Just as supermarkets killed your local butcher and baker?and drove most general stores out of business?grocery chains are themselves at risk of becoming obsolete. Now, Wal-Mart and other large discount retailers such as Target and Costco Wholesale make it so you can pick up a few lawn chairs, the latest DVD and some undershirts while you’re out shopping for dinner. Low prices on staple items are increasingly driving shoppers to the giant discount stores, which in turn are opening up more grocery outlets.

Don’t count out the supermarkets just yet, however. Traditional grocery chains?from number-one Kroger to small players such as Price Chopper and Hannaford Bros.?are betting big bucks that new technologies will help fend off Wal-Mart’s assault. And while Wal-Mart is famous for its early and effective use of supply chain technology to keep costs and prices low, supermarket chains are working to distinguish themselves from the big discounters, which lack customer loyalty programs and rely on uniform pricing. The grocers, in addition to revamping their own supply chains, are investing in technologies that will boost customer loyalty, respond to local consumer needs and enhance the shopping experience.

"Supermarket operators are starting to focus on how we are going to be different," says Bob Schoening, CIO at Carteret, N.J.-based Pathmark, which is in the midst of a $31 million across-the-board technology overhaul. "We have to answer the question: Why should people shop our stores versus Wal-Mart, where sheer buying power and systems can deliver items cheaper than we can?"

The ABCs of Grocery Retailing

Finding the answer to that question begins with a short history lesson. Wal-Mart, the world’s largest company, built up its retail empire in the 1980s using a combination of shrewd business strategy and technological know-how. It invested heavily in supply chain technology before other retailers, and it lowered supply costs with its massive and efficient distribution centers. Wal-Mart’s private exchange, known as RetailLink, provides suppliers with raw sales and inventory data to better manage stocking decisions and reduce costs of transactions within the supply chain. (For more about Wal-Mart’s IT, see "The IT Inside the World’s Biggest Company," at www.cio.com/printlinks.)