For supermarket owners, the scary part started 14 years ago when the Bentonville, Ark., mega-retailer expanded into groceries. Wal-Mart now has more than 1,000 of its so-called Supercenters, which include groceries, and this year claimed the number-one spot in the U.S. grocery market, according to the trade magazine Supermarket News. Wal-Mart beat out Kroger, Albertsons and Safeway, with an estimated $65.3 billion in food sales in the fiscal year that ended Jan. 1, 2002. U.S. consumers spent $682.3 billion on groceries last year, and Wal-Mart took 9.6 percent of the total receipts (and even more when you add grocery sales from Wal-Mart’s Sam’s Clubs stores).

That takes us to now, when the clouds continue to form over the supermarket parking lot: Wal-Mart is adding another 185 Supercenters this year and has started its latest onslaught, opening 12 Neighborhood Markets, small groceries-only outlets, during the past year bringing its total to 35. Plans call for another 20 this year. Wal-Mart won’t reveal expansion plans beyond that and declined to comment for this story, but analysts predict that Wal-Mart could have thousands within five to 10 years. The grocery-focused Neighborhood Markets present yet another challenge to grocery chains because they bring geographic convenience to Wal-Mart’s recipe of gaining scale and volume?and the lowest prices?from its famed distribution infrastructure. Meanwhile, as Wal-Mart has gained ground organically, supermarket chains have sought growth by buying each other up, creating sprawling conglomerates with disparate IT systems.

While Wal-Mart is the leader, it isn’t the only 800-pound gorilla out there. Discounters such as Target and Costco and niche supermarkets such as Trader Joe’s, which focuses on discounted gourmet products, are also pressuring the traditional grocery chains. In an industry with razor-thin margins (the typical supermarket retailer makes a penny on every dollar of sales compared with Wal-Mart’s 8 or 9 cents on the dollar), observers say supermarket chains must move ahead with their IT or move aside.

"Food retailers have to look at their IT and ratchet up their investment," says Pete Abell, a retail analyst at AMR Research in Boston. "They’ve been so far behind Wal-Mart and Target that unless they step up to the plate and spend 50 to 100 percent more, they will continue to fall behind."

On the Trail of the 800-Pound Gorilla

Grocers realized that they had to change the way they were doing business a decade ago, when many grocery chains hit a replacement cycle for an earlier generation of point-of-sale and in-store systems. But the introduction of technology hasn’t always come easily. Because of the industry’s narrow margins, companies have been slow to adopt new technologies. And as supermarket chains have merged and consolidated, they have been stuck with multiple, nonintegrated systems. Adding to the complexity, many grocery retailers suffer from vast information gulfs, as disjointed distribution systems mean back-office operations rarely have a clear view of what is selling in the stores. Wal-Mart, by contrast, has driven efficiencies by centralizing its distribution system."The bringing of technology into the supermarket industry has probably been forced by Wal-Mart," says John E. Metzger, senior vice president and CIO at A&P, the 144-year-old Montvale, N.J., grocer, now in the midst of a $250 million systems and supply chain overhaul that will ultimately replace a high percentage of its current applications in its 750 stores. "If we didn’t start investing early on, we were absolutely dead."