Ninth Annual State of the Industry/Supermarket Technology Report
When all is said and done, the linchpin of retail technology remains the point-of-sale system, where transactions are consummated, and the sales and customer data that drive the enterprise are captured.
So it should probably come as no surprise that in SN's ninth annual State of the Industry Report on Supermarket Technology, POS systems ranked as the area that most survey respondents -- an even 50% -- considered a high priority among technology applications for 2003. POS also garnered the most votes for 2002.
When asked if they would substantially upgrade their POS software in 2003, 35% said they planned to do so on a wide-scale basis, while 28% said they would on a limited basis, for a total of 63% with POS changes in the making. A little less -- 61% -- said they executed a POS upgrade last year.
It could be that a pent-up need for POS improvements caused first by attention to Y2K and supply chain performance and then by the slow economy is finally catching up with many retailers, who find they can no longer put off investing in this mission-critical area, observers noted. This is especially true for many chains that have been holding onto aging systems for many years, especially the durable IBM 4680/4690 systems.
"In terms of glaring opportunities, an area of particular potential in supermarkets is the replacement of aging POS hardware," according to IHL Consulting Group, Franklin, Tenn., in its "Market Study: Information Technology & The North American Supermarket," released last year. "Some units are now reaching 10-12 years of age and are due to be replaced in the next two years. By our estimates, there are over 300,000 POS units that can be replaced in the next three years."
Last year, Food Lion, Salisbury, N.C., replaced all of its proprietary 4683 POS terminals, which were almost a decade old, with PC-based IBM 4694 terminals, noted Doug Miller, director, store systems, for the chain. "We got a lot of life out of the older terminals, but it was time to upgrade them to improve reliability and performance and also to have an open, PC-based platform that gives us the opportunity to try different operating systems and applications."
Food Lion continues to run the IBM 4690 OS and IBM Supermarket Application, but Miller said the chain is tracking developments in other operating systems such as Linux and Microsoft XP Embedded as well as new graphical applications.
Also helping to drive the focus on POS systems is the marked growth in self-checkout implementations in the recent past. In 2001, said IHL Consulting, shipments of self-checkout systems increased by 235% over the previous year, raising the number of installed lanes to 10,980, a number the company expects to grow to 79,000 by 2005.
Indeed, in this year's SN survey, self-checkout devices got the most votes among technologies that respondents said they tested or launched last year, with just over one-quarter saying they tested or launched these systems. The percentage following suit this year, however, slipped to 15%.
For all the attention on the POS, it remains a daunting investment to make during still-uncertain times, which is why Miller said Food Lion is sticking to its proven operating system and application for the time being.
When they do invest in POS systems, it's important for those systems to integrate easily with other applications, both at the point of sale and in the back room. So as they pay greater attention to POS, respondents in this year's survey gave high priority to related technologies, including customer loyalty programs, data mining, electronic payment systems and category management.
Loyalty programs are gaining more attention as food retailers seek to hold onto their customers in the face of intense competition from Wal-Mart. Those programs ranked second behind POS systems among tech priorities for 2003, with 43% of respondents regarding loyalty as a major initiative, up from 30% for 2002.
A little more than 40% of respondents said they currently offer a card-based loyalty program, and of those that do, almost 60% said it was highly successful, compared to 39% in last year's survey. Significantly, 91% of respondents with loyalty card programs said they were using the data from those programs for such purposes as targeted promotions, category management and Internet shopping, up from 75% last year.
Indeed, data mining, data warehousing and category management were also way up on the list of major initiatives for 2003 cited by respondents. Data mining doubled its percentage of the vote to 30% in 2003 from 2002, while category management was given high priority by 37% of respondents.
Another technology associated with the point of sale, electronic payment systems, was considered a major initiative by 31% for both 2003 and 2002. The growth of electronic check conversion -- seen as improving the efficiency of check acceptance while drastically cutting processing costs -- is contributing to the interest in payment systems. Last year, 17% of respondents said they tested check conversion, though that slipped to 6% of those planning to do so this year.
Price optimization technology is an area that respondents said they are giving more attention in 2003. Nearly one in four said it was a high priority for this year, compared to 7% ranking it that way for 2002. Some retailers see this application as a way to compete with Wal-Mart on some prices but not others.
Another area of interest this year and last is disaster recovery (selected by 24% and 22%, respectively), showing the continuing impact of the Sept. 11 attacks and the threat of war. Loss prevention was a high priority among respondents last year, according to 31% of them, and will be among 20% this year.
With less than two years left before the Sunrise Date -- Jan. 1, 2005, which the Uniform Code Council has set as the deadline for North American retailers to be able to scan and communicate 13- and 14-digit Global Trade Item Numbers (GTINs) in addition to the traditional 12-digit bar codes -- retailers are starting to get their scanning and back-office systems ready. Among technologies that respondents said they would test or launch in 2003, preparation for 14-digit GTINs ranked first, notching 37% of responses, up from 15% for 2002.
Web-based electronic data interchange (EDI) was second on the list of new initiatives, with 26% of respondents selecting it, and 20% saying they tested it last year. More retailers are beginning to recognize the potential cost savings of switching EDI transmissions from proprietary value-added networks (VANs) to the open-standard Internet. And many retailers are mandating that their suppliers become able to accept and transmit documents over the Web as well.
Other areas high on the list for a test or launch in 2003 included promotional planning tools (19%), which AMR Research, Boston, has targeted as a key application for retail; biometric systems (17%), which are being propelled by new concerns about identity theft and terrorism; fuel integration/marketing (17%), which follow the rapid expansion of gasoline stations in supermarkets; voice-based picking in DCs (17%), which were a much-discussed topic at last year's Food Productivity show in Atlanta; and scan-based trading (15%), which is expected to benefit from progress in global standards and UCCnet.
Electronic shelf labels, which are being helped by their link to price optimization software, were tested or launched last year by 11% of respondents (down to 6% for 2003).
Starting to creep up on the radar is radio frequency identification (RFID), which has gotten a tremendous amount of attention as a result of pioneering research efforts at the Auto-ID Center at the Massachusetts Institute of Technology, Cambridge, Mass. The center has developed a new 96-bit electronic product code (EPC) that resides on a chip in a tag with an antenna that can transmit the data to a reader linked back to Web-based servers. The system is being touted as the next big advance in product identification that could replace the bar code someday.
Among survey respondents, 7% said they would test or launch RFID systems this year, up from 4% who did it last year. Asked if they were interested in evaluating RFID-based EPC technology, 26% said yes, and 24% said it was under consideration. Interest in this area promises to grow this year as more tests get under way and the Auto-ID Center holds its first symposium in Chicago in September.
Another area respondents said they are looking at is UCCnet, the non-profit Lawrenceville, N.J.-based subsidiary of the UCC that has established a data registry for item information intended to support industry efforts at data synchronization among trading partners. While just 15% of respondents said they participated in UCCnet (which is actually high considering UCCnet only has 15 retailer/distributor members), another 13% said they expected to participate in it this year, while 37% said it was under consideration for this year.
Prospects for online grocery shopping appear to be growing. Almost half of respondents believe it could account for as much as 10% of total grocery sales (between 6% and 10%) in five years. But just 7% of respondents said they offered online shopping now, down from 10% last year.
About the same percentage of respondents indicated they participated in a B2B Internet trading exchange (public or private) this year as last (20%), and about the same percentage said exchanges would be important to the future of their company. Those using the exchanges suggested they were getting less out of them, with smaller percentages this year saying that any of the exchange's services benefited them in a major way.
Given the consolidation the food retailing industry has undergone in recent years, it's no surprise that integration of systems continues to be cited by the most respondents, 35%, as the greatest challenge facing IT this year, about the same response as in last year's survey.
IT budget was viewed by far more respondents (26%) as the greatest challenge than last year (8%), no doubt a by-product of the tight economy. On the other hand, 54% of respondents said they planned to increase their IT budget in 2003, compared with 44% last year. But they have more modest goals this year -- just over 40% indicated that the budget would rise between 1% and 10%, compared with 25% last year.
Just over 40% of respondents said they spend up to one-quarter of their IT budget on system maintenance, and an equal percentage said they spent between one-quarter and one-half of it on maintenance. More than half said they spent between one-quarter and one half of their budget on systems development and implementation, while 17% spent between half and three-quarters.
A significant percentage of respondents (44%) said they developed more than half of their IT systems in-house. Outsourcing played a limited role last year, with 35% of respondents saying they outsourcing no IT functions and almost 60% saying they outsourced less than half.
As one would expect, just 6% of respondents described themselves as "cutting edge" on technology, though almost a third said they were "aggressive." Almost half regard themselves as "moderate."
Significantly, more respondents (35%) consider "contribution to company's strategic vision" the most important criteria in evaluating an IT system than those who rate ROI most important (31%).
About the Survey
SN's ninth annual State of the Industry Report on Supermarket Technology is based on a survey developed by SN editors and conducted by Opinion Centers America, a marketing and research firm located in North Olmsted, Ohio.
Mailed to corporate and IT executives from November 2002 through January 2003, the survey elicited responses from 54 companies accounting for $46.8 billion in annual sales and operating or supplying 15,000 stores.
Retailers represented the lion's share of respondents in this year's survey (93%), with the rest being wholesalers or both. Respondents included senior vice presidents or chief information officers (41%), directors (28%) and vice presidents (15%), among others.
