Deal of the Year: H-E-B acquires Favor

Highlights

H-E-B store count:

400 (U.S. and Mexico)

Number of Texas cities Favor served pre-deal:

Outlook:

With the acquisition, H-E-B can expand delivery services, move into more cities and continue to hone its digital transformation.

For 113 years beloved Texas chain H-E-B never bought or merged with another company, preferring instead to organically grow its stores and services in order to keep tight control over operations.

But in February, the company broke that streak. H-E-B acquired Favor, an on-demand delivery company known for its army of blue tuxedo T-shirt wearing workers. Financial terms of the deal were not disclosed.

In addition to being a first for H-E-B, the acquisition was also incredibly innovative. As one of the few profitable on-demand delivery outfits, Favor operates a well-known and well-run business. It also helps H-E-B scale its own e-commerce operations in a highly competitive Texas retail landscape while also extending into the fast-growing on-demand and restaurant delivery space.

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What sealed the deal though, according to Diana Sheehan, vice president of retail and shopper insights with Kantar Consulting, was the fact that Favor is a homegrown company. It’s headquartered in Austin, Texas and operates in more than 80 cities across the state, many of which overlap with H-E-B. Sheehan called the deal a "perfect" match.

"[H-E-B] doesn't like outsourcing, they don't like having to deal with national players in their own market. They're the experts," Sheehan told Grocery Dive. "For them, this was a natural step to be able to compete in something that's happening in that marketplace."

H-E-B — which declined to comment for this story — has said it doesn't want to change Favor's business model. Still, the grocer wasted no time integrating its acquisition into its growing digital operations.

Three months after closing the deal, it named Favor CEO Jag Bath, who previously worked for Weight Watchers and RetailMeNot, to the newly created role of chief digital officer, charging him with overseeing the retailer's omnichannel push. Subsequent top-level hires followed, and in early September, H-E-B announced it would open a new, 81,000-square-foot digital headquarters in Austin to house the retailer's digital team along with Favor.

Under H-E-B, Favor plans to more than double the number of cities it served before the deal, according to local reports. It has also expanded its services and boosted the number of runners who contract with the company by 20,000. This summer, H-E-B launched alcohol delivery in 30 markets powered by Favor.

“As we look to the present and future, we have to become more and more convenient,” Martin Otto, H-E-B’s chief operating officer, recently told Texas Monthly. “Favor has been one of the companies we work with on that, and it’s clear to us that they’re the best in the game, so it made a lot of sense.”

Favor gives H-E-B a foothold in the growing on-demand delivery market that also includes names like Deliv and Postmates at a time when consumers are increasingly willing to shop for food, home goods, electronics and more online. Restaurant delivery is a particular bright spot, especially in foodie-dense cities in Texas, like Austin and San Antonio. According to the NPD Group, restaurant delivery sales are up 20% over the past five years, while the number of deliveries have increased 10% in that time. By 2022, Cowen & Company project that the service will rake in $76 billion nationwide.

"As we look to the present and future, we have to become more and more convenient. Favor has been one of the companies we work with on that, and it's clear to us that they're the best in the game, so it made a lot of sense."

Martin Otto

Chief operating officer, H-E-B

Sheehan acknowledged the benefits of owning a slice of the restaurant delivery business, but predicts Favor's biggest asset to H-E-B will be in grocery. The supermarket chain operates about 340 stores in the Lone Star state and hopes to bring around half of those online with delivery and curbside pickup by the end of the year. It’s also pushing mobile ordering, a skip-the-line checkout app and other features that will help reach more consumers where and how they want to shop.

In addition to helping these services scale, H-E-B can also lean on Favor for unique solutions that set it apart from competitors, Sheehan said. The grocer has some of the strongest foodservice offerings in the industry, she noted, ranging from breakfast tacos to coffee shops and pizzerias.

"H-E-B is an incredibly strong player in the foodservice space," she said. "I could see that becoming a key element that’s clearly distinct from what Kroger and Walmart can offer. With Favor, you can get your groceries but you can also get tacos from the taqueria."