WHEN INDUSTRY PUNDITS look at the future of retail banking, they often see offices full of the latest technology.

Thomas M. Garrott, on the other hand, sees miles of supermarket aisles.

More specifically, the chairman and chief executive of National Commerce Bancorp. - a former grocer - sees his institution as a fixture inside supermarkets, in much the same way florists, pharmacies, and delicatessens have sprung up in American food stores.

National Commerce currently has 49 bank locations called Money Markets in grocery stores. Those locations - please don't call them branches, Mr. Garrott pleads - far outnumber National Commerce's 16 traditional offices. No other bank in the country maintains such a mix of retail outlets.

And through a subsidiary, National Commerce Bank Services, it has sold its expertise in developing and opening such locations to more than 85 institutions nationwide.

Now the Memphis-based bank, with $2.5 billion in assets, is moving beyond its Tennessee roots. After acquiring de facto interstate branching powers through a federal savings bank charter it gained via acquisition of a tiny thrift in July, National Commerce opened six more locations in Kroger supermarkets in the Roanoke, Va., area.

In making its commitment to supermarket banking, National Commerce essentially transformed itself from a steady, if unspectacular, performer to one of the industry's brightest regional stars.

Over the past decade the company's assets have more than doubled, as has its return on assets. Net income, earnings per share, and dividends have all increased sixfold during that time. National Commerce's efficiency ratio, or its noninterest expenses as a percentage of revenues, dropped from 74.1% in 1982 to 54.1% in 1992.

"They've developed a process that works, and they know how to manage it," said Susan Leadem, an analyst with Atlanta-based Robinson Humphrey Co.

"Most of the concerns they have are ones that other banks would like to have," such as the possibility of encroaching competition, she added.

Ms. Leadem rates National Commerce stock, which currently trades at nearly three times book value, as a "long-term buy." Accounting for a 3-for-2 stock split earlier this year, the bank should earn $1.05 per share this year, and $1.17 in 1994, according to consensus estimates from First Call Corp.

National Commerce's transition from the favored institution of Memphis' moneyed elite - one client is the Elvis Presley estate - to supermarketeer didn't happen overnight.

Initially, Mr. Garrott was the prime mover behind the transition. After 17 years as an executive at a Memphis food wholesaler, he felt "burned out" on the grocery business. "I had done all the things that had interested me there," said Mr. Garrott, 57.

So in 1982, at the behest of his neighbor, National Commerce chairman Bruce E. Campbell, Mr. Garrott - al- ready a bank director - went to work there.

When Mr. Garrott arrived, the company's flagship, National Commerce Bank, was a staid, middle-market lender. But both Mr. Campbell and Mr. Garrott realized that commercial lending was becoming more of a commodity business.

"It was apparent that we were gone as an independent if we didn't do something," said Mr. Garrott.

On the retail side, National Commerce ranked a distant third among the three large banks in Memphis at the time, with a client base that had aged beyond its peak borrowing years.

"There wasn't many of 'em, but they were wealthy, and they also had the habit of dying," Mr. Garrott noted.

Mr. Garrott spent his first two years at the bank trying to build retail business using traditional methods. "I was able to take it [National Commerce's account base] from 35,000 all the way down to 30,000," Mr. Garrott joked. "I lost 5,000 customers and spent a couple of million dollars in the process."

After that expensive learning experience, the former grocer had his epiphany. "It was like a light came on," said Mr. Garrott. His initial insight involved the common denominator among grocery shoppers and banking customers: convenience.

"Wouldn't it be doubly convenient if we could put the bank in the supermarket?" Mr. Garrott thought. With the blessing of Mr. Campbell, he set about doing just that in 1985.

Putting branches inside retail stores was not a new idea. But earlier efforts by First Nationwide Bank to set up shop inside K mart stores were hampered by the limited functionality of the branches themselves.

From the start, National Commerce's Money Markets have been full service banks, following a formula that is constantly fine-tuned.

The original concept was relatively simple. Place a bank location less than 500 square feet at the front of a 50,000-60,000 square foot supermarket. Include teller stations, a conference room, safe deposit boxes, and an ATM. Staff it with four college educated employees imbued with a sales culture - Mr. Garrott calls them "BVAs," for Bright, Verbal, and Attractive. Piggyback on the grocer's advertising budget, and work closely with the store's management to develop promotional opportunities.

Like any bank executive, Mr. Garrott can recite the intricacies of his bank's operations. But he becomes truly animated when talking about the supermarket project.

"Most people don't know they need a bank in the supermarket. Once they use it, then they're hooked on it. We've created the need," said Mr. Garrott.

The formula played right into current demographic trends. The convenience of having a bank in a supermarket appeals to time-strapped families with two wage earners who share the household duties, including the shopping. Not coincidentally, this broad swath of the population also is more likely to have borrowing needs.

"This is not what a lot of bankers perceive it to be - a check cashing facility. That's what turns some bankers off," Mr. Garrott explained. "We let the grocery store's courtesy booth do that. The reason we went into this from the beginning was to make loans."

Supermarket branches also counteract traditional notions of new-customer contact. If a bank has 10% retail market share in a particular area, then roughly 90% of the customers in a supermarket are noncustomers, compared with estimated noncustomer traffic of 1% to 5% at a traditional branch.

"While the number of people that go to the bank is generally declining, the number of people that go to the supermarket is actually increasing," noted John L. LeCave, first vice president and director of marketing for National Commerce's lead bank.

To make that additional contact with noncustomers pay off, however, requires an all-out selling effort.

"As much as people sit down with a pen and try to figure [this concept] out, it's the |warm and fuzzy' customer contact that makes it work," said Ms. Leadem, the Robinson Humphrey analyst.

And National Commerce employees do sell. Things were quiet on a recent Wednesday as two employees minded the teller line at one of the bank's new Super Money Markets, in a Memphis Kroger store.

Within a few minutes, two more Money Market employees came into view. Where were they? "Working the dairy case," said branch manager Linda C. Rose. "That's usually a good place to find customers."

National Commerce expends considerable effort finding employees to staff the branches, and then teaching them operational, lending, and sales skills. Incentives form a good deal of their compensation package.

"Every retail manager receives stock options after a six month trial period. Twenty-seven percent of our employees have stock options," Mr. Garrott said. "We've had a few gray hairs, particularly on the credit culture side, but the young people provide the energy and the intellectual capital to drive the company, so they've been rewarded."

In addition to the focus on selling, National Commerce restructured its back office operations - under the direction of chief financial officer Walter B. Howell Jr. - to support the new look of the organization.

For example, instead of relying on complicated and expensive on-line systems for account opening and other platform functions, employees first collect much of the data on paper for eventual entry at the bank's operations center. As a result, it takes a supermarket banker an average of only six minutes to open a new checking account for a customer.

Working this way, National Commerce's back office "took on more work, [while they] cut their work force. That has contributed dramatically not only to our efficiency ratio but also our quality of service."

There is also a focus on delivering timely data to the appropriate employees. The performance of the entire company is closely reviewed in a weekly meeting.

"If we see we're going off kilter on a plan, we're going to fix it, and we're going to fix it now," said Chuck Ogilvie, a vice president of National Commerce Bank Services.

After tolerating the missteps of earlier in-store efforts, supermarket executives seem to be warming to the National Commerce program. "My rationale is to give the customers as many reasons as we can to come to the grocery stores," said Mark Thompson, president of the Nashville division of Kroger Corp., which has 68 stores in the Nashville and Knoxville areas.

Kroger has been a leader in placing banks in its stores, but Mr. Thompson said that is not a corporate directive. Rather, bank placement is at the discretion of regional executives.

He said National Commerce has a right of first refusal arrangement to place locations in any new stores built in the Nashville area. The bank typically signs a 20-year lease with Kroger. The rent typically increases on a sliding scale during the first five years, to give the bank an opportunity to recoup its start-up costs.

"It's another thing that locks in the customer," said Mr. Thompson, who is a member of the boards of directors of National Commerce's Nashville and Knoxville banks. "It also saves the bank a lot of money. They have access to our customers for 10% to 15% of the cost of building a branch in our parking lot. So it's a good deal for both parties."

Through its bank services unit, National Commerce has been taking that message on the road for several years. It has enlisted a number of major banks as clients, including Nations-Bank, Wells Fargo & Co., and First Chicago Corp. The clients pay an up-front fee to get their supermarket programs off the ground, along with a monthly sublicensing fee based on the number of branches.

"Many banks are looking at supermarket banking in an esoteric way," said Doug Ferris, an executive vice president with the services unit. But, he says, the research is worthless "until a line banker looks at it, understands it, and buys into it."

National Commerce plans to develop the consulting business, even as it expands in the states surrounding Tennessee. "We think we can operate with the formula we've developed everywhere in the country," said Mr. Garrott. But the company will try to avoid areas covered by banks that have alliances with its services unit.

In fact, competition might be the only thing that rains on the National Commerce parade. The number of U.S. supermarket branches has grown from 700 in 1990 to 1,700 in 1993, according to International Banking Technologies, a Norcross, Ga., firm that also develops supermarket branches.

"There is room for other competition, because they're basically the only ones out there," Ms. Leadem said of National Commerce. She added that the work of National Commerce and a handful of others in the area of supermarket banking has forced larger competition to respond.

Whether those competitors can make it work as well is another question for the pundits to ponder.

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