FAST FORWARD 1995-12-25

MARC MILLSTEIN

This was the year the Internet and the World Wide Web burst onto the scene, seemingly overnight, and captured virtually every food industry executive's attention.

It was the year Efficient Consumer Response stopped being hailed as an indispensable

blueprint for future progress and instead became nearly a sine qua non for conducting business with major trading partners today.

It was the year home shopping jumped from the realm of pilot tests fraught with skepticism to merchandising tools succeeding in attracting large numbers of consumers and yielding valuable data about shopping behavior.

It was the year electronic benefit transfer programs made serious strides in establishing footholds in many states, while electronic payment methods, including the American Express charge card, exploded, and smart-card technology edged closer to reality.

It was the year the industry turned its fierce attention to tackling one of the largest areas of lost profits in supermarkets today: consumer and employee theft.

And it was the year that several chains rolled out frequent shopper programs offering consumers what consumers like best: cash incentives and steep product discounts for being loyal store customers.

Following are the highlights of this year's key trends and major news stories covered in the Productivity section of SN:

Web Sightings

At the beginning of the year, the Internet and World Wide Web scarcely registered on most executives' radar screens as serious tools for conducting food industry business.

By the end of the year, cyberspace was the hottest topic of discussion, with virtually every company either creating a home page on the web or exploring the myriad possibilities of doing so.

Companies such as Cub Foods Stores, Atlanta division, Lithia Springs, Ga.; Ralphs Grocery Co., Compton, Calif., and Scolari's Food & Drug Co., Sparks, Nev., among others, all launched web sites, as distributors of all sizes sought to stake out a position and prepare for a possible new age of retailing.

Some companies went even further. Independent Grocers Alliance, Chicago, launched a second-generation site on the web and began using the Internet as a key communications tool to link up with its 3,600 retailers worldwide.

Food Lion, Salisbury, N.C., established a web site and used it for, among other things, providing information on its innovative frequent shopper program.

Giant Eagle, Pittsburgh, forged ahead with a site and staged customer promotions offering awards to customers participating in the interactive network.

Byerly's, Edina, Minn., set up its web site with the goal of cultivating a global reputation, fostering new business relationships and paving its entry into new markets.

Perhaps the most significant development in the world of the web, though, involved the development specific sites designed to link a wide range of retailers, manufacturers and consumers.

One such site, Supermarket Connection, spearheaded by Shopping Alternatives, Bethesda, Md., went live this month, and a second web community, developed by Supermarket Shopping Network, New York, is expected to open up next month. Both sites are designed to feature a broad range of consumer and business-to-business hot links, services and entertainment.

The question now facing all players is what the Internet and World Wide Web will mean for conducting food industry business in the year ahead and how to make the most of the opportunity.

ECR: Getting Serious

This was the year that Efficient Consumer Response stopped serving primarily as a template for future change and instead took on the stature of a clear mandate for conducting business in the food industry today.

As the year wore on, pressure began mounting for suppliers and distributors not yet engaged in implementing fundamental and widespread changes at their companies -- via ECR principles -- to get on board and to do so quickly, or risk alienating important trading partners.

The sense of urgency was evident at Fleming Cos., Oklahoma City, which gave suppliers a Sept. 30 deadline to begin transmitting key information via electronic data interchange or face the prospect of heavy fines.

The nation's largest wholesaler reportedly was ready to impose fines of $110 per purchase order if vendors failed to transmit purchase orders and invoices via EDI. In addition, Fleming said it was requiring its suppliers to bar code all cases by July 1996.

Fleming was only the latest in a wave of distributors, such as Wal-Mart Stores, Bentonville, Ark.; H.E. Butt Grocery Co., San Antonio, and Kroger Co., Cincinnati, pressuring manufacturers to comply with specific efficiency standards to help streamline operations and cut costs.

In October, Harold Rudnick, senior vice president of retail purchasing at Vons Cos., Arcadia, Calif., said that lack of cooperation by some vendors in the initial phase of an electronic receiving rollout would probably result in the chain issuing incentives or fines to increase supplier participation.

Stores involved in the program were to convert to direct exchange, or DEX, electronic receiving by late July. The deadline was then extended to Sept. 28. The prospect of fining companies for not participating may not be pleasant, but it could well prove necessary, Rudnick said.

Signs of growing tensions were again evident in October at the Productivity Conference in Phoenix. Michael W. Wright, chairman, president and chief executive officer of Supervalu, Minneapolis, said during a keynote address that the failure of some companies to move forward with ECR was forcing Supervalu to pay for the inefficiencies of others.

He challenged suppliers to move swiftly in implementing ECR and called on them to offer a complete unbundling of economics, or menu pricing options, so that the wholesaler, and ultimately its retail partners, could choose which specific distribution services it wanted and was willing to pay for.

This was also the year the official committees guiding the ECR initiative forged a new blueprint calling for a sharper focus on consumer and in-store issues.

Home Shopping Delivers

As the year began, home shopping services, via telephone, fax or computer, were still viewed primarily as niche opportunities for some retailers to target a small segment of shoppers.

As the year progressed, though, the number of chains offering home shopping services mushroomed, as did the proven, and often startling, benefits associated with the programs.

Community Cash Stores, Spartanburg, S.C., was one of the first chains in 1995 to launch a home shopping and delivery service. A&P, Montvale, N.J., soon followed suit with a test involving several of its Food Emporium stores in New York City.

In April Kroger Co.'s Dallas division announced plans to launch a home shopping test in Denton, Texas, involving 250 households placing grocery orders via an interactive cable television system.

Bashas' Markets, Chandler, Ariz., jumped on board with a home shopping program in the Phoenix area during the spring, and many other retailers continued to launch programs throughout the year.

But perhaps the most striking developments on the home shopping front came in the form of two news stories late in the year.

In one, a national study sponsored by Kraft Foods, Northlake, Ill., and Cornell University, Ithaca, N.Y., revealed that perishables, not dry grocery staples, are the most frequently ordered category by home shoppers. That seemed to contradict nearly everyone's notion about what could and what couldn't work in the realm of home shopping.

Another key development involved Jewel Food Stores, Melrose Park, Ill. In a talk late in the year, Ed Hanson, sales manager, revealed that customers who tap into Jewel's computerized home shopping program are more loyal and ring up higher average transactions than other shoppers, including those enrolled in the chain's frequent shopper program.

But that was only the beginning. Because customers using the service must indicate in advance which items they want to purchase, the chain has been able to gauge not only sales results but also purchasing intent. That, in turn, has led to the discovery of several merchandising problems, such as frequent out-of-stocks, that were harming sales.

As a result, Jewel has been able to beef up sales and profits in several unexpected and highly profitable ways, Hanson said.

The Electronic Payment Revolution

This was the year electronic benefit transfer programs became a reality for many retailers across the country.

It was the year American Express joined MasterCard, Visa and Discover as checkout payment options in supermarkets. And it was the year the term "smart card" began to have a real meaning for retailers wondering about the future of payment systems.

Throughout the year, state and regional coalitions announced plans to begin or expand tests of EBT programs and find ways to standardize systems across state lines.

In April retailers in the Southern Alliance of States said they were gearing up for a 1996 pilot designed to use national standards and existing commercial networks for tapping into government benefits.

In May the Gulf Coast Grocers Association in Houston reported that retailers involved in Texas' EBT program were seeing 8% to 10% increases in food stamp sales.

In October a provision added to a welfare reform bill in Congress under which retailers would receive federal subsidies for upgrading EBT systems was unveiled at a Missouri Grocers Association convention.

As the year ended, retailers remained concerned about the issue of EBT systems compatibility, but they were also preparing for a more efficient and widespread system enabling customers to access -- and spend -- government benefits at supermarkets.

On another front, this was the year that retailers began accepting the American Express charge card, joining the supermarket electronic payment revolution already spearheaded by Discover Card, MasterCard and Visa.

It was also the year retailers began discussing the possibility of smart cards playing a serious role in the electronic payment arena. In August Ohio was finalizing plans to launch the first U.S. test using smart-card technology for statewide electronic distribution of food stamps. At the same time retailers in the Atlanta area were gearing up for a smart-card program to run in conjunction with next year's summer Olympics.

Big Moves Against Shrink

In 1995 retailers turned their attention, with something of a vengeance, to fighting back against the infuriating and costly problem of shrink.

In a series of initiatives that were rolled out throughout the year, distributors such as Abco Foods, Phoenix; Albertson's, Boise, Idaho; H-E-B, and Ralphs, among others, took dramatic steps to reduce employee and consumer theft.

The issue gained increasing attention as retailers and wholesalers searched for new ways to cut out waste and boost profits in an industry that has already made measurable progress in streamlining most other areas of operation.

In June Abco revealed it was installing closed-circuit television cameras chainwide to tackle the growing problem of shoplifting in its stores.

In August Ralphs said it was installing an electronic article surveillance system in 100 more stores during the fall and planned eventually to go chainwide with the program.

In October Albertson's opened the latest new store featuring a wide range of advanced loss-prevention technology, including broadly deployed closed-circuit television systems costing $500,000 to install in 10 stores. It was also moving forward with electronic article surveillance technology and pushing for increased manufacturer source tagging.

Late in the year, H-E-B revealed its determination to radically battle back against internal and consumer theft with a comprehensive chainwide program involving cashier monitoring and electronic article surveillance, among many other strategies. The chain has also established 20 continuous improvement teams to improve operations and reduce shrink.

Raising the Frequency

In the area of frequent shopper programs, 1995 was the year retailers expanded and retooled their systems to discover the true path to boosting customer loyalty and hiking sales.

While distributors nationwide launched or revised a wide number of programs, two programs in particular seemed to capture the attention of industry observers.

In January Food Lion launched a chainwide electronic frequent shopper program featuring incremental discounts on selected manufacturer items. The chain was believed to be the first with an established everyday-low-price strategy to participate in a comprehensive shopper loyalty initiative.

Under the program, consumers spending less than $20 on a visit received a 5% discount on any of about 300 designated items. Shoppers spending up to $50 in a single visit received a 10% discount on the selected items, and orders of more than $50 earned a 20% discount.

In September, at the Food Marketing Institute's Information Systems conference, A&P shared details about its frequent shopper program in which loyal customers could earn cash and gift awards ranging from a free pound of coffee, at the bottom rung of the incentive ladder, to cash vouchers for customers ringing up the largest sales increases.

A test of the program was conducted in nine A&P divisions, involving 100 stores and 200,000 customers, in the spring, and was to be rolled out to a much larger number of stores throughout the chain, said Lawrence Zimmerman, A&P's vice president of systems development.

Zimmerman declined to provide details on sales increases generated from the program, but said some consumers, for example, doubled their shopping levels from $250 to $500 during the test period.