Kwik Trip Solves the Puzzle
People, commodities and foodservice complete retailer's picture of success.
There is perhaps no better measure of Kwik Trip’s operational excellence than the number of complaints president Don Zietlow personally receives from the 2.5 million customers who visit the chain’s bathrooms each week.
Kwik Trip first started placing a letter from Don—now part of industry lore—into each of its bathroom stalls in 2004. Customers dissatisfied with conditions are encouraged to contact Don or his son, Steve Zietlow, directly with their complaints.
Back then, 50 to 100 calls each week were common. The number of calls received the week of CSP’s visit to Kwik Trip’s headquarters in La Crosse, Wis.? One.
Whether one or 100, each call receives the same KT treatment.
“We call every customer back and thank them for their call, give them a gift card, and try to turn a negative into a positive,” says Zietlow.
It’s initiative such as this—and the retailer’s embrace of The Golden Rule—that has helped Kwik Trip win its second CSP-Service Intelligence Mystery Shop in a row, leading a pack of nine competitors that includes heavyweights such as QuikTrip, Maverik and Kum & Go. (See full mystery-shop results on p. 48.) The 366-store chain, with locations in Wisconsin, Minnesota and Iowa, scored highest in customer service and placed high in cleanliness, manifestations of its operational prowess.
Further proof: While the industry saw a 7.6% drop in profits in 2009, it was the most profitable year in Kwik Trip’s history. And 2010 is proving to be the second-best year on record. Sales in 2009 totaled $2.8 billion, with inside sales up 8%. This is in the midst of a recession in which Kwik Trip, quite frankly, has refused to participate.
Much of this is credit to KT’s leader. Zietlow, a man with a prodigious memory and recall of numbers that is bested only by his passion for his employees, is notoriously pressshy; he prefers to let Kwik Trip’s co-workers speak for the company’s success.
Yet in a rare, exclusive interview, he and son Steve Zietlow sat down with CSP one June morning to discuss why Kwik Trip is not only a consistent, reliable winner of the mystery shop [CSP—Aug. ’09, p. 36], but also a retail leader that bucks the trend.
This is not the first time a publication has directed a spotlight on one of the c-store industry’s premier chains. It is the first, however, that is captured through the lens of a father and son who—much like the Cadieuxs, of a similarly named company—are heralded for planting and nurturing a culture built on core values.
As the elder Zietlow sees it, those anchors of KT’s past and future successes are three: commodities, foodservice and people. One of the industry’s few vertically integrated retailers, Kwik Trip has seen incredible cost efficiencies from producing and distributing most of its in-store offerings, allowing it to compete head-to-head with big boxes on staples such as milk, bread and eggs. Foodservice, meanwhile, has contributed an increasingly greater share of the company’s profits. And then there are the people, hired not only for skills, but even more for intangibles: adaptability, dependability, work ethic, professionalism and, perhaps most important, the desire to treat others how they would like to be treated.
SHORT-TERM LOSS, LONG-TERM GAIN
For the Zietlows, numbers and people are inseparable. Indeed, some of the financial hiccups KT is experiencing in 2010 come primarily from the company sticking with its commitments, whether in prosperous or more onerous times.
In 2010, the chain’s operating expenditures will total around $150 million. Most of this will go toward retail—it costs $25 million annually just to “keep the doors open”— while the remaining portion is earmarked for transportation and infrastructure.
Earlier this year, Kwik Trip made an 80,000-square-foot addition to its 68,000-square-foot bakery, with plans to upgrade the original facility and add space to its distribution center. It has spent half of $30 million reserved for upgrades to its store network. And it has plans to build 20 stores by year’s end.
Tack onto that the fact that Kwik Trip has maintained its historically known generous benefits for employees in 2009 and 2010, including the famous profit-sharing plan, which shares 40% of the company’s pretax profits with its 9,500 employees in the form of a year-end cash bonus or a contribution to a profit-sharing fund.
This is KT’s circle of life: Invest in the company to produce more profits, some of which will benefit the co-workers, some to go back into the company to produce more profits. Each year, one-third of annual profits are reinvested in the company, while another one-third goes toward taxes.
And while 2009 broke company records, 2010 reflects a sacrifice in gross profits to grow customer counts. “Our sales have grown through that period of time,” says Don. “But we’re not making as much money because we’re spending more money on promoting; our margins are less, and our fuel margins are less.”
There’s another factor contributing to the current challenge, he says: “People ran out of money. We have more cus tomers, more values, more visits. The customer count grew a lot in 2010, but they’re buying a little less. And tobacco has changed dramatically.”
Kwik Trip sells 100,000 fewer cartons of cigarettes per week than it did only two years ago. “With regulations, people not wanting to smoke, we needed to focus where are we getting those profits from, which has led to food, and commodities— things we produce that attract the largest amount of people, that every household needs and uses,” says Steve. “Focusing on those is how we’re able to increase our customer count and our sales.”
Meanwhile, operating expenses—namely credit-card fees and health-care costs—have risen by $8 million and $5 million, respectively. Big figures, no doubt, but they are simply the cost of doing business, and they in no way make Kwik Trip clamp down on expenditures.
“It can be easy to cut way back on cap-ex and get more margin, but we don’t want to sacrifice growth for short-term profits,” says Steve. “We’d rather have long-term growth and build customer counts and market share.” Don concurs: “We were more aggressive doing it this year than last year and we’re being more aggressive in 2011. I think there are times to be aggressive, and I believe in being more aggressive in a recession than without the recession.”
CAPITALIZING ON COMMODITIES
A large piece of Kwik Trip’s value equation is its price competitiveness in commodities. The company likes to point to a 2008 market basket study it conducted, showing how it beat Walmart and two local supermarkets on the price of four types of apples, bananas, oranges, onions, potatoes, 2% milk gallons, eggs, cookies, bagels and two loaves of bread. Kwik Trip’s basket totaled $16.44, compared to $23.92 for Walmart.
Of course, Kwik Trip picked the items in the basket, and it makes no claim to be competitive on ketchup, for example, or pork and beans. But for commodities, it has cornered the market. “When it comes to commodities, we should be able to buy flour as cheaply as Walmart does,” says Don. “If we buy 15 to 20 loads of bananas a week, we should be able to buy them as cheaply as Walmart, buy milk as cheaply as Walmart. Now it becomes: How efficient can we be?”
Here is where Kwik Trip’s vertical integration comes into play. With a commissary, dairy, water plant, bakery, ice plant, distribution warehouse and transportation network, the company is virtually a self-contained operation.
“We have a grocery background, so you can see that in our stores,” says Steve Loehr, vice president of support operations. “We sell bananas, bread and milk because we know in the grocery business those are the big demand items, the big traffic items. … The grocery background drove the vertical integration, and it continues to drive it today.”
The cost of delivery is a huge area of savings for Kwik Trip, one that is passed down to its customers. Don cites the example of salty snacks, where, formerly, Kwik Trip’s gross profit through a major DSD snack manufacturer was 27%. After Kwik Trip replaced the bulk of branded snacks with its own Urge private-label line, gross profit rose to 51%, and all because of delivery efficiencies.
“We have to order it, stock it, keep it fresh, rotate it,” he acknowledges. “But if we can have an item with a one-day shelf life, we should be able to handle an item that has a 30- day shelf life.” Another example: carbonated soft drinks. Kwik Trip sells 21 trailer loads of soda each week, Don says. About 18 months ago, the company brought in a control label, Faygo, to compete with the major brands. In less than a year, it grabbed 10% of category sales. That’s because delivery costs for the control-label soda were dramatically lower, and Kwik Trip was therefore able to pass the savings on to customers.
“Instead of selling a 20-ounce bottle of Coke or Pepsi for $1.59, we sell a 24-ounce bottle [of Faygo] for 99 cents,” says Don. “Instead of $3.49 for a 12-pack, it’s two for $5, or whatever it may be. This year, I think we will get an even bigger piece of the pie. “It’s no different than General Motors—if you aren’t going to be efficient, you’re going to die,” he concludes. “You’ve got to take costs out of the system and you’ve got to give values to the customer.”
Another example where Kwik Trip had dominated the commodities game is fuel. “Gasoline again is a commodity, and I think we can buy as well as anybody,” says Steve. Kwik Trip has 30 different suppliers and delivers 95% of its own fuel itself. “It’s just a matter of, do you have the staying power to stay with someone who’s going to sacrifice margin for just driving customers in? We won’t be undersold on gasoline. We don’t let anybody have a price advantage.”
As an example, he cites Walmart, which at one time had 30 fuel sites in the state of Wisconsin, run by Murphy Oil Corp. Today, it has two.
The Zietlows believe Kwik Trip’s refusal to let Walmart beat them on price not only prevented expansion of the company’s fuel sites, but also led to its retreat from the market.
“That would be an example of: Can we be competitive with Walmart?” says Don, who sees it as a them-or-us situation. “If we would have let them win, and given them 2, 3, 4 cents more per gallon, they would have put more gas operations in.”
FUELED BY FOOD
Despite its prowess at selling fuel, Kwik Trip considers foodservice the company’s foundation of future growth and financial security.
One recent milestone cementing its choice: Foodservice recently generated more gross-profit dollars in one week than fuel or tobacco. In 2009, it generated nearly $190 million in sales and today is growing at a rate of 10% to 12%. Of course, it didn’t start out that way.
When the company plunged into foodservice in 2002 with the introduction of its Hot Spot hot case, the investment was huge, and so, initially, was spoilage. The investment of time required proved surprising as well.
“On the surface it seems like it’s not that difficult, but when you really get into foodservice, there are so many moving parts and so many things to do,” says Steve. “The amount of time from when this item is what we want to have in our stores, until it actually gets into our stores, is longer than what you’d think. It’s probably a good thing in the end because you want it to be safe, high-quality, a value.”
Kwik Trip’s Glazer, a Krispy Kremeinspired doughnut, took a full year to develop. The company is currently wrestling with the surprising complexity of lettuce—from washing, drying and cutting it to keeping it fresh. And in the future, take-home refrigerated meals—single-serve or family portions— are on the radar screen.
In 2009, Kwik Trip sold 1.5 million doughnuts weekly, 10.8 million roller-grill items for the year, 274 units daily from its Hot Spot hot case per store, and 960 units of items from its Fresh Case (cold sandwiches, yogurt, salads) per store per week. The secret, says Don, is the freshness. Store deliveries take place each night so that items with a short shelf life are in place by 5 a.m. Once an item sells, it is automatically reordered at the commissary.
On promotional days, volume sales explode. KT runs a weekly $1 Wednesdays promotion, where it offers a food item—pizza slices, cheeseburgers—or an item from its “red zone” of vertically integrated, high-profit products, for $1. On a typical day, a Kwik Trip store may sell 25 pizza slices; on the promotion day, store sales can sizzle to 322, or 118,000 chainwide. On weekends, the stores offer bakery promotions.
The success of the foodservice program, of course, is tied intrinsically to Kwik Trip’s coworkers. Employees understand that sales of high-profit items benefit them directly, providing motivation for suggestive selling on promotions.
“I think people understand when we sell a loaf of bread, the store makes a profit on it, the bakery makes profit, and as a group, we all share,” says Greg Olsen, director of retail operations. “Most folks get the vertical-integration part and really support those products.” Meanwhile, cleanliness has a direct correlation to customer acceptance of c-store food.
“If you’re not clean on the inside or outside, if you don’t have clean bathrooms or uniforms, the customer doesn’t look at us as a good place to buy food,” says Don.
Folks in Kwik Trip’s markets definitely consider the chain a good place to work. The company had 40,000 online applications for 3,000 positions last year. Average turnover for full- and part-time workers combined is less than 25%, while for positions at the support center it is only 1%. Shrink is less than four-tenths of 1%. Don considers 25% “a lot of turnover,” because that equates to 2,500 new employees who need to be trained each year. But compared to the 2009 industry average of 52.1%, it is among the industry’s lowest turnover rates. “Can we get to 15%? I don’t think so,” he says, “because there is certain turnover that’s going to be mandatory.” At the same time, Kwik Trip acknowledges that for some employees, it can do a better job highlighting the opportunity for long-term growth within the company. “The problem for us,” says John McHugh, corporation communications director and head of training, “is we don’t do a good enough job of communicating to a young college student who comes to Kwik Trip for a job to help them see they can make this a career.” Most of the upward paths are through retail; otherwise, the support center provides opportunity, but it requires folks to move to La Crosse, which, while beautiful, is not a buzzing metropolis. At the same time, it tends to attract a lot of employees with a wholesome, Midwestern sensibility. For those employees who did stick around for the long term, Kwik Trip has recently unveiled a sabbatical program. Employees with 20 years of service at the company earn a paid four-week sabbatical, to use as they please within one year of their anniversary date, in addition to any vacation time they have already earned. “It’s a good thing for those really long-term people who have created a lot of value for KwikTrip, to thank them,” says Steve Zietlow. “For some people, we have to physically take their badge and push them out the door. It’s been the most well-received benefit we’ve ever had.” The sabbatical program—just like the profit sharing—is simply one piece of this compelling puzzle that is Kwik Trip’s compelling culture. And from Don Zietlow’s perspective, it’s an easy decision to make. “I’m proud of our people,” says Don. “They want to give good customer service, they want to be clean, and they want to have the best quality food. So if we can give them the tools, and if they can share in the pie, it’s a lot easier.”
President and CEO
Talk to Kwik Trip president Don Zietlow for a few minutes and you’ll quickly appreciate his uncanny ability to recall all of the various metrics that quantify Kwik Trip’s operations. This is despite the fact that a computer—and calculator—are conspicuously absent from his office desk.
“If I do have a gift, it’s probably with numbers,” Don says. Nowadays, he spends one-third of his time examining Kwik Trip’s P&Ls and looking for sales and profit trends in “the numbers.”
Another third of the time is spent at Kwik Trip headquarters, meeting with management; his son and director of petroleum, Steve Zietlow; and the production department. The final third of his week is devoted to visiting Kwik Trip and competitors’ stores, and examining real-estate opportunities. While he has the energy and enthusiasm of a 25-year-old, Zietlow, at 75, is well past retirement age. But he is still actively leading Kwik Trip—a circumstance that surprises even him.
“I never thought I’d still be here, because I thought they would have appointed a new CEO,” says Don of what he describes as Kwik Trip’s “very aggressive, strong” board of directors, which includes his three children. The question of who will succeed Don is still unanswered. For now, “the kids” and Kwik Trip seem happy to keep Don on the case.
“When we bought our last partner out in 2000, I told the kids, ‘I’ll be here for 5 years if they want me,’ ” Don recalls. “It’s been 10 years now. I have a passion for the business, although I don’t have any voting stock at all—the children have it all.
“I enjoy what I’m doing, but I think once I leave the company, it will be much better,” he concludes. “Young minds, young people—I think that we have a footprint that they can grow from.”
Director of petroleum operations
It’s easy to see Steve Zietlow as one of the heir apparent leaders of Kwik Trip. As a second-generation owner, along with his siblings, he personally announces any new company initiatives. He often joins Don in media interviews, and he shows keen command of areas beyond petroleum. And, perhaps most tellingly, his name appears alongside Don’s in the famous letter that hangs in every Kwik Trip bathroom stall.
Colleagues describe Steve as more reserved than Don, but exceedingly bright and capable of solving problems. The origins of his career highlight this.
Steve joined the company out of college in 1994, as his father retired from the grocery wholesale business and came to lead Kwik Trip full-time. In a move that mirrored Chet Cadieux’s induction into QuikTrip [CSP—Dec. ’07. p. 40], he was given an opportunity to work in each department of the chain for a month, to not only learn the company but also to figure out where he wanted to make a difference.
“After a year and a half, Dad said, ‘When you’re done, come back to me and tell me what you want to do,’ ” Steve recalls. “I told him what I wanted to do, and he said, ‘No, go over here.’ ” What Steve was most interested in was buying and procurement; however, Don had a problem that needed solving in the petroleum department.
“The guy who was the head of the fuel department wasn’t too happy to have Steve there,” Don says, “and Steve wasn’t too happy to go.” But Don made a deal with both men: Give Steve six months to solve the issue in the petroleum department; then, both could decide if the arrangement worked.
“Six months to the day, Steve said, ‘I kind of like it here,’ ” Don says. And the head of the petroleum department didn’t want him to leave. In 2000, Steve took over the department and has made his mark: In the past three to four years, the 11-person department has generated half of Kwik Trip’s profit.
Vice president of support operations
With 2010 marking Steve Loehr’s 20th year at Kwik Trip, he will be one of the first to enjoy its new sabbatical program. Incidentally, he plans to spend three weeks of his sabbatical in Israel with his wife. And for someone who arrives at the office by 5:30 a.m. by choice— he can get more work done in those early hours, he says—it will be a definite change of pace from his busy Kwik Trip life.
As head of support operations, his largest challange comes from outside KT.
“To me, our biggest challenge today is to keep government out of the way, limit governmental regulations, fees, taxes they’re charging our company,” he says. As such, Loehr has led Kwik Trip’s political activity, which means four to five trips to Wisconsin’s capital each year, as well as forays to Washington, D.C., as a member of NACS and SIGMA. And as an employer of 9,500 workers across three states, with 6,000 in Wisconsin alone, Kwik Trip has some heft. It also has built a reputation as an honest constituent whom representatives can call for a business perspective.
Last year, Loehr brought along 50 Kwik Trip co-workers to Madison to meet with local representatives and share their views on pending legislation and the state of the economy. They can also volunteer to make phone calls to local legislators and mark a portion of their paycheck for Kwik Trip’s political fund, which already has 300 participants.
Employees are not told whom to vote for, Loehr says, nor are they paid for participation. Rather, they seem to be motivated by protecting Kwik Trip’s profits and, ultimately, their piece of the profit-sharing plan.
“We work hard with our employees to try to educate them on what’s happening politically not only in the states we operate in, but also nationally now,” says Loehr. “We just feel it is part of living our mission statement to help make a difference in people’s lives, to involve them in the political process.”