When a company files for Chapter 11 reorganization, how much can its financial woes be attributed to an inadequate technology infrastructure?
Information technology, regardless of how out-of-date or poorly implemented, often escapes major blame for a company's financial struggles. On the other hand, departments like store operations, marketing or merchandising are far more likely targets. But in the case of Winn-Dixie Stores, Jacksonville, Fla., which filed for Chapter 11 in February 2005, its flawed IT operation was regarded as a primary contributor to the retailer's difficulties, said Charlie Weston, the chain's group vice president of IT.
“Our old systems literally made us non-competitive,” said Weston, who joined Winn-Dixie about four months before Chapter 11 was declared. “We couldn't have competed in the modern world with our legacy systems.”
As one example, Weston noted that Winn-Dixie was laboring under 15 merchandising hierarchies, the result of attempts to consolidate different parts of the company. “You can imagine how many different reports that drove and how much conflicting and overlapping information came from that,” he said. But as it was constituted, the IT department was unable to execute the system and technology changes needed to change the merchandising structure.
In the shadow of bankruptcy, Weston, who had previously worked in IT for Home Depot and American Retail Group, set about fixing Winn-Dixie's technology infrastructure. His efforts resulted in massive and far-reaching changes in everything from core merchandising and pricing systems to the wireless infrastructure and server hardware supporting the chain's 522 stores throughout Florida and the Deep South.
Today, almost five years since filing for Chapter 11, and just over three years since emerging from that status, Winn-Dixie is on a much sounder footing, technologically speaking, and that has played a major — if not widely appreciated — role in its continuing turnaround. “We're now able to think more strategically because we fixed so much of the core IT capability we needed to compete,” said Weston.
“IT has been a key aspect of the progress the company has made,” observed Chuck Cerankosky, managing director for Northcoast Research, Cleveland. “You can tell that management is using systems in ways that had not been done before.” In particular, he added, the use of POS data analytics “had dropped off the edge of the Earth, but we've seen progress in that.”
No longer does IT get shortchanged at Winn-Dixie. Indeed, when it comes to the capital expenditures, IT is second only to store remodels. “[Winn-Dixie Chief Executive Officer] Peter Lynch attempts to make sure IT investment goes hand-in-glove with the overall company strategy,” said Weston.
While Winn-Dixie still faces major challenges as it deals with a weak economy and competitive activity, its most recent financial numbers have been stable. In its 2009 fiscal year, which ended on June 24, the chain reported sales growth and compstore increases of 1.2%. In the first quarter of its 2010 fiscal year, the chain's compstore sales fell 1.2%, but its gross margin rose to 28.3%, from 27.9% in the previous year's first quarter.
“They obviously now have systems in place to effectively hold their margins in a highly competitive environment,” said Karen Short, an analyst for BMO Capital Markets, New York.
STREAMLINING PRICING
Given the way its legacy systems were hampering Winn-Dixie, Weston's most important change since joining the company was a multiyear project aimed at consolidating its core merchandising and pricing systems. “Those were legacy systems that had to be rearchitected,” Weston said.
In so doing, the chain “massively streamlined our pricing process and execution,” he said, adding that this is especially important to a high/low pricing operation like Winn-Dixie. “We now have more flexibility and capability in handling promotions, which were extremely cumbersome and in some cases impossible to do in the past.”
In addition, the chain is down to one merchandising hierarchy. “We now have one set of accurate and consistent data that drives our merchandising and related financial decisions,” Weston said.
Winn-Dixie employs a mixture of internal and third-party software for merchandising and pricing. “We buy when we can and build when we must,” Weston said. He confirmed that Winn-Dixie uses pricing software from Retalix, Plano, Texas.
The need for robust pricing and merchandising systems is reflected in the attention the food industry is paying to those processes, noted Mike Griswold, vice president, research, AMR Research, Boston. “Merchandising and pricing remain and will continue to be hot topics for retailers into 2010, pricing in particular for food retailers. We are seeing significant growth in the number and complexity of weekly and multi-week promotions.”
After merchandising and pricing systems, Weston considers store infrastructure the second most important IT upgrade undertaken by Winn-Dixie. In particular, the chain replaced its entire storewide 802.11 wireless infrastructure, as well as deli/meat scales, radio-frequency (RF) handheld terminals and certain floral printers. “All the devices require the use of the 802.11 infrastructure, which is why we lumped them together into one project,” said Weston. The project took two years to implement across all stores.
Beyond foundational technologies, Weston has overseen the redesign of a host of other applications, ranging from direct-store delivery to warehousing. The redesign process began in late 2005 and was completed at the end of the 2008 fiscal year, in June 2008. “It was done in pieces,” said Weston. “It was quite a large investment.”
This year, Winn-Dixie's most significant software project is the implementation of a computer-generated ordering application, the SuperStore forecasting and ordering system, from SAF, Dallas. The system will automate store orders across the chain using forecasted sales and current inventory levels while taking into account seasonal effects, promotions, price changes and ad campaigns. In a statement earlier this year, Weston said the system is expected to reduce out-of-stocks and increase sales.
The SAF system is now in a pilot at a small number of stores, and will be implemented in a “gradual rollout,” he said. “This is a large, business-process change in the way every store orders and replenishes merchandise.”
Another new strategic use of technology is to support “neighborhood marketing,” in which the chain is aligning merchandising, marketing and operations to better serve specific clusters of stores: Hispanic, urban, affluent, kosher and resort. “We're leveraging data warehousing enormously in neighborhood marketing,” said Weston. “That is why we needed to get our data right from day one, and we couldn't compete until we did that.”
IBM OVERHAUL
In addition to the changes made to its headquarters and store applications, Winn-Dixie has altered the look of its underlying IBM hardware as well. For example, last year the chain migrated from two IBM z900 mainframes to one IBM z9 Enterprise Class mainframe, thereby cutting its lease costs by $100,000 annually while adding new functionality, such as an Integrated Facility for Linux processor. The mainframe handles business-critical processes and data for store operations, finance, human resources and Web content.
The decision to stick with an IBM mainframe was shaped by the limitations imposed by Chapter 11, which made Weston loath to abandon technology in which Winn-Dixie had already invested heavily. “We decided not to adopt the mantra that mainframes were bad and we had to get rid of them, which would have incurred large charges,” said Weston. “Instead, we decided to repurpose the mainframe, keep our investment and lower monthly payments.”
An even more ambitious project undertaken by Weston was replacing in-store servers at Winn-Dixie's 522 stores with “virtual servers” in the form of IBM Power VM virtualization technology housed at chain headquarters; the project was completed last year. In effect, one IBM BladeCenter JS22 “blade” has taken on the processing load previously handled by servers in 16 stores. Winn-Dixie fits between 12 and 14 of these blades into slots on a single IBM BladeCenter H chassis, and three of these chassis boxes are enough to accommodate the entire chain. Additional stores are “easy to add,” Weston said.
Winn-Dixie has a comparable blade setup in a disaster recovery center. “At a moment's notice, we can turn it on if something happens to [chain headquarters],” Weston said. “That's important with the hurricanes we get.”
Weston described the virtualization program as “one of the more successful projects I've been a part of, including ROI and TCO [total cost of ownership] considerations.” He estimated that even after the investment in the virtualization technology, the chain will save more than $5 million by not having to buy and maintain store servers. In addition, applications run faster on the blades than they did previously on the in-store servers, increasing performance from five to 10 times.
In contrast with Winn-Dixie's approach, Janet Sherlock, an analyst with AMR Research, observed that other retail sectors “still typically support in-store servers.” Some applications, such as customer look-ups and real-time offer management are candidates for “thin solutions” that can be processed at headquarters. “However,” she noted, “100% reliable persistent connectivity [between headquarters and stores] is still a major issue. So retailers still heavily rely on in-store processing and storage.”
Weston acknowledged that the blades do require wide-area-network (WAN) connectivity to the stores for the applications to work. “We definitely took that into account when planning that project,” he said. “We were able to procure a wireless 3-G card to serve as our backup. It provides the reliability and bandwidth necessary for these applications.”
Winn-Dixie is also unorthodox in reorganizing its IT department to bring mainframe and distributed functions under one banner, rather than allowing them to operate in separate areas. “That's what retailers do,” Weston said. “We have to leverage assets to be competitive.”