by Susannah Patton

Supermarkets Turn to IT for Survival

Oct 15, 200216 mins
MobileSmall and Medium Business

A generation ago, you went to the bakery for bread, the butcher for meat and the general store for rice. Along with the groceries came a good dose of conversation and personal service. Then came the supermarket, where you could get your Wonder Bread, hamburger meat and Uncle Ben’s under one roof. The personal touch was lost, but shoppers quickly gave up local gossip for the convenience of one-stop shopping.

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

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.”

Metzger, who before he was appointed CIO in February headed the company’s tech revitalization program dubbed Evergreen, notes that a lot of activity has occurred in terms of supply chain investment in the industry, but that legacy systems are slowing down the process in some cases. Still, grocery industry CIOs agree that supply chain renovations remain an urgent priority, even if it won’t mean catching up with Wal-Mart. Bill Homa, CIO at Hannaford Bros. in Scarborough, Maine, says that all grocers need to work on the supply chain in order to increase efficiencies and cut costs. “You don’t have to be as good or better than Wal-Mart, but you better be in the ballpark,” Homa says.

Hannaford Bros., like other grocery chains, took its first steps into supply chain automation with a warehouse management system (WMS) that allowed distribution centers to keep better track of inventory. In a typical scenario, a WMS is used in conjunction with bar coding and radio frequency scanners so that workers in a distribution center can use the RF scanners to locate the right merchandise for the right store.

In order to compete with Wal-Mart, grocers need to go several steps further with supply chain management and automated replenishment systems that can increase communication with suppliers and ensure that products remain in stock. Hannaford, for its part, is now focusing on demand-driven replenishment with wireless technology from Symbol Technologies of Holtsville, N.Y. Using the Symbol units, store employees can communicate with the warehouse through a mainframe system in Scarborough and order grocery items that more closely fit the needs of individual stores. All of Hannaford’s 115 stores are using the system for grocery items, and two stores are piloting it for perishables. “It’s hard to beat Wal-Mart at their own game, which is price,” says Homa. “If we focus on service as well as price, we have a chance.”

Wal-Mart’s RetailLink private exchange has allowed the company to reduce the cost of transactions within the supply chain by providing daily scan-data to suppliers, creating a system in which items are rarely out of stock. By contrast, many grocery retailers have 8 percent to 12 percent out-of-stocks because partners can’t see the demand levels, says AMR Research’s Abell.

Tom Nowak, senior vice president of IS and CIO at the Price Chopper Supermarkets chain based in Schenectady, N.Y., is working on that problem by implementing retail software that promises to reduce out-of-stock product levels and help the company maintain inventory levels based on customer demand. Price Chopper is in the first phase of implementing the software, from Industri-Matematik International, with the goal of having computerized ordering. “We’ll have a better sense of our stock, and we’re aiming for perpetual inventory,” Nowak says. “At that point, the computer can take over ordering for the store people.”

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.”

That’s starting to change. Larger chains such as Tesco of the United Kingdom, Kroger, Safeway and Ahold USA are all working on tests that target promotions and pricing based on loyalty programs. Stop & Shop, a Quincy, Mass.-based chain owned by Ahold USA, which is itself a unit of the Netherlands’ Royal Ahold, has recently spent millions to develop a data warehouse that allows the company to send out targeted direct-mail offers, offering discounts on diapers for shoppers with babies or ice cream to those with a sweet tooth.

Even some smaller chains are getting into the CRM fray. Price Chopper, for example, provides real-time information to customers on their loyalty points balance, which shoppers can amass for greater savings or rewards. Using software from Shelton, Conn.-based VRMS, Price Chopper is able to mine customer data in order to send out targeted offers. For example, if a customer has shopped regularly at Price Chopper for three years and then stops, the company can send that customer offers to entice her back. Or if a customer shops at Price Chopper, but never buys produce, it can send that person some produce coupons.

Price Chopper won’t reveal how its customer loyalty program has affected its bottom line, but insists it has been beneficial.

Grocery chains should also focus on providing the best assortment and product placement for their customers. One way to do that is to use software that sets prices based on customer demand, a sharp contrast to Wal-Mart’s lowest retail across-the-board philosophy. D’Agostino Supermarkets, a family-owned 23-store chain in New York City, says it has seen revenue grow 9.7 percent and gross profit dollars rise 16.1 percent since it started using software from DemandTec of San Carlos, Calif. Such software helps D’Agostino and others understand which grocery items are key to their customers so that promotions are successful.

At Giant Eagle stores, based in Pittsburgh, the IS department has been working with colleagues in the retail operations group on a knowledge management project they hope will boost the chain’s competitive edge by allowing individual stores to share money-saving practices. “We’re facing competition all along the line from the new mass market, including Wal-Mart, Costco and Target,” says Bob Garrity, senior vice president of IS at Giant Eagle. “We’re always looking for opportunities that will help us stay competitive by improving customer service.”

Giant Eagle began work on the knowledge management project four years ago and kicked off its pilot program two years later. Now, 120 of its 216 stores are equipped with new PCs so that employees in the meat, dairy and produce departments can log on to the company portal, known as KnowAsis, and share or receive tips on product assortment and how best to arrange products. The company invested $1.5 million in new PCs and says the entire initiative has cost more than $2 million. Giant Eagle has already seen an ROI from the project, says Bob Guy, director of retail operations, information and knowledge. He declined to provide a number but says the company no longer has to publish some 200 procedure manuals (such as how to cut meat or arrange products on display) because they can now be automatically updated online. So when the chain decides to change the “planogram” for its meat department displays, it can now send out digital photographs instead of sending someone out to each store.

Supermarkets of the Future

Ask people what bothers them most about their local supermarket, and they’re likely to reply: long lines, empty shelves and missing price tags. To address those complaints, among others, supermarket retailers are asking shoppers to do a lot of things themselves. Bar codes and scanners are giving way to self-checkout lanes, where shoppers scan and pack their own paper or plastic shopping bags. Internet kiosks offer store information and allow shoppers to preorder cold cuts from the deli counter or locate hard-to-find items. In some stores, you can pay without taking out your wallet by using a biometric fingerprint system. While some of these technologies are still unproven, supermarket chains should be experimenting with them to improve the shopping experience and to save money by cutting down on labor costs.

Kroger started testing a biometric payment system in April in three stores near Austin, Texas, and says early indications show that customer acceptance is good. Customers who have enrolled in the program pay for groceries by punching in their password, swiping their loyalty card and placing their finger in the device from Roundrock, Texas-based Biometric Access, which charges the customer’s credit card. “This kind of new technology improves customer service and reduces cost by speeding up service,” says Gary Huddleston, manager of consumer affairs for Kroger in Texas and Louisiana.

Stop & Shop has been testing wireless Internet tablets that allow customers to order deli items from an aisle, log on to the Internet while they are shopping and find out what’s on sale in the store. The chain reports that eight out of nine customers using the system liked it and would use it regularly.

Internet kiosks have had mixed results, but grocers see potential. Syracuse, N.Y.-based Penn Traffic, which has 216 supermarkets in the Northeast, has installed kiosks in six of its stores in a pilot program. The kiosks, known as Endless Aisle, allow customers to order products they can’t find, such as imported or gourmet foods. Penn Traffic says it is still evaluating the pilot, but Stop & Shop, which also piloted Endless Aisle in six of its stores, says it has found that customers are using the service more often from their home computers than from the store kiosks.

Looking ahead, grocery retailers are eyeing radio frequency identification, or RFID, a “smart tag” technology that could replace 30-year-old bar codes. So far, RFID is too expensive to tag all individual merchandise, but trial runs at companies such as the Marks and Spencer Group, one of Britain’s largest retailers, show it can pay for itself in increased efficiencies and less spoiled food when used on containers that carry food from suppliers to stores. RFID devices contain computer chips that can store a much larger amount of data than bar codes. If it catches on and the price comes down, shoppers could conceivably check out without removing items from the cart and grocers could more easily track their merchandise as it flows through the supply chain.

Says Pathmark’s Schoening: “It’s not for tomorrow?or maybe not even for five years. But the possibility is there to revolutionize the way we operate supermarkets.”