TECHNOLOGY HELPS IN CENTER STORE 2004-05-10 (2)

ROBERT VOSBURGH

CHICAGO -- Technology must be properly applied if it is to help grocery category managers drive incremental profits, a consultant said at the FMI Show here.

Tim Manning, vice president of marketing for KhiMetrics, Scottsdale, Ariz., said the sources of channel leakage siphoning sales from Center Store have grown beyond price to include convenience and variety.

All of these formerly strong walls are crumbling before the pressure applied by today's generation of supercenters, warehouse clubs, health food stores, e-commerce and convenience stores.

"[Technology can be used] to compete profitably through a better understanding of customer demand, as an offensive strategy rather than a defensive strategy," said Manning.

The consumer's shopping experience is made up of a variety of factors that must converge effectively in order for retailers to drive Center Store. Manning noted that supermarkets haven't successfully found the right balance between pricing and promotions to produce accurate, demand-based forecasts.

"Historically, [retailers] have priced and promoted in the store based primarily on cost and competitive considerations. The shift to an offensive strategy, based on customer demand, turns that upside down and says, 'Let's take our point-of-sale data, derive meaning from that data, and then have that become how they begin to price and promote products across the entire chain,"' he said.

Manning defined customer demand as the relationship between price and unit movement, where price increases have a depressing effect on volume, and vice versa.

Supermarkets are beginning to learn the deeper relationship between the components of the sales equation. It begins with understanding demand at the store, stockkeeping unit level, he said.

"That is, how each product, in each store, performs uniquely when tied to a customer within a loyalty program," he said. "It's having the ability to say how each product performs in each store in each customer segment."

Manning said that, while the relationship between price and volume is deep, it is not necessarily complicated. It begins with taking POS data and having that posted against competitors' information and creating a complete picture of the sales environment around a particular store. This is the template of demand forecasting, and can be used as a starting point for future technology applications, he said.

Demand forecasting is an unintended -- but extremely valuable -- consequence of such data collection.

Manning noted that the result is a more precise view of consumer demand that can help prevent out-of-stocks and related pitfalls that plague Center Store.

Looking at specifics, Manning said a typical assortment mix today might consist of roughly 200 key value items, those image-building products that define a retailer's image in the marketplace. These are bolstered by sensitive items -- those that aren't as crucial as KVIs, but still important to supporting sales.

"Statistics have shown that an average pantry consists of 160 to 200 items," Manning said. "That maps consistently with what you would find as the KVI count, or the very sensitive items, that supermarkets must manage to maintain their price image."

Figures cited by Manning show that KVIs and sensitive items comprise only 18% of a store's SKUs. The other 81%, termed "blind" or "background" items, presents the best opportunity for increasing gross profit in Center Store.

"Historically, you haven't had the technology at store level or zone level to manage 35,000 to 40,000 SKUs, and do that systematically across the entire chain," he said.

The challenge presented is daunting but surmountable with increasingly sophisticated uses of technology.

Retailers are seeing they can rigorously manage KVI and sensitive items, while scaling price across the rest of the store, "some of which will be low-hanging fruit," Manning said.

For example, in dropping the price of a KVI as a loss leader to drive traffic, the investment of margin should be recovered somewhere else across the chain.

Technology applications can now show which categories or which items can be used to best compensate for the loss.

Citing a hypothetical marketbasket of $100, carrying a net profit of 1.5%, Manning noted that if a solution-focused vendor can generate an incremental 15 cents on the basket, it translates into a 10% increase in net profit.

"Such increases are possible by looking an your entire basket, how those products in it interact, and then looking at the categories and understanding which items can drive incremental profits," he said. "That's the opportunity that is exposed through technologies that expose customer demand."