SAFEWAY UK LINKS ESLS TO PRICING OPTIMIZER

SARAH MULHOLLAND

LONDON -- Safeway UK here has committed to becoming one of the first chains to use electronic shelf labels to empower a price optimization system.

ESLs, which are plastic pricing modules attached to the shelf edge that can be controlled from a back-office PC, enable retailers to make the pricing changes suggested by price optimization software without incurring the labor costs typically required to make manual price changes.

The two systems' natural synergy prompted the retailer to commit to a dual investment, according to Graeme Mcleod, price development and operations manager for Safeway UK.

The ESL piece, from NCR, Atlanta, is currently installed in 12 of the chain's 480 stores, Mcleod said. The selection process began 18 months ago, with a small section of a store piloted 14 months ago, and the first store completed in May of this year, he added. Mcleod anticipates having the labels in 50 stores by the end of February 2003, and ultimately looks toward a chainwide implementation. "We are trying to hit four to eight stores every week," he said. "In February we will have a review and determine the next step."

While the price optimization system, from KhiMetrics, Scottsdale, Ariz., is not yet running in any stores, Mcleod said he hopes to see the system implemented by the beginning of 2003. The number of stores in the initial implementation was not available.

Price optimization allows retailers to analyze and adjust pricing strategies for entire categories, accounting for the effects of cannibalization and product affinity, said Don Harrington, vice president of international sales at KhiMetrics. However, given finite labor resources, retailers are limited in how many prices they can change at any time.

"Maybe I can only execute 100 price changes per store in a week, which means there has to be some kind of priority process to what gets done," Harrington said.

With ESLs, labor is no longer a consideration, and a pricing strategy can be deployed across categories instantaneously, he said. In addition, by accelerating the process of price changes, ESLs eliminate lag time, enabling retailers to capture incremental sales, Harrington said.

The combination of ESLs and price optimization allows retailers "to look holistically at a business on a daily basis without being limited by the labor constraints that exist in our business today," he said.

At Safeway UK, Mcleod expects the implementation of price optimization to be more complex than that of ESLs. "ESL is a physical product. You simply put it on the shelf," he explained.

"With price optimization, you have to go through data cleansing, and you have to make sure associated brands and products tie up together to assure maximum efficiency." The chain is currently in the data-cleansing phase, he said.

Mcleod declined to comment on cost and ROI, but industry observers said the cost of a single electronic shelf label is down to around $5. According to Mcleod, the labels are being applied storewide on roughly 20,000 stockkeeping units per store, excluding fixed-price items such as magazines and greeting cards. This would put the cost of the ESL system alone at about $100,000 per store.

Indeed, cost has been a prohibitive factor in the widespread adoption of ESL. Yet advances in technology continue to bring the cost down, and Mcleod is confident of the eventual payback for his stores. "By the state's average, every time you change a price, it costs 50 cents in labor. That element is completely eliminated with the electronic tags," he said.

Those benefits become enhanced when ESLs are linked to price optimization, just as price optimization, itself a costly system, becomes enhanced with ESLs, observers said.