegmans creates value by pulling the best attributes of its competitors together, giving it the power of 36
0-degree competition.[2] It is the best of both worlds or – more accurately – the best of four worlds. First, Wegmans stores carry a wide selection of 50,000-70,000 products compared to a competitor average of 40,000.[3] This is possible because its stores are very large, measuring up to 140,000 sqft.[4] Second, Wegmans creates a shopping atmosphere that mimics European open-air markets where customers can see and smell foods being cooked/baked. Third, Wegmans is focused on providing a customer-focused experience, driven by friendly, empowered workforce. Fourth, Wegmans captures value by offering consistent low prices on popular items and bulk purchase options through its Family Packs. An independent study found that average prices are 13% cheaper at Wegmans than Giant or Safeway.[5] To deliver on all four aspects of this business model simultaneously, Wegmans needs a uniquely effective operating model.
OPERATING MODEL
Structure
Family-Owned: The company has passed through generations of the Wegman family since opening in 1916. It is currently led by CEO Danny Wegman and his two daughters. This leadership is critical because it creates consistency in how the company is managed, which supports the customer-focused experience and atmosphere.
Store Communities: Wegmans has strategically placed most of its stores in affluent suburban neighborhoods. It makes an effort to truly become part of these communities by getting involved with local charities. A core company value is to “make a difference in every community we serve”.[6] Wegmans cannot compete directly on price with Wal-Mart, but it chooses neighborhoods where shoppers care about all four aspects of its business model.
Processes
Supply Chain: Wegmans has a mostly vertically-integrated supply chain that allows it to control the distribution process. It owns warehouses instead of outsourcing distribution and sources some food from its 50-acre organic farm.[7] Wegmans is able to manage this unique operating model because it restricts its footprint to only six states. This helps restrain its distribution scope, which is critical since refrigeration increases transportation costs. Additionally, Wegmans has clear requirements for suppliers based on its New Ways of Working Together, which aim to improve communication and data. [8] For example, Wegmans will not accept backordered items to avoid inventory and process interruptions.[9] This distribution system reduces costs, retaining low prices. It also allows Wegmans to overturn fresh inventory 100 times/year, compared to 20 for competitors, which supports its wide selection.[10]
Assets & Capabilities
Employees: Wegmans attracts strong employees with competitive salaries and unique perks, including a $4.5 million annual scholarship program.[11] These benefits earned Wegmans a spot on Fortune’s 100 Best Companies to Work For every year (#7 in 2015).[12] Wegmans also ensures that its employees are trained in customer service and food preparation. For example, it requires a 40-hour class for new cashiers and sends its chefs all around the world.[13] As the VP for HR stated, “The first question you ask is: ‘Is this the best thing for the employee?’ That’s a totally different model.” This committed workforce delivers the customer-focused experience.
Global Data Synchronization: Wegmans established data synchronization with local and national suppliers in 2006. According to a joint report, this synchronization improved supply chain efficiency, which saved $1 million in labor and inventory costs and led to a 7% increase in productivity from store delivery process improvements.[14] Suppliers also saw direct improvements, including 75% reduction in speed-to-shelf for new items and a decrease in inspection time by five minutes per order.[15] These time reductions dampen the bullwhip effect between Wegmans and its suppliers, which helps ensure low prices. It also encourages new suppliers to work with Wegmans, which increases product selection.
THE FUTURE
Wegmans will face new competition in 2016 with the launch of Whole Foods chain of cheaper stores.[16] It is important that Wegmans does not react by growing too quickly, which would be easy given that 2,600 people contacted Wegmans asking for a store in their community last year.[17] The benefits of its vertically-integrated supply chain and product selection will be difficult to retain on a national level. A good test for Wegmans will be its Brooklyn store opening in 2017. The urban setting will create new competitive and distribution challenges that test both Wegmans business and operating models.
[1] http://www.forbes.com/companies/wegmans-food-markets/
[2] https://www.washingtonpost.com/news/wonk/wp/2015/05/13/why-wegmans-really-is-the-best-supermarket-in-the-u-s/
[3]http://www.wegmans.com/webapp/wcs/stores/servlet/CategoryDisplay?categoryId=281152&storeId=10052&catalogId=10002&langId=-1
[4]http://www.wegmans.com/webapp/wcs/stores/servlet/CategoryDisplay?categoryId=281152&storeId=10052&catalogId=10002&langId=-1
[5] https://www.washingtonpost.com/news/wonk/wp/2015/05/13/why-wegmans-really-is-the-best-supermarket-in-the-u-s/
[6]http://www.wegmans.com/webapp/wcs/stores/servlet/CategoryDisplay?categoryId=281152&storeId=10052&catalogId=10002&langId=-1
[7]http://www.wegmans.com/webapp/wcs/stores/servlet/CampaignLanding?storeId=10052&catalogId=10002&langId=-1&clear=true&partNumber=CAMPAIGN_51293
[8] http://www.wegmans.com/pdf/forOurSuppliers/vendorGuide.pdf
[9] http://www.wegmans.com/pdf/forOurSuppliers/vendorGuide.pdf
[10] https://www.washingtonpost.com/news/wonk/wp/2015/05/13/why-wegmans-really-is-the-best-supermarket-in-the-u-s/
[11]http://www.wegmans.com/webapp/wcs/stores/servlet/CategoryDisplay?categoryId=281152&storeId=10052&catalogId=10002&langId=-1
[12]http://www.wegmans.com/webapp/wcs/stores/servlet/CategoryDisplay?categoryId=281152&storeId=10052&catalogId=10002&langId=-1
[13] http://www.theatlantic.com/business/archive/2012/03/the-anti-walmart-the-secret-sauce-of-wegmans-is-people/254994/
[14] http://mhlnews.com/technology-amp-automation/data-synchronization-improves-supply-chain-wegmans
[15] http://mhlnews.com/technology-amp-automation/data-synchronization-improves-supply-chain-wegmans
[16] https://www.washingtonpost.com/news/wonk/wp/2015/05/08/whole-foods-is-learning-that-millennials-arent-who-it-thought-they-are/
[17]http://www.wegmans.com/webapp/wcs/stores/servlet/CategoryDisplay?categoryId=281152&storeId=10052&catalogId=10002&langId=-1
Video: https://www.youtube.com/watch?v=KHXKTbRASqk
Photos: www.wordsinspace.net, www.syracuse.com
Thank you Kim for your detailed analysis of Wegmans, a grocer I have never heard of, yet one I am excited to visit after watching the “Who we are” video. Through your analysis I am able to understand how Wegmans is able to stock 25-75% more inventory than its competitors without incurring high holding costs: vertical integration, strategic store positioning and moderated growth.
I do wonder, though, how Wegmans can achieve meaningful growth moving forward considering its more narrow “affluent” target market, prices that cannot complete with the likes of Walmart and increasing competition from local favorite Whole Foods? Also, do you believe that Wegmans should continue owning its own distribution as the grocer grows? Perhaps Wegmans is great at the grocery business, but I do not see many parallels to the distribution business.
I look forward to visiting my first Wegmans soon!
Thanks for the comment, Simeon! Even though Wegman’s has a smaller target demographic than some competitors, I think it can continue to grow by being the secondary shopping market for many families. For example, Wegmans was the store for specific purchases in my family growing up. We would get fresh bread, meats, and homemade desserts there, even though we would shop for dry goods or cold cuts at a cheaper store like Giant. By getting more customers in the door, Wegmans can “wow” them with its customer shopping experience and slowly increase basket size (i.e., wallet share) over time.
As for growth, I think Wegmans needs to slowly expand its geographic footprint. It would not be logical to jump somewhere like California next, which is completely separated from its current distribution system. But, I agree that it may reach a point in its growth where it is no longer efficient to manage its own distribution. At that point, Wegmans should consider shifting its operating model to work with third-party distributors for particular regions and/or product types.
Hey Kim, thanks for this piece — my mom has been going crazy recently over the Wegmans that just opened in Westwood, MA. Now I’m starting to see why! It’s interesting to compare/contrast them with Whole Foods. Whole Foods definitely follows the same pattern of locating itself in affluent areas, but doesn’t have the “European market” atmosphere and (to my knowledge) doesn’t operate its own farm… wow! Whole Foods also doesn’t limit itself to 6 states. I wonder if Wegman’s can sustain its operating model AND expand geographically to really challenge Whole Foods across the US. Great job!
– Molly
Thanks for the comment! I was also very surprised to find out during my research that Wegmans operated its own farm. It is not something that is apparent to shoppers, but they should publicize it more since it separates them from competitors. I agree that Wegmans will struggle to maintain its operating model if it tries to compete head-to-head with Whole Foods in too many markets. I think they would do better focusing on a “fill-in” strategy in which they build additional stores in one geographic region before starting to slowly expand their footprint outward. There is still a lot of growth potential left for them in the Northeast!