YEAR OF THE PRODUCT 2004-02-16 (1)

MICHAEL GARRY

While they may not have much in common with journalists, retailers can still appreciate a deadline. Now, retailers have a common deadline to meet.

That would be the 2005 Sunrise date -- Jan. 1, 2005 -- set by the Uniform Code Council, Lawrenceville, N.J. UCC expects all North American retailers to be able to read and process 13-digit bar codes used outside of North America under the EAN system by that date. While it's not a do-or-die deadline, those who fail to meet it risk suffering a serious competitive disadvantage. So 2005 Sunrise is prominent on the radar of food retailers.

The 2005 Sunrise issue is one of the supermarket IT trends reflected in SN's 10th annual State of the Industry Report on Supermarket Technology. When those surveyed were given a list of IT programs and asked which areas will command the highest priority at their company in 2004, 41% of respondents selected preparation for 13-digit bar codes, the second-highest ranking. Just 13% said it was a high-priority area for them last year.

Among programs that respondents plan to test or launch this year, 34% selected preparation for longer bar codes, the highest percentage on the list. It also ranked first on the list of programs tested or launched last year, albeit with 27% citing it.

Thus, retailers who have procrastinated are scrambling to make the back-office system adjustments needed to accommodate a 13-digit bar code (one more than the traditional UPC). Some are going one digit further to handle the more universal 14-digit GTIN (global trade item number).

The work on bar codes represents in many ways a broader focus on systems and applications centered around managing products more efficiently. While in recent years the survey revealed a propensity toward consumer-oriented systems like loyalty programs, electronic payment systems and point of sale -- and those will always get a certain amount of attention -- this year's survey shows retailers more preoccupied with product-related systems like bar codes, inventory management, pricing management and even the new kid on the block, RFID (radio frequency identification).

For example, among high-priority programs in 2004, the only one that garnered more votes than preparation for 13-digit bar codes was inventory management, selected by 43%. That was more than the 25% who said it was a high-priority item in 2003.

Inventory management is getting noticed for several reasons. On the one hand, retailers increasingly recognize the competitive necessity of being in-stock. Yet, in the competition with Wal-Mart, retailers are seeking to emulate the retail giant's supply chain efficiencies that keep inventories lean.

Pricing management is another priority application for 2004 selected by a high percentage of survey respondents, 41%, tied with 13-digit bar-code preparation, and up slightly from 2003. Making sure that products are priced correctly to reflect supply and demand helps keep inventory turning and carrying costs low, to say nothing of maintaining sustainable margins.

More retailers are even willing to invest in highly sophisticated price optimization systems, regarded as a high priority for 2004 by 29% of respondents, compared with 11% who said it was a priority last year. Moreover, 23% said they would test or launch price optimization in 2004, up from 20% who did so last year.

An emerging product-oriented system -- data synchronization -- was cited by more retailers as a priority for 2004. More than one in five (21%) said data synchronization would be a high priority this year, compared with 14% who rated it such in 2003. In addition, 13% said they would test or launch data synchronization in 2004, compared with 9% who did so last year.

Exactly 20% of respondents said they were participants in UCCnet, the UCC's data synchronization division, which grew significantly last year. Another 9% said they would join this year, while almost a third said it was under consideration.

A product-tracking technology that has generated ample press notices of late, RFID, is also gaining attention in SN's survey. While just 14% of respondents said they were interested in evaluating the RFID-based electronic product code (EPC), another 46% said it was under consideration. Just 9% consider it a high priority for 2004, and 7% said they plan to test or launch an RFID program this year. Wal-Mart has driven a lot of the momentum in this area with its announcement last year requiring its top suppliers, and then all of its suppliers, to put RFID tags on pallets and cases over the next few years.

POS: Still the Linchpin

Point of sale, the linchpin of retail systems, is always prominent on the agenda; that continued in this year's survey. A bit under half (45%) of respondents said POS was a high priority last year -- first on the list -- though that declined to 38% who said it would be in 2004. POS received more attention in last year's survey.

Looking separately at POS software and hardware, the survey found that 64% of respondents upgraded POS software substantially (30%) or on a limited basis (34%) in 2003, while 59% would do so this year (23% substantially). Similarly, 57% said they upgraded POS hardware substantially (25%) or on a limited basis (32%) last year, while 59% said they would upgrade POS hardware in 2004 (16% substantially).

In a recently released study, "IT and the North American Supermarket," IHL Consulting, Franklin, Tenn., identified replacement of aging POS hardware as an area of potential. "Some units are reaching 10 to 12 years of age and are due to be replaced in the next two years," the report said. "By our estimates, there are over 300,000 POS units that can be replaced in the next three years."

At the same time, retailers are taking a more open, less proprietary approach to POS software. Shaw's Supermarkets, for example, has been testing a Web-based, open POS architecture from Sweda (formerly Innovax), Dallas. And Hannaford Bros. has been implementing a POS system built around the Linux operating system. Open systems offer retailers the flexibility to choose best-of-breed components from a variety of vendors.

IHL Consulting also observed that supermarkets have made significant investments in POS-related systems, including self-checkout systems, thermal printing solutions, online and offline debit/EFT/EBT, electronic check conversion and biplanar/360-degree scanning.

SN's survey is in line with IHL Consulting's findings on POS-related applications. Systems gaining on the SN list of those that respondents will test or launch in 2004 include self-checkout devices (21%), biometric systems (18%) and electronic check conversion (14%) -- the last two up substantially from last year.

Self-checkout is fairly well-entrenched, yet 20% still consider it a high priority this year. According to IHL Consulting, in stores that use self-checkout lanes, 25% to 40% of transactions and 15% to 25% of dollar volume are processed by these systems.

Other areas many respondents regard as high priority in 2004 include loss prevention (34%), data warehousing (32%), category management (30%) and promotion management (30%). A new but important area, fresh item management, was cited as a high priority by one in four respondents, with 11% planning to test or launch a program this year.

Although loyalty cards are known to have gained a foothold in many supermarkets, SN's survey offers a mixed report. Among respondents, just 41% said they offered a card-based, electronic loyalty program. Less than half (48%) of those who have programs said they were highly successful, with the rest saying they were moderately successful. All of those retailers with programs said they were using data from the loyalty program for such purposes as Internet shopping, targeted promotions, category management, and dissemination of food-safety information.

In its supermarket IT report, IHL Consulting observed that, while successful in Europe and parts of the western United States, "loyalty programs have struggled to catch on in much of America." Most retailers, the report said, continue to use the loyalty card as a discount card rather than to target individual shoppers. Still, the potential of the card remains strong, the report added, considering that the top 30% of shoppers -- who can be identified and marketed to via the card programs -- account for 75% or more of supermarket sales.

Increasingly, retailers are turning to technology to address new regulations being imposed by government. For example, country-of-origin labeling (COOL) became the focus of much attention until it was mostly postponed earlier this year. However, among retailers surveyed by SN late last year, 23% said they invested or planned to invest in technology to support compliance to COOL, while 43% said it was under consideration. Other regs stirring activity in the IT department include the Sarbanes-Oxley rules, the Bioterrorism Act, and revised hours-of-service rules for truck drivers.

The Internet continues to expand in importance for food retailers. Asked to judge the growth of online sales, most respondents (96%) said online ordering would account for 5% of total grocery sales in 2004. Yet, nearly one in five (18%) said it would generate 6% to 10% of sales within three years, and nearly a third (32%) expected it to generate that range of sales within five years.

"Contrary to public perception, online grocery shopping is alive and growing," said Kenneth Boyer, associate professor of supply chain management, Michigan State University, and co-author of a three-year study of online grocery ordering. "Companies such as Tesco, Albertsons, Publix, Safeway, Ocado and FreshDirect have all learned lessons from earlier efforts, have carefully developed their business models and have worked to educate customers on the benefits of online ordering."

Still, just 9% of respondents said they currently offer full home shopping, with another 18% offering limited home shopping such as gift items; just 4% said they would test or launch online sales this year.

By far the most popular feature offered on supermarket Web sites, according to the survey, is the store locator (79%). That's followed by e-mail feedback from customers (75%), company history (75%) and job openings/recruitment (68%).

Online coupons created a lot of controversy last year as several chains stopped accepting them in the wake of coupon fraud that struck Atlanta and elsewhere. Nevertheless, 43% of respondents said they offered coupons on their Web sites.

Another area of interest is promotional e-mails (41% offer it), which some retailers are using to target their best customers. With health concerns over obesity and diabetes on the rise, almost a third (32%) of respondents are putting health-related information on their sites. Incidents like the mad cow discovery are leading 25% of respondents to add food-safety information online.

B2B Internet trading exchanges continue to remain the province of larger retailers. Among respondents to the SN survey, just 21% said they were involved in these exchanges, public or private. Only 16% said they would do so in the future.

This could change as exchanges like the WorldWide Retail Exchange (WWRE) and Transora delve further into data synchronization, to which retailers are increasingly committed.

In more general trends, more than a third of respondents said they would increase their IT budget this year by up to 10%, though an almost equal percentage said they would decrease their IT budget (14%) or keep it the same (23%). Interestingly, the lion's share of respondents, 75%, said their IT budget represented 1.0% of sales or less. Only 8% said their IT budget exceeded 2% of sales.

Those IT budget results are somewhat comparable to what retailers across channels are spending in the United Kingdom, according to a recent survey by Retail Knowledge Bank, with research by Martec International. The U.K. survey showed that average investment in IT by U.K. retailers was 1.4% of sales last year, up from 1.1%. Tesco, the U.K.'s largest supermarket chain, invested 2.2% of sales in IT.

When it comes to outsourcing IT responsibility, a sizable majority of respondents (79%) limited it to 25% or less. On the other end of the spectrum, only 9% said they outsourced between three-quarters and 100% of their IT department. Thus, while some areas, notably in logistics and supply chain, are being increasingly outsourced, retailers still prefer to hold onto control of IT. This suggests retailers are recognizing the strategic competitive role that IT can play.

However, a few retailers, such as Hannaford Bros., are beginning to follow the trend to outsource some IT functions (programming, in this case) to foreign locales like India. And many retailers are seeing the advantage of employing an application service provider (ASP) model whereby systems are hosted by a third-party provider.

System maintenance is a vital, though often overlooked, part of the IT department's responsibility. Respondents to the SN survey, however, are clearly giving system maintenance its due. Almost half of respondents (46%) invest between 26% and 50% of the IT budget -- a healthy chunk -- in maintenance.

Robert Garrity, senior vice president of human resources and formerly head of information services at Giant Eagle, Pittsburgh, told SN the chain has put considerable emphasis on the maintenance role of IT. "After a technology is in place, the payback comes from keeping it running so people can use it," he said.

Reflecting their conservative approach to IT, almost half of respondents (45%) said they invested 25% of the IT budget or less in system development/implementation. Only 13% said they invested more than half the IT budget to development/implementation.

In-house development of IT applications plays a modest role at respondents' companies. Almost half said they develop 25% or less of their systems in-house, preferring to rely on third-party applications. Still, a third of respondents indicated they develop more than half of their systems in-house.

Asked to describe their company's overall approach to IT, only a small fraction (4%) of respondents said it was cutting edge, while others were almost equally divided among aggressive (32%), moderate (36%) and conservative (27%).

Which areas will command the highest priority in 2004?

(multiple responses allowed)

Inventory Management......................43%

Prep. for 13-digit bar codes..............41%

Pricing Management..........................41%

Point-of-Sale Systems.......................38%

Loss Prevention.................................34%

Data Warehousing.............................32%

Category Management.....................30%

Promotion Management...................30%

Price Optimization..............................29%

Electronic Payment Systems...........27%

HQ-Store Communications..............27%

In-Store Handhelds............................27%

Intranet.................................................27%

Disaster Recovery..............................25%

Fresh Item Management...................25%

Wireless Applications.........................23%

Customer Loyalty Programs.............21%

Data Mining.........................................21%

Data Synchronization.........................21%

Financial Systems...............................21%

Customer-Relationship Mgt..............20%

Direct-Store Delivery..........................20%

Self-Checkout.....................................20%

Workforce Management....................18%

Replenishment Systems....................16%

Scale Management.............................16%

System Integration.............................16%

Electronic Data Interchange..............14%

Shelf Space Management.................13%

E-Commerce: B2B.............................11%

RFID........................................................9%

E-Commerce: Online Shopping.........7%

Transportation Management................7%

Warehouse Management....................5%

Web Security.........................................5%

Demographic Systems........................4%

CPFR.....................................................2%

Which areas commanded the highest priority in 2003?

(multiple responses allowed)

Point-of-Sale Systems........................45%

Pricing Management..........................39%

Category Management......................29%

Data Warehousing.............................29%

Disaster Recovery...............................30%

Intranet..................................................25%

Inventory Management.....................25%

HQ-Store Communications...............23%

Customer Loyalty Programs.............21%

Direct-Store Delivery..........................21%

Electronic Payment Systems............21%

Pharmacy Systems............................21%

Fresh Item Management...................20%

In-Store Handhelds............................ 20%

Loss Prevention..................................20%

Financial Systems...............................18%

Promotion Management....................18%

Sign Production..................................18%

Workforce Management...................18%

Shelf Space Management.................16%

Data Synchronization.........................14%

Scale Management.............................14%

System Integration.............................14%

Customer-Relationship Mgt..............13%

Data Mining.........................................11%

E-Commerce: B2B.............................11%

E-Commerce: Online Shopping.......11%

Price Optimization...............................11%

Wireless Applications.........................11%

Electronic Data Interchange...............9%

Self-Checkout.......................................9%

Web Security.........................................9%

Warehouse Management....................7%

Replenishment Systems.....................5%

Demographic Systems.........................4%

Transportation Management................4%

RFID........................................................2%

How will your IT budget change in 2004?

No answer: 18%

Decrease: 14%

Remain the same: 23%

Increase more than 25%: 4%

Increase 11%-25%: 5%

Increase 1%-10%: 36%

What percentage of sales is your IT budget in 2004?

More than 4.0%: 2%

No Answer: 4%

0%-1.0%: 75%

1.1%-2.0%: 13%

2.1%-3.0%: 2%

3.1%-4.0%: 4%

Will you upgrade your point-of-sale software in 2004?

Yes, substantially: 23%

Yes, on a limited basis: 36%

No: 34%

No answer: 9%

Did you upgrade your point-of-sale software in 2003?

Yes, substantially: 30%

Yes, on a limited basis: 34%

No: 36%

Will you upgrade your point-of-sale hardware in 2004?

Yes, substantially: 16%

Yes, on a limited basis: 43%

No: 30%

No answer: 11%

Did you upgrade your-point-of-sale hardware in 2003?

Yes, substantially: 25%

Yes, on a limited basis: 32%

No: 39%

No answer: 4%

In which of the following areas will your company test or launch a program in 2004?

(multiple responses allowed)

Prep for 13-Digit Bar Codes.....34%

Price Optimization.....................23%

Self-Checkout Devices..............21%

Biometric Systems.....................18%

Electronic Check Conversion...14%

Data Synchronization................13%

In-Store Kiosks............................13%

Scan-Based Trading...................13%

Fresh Item Management...........11%

Promotion Management...........11%

Voice-Based Picking in DC.........9%

RFID...............................................7%

Web-Based EDI............................7%

Fuel Integration/Marketing..........5%

Online Sales..................................4%

CPFR.............................................2%

In which of the following areas did your company test or launch a program in 2003?

(multiple responses allowed)

Prep for 13-Digit Bar Codes.....27%

Price Optimization.....................20%

Self-Checkout Devices..............20%

Scan-Based Trading...................14%

Fuel Integration/Marketing........13%

Fresh Item Management...........11%

Promotion Management...........11%

Voice-Based Picking in DC.......11%

Web-Based EDI..........................11%

Data Synchronization...................9%

Electronic Check Conversion.....9%

In-Store Kiosks..............................7%

Online Sales..................................5%

Biometric Systems.......................4%

Electronic Shelf Labels................5%

RFID...............................................4%

Is your company interested in evaluating the FRID-based electronic product code (EPC) technology develpoed at MIT?

No answer: 2%

Yes: 14%

No: 38%

Under consideration: 46%

Has your company invested in, or does it plan to invest in, technology to support compliance with country-of-origin labeling (COOL)?

No answer: 2%

Invested: 7%

Plan to invest: 16%

Under consideration: 43%

No interest: 32%

How much of your IT responsibility do you outsource?

26%-50%: 5%

51%-75%: 5%

76%-100%: 9%

No answer: 2%

0-25%: 79%

How much of your IT budget is spent on system maintenance?

51%-75%: 11%

76%-100%: 2%

No answer: 2%

0%-25%: 39%

26%-50%: 46%

How would you describe your company's overall approach to IT?

No answer: 1%

Cutting edge: 4%

Aggressive: 32%

Moderate: 36%

Conservative: 27%

How much of your IT budget is spent on system development/implementation?

No answer: 1%

0%-25%: 45%

26%-50%: 41%

51%-75%: 13%

How much of your IT do you develop in-house?

No answer: 1%

0%-25%: 48%

26%-50%: 18%

51%-75%: 20%

76%-100%: 13%

What percentage of total grocery sales do you think home shopping services will account for...

WITHIN 1 YEAR?

No answer: 4%

5% or less: 96%

WITHIN 3 YEARS?

No answer: 3%

5% or less: 75%

6%-10%: 18%

11%-15%: 4%

WITHIN 5 YEARS?

No answer: 3%

5% or less: 45%

6%-10%: 32%

11%-15%: 13%

16%-25%: 7%

Are you involved in B2B Internet trading (public or private)?

No answer: 2%

Yes: 21%

No: 77%

Which features are available on your company Web site?

(multiple responses allowed)

Store locator..................................................................79%

E-mail feedback from customers..............................75%

Company history.........................................................75%

Job openings/recruitment..........................................68%

Meal planning/recipes.................................................57%

Send informational e-mailing.....................................55%

Corporate information ................................................54%

Online coupons...........................................................43%

Send promotional e-mailings....................................41%

Store events calender.................................................39%

Shopping lists..............................................................36%

Loyalty card information.............................................34%

Health-related information..........................................32%

Catering information...................................................32%

Local news/events......................................................29%

Children's pages.........................................................29%

Food-safety information.............................................25%

Company policies.......................................................20%

Department-level information....................................20%

Limited home shopping (gift items)..........................18%

Prescription refills........................................................16%

Local cross promotions..............................................11%

Full home shopping......................................................9%

Micro-sites......................................................................5%

About the Survey

SN's 10th 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 2003 through January 2004, the survey elicited responses from 56 companies in food distribution accounting for more than $111 billion in annual sales and operating or supplying more than 13,250 stores. With many questions geared to store systems, almost all respondents in this year's survey (98%) were retailers. Respondents included senior vice presidents and chief information officers (25%), directors (27%), presidents and chief executive officers (25%), among others.