CATALINA FORESEES STEADY GROWTH IN ELECTRONIC MARKETING

MARC MILLSTEIN

ST. PETERSBURG, Fla. -- Catalina Marketing Corp. expects to have its electronic marketing system operating in more than 9,000 stores by the end of this year and in a total of 12,000 stores soon thereafter.

Anyone who believes electronic marketing services, such as electronic couponing, have not yet emerged as an everyday star player in the supermarket industry had better think again.

The only question now is how big an impact electronic marketing can have on the industry -- and how soon.

The potential clearly is enormous. The promise of electronic marketing, ranging from more efficient targeted couponing to highly sophisticated scanner-driven frequent-shopper programs, has only barely begun to be met.

In an interview shortly before the Food Marketing Institute's annual convention in Chicago this week, SN sat down to discuss the state of electronic marketing in the supermarket industry with Tommy Greer, chairman and chief executive officer of Catalina Marketing Corp. here, and George Off, Catalina's president and chief operating officer.

Not surprisingly, Greer and Off predicted a consistent rise in the use of electronic marketing systems in the supermarket arena over the next several years. But the pace of change probably will be slow and steady, not revolutionary, they said.

Moreover, for the industry to take full advantage of electronic marketing and other increasingly efficient programs -- many of which come under the Efficient Consumer Response initiative umbrella -- retailers and manufacturers will have to do a better job at sitting down and working together. Although progress has been made in this area in the last couple of years, there is still a long way to go, they said.

Catalina, whose sales topped $71 million in 1993, currently offers four electronic marketing programs: Checkout Coupon, its core scanner-driven coupon dispensing system; Checkout Direct, which provides incentives to consumers based on extended purchase patterns; QuickCash, a frequent-shopper program administered by retailers, and MarketMatch, which provides shoppers with incentives for products and services outside the supermarket industry based on their in-store purchases.

Here's what Greer and Off had to say:

SN: Are you surprised about where the industry is today in terms of electronic couponing and marketing?

GREER: It's amazing to me that things haven't moved faster. The Uniform Code Council met back in the late 1960s and the first scanners were put in 20 years ago. I'm surprised it hasn't gone faster. But it's not an industry that moves like a speeding bullet.

OFF: It is a fast-paced business, but it's not one that's quick to change. My perspective on electronic marketing is that it's an extremely complex area requiring lots of changes. The success of our system is that it's simple. There's no hassle for the store. When you take the whole gambit of what you can do with electronic marketing, it's a complex subject and it's a challenge to take advantage of it.

I remember a few years back when there was an emotional, almost panicked, move toward frequent-shopper programs. Big corporations spent millions of dollars trying to develop a system, and retailers were in a hurry to get involved. But reality set in. To pay for these things requires significant change. It'll come, but it will be a slow change. It took scanners 10 years to catch on, and I suspect it may take electronic marketing even longer.

SN: Why doesn't it move quicker?

OFF: I think we have to keep in mind that some retailers have done a great job in mining the opportunities in electronic marketing. But it's a huge industry, and it's very operation-oriented. It has to move a lot of tonnage of products each day and there are thousands and thousands of details that have to be attended to. There's a lot of inertia.

GREER: There's also the infrastructure to consider. There's not a lot of entrepreneurs or risk-takers out there. I'm not saying there's no one out there moving in the right direction. Look at retailers like Wegmans, H-E-B, Ralphs. There are a handful of retailers moving this stuff as hard as they can. But the tried-and-true maxim is, "Will we get in trouble?"

SN: What changes can we expect to see in the area of electronic marketing in the next few years?

GREER: I think the key is information. The better the information, the more efficient the whole process is going to be. We're not in the information business, but the information we provide through our services is tremendous. It gives people the ability to make better, more objective decisions.

One area in particular that I think is going to change is forecasting. I think it is going to be much faster and more accurate than it has been before. There will be many other changes as well. It's unbelievable what people in this industry are thinking about because a lot of it comes on our board. We have to sift through it.

OFF: I also see companies assigning greater resources to dealing with the issues of electronic marketing. There is strong interest on the part of many retailers. The study on shopper loyalty presented at the Food Marketing Institute Midwinter Executive Conference, for example, was a sign of that.

Electronic marketing is an area that will evolve even more as people get smarter and the cost of acquiring and using the data bases comes down. But it's not going to happen overnight. The amounts of money spent on consumer and trade promotions are unbelievable. Manufacturers and retailers are looking for ways to spend that money smarter.

SN: What are some of the obstacles toward taking greater advantage of electronic marketing programs and how can they be overcome?

OFF: Many of the challenges are similar to why it took scanning so long to take hold in this industry, only they are even broader with the ECR initiative. But there is also a more receptive attitude by retailers and manufacturers to new ideas.

There are also capital requirements for investing in new technology. That is an especially sensitive issue because the industry's profitability is under attack from other classes of trade. So there are some big challenges.

SN: What do you see as the major impetus for retailers and manufacturers to take advantage of electronic marketing programs?

OFF: The tangible benefits are more efficiency and effectiveness in spending money. The amount of waste in some of our traditional practices is substantial. There is a campaign now to eliminate waste. We are trying to help by providing insights into consumer purchases and a method to plan promotions better.

GREER: If you handle consumers correctly, if you provide the right service, then your business is going to flourish. There's a lot of work going on to learn more about the shopper.

SN: Could you elaborate?

GREER: It's coming from information, from technology. I may have 15,000 consumers coming through my store. Well, 5,000 of them may spend less than $5, whereas 2,000 may spend $60, $70 or $80 on average. I need to know what they buy and how much they spend on average. I want to use this information to keep my good shoppers loyal. There's a lot of work going on in this area.

SN: What about the objectives of manufacturers and retailers? Are they looking for the same thing?

OFF: In some instances we do find that the objectives are not identical. Manufacturers are interested in improving market share for products. Retailers are trying to improve total category sales and profitability in their stores, or in their section of the store. Those two goals are not always in concert. But it has to be a win-win situation for both sides.

SN: Are the two sides doing as good a job in coming together and working for common goals as you might have expected at this point, especially given the ECR mandate?

OFF: There's been definite progress made. It certainly is better than a year or two ago. But there's still a long way to go to drive that message of working together down to the individual buyer and salesperson levels. There are still plenty of adversarial situations and considerable mistrust. It's still a huge problem.

SN: What are some of the technological hurdles that still have to be solved? Is the infrastructure now in place, both in terms of hardware and software, to move ahead quickly with electronic marketing?

OFF: We think there are huge developments needed, but not so much in technology as much as in understanding how to construct the right data base and deal with the information efficiently. There's a lot to learn in that area.

In terms of technology, the fact that the scanning subcommittee and the UCC are working on a standard for several new areas (such as the extended manufacturer coupon code) is great. It looks like it's about to materialize. SN: How important do you view systems compatibility or "open" systems as being for electronic marketing?

OFF: It is very much a consideration. Currently our system is proprietary and it's been successful for retailers and for us. But as this area gets more sophisticated, we'll have to get more involved in the in-store systems, and open systems will have to play a bigger part. I expect that to happen over the next decade. But up until now, the definition of "open system" typically has been the one I want as opposed to the one you want. SN: Let's talk about the programs you have on the table right now. How are they doing? Are there any new programs you will be introducing?

OFF: We've built up a lot of momentum in the last several years. Our system is going to be installed in about 2,000 new stores this year alone. We also have a large backlog beyond that. We think we can grow our store base to at least 12,000 stores.

SN: You will be up to about 9,000 store installations by the end of 1994, right?

OFF: Yes. That's our goal. We have the commitments to get there. GREER: We've changed our outlook also. We're offering a medium for delivering any kind of message that the retailer or manufacturer wants to deliver. We're moving more and more to being a medium rather than a coupon product. We can talk to the consumer through our system in the store. That's efficiency. There's no comparison.

OFF: We're tracking purchases at a sizable number of households by ID number. That will lead to a smarter way to target the consumer. By tracking shopper loyalty and consumption by household, incentives can be refined more than with checkout coupons.