HAPPY AISLES 2004-05-03 (1)

LIZ PARKS

Center Store is still the primary destination for most shoppers, and represents the majority of sales for most retailers.

Yet it remains the one area of the store where they have difficulty in connecting with consumers. Through all the signs, promotional displays and variety, several challenges remain stubbornly entrenched. Until they are addressed, supermarkets will continue to lose sales to competing formats, retailers and industry experts told SN.

Perhaps more than any other component, out-of-stocks have a direct impact on the customer experience, creating frustration and undermining all the service programs that retailers put in place to enhance the shopping experience.

"We are trying to deploy our labor into the right areas," said Paul Bergstrom, director of retail operations for Lund Food Holdings, a 20-unit supermarket chain headquartered in Minneapolis. "In Center Store, that means having the right people in the aisles when they are most needed -- whether it's to do resets, build displays, or prevent stockouts."

Kim Feil, chief executive officer for Mosaic InfoForce, a market research company based in Chicago, said stockouts in the past several years have reached "shocking" highs, due to an annual marked increase in new products and promotions.

"For the last two years ending in December 2003, based on our in-store audits, we have observed a 35% increase in the number of [Universal Product Codes] on display," she told SN. "We're also seeing about 140 displays a week in a grocery store, which is up 18%. We're seeing over 1,000 new [UPCs] on display, up 26%, year-end 2003, vs. year-end 2001."

The avalanche of UPCs on display requires a greater demand for labor to manage it. In Center Store, which remains the largest department in the supermarket, insufficient labor, or poor use of existing associates, brings a much higher likelihood of problems, Feil noted.

Peter Charness, senior vice president of global marketing and chief product officer for Scottsdale, Ariz.-based JDA Software, agreed, noting OOS is clearly Center Store's biggest ongoing problem.

"In the deli, you generally won't lose sales because they're out of something," he said. "But in the Center Store, a hole in the shelf is a problem. In a lot of cases, the product is available in the back room, but it's just not getting to the shelf. So there is a ton of focus in the industry on addressing that and preventing stockouts."

Industry observers said the stockout problem hit rock bottom a year or so ago, and that since then, manufacturers and retailers have been forming partnerships to help put more man-hours back into Center Store. For their part, retailers have been investing more in technologies that automate manual processes so they can redeploy their own in-store labor more efficiently.

"Just continuing to decrease our labor isn't the answer to building sales and growing market share," said Bergstrom.

Of course, in-store labor reductions continue to take place, but those losses have been offset to a degree by the utilization of outside resources to better manage product sitting on the shelf.

More of the major consumer packaged goods manufacturers like Procter & Gamble and Kraft, in mutually beneficial partnerships with grocery executives, are hiring or funding merchandising sales representatives who help out in the store in various ways. They receive product; pack it out; set and reset planograms; reorder; and install and stock promotional displays.

"We are certainly seeing a shift toward better collaboration between retailer and manufacturer," said Rob Garf, Retail Analyst for AMR Research, Boston. "From the point of view of labor savings, you see it in the push toward vendor-managed inventories where the supplier provides the manpower and the labor. In some cases with direct-store-delivery vendors, they are taking more responsibility for delivering product directly to the shelf."

Lunds/Byerly's, for example, recently negotiated a new contract with its union that gives it the flexibility to have vendors come in and stock many categories.

"In the past, that really wasn't possible," Garf observed. "We have to control the situation, but the vendors really do know their own products best. And they want to sell those products as much as we do. So they try to give us the best mix. And with vendors stocking their own products, we just naturally have less out-of-stocks and less overstocks."

The success of category management, a process where retailers work with leading manufacturers within categories to better understand and manage the consumer demand for products, has also resulted in many initiatives that have pumped additional labor into Center Store.

A few years ago, Albertsons, for example, developed a category management program commonly referred to as a "home store," now a fairly common practice. Retailers with such a program ask their highest-volume vendors to send merchandisers into units that are about to be reset, and to help reset not only the categories in which they compete, but the entire store.

In other instances, retailers have found a way to lower their inventory costs by allowing manufacturers to retain ownership of their products until they are rung up at the point-of-sale, a procedure known as scan-based trading.

Garf said scan-based trading has helped retailers deploy more labor into strategic areas of their stores, including the grocery aisles, because it creates inventory cost savings as well as store-level labor cost savings.

"It puts more incentive on the supplier to ensure optimal on-shelf positions, and it helps the retailers lower their investments in inventory. And those savings can and are being used, in some instances, to redistribute labor costs," he said.

Such thinking wasn't always common. Ken Harris, partner in Wilton, Conn.-based Cannondale Associates, a marketing and services consulting company, recalls that as recently as 1999, major CPG companies stated they were scaling back retail services because retailers were moving to manage that end of the sale.

"The thinking then was that manufacturers couldn't do much at retail because everything at retail was controlled by headquarters," Harris told SN. "Now, everyone's come to the conclusion that that is not true. P&G reinstalled 250 to 300 people back into their retail service division in 2002, and they did that because retail conditions are difficult at best. Wal-Mart does not have any better situation at retail. Their advantage is that they have better logistics and self-distribution, so that negates some of the issues they have in the store."

Albertsons was one of the first supermarket chains to welcome brokers and manufacturer sales reps back into its stores in 1999.

Harris said, today, many CPG companies "are taking the retail element into their own hands for the benefit of the retailer and for the benefit of their own products. There are different ways for manufacturers to participate in retail merchandising programs. They can use the chain's in-store suppliers, their own service representatives or organizations, or they can use brokers.

"But in whatever way, labor needs to be provided -- particularly to do the resets. That kind of concept has spread to other grocery retailers," he added.

Outsourcing category management is fine to a degree, but retailers are motivating their own employees to set and meet higher productivity standards.

Lunds/Byerly's, for example, sets productivity standards, and then challenges and rewards employees who can exceed those standards.

"In Center Store, we may have a standard that you need to stock 25 cases in an hour. Well, we may ask our stores to bring that standard up, and that may save us 15 hours a week," Bergstrom said, adding the goal is not to necessarily cut those hours from the payroll, but to put them to better use driving sales by restocking, creating displays, or writing more accurate orders.

"It's a matter of taking labor that wasn't very efficient, and instead of chewing it up, employing it into a place where you can really grow sales," he said. "And that gets us out of the vicious cycle of cutting labor. You have to build your sales to get out of that."

Some retailers have been able to more efficiently reallocate labor by installing electronic shelf labels.

"Many retailers that have been early adopters of electronic shelf labels have seen some benefits in labor savings," said Scott Langdoc, vice president, research, retail industry, AMR Research.

Los Angeles-based Smart & Final, a 230-unit chain of non-membership warehouse stores for food and food-service supplies, was an early adopter of ESL, said Langdoc, and has been quite successful at "getting some of the labor back from automating the traditional manual process of shelf-label management, setting tags, putting labels on signs for promotions, and doing price changes."

Steve Frenda, executive vice president of business development for Mosaic InfoForce, said Colton, Calif.-based Stater Bros. Markets, which operates 158 full-service supermarkets, is a great example of a chain successfully using its investment in service and labor hours to drive sales and profits.

"They've put their employees into the stores to make sure their products are always available on-shelf," said Frenda. "They're justifying the investment as part of enhancing the customer shopping experience, and it's working. They're very successful."

Some retailers like Quincy, Mass.-based Stop & Shop are using self-checkout systems to help reduce labor costs at the front end while making Center Store shopping more interactive. The Ahold USA division has been testing wireless mobile devices that customers can attach to their shopping carts in three stores since early last year.

As customers come into the store, they can opt to scan their loyalty card into one of the devices, and then place the device known as "Shopping Buddy" onto their shopping cart. As the shopper moves throughout the store, the system, through a local area network, communicates with Stop & Shop's loyalty database and its point-of-sale, so customers can self-scan their purchases as they shop. They can even order deli items through the system, avoiding potentially long lines at the service counter. They pay for those purchases at a self-checkout register.

Stop & Shop's management said the device has helped lower labor costs, but executives have decided not to cut back on labor hours. Instead, those saved man-hours are redeployed into sales associates whose main job is to walk around the store offering help to customers in need of service. Stop & Shop refers to them as concierges, and they wear red shirts to make it easier for customers to find them.

Faith Weiner, a spokeswoman for Stop & Shop, said the program is still too new to have fully measured its cost-effectiveness, but she said customer reaction has been positive. One of the major goals is "to make service differentiation, not cost differentiation, their consumer value proposition in all areas of their store," according to AMR's Langdoc.

"Grocery retailers who optimize labor to combine efficient costs with customer service are not just going to compete more effectively with the likes of Wal-Mart. They are going to beat Wal-Mart," he said.

Six Sigma Process Bodes Well for Center Store

Center Store productivity has the potential to be enhanced by a new methodology just starting to take root in the grocery industry.

Six Sigma "is all about removing variability from store operations," said Rob Garf, a retail analyst for Boston-based AMR Research.

Three components of store operations critically affect customer experience. They are employee efficiency, product availability and customer intimacy.

"Six Sigma retailing looks at the customer and the customer's experience, and tracks the processes backwards through the store and back through the supply chain," Garf told SN. "In the process, Six Sigma retailing tries to identify all the things that are good, and keeps them. But it also tries to identify all the things that are wrong, processes that are causing a bad customer experience, and it focuses on fixing them."

The program can show if cutting man-hours will result in stockouts, lost sales and a negative shopping experience, he said. Over time, Six Sigma has the potential to help retailers enhance the productivity of store associates "because it doesn't look at labor in a vacuum. It factors things like task management, inventory management and customer service into the equation. It provides a perspective on labor management."

Last February, Albertsons became the first food and drug chain -- possibly even the first retailer -- to announce that it was launching a business-wide Six Sigma Quality program. Larry Johnston, Albertsons' chairman, president and chief executive officer, said in a press release that Six Sigma "has the potential to move Albertsons to an all-new level of productivity and customer service in our industry."

Others such as Sears and The Home Depot have launched Six Sigma programs in selected areas of their operation, but Albertsons is the first food retailer to take the program company-wide.

Over the next 36 months, Albertsons will begin to "re-engineer our major processes in every function and discipline," Johnston said.

"The world has witnessed how Six Sigma can transform industrial giants like GE, Allied Signal, 3M and others. We believe it holds the same exciting potential in food and drug retailing."

A spokeswoman for Albertsons declined to give further specifics, saying the program is still in the early phases of development.

Because Six Sigma is still in its infancy, there are no benchmarks to measure it against. Yet informed sources described it as more a revolution than an evolution of retail merchandising.

Instead of following the historic view of "getting product to the customer," Six Sigma puts "the customer at the center of the supply chain," said Garf.

The "trick" to Six Sigma -- the paradigm shift -- is that it does not try to optimize different key areas of retail operations independently of each other. Instead, it tries to optimize the retail operation as an organic entity, similar to a physician trying to cure a patient's liver condition with a drug that will heal the liver, but not stress and possibly stricken the heart, he said.

"You don't want to optimize one area within the store operation that might then, unwittingly, adversely impact a different piece of the operation that diminishes the customer experience," Garf added.

As a holistic system, Garf emphasized, implementing Six Sigma will make it possible for retailers to "map all the processes from the customer backwards. That's where retailers will gain the greatest value, and that's what will create a major point of differentiation."