How IT Shapes ‘Store of the Future’ for Retailer Family Dollar

“Everybody knows retail IT is lean,” says Josh Jewett, CIO of Family Dollar Stores, a discount retail chain of more than 6,400 stores in 44 states, competing wih the likes of Dollar Tree and Walgreens.

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Indeed. Yet in this competitive business with historically tight margins, Family Dollar’s business and IT sides have come together to do a major revamp of the company’s IT. This includes a portal project that delivers daily business intelligence (BI) data—including sales trends—to store managers using a lean communications pipe for data (64Kbps frame relay lines). Those store managers used to wait for paper reports via snail mail. Also on the revamp menu: Replacement of the point-of-sale system—the sacred cow that retail industry IT departments rarely advocate touching.

What’s the secret to making an IT overhaul on this scale work? Alignment.

The changes began when IT and the business side crafted a vision of the company’s “Store of the Future” and then designed the technology framework that would be necessary to support it. So far, IT’s keys to successful execution have been tight partnerships with the business, strong executive support, a flexible consulting partner and a commitment to learning new IT skills as you go along, Jewett says.

Keep in mind, Family Dollar implementing a portal project isn’t revolutionary, says Paula Rosenblum, an analyst and managing partner with Retail Systems Research, noting that in discount retail segments like party supplies, where she worked, business intelligence portals were common seven years ago.

A Common Headache for Retailers

To be fair, no one company in Family Dollar’s market segment stands out for being an IT guru, Rosenblum says, with the possible exception of Big Lots, which has done some innovative work with initial allocation of merchandise to stores (getting the right product to the right store in the first place, to avoid costly store-to-store product transfers that aren’t selling well in a particular locale), she says.

But what’s intriguing about Family Dollar and its discount store peers is the stunning volume of data with which they grapple, she says. “These guys are mashing up some serious amounts of data,” Rosenblum says, due to the sheer number of product SKUs in the stores. And due to the commodity nature of the products, “You need the ability to make intelligence out of it pretty quickly. You don’t want to wait and see if a product will do better tomorrow.”

“The 90’s and early 2000’s were all about efficient supply chain,” she says. “Having an efficient supply chain is now table stakes. Now it’s about providing near real-time information on what’s selling and what’s not. Every customer trip becomes precious.”

Does this business intelligence desire sound familiar? Read on for a look at how Jewett’s team is pulling it off in a cost-conscious environment.

Four Strategic Goals for Family Dollar’s IT System

Family Dollar, a $6.8 billion company founded in 1959 and based in North Carolina, is the kind of place you might go to pick up a case of Diet Coke and some chips, and walk out with those items plus a paper tablecloth and some Hanes socks.

The store carries all name-brand merchandise, with most items ringing up at less than $5. The typical store has 6 to 8 employees, 2 to 3 cash registers, and 7,000 to 9,000 square feet of floor space. That store has to compete with other discount stores, supermarkets and drug stores. “In retail, there’s been a blending of channels,” says Jewett. “You can buy toothpaste at 7-11, Walgreens or Family Dollar.”

Even the mighty Wal-Mart is struggling to convince consumers that it’s the place for these kinds of items. But Family Dollar is committed to an aggressive growth clip: In the five years that Jewett has been there as CIO, the company has added 250 to 500 stores per year; it added about 300 last year.

When Jewett came on board, he learned the business side had four strategic goals that IT needed to help support: expanding in existing urban markets and improving store operations there; expanding the food assortment in locations carrying groceries; expanding the payment types accepted to include options such as food stamps and credit cards; and continuing to increase the number of stores.

“We birthed the store of the future project because we didn’t believe our existing technologies were necessarily going to drive those goals,” Jewett says.

The “Store of the Future” Template

The “store of the future” for Family Dollar—a technology vision that’s been rolled out to about 750 stores so far and will hit another 1,500 in fiscal 2008—looks dramatically different than from those in the past. The old stores were using a color-coded paper folder system for tracking store management activities and using back-of-store PCs running DOS with dial-up lines, Jewett notes. Good old three-ring binders were plentiful for requirements like training and hiring, he says.

The replacement: The “Red Zone,” Family Dollar’s new portal, sends key data from corporate to store managers using a lean bandwidth arrangement. (“Red Zone,” selected as a name by Family Dollar employees, refers to the last yards before you get a touchdown in football; red is also the company’s corporate color.)

Store managers access that portal via the cash registers: “It’s very important for the store manager to be at the front of the store,” Jewett notes. A centralized Oracle database at corporate feeds the portal using BEA software in the middle. But since the stores only have a cost-minded 64Kbps frame relay line for data, Jewett’s IT team and its consulting partner on the project, Ironworks, had to keep the flow of information in check. So they created operational data stores—lighter views of the data customized specifically to what district managers and store managers will need.

Daily Updates to Store Managers

Whereas managers previously received bulky reports via snail mail from corporate on matters like loss prevention rates and top sellers at other stores, they now get daily, tailored updates via the portal. After nightly batch processing, the system preloads data pertinent to the region and/or the store for the manager’s review the next day. “The goal is to give daily, actionable BI to that store manager,” Jewett says. The store manager can track factors like their store’s sales performance against plan, and when the next delivery truck will arrive, he notes.

The portal system also helps maintain product ordering, track employee training and do employee screening and hiring. Kronos serves as a third-party partner to handle the hiring and employee onboarding process, which has now ditched the three-ring binder system to become nearly paperless, Jewett says.

Providing some early ROI, the changes to the hiring and screening process have helped the company reach a goal of getting store manager turnover below 40 percent, Jewett says. The company has also improved training while cutting costs, and improved compliance monitoring, he says.

What can other CIOs learn from this portal project? It certainly didn’t require cutting edge technology. The cash registers, in case you’re wondering, run Microsoft Terminal Services software, which is thin-client software, and the store managers don’t even use a full-blown e-mail client. The portal handles most of the managers’ needs.

Overall, don’t be afraid of a direct approach when implementing a portal project like this one, Jewett recommends. A lot of companies choose to start a portal project with a “B” or “C” priority project, like distributing employee-newsletter-type information, Jewett notes. Family Dollar went right for the “A” priorities, the business processes of the store managers and their district managers, he says. The IT team now does a new release on the portal every 3 to 6 months, adding sales indicators and alerts, for example, to product recalls.

An industrial engineering study on the store’s checkout lanes was IT’s ally here: The study convinced Family Dollar’s business and IT sides to reduce the number of checkout lanes in the company’s designs for its store of the future. “That allowed us to redirect capital to the portal,” Jewett says, as did ripping out the previous back-room PCs running DOS that were made unnecessary by the new portal. In the process, stores got more merchandising space as well.

Pulling the Point-Of-Sale Plug

As if the portal wasn’t a radical enough change in itself, Jewett and his IT team are also overseeing a switch to a new point-of-sale system—the system that retail IT execs often dread touching, never mind ripping out.

“You cold have put in the portal without the POS system,” Jewett says. “But when we looked at the food strategy (and the company’s looming need to do things like accept coupons), the old POS system couldn’t handle it.”

Also, the company needed to accept payment types like food stamps and credit cards. “You could carry milk without a new POS system,” Jewett says. “But you couldn’t buy it with food stamps.” Merchandising strategy was also begging for more power: “We were going to need a platform for more efficient execution of markdowns,” for example, Jewett says.

Jewett and his team decided on a gradual POS rollout in concert with the store of the future revamp. First, they did one last upgrade to the legacy POS system, which was going to have to last several years for some stores until they got the new POS system. For that new POS software, Family Dollar chose technology from Triversity (now owned by SAP.)

Jewett prototyped the Triversity application in test stores, slowly: “We studied it for a good year,” he says. Production rollouts began in March of 2007 and was to reach about 750 stores by August, Jewett says. Lesson learned: The business and IT sides of an organization both needed plenty of time to work with the prototype and the early implementations, and IT had to decide to learn as it went, Jewett says. “The business wanted time to study it. And we in IT knew that was a whole new architecture and we needed to expand our IT skills back here.”

“As we’ve grown, we’ve developed some areas of expertise—project management, for example,” he says. “That’s helped us raise our process execution.”

So far, so good: No major glitches with the POS system, he says. Today, Family Dollar accepts food stamps in the approximately 750 stores that have the Store of the Future setup. And it’s testing credit cards in a limited number of stores.

“What we’ve developed here is a flexible, scalable model in the data center and the store. I don’t worry a lot about what I have to do five years from now, I worry about a flexible architecture.”

Lessons Learned for IT Leaders

Jewett almost makes it sound simple, the tight alignment between his IT group and the business necessary to keep a revamp effort like this one on track. But, he says, one key was that the store of the future vision got set and supported from the top, right from the start.

“Our president and CEO definitely set the strategic agenda,” he says. “We really worked collaboratively with the business every step of the way.” Like many of his peers, Jewett uses direct relationship managers in IT to stay close to individual parts of the business.

His advice to CIOs facing a major IT overhaul: Focus on the business imperatives and building a strong team. “You need to build a team and maintain a team that will help build that agenda,” he says. “It’s all well and good to understand what the business wants but it breaks down if you don’t deliver.”

But he does more than talk about alignment. “Once a year, I make everyone in IT go work in a store,” Jewett says. “The point there is we’re here to serve them. It’s a subtle but important point. They usually come back and say ‘Wow, it’s hard to be a store manager.'” And yes, Jewett goes too, most recently working at a store in Chicago for a couple of days.

One other factor has helped Jewett and his IT team execute the complex revamp: They’ve used one consulting company, Ironworks, from the start of the project, with good results. (Ironworks, known best regionally, has offices in Virginia and North Carolina, where Family Dollar is based.)

“They’re an expert in process,” Jewett says. “Yes, they bring tech skills to the table. But they’re helping us structure these efforts.” How has he made the consulting relationship work over time? Pick a partner with whom you have good chemistry and, as CIO, get to know the consulting team personally early on. Jewett says, adding: “Being a known customer is very important. People get into the trap of the first call you make being about a problem.”

Gross Profit Margin Rising

Is the Store of the Future revamp making a significant contribution to the chain’s bottom line?

It’s pretty early to judge, but according to fiscal 2007 results reported by the company in early October, Family Dollar’s gross revenue is trending up: That’s a good sign in what’s now a tough economic climate in its market, with rising energy and gas prices, and the subprime mortgage crunch, Jewett says. Family Dollar’s gross profit margin, as a percentage of sales, was 34 percent in fiscal 2007 compared to 33.1 percent in fiscal 2006. Sales in comparable stores (stores open at least one year) increased approximately 0.9 percent, according to the company.

Net income for the fourth quarter of fiscal 2007 increased 17 percent to $37.8 million; that compares to $32.3 million in fourth quarter of fiscal 2006, according to the company. Sales for fiscal 2007 were approximately $6.8 billion, about 6.9 percent better than fiscal 2006.

The growth plan continues: During fiscal 2007, Family Dollar opened 300 new stores and closed 43 stores. It plans to open about 300 new stores in fiscal 2008. Capital expenditures for fiscal 2008 are expected to be between $180 and $190 million.

Jewett and his IT team stay ready for that growth by staying nimble: “What we’ve developed here is a flexible, scalable model in the data center and the store,” he says. “I don’t worry a lot about what I have to do five years from now, I worry about a flexible architecture.”