IT SOLUTIONS 1998-03-16 (1)

LINDA PURPURA

Atlanta -- While the collection of programs and processes under the Efficient Consumer Response umbrella has traditionally been focused on bringing greater efficiency to the supply chain, the application of ECR principles has begun to generate benefits at the store level as well.

Retailers are seeing the value of applying activity-based costing analyses to store operations ranging from product receiving to shopping-cart recovery. Executives are also discovering unexpected information about their shoppers by linking databases from customer-loyalty programs and category management efforts.

A variety of technologies are allowing retailers to emphasize the "consumer" in Efficient Consumer Response, by delivering what consumers really want at the store level.

Translating technologies into tangible ECR benefits will be among the topics discussed at the fourth annual ECR Conference this week, March 18 to 20, here.

H.E. Butt Grocery Co., San Antonio, for example, is beginning to look at market-basket data from point-of-sale scanning information, in order to get a picture of the customer and what he or she is buying.

"Part of the problem is there is a mountain of data," said Kevin Moore, activity-based costing/activity-based management manager at H-E-B. "It's everything that everyone buys from the front end. That's a lot of data points."

When the data can be analyzed, however, it can be used to assign costs to specific products sold, according to Moore. For example,

"When trying to assign carryout and cart-recovery costs, we look at products that typically are in small market baskets, meaning 10 items or less. In a basket with 10 items or less, customers usually carry the items out themselves, so we don't want to burden those items with expenses."

Activity-based costing can also be used to balance supply-chain costs with consumer demand, allowing a retailer to determine the effect of price reductions and increased variety on a product's volume, according to consultant Milton Merl, president of Milton Merl Associates, New York.

"If you don't know the cost of your actions, then you're not being true to your business management objectives," he said.

"Very often retailers will find out that a certain private-label category might be losing them money, either because it is underspaced or overpriced, or just costs too much to distribute relative to other brands," Merl noted. "We are not saying to them 'eliminate private label.' All we are saying to them is: 'Understand the amount of money you're investing against building a private-label business.' "

A retailer who requested anonymity said the company is looking at decision support tools and ABC analyses for supply-chain decisions that affect store operations. This system will look at determining optimal ways to bring products to consumers, whether by using warehouses or choosing to go direct to the store.

"These decisions would be difficult for different departments if they had to make them in and of themselves," the retailer said. "But when you're mindful of the bottom line and linking the whole supply chain together, you're making a much sounder decision."

This type of holistic analysis is in line with the maturing of the ECR initiative. "ECR's real progress has been as a business model that encourages, if not requires, cooperation among trading partners," said Mike Maurer, director of industry affairs at Procter & Gamble, Cincinnati, and co-chair of the ECR Operating Committee. Such cooperation allows companies "to come up with answers that benefit all parties and ultimately to benefit the consumer."

One of the most fruitful store-level areas for the application of ECR principles is category management.

"We recently completed a study with one of our vendors in a dry grocery category," said the retailer. "We found that if we used ABC and supply-chain metrics to optimize the assortment using the five tactics of category management, we were able to project sales increases in the neighborhood of 5% to 6% and profitability in the neighborhood of 13% to 14%.

Customer-loyalty programs' capture of consumer-specific data is also helping retailers gauge what types of assortments and promotions consumers really want.

"We're going to look back on this time and find loyalty marketing data is every bit as valuable as when we added scanning to the store," said Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill. "But that will play out over the next five years."

One reason for the delay is the complexity of analyzing and mixing these large databases. "The biggest challenge in the industry is data management," said Merl, adding that data is sometimes just not clean or easily accessible. "If data were harnessed more effectively throughout the industry, everyone would be able to do a much better job of achieving ECR objectives."

Retrieving better data is not just a technology issue, though it often requires changing systems and processes. Often, in-store disciplines must be altered, a time-consuming and costly process that can involve retraining and education.

Using frequent-shopper marketing data in combination with the category management process is one way to sharply focus on consumers at the store level.

"Category management organizes the store and loyalty marketing organizes the communication and promotion, and you want those two in sync," Bishop said.

One retailer working in this direction is Paw Paw Shopping Center, Paw Paw, Mich., which is networking its loyalty marketing and category management systems.

Marv Imus, vice president at Paw Paw Shopping Center, said an analysis of a 4-foot segment of a category revealed that decisions based solely on product movement data may not be the correct ones.

When the retailer overlaid its loyalty marketing customer database with its product-movement information, it found the lowest mover in that section was the most profitable, while the second-highest mover was by far the least profitable. Indeed, it was dragging the whole category down.

Using only category management principles, a retailer would normally "try to increase category profitability by increasing the profit structure of the other items in the category," Imus said. But doing so would involve "increasing the price of a product that your best customers buy, which may in fact impact their decision-making.

"We found the competitors that used category management were applying that exact rule," he added. As a result, "our best customers [continued to] shop us, because while we don't have the low price image in our town and never will, we have it with our best customers. Competitors raised prices on the items [that my best shoppers were buying], whereas we had not."

While Imus is still analyzing the issues surrounding the mix of customer-loyalty and category management information, the process has led him "further down the road in understanding how the consumer shops my store. That's key. The better I get, the better the customer shops me and the harder it is for a competitor to move into my area and draw my best shoppers away."