Wal-Mart’s example with RetailLink gave rise to industry exchanges World Wide Retail Exchange and GNX, each of which counts dozens of grocery retailers as members. The public exchanges aim to reduce transaction costs through auctions and reverse auctions, in which the retailer solicits bids from suppliers for items that it needs. Kroger reported in its annual report that it had completed more than 300 reverse auctions in 2001, and Albertsons has also been active, buying a wide range of supplies by auction. Although some smaller chains are still waiting to see whether it is worthwhile to join, the larger players are pushing for wider adoption of the retail exchange to reduce gaps in supply chains. "Smaller players can get access to great technology through the exchange," says Bob Dunst, Albertsons executive vice president and CTO. "We need to get critical mass and standardize how the industry does business."

Grocery chains such as Safeway and Wegmens have also been experimenting with a supply chain technique known as collaborative planning, forecasting and replenishment, or CPFR, in which manufacturers and retailers share information in order to develop one common, improved forecast, which then drives down replenishment and manufacturing costs. That approach is still young, but grocery retailers need to focus on such technologies that can improve collaboration with suppliers and trading partners?even if they can’t lower prices to match Wal-Mart’s.

"Grocery retailers must get their prices as low as possible, but they will seldom be able to match prices [with Wal-Mart] and survive," says Thomas Murphy, president of Peak Tech Consulting in Colorado Springs, Colo., and former vice president of IS at Kroger. "Therefore, they must concentrate on the strengths that can differentiate them from a Wal-Mart: product assortment, customer service and perishables."

Setting Themselves Apart

With Wal-Mart and other discounters focusing on getting the lowest prices, supermarket chains need to build up customer loyalty programs, invest in knowledge management projects and investigate pricing technologies that can set them apart. "Wal-Mart is everyday low prices to everyone," says Henry Vogel, a Chicago-based retail analyst for the Boston Consulting Group who notes that the retail giant has shied away from loyalty card programs. "Grocery stores need to play on this by segmenting their customers and actively targeting their promotions."

Loyalty card programs are becoming more and more common, but so far they have been primitive for the most part. "Most chains have collected a lot of data but haven’t gotten very good at using it," says Murphy. "They have a mass merchant mind-set rather than focusing on one-on-one situations."