CLEARING THE BACKLOG

MARC MILLSTEIN

The age of electronic coupon clearing may finally be dawning.

Electronic clearing, long touted as the most efficient and logical next step in how coupons are processed and their information extracted, will undergo extensive industry testing for the first time beginning this March.

Under electronic clearance systems, coupons would be scanned and verified at the front-end checkout, with all the key information electronically gathered and transferred, either directly or through a third-party firm, to the manufacturers and retailers. Physical handling of paper coupons, now standard practice in the industry, would be eliminated.

The benefits of such a system could be substantial. As part of the industry's Efficient Consumer Response initiative, electronic clearing is projected to result in savings of up to $750 million a year and could cut coupon processing costs by up to half.

It is considered a fail-safe method for dramatically speeding payments to retailers and eliminating the expensive problem of misredemptions, malredemptions and chargebacks. It would also put an end to the cumbersome industry practice of physically counting and recounting an estimated 7.5 billion coupons each year, most often by shipping them to Mexico, where labor costs are low.

If all the technical and logistical wrinkles can be worked out, industry observers predict, "paperless" electronic coupon clearing could become a widespread industry reality within two to three years.

"I think the information base and the technology is available today for electronic clearing to happen," said Abe Mirza, director of accounting at Ralphs Grocery Co., Compton, Calif. "I think change can take place a lot quicker than it did, for example, when the industry was first introducing bar-coding. Within two years we should be in pretty good shape" in terms of implementing electronic coupon clearing extensively.

"How quickly we, as retailers, get paid, though, will be the major incentive for us. We are talking millions of dollars. Today, it can take up to 45 or more days to get paid, although there are some programs our there that offer faster payments," Mirza said.

But even those systems still rely on the traditional painstaking practice of physically counting and recounting the coupons, once for the retailer and once for the manufacturer, to verify the amounts and account for possible errors in the redemption process.

An executive at a large supermarket chain agreed that the driving force behind the move to electronic coupon clearing for retailers will be swifter payments. But it does not end there.

"In terms of benefits to retailers, quicker payment is definitely at the top of the list. We want to get reimbursed for our coupons more quickly. That is the idea behind the Quick Pay type of programs out there today. But this would take it several steps further" in that the coupons would no longer be counted and verified by hand, said the executive, who asked not to be named.

"We are also very interested in improved validation of coupons, especially in our stores where double couponing is very common. We hope that the electronic clearance of coupons will significantly help improve misredemption rates," he added.

That the industry is now gearing up to implement an electronic clearing system to dramatically alter how coupons are handled is beyond doubt.

The first comprehensive test of an electronic clearing system, for instance, is set to begin this spring. The system, the brainchild of Catalina Electronic Clearing Services, St. Petersburg, Fla., will be tested in a total of 24 stores at 12 major chains, including Kroger Co., Giant Food, Ralphs Grocery Co., Dominick's Finer Foods and Pathmark Stores.

The test, slated to begin in March, is being supported by a number of large manufacturers, led by Procter & Gamble, Nestle U.S.A., Campbell Soup, Lever Bros., Nabisco Food Group, Ralston Purina Co. and Best Foods.

Advanced Promotion Technologies, Pompano Beach, Fla., also has just been granted a patent for its version of an electronic coupon clearing system. The system electronically reads, validates, cancels and clears paper coupons at the point-of-sale.

In addition, at least two other companies, including Comark Technologies, a Virginia Beach, Va.-based electronic marketing company, are expected to announced test programs of electronic coupon clearing systems by late spring.

A further sign of change to come is evident in the expected recommendation by the Food Marketing Institute-Grocery Manufacturers of America Joint Industry Coupon Committee at

a meeting Feb. 16 to adopt the extended UCC EAN-128 code for encoding manufacturer information on coupons.

The question of which code to use to hold critical manufacturer information on the coupon, and how to ensure that all scanners can read the code, has been one obstacle to electronic coupon clearing taking off sooner. Those barriers seem finally to be fading.

The Joint Industry Coupon Committee also is expected to put its stamp of approval on several electronic coupon clearing pilot tests later this year. The programs should help usher in new communication standards and set the stage for a wider rollout of electronic clearing.

The gross inefficiency of the current coupon clearing process was spelled out by Bob Grottke, founder of Robert Grottke & Associates, Chicago. Grottke is a former associate with Arthur Andersen & Co., Chicago.

"Coupon clearing today is a very inexact, difficult process when you consider that 7.5 billion odd-shaped pieces of paper from thousands of supermarkets have to be gathered into warehouse or offices, shipped down to Mexico, counted down there, shipped back to the manufacturers in the United States, and counted again. It is an extremely labor-intensive process," Grottke said.

Today, however, there is no reason to continue to rely on such an outmoded system. With the sophisticated technology now in place at many supermarket front ends, the industry should be ready to enter a more advanced couponing age.

"What is very precise is the front end of the supermarket," Grottke said. "It is really a computer. The cash registers have been replaced with terminals, and we should be able to scan the coupon just like we scan grocery items.

"Customers are willing to pay cash for the products they purchase, relying on the register tape total for verification. Manufacturers and retailers should also be able to use that same reliance to pay for coupons," he said. Until now, the issues of trust and verification of coupon totals have been an impediment to moving beyond the present system that relies on both segments physically counting each and every coupon, he added.

In Grottke's opinion, a two- to three-year test period will be sufficient to convince manufacturers and retailers that electronic coupon clearance is reliable, verifiable and feasible for all industry segments.

By 1996, he predicted, the supermarket industry should be processing coupons in a completely different, more efficient manner than it does today.

"I think that the testing period in the next two years is really going to convince manufacturers that the front end of the supermarket has the controls in place to clear coupons. After that point, I think the process will flow a lot smoother than it has so far," Grottke said.

"For retailers, the benefits are that they will get paid more quickly, instead of having to wait 30 to 45 days for verification. Once the reliability is developed, they will be able to get paid in a week," he added.

According to Ralphs' Mirza, the benefits of moving to an automated coupon clearing system, though, go well beyond coupon reimbursement and control issues. They tie directly into

the entire movement toward increased efficiency and advanced technology at the front end.

"As far as electronic coupon clearing goes, there is a lot of potential. The [front-end] equipment is going to be available, and in some cases already is available, although it is still a little expensive," Mirza said.

"But there are other benefits associated with it. For example, there are scanners right now that scan faster and more efficiently. This should help improve cashier productivity and could end up being the driving factor for retailers going that route," he said

"I am looking at it from a different angle. How do we use the better scanners to reduce our checkout costs? The coupon may be a way to get there, or an incentive to get there.

"The one thing the industry doesn't look at enough is that the cost of handling a coupon takes X amount of seconds. We could be selling during that time. I think with a better system we could minimize that expense of doing business," Mirza said.

The need for more information extracted at the register level is another driving factor in the move toward electronic clearance. Information that can be especially beneficial to retailing marketing analysis people, as well as to manufacturers who want to know whether their coupon drops are really helping sales, is crucial, he said.

Mirza cited one area of couponing in which an improved system could be especially beneficial for retailers. "The costs involved in shortages, and accounting for shortages, is significant," Mirza said. "Let's say that we clear $10,000 in coupons, we send it to a clearinghouse and they count $9,000, and the manufacturer then sends us $8,000. Right now we can't go back and figure where that $2,000 is. That problem should go away, so we will save money there," Mirza said.

While most industry observers expect electronic coupon clearing to take hold within the next two to three years, at least one executive thinks it may take longer.

"I don't think anyone really knows how quickly we can get to this point. There are a number of critical issues. Manufacturers and retailers need to be able to have confidence in the data transferred back and forth. There is also the issue of security with coupons, the reliance of actually counting each one by hand, and whether to destroy them at the checkout," said the retailer, who asked not to be named.

"Also, there is the issue of standardizing an extended code before any of this can take place, even though it looks as if the adoption of the extended 128-code is all but a done deal."

The retailer questioned how quickly the industry could move, en masse, toward a fully automated paperless system.

"Catalina, for one, has an aggressive schedule with their tests and expects it to be quick progress. But I feel it will be a much slower process and slower to gain momentum. I think it will be more along the lines of five years out," he said.

He also questioned the true cost savings. "I wouldn't necessarily say yes to the idea that electronic coupon clearing will save the industry a huge amount of money. No one has conducted an in-depth study to look at what the costs really are. The feeling is yes, it will save costs, but to my knowledge no study has yet documented precisely how much," he said.