Shelter in the Storm

MICHAEL GARRY

Faced with the worst economic downturn in decades, U.S. food retailers are using technology to gain a better understanding of their position in the marketplace — and to optimize that position in respect to inventory, pricing, labor and a host of other business-critical elements.

That was one of the major findings of SN's 15th annual State of the Industry Report on Supermarket Technology, based on an online survey of subscribers to SN and the SN daily newsletter conducted between Dec. 8 and Jan. 9.

Select chart to enlarge.

Asked to identify the technology applications that received the highest priority at their companies in terms of usage, expansion or upgrades in 2008, respondents frequently selected systems — such as business intelligence, category management, inventory management and profit analysis — that can help them stay afloat in troubled economic waters.

The survey received input from 38 retailers, 27 wholesalers, 18 combined retailer/wholesaler companies and 11 respondents who did not identify the primary business of their organization. (See story on Page 58 for further details on the survey.)

While the survey reflects retailers' desire to wield technology to address economic challenges, it also suggests that many retailers are being conservative with their IT budgets. Almost 43% of respondents said their IT budget for 2009 will remain the same, compared with 32% who gave the corresponding answer in last year's survey.

No mission-critical applications can work well without an underpinning of accurate product data. With this in mind, 34% of survey respondents said data accuracy was a high-priority application in 2008, making it the most frequently cited application. Almost as many respondents (33%) called it a high-priority item for 2009.

Marianne Timmons, vice president, supply chain and global business-to-business for Wegmans Food Markets, Rochester, N.Y., frequently speaks on the importance of data accuracy at industry conferences. “Once data is accurate, more time can be spent building sales and growing the business,” she said at one data synchronization event.

To ensure that product data continues to be accurate, retailers have begun to synchronize the data with their manufacturers via the Global Data Synchronization Network (GDSN), operated by GS1, Brussels. In the current survey, 16% of respondents said data synchronization was a high-priority application for 2008, increasing to 21.3% who said it will be a priority in 2009. About 13% said item synchronization will be tested or launched this year, while about 11% said the same about price synchronization, a newer but potentially more powerful application of synchronization.

Business intelligence (BI) applications — used to support better decision-making — ranked second on the list of high-priority applications for 2008, selected by 30.9% of respondents, and first (38.3%) on the 2009 list. BI systems provide historical, current and predictive views of business operations, most often using data that has been gathered into a data warehouse.

Last June, Wal-Mart Stores, Bentonville, Ark., invested in Oracle's business intelligence system to provide data intelligence and analysis for a host of other applications.

In November, Meijer, Grand Rapids, Mich., announced its selection of a retail-specific BI and data warehousing application from QuantiSense, Atlanta, initially to support its merchandising team.

Associated Grocers, Baton Rouge, has been an active user of a low-cost BI tool, Report Portal, from XMLA Consulting, Tampa, Fla. Last April, Steven Miller, Associated's vice president of strategic planning, projects and information services, contributed an article titled “Business Intelligence for Less Than $25K” to CIO magazine, which posted it on its website.

MAXIMIZING CATEGORIES

Category management was cited as a high-priority system in 2008 by almost 30% of respondents, and jumped to 37.2% on the 2009 list. In difficult economic times, category management enables retailers to maximize the contributions of each category in the store, often with market data and insight provided by manufacturers. Some retailers, such as Food Lion and Wegmans, are collaborating with their suppliers on category management goals by sharing daily retail sales data and scorecard calculations.

Profit analysis is an application many worried retailers are turning to these days. While it ranked high on the list of priority items for 2008 at 25.5%, its popularity jumped to 36.2% on the 2009 list. For retailers of any size this would be fairly routine, but now more small operators may follow in the footsteps of Van's Markets, an eight-store independent based in Bozeman, Mont. Van's has developed its own systems to maximize category profits while understanding losses due to ads.

Closely aligned with profit analysis is the expanding area of price and promotion planning and optimization.

Pricing has been an especially complex issue in the past year as retailers have grappled with rising commodity prices, as well as the need to lower retail prices to help out struggling consumers. Survey respondents consequently were prone to select promotion planning (30.9%) and price management (29.8%) as high-priority applications for 2009. Likewise, among applications that will be tested or launched in 2009, trade promotion management (16%) and price optimization (13.8%) ranked second and third.

Price optimization applications give retailers a forecast of what consumers are likely to do — and how profit margins will be impacted — when prices are raised, lowered or left the same. Without this scientific approach to pricing, retailers “are not going to find margin improvement,” said Scott Langdoc, chief strategist, RetailCentric, South San Francisco, Calif.

U.S. food retailers, unlike their European counterparts, have been slow to adopt automated store ordering and perpetual inventory systems. But that may be changing, as inventory management was a frequently cited priority for both 2008 (29.8%) and 2009 (30.9%), while computer-based ordering also got attention in both lists, rising to 26.6% in 2009.

Moreover, computer-based ordering topped the list of applications that were tested or launched in 2008 (at 17% of respondents), as well as the list of applications to be tested or launched this year (16%, tied with trade promotion management).

Hannaford Bros, Scarborough, Maine, is an example of a retailer that last year completed a chainwide rollout of computer-based ordering for all warehouse-delivered Center Store items. The system has enabled the chain to reduce out-of-stocks by as much as 70% in some locations.

Computer-based ordering and many other in-store applications are highly dependent on the execution of tasks by store personnel. To ensure a higher level of execution, retailers are beginning to turn to task management systems that assign and confirm the completion of store-level duties. Among applications to be tested or launched in 2009, about 13% of all respondents — and 21% of retail respondents — selected task management.

Given labor's major contribution to store costs, labor scheduling systems are gaining a higher profile, with 37% of retail respondents (26% overall) giving them high priority for 2009.

As the most important piece of in-store technology, POS systems continue to warrant attention, even in the downturned economy. About 42% of retail respondents (28% overall) regard POS software as a high-priority item this year.

SECURITY FOR DATA

Last year marked a watershed in data security for supermarkets when Hannaford Bros. experienced a major breach that exposed 4.2 million credit and debit cards at the chain's checkout lanes. It therefore comes as no surprise that data security was second on the list of most-cited high-priority applications for 2008 (30.9%) and third on the 2009 list (36.2%).

Respondents were also asked if their companies were in compliance with all PCI (Payment Card Industry) Data Security Standards, which were established by the credit card companies to protect cardholder data in stores. Just under half (46.8%) of all respondents said they were in compliance; among retail-only respondents, 57.9% claimed to be in compliance.

The relatively low level of compliance may be due in part to the release of a new version of the PCI standard, version 1.2, last October by the PCI Security Standards Council. The council also launched a quality assurance program in November to bring greater predictability to retailers' PCI audits.

But one of the hard lessons of the Hannaford breach was that PCI compliance alone is no guarantee of data security. The Hannaford breach took place despite the chain's claim that it was in compliance at the time of the breach.

In turned out that Hannaford's vulnerability was due to unencrypted data in transit to card processors; the PCI standard, even in its latest version, does not require such data moving over a private network to be encrypted. Thus, following the breach, Hannaford upgraded its data security to levels far beyond PCI requirements.

Many retailers are following Hannaford's lead. When asked if their company is investing in more data security technology/services than PCI compliance requires, 44.7% of all respondents said yes, as did 58% of the retail respondents.

HERE COMES DATABAR

One of the biggest changes coming to supermarkets is the use of a new bar code — the GS1 DataBar — on coupons and perishables. Last year, manufacturers began issuing interim “hybrid” coupons that include both the traditional UPC-A bar code and the DataBar, making coupons the first area to move to the DataBar in a widespread fashion. GS1 US has set 2010 as the year when the DataBar alone will be used on coupons (no later than June).

In the loose produce arena, numerous suppliers have begun putting stickers on fruits and vegetables that bear both the traditional price lookup (PLU) code and the DataBar. Wal-Mart and Loblaw Cos., Brampton, Ontario, have acknowledged that they are scanning DataBars on loose produce in some stores.

GS1, the parent of GS1 US and other GS1 country organizations, has set January 2010 as a global “sunrise date” for general use of the GS1 DataBar. That is the target date for scanners to be able to scan the DataBar and for the POS to process information contained within it. But full implementation of the DataBar for fresh foods is expected to continue through 2014.

In the SN survey, 32% of all respondents — and 47% of retailers — said they can scan and process the GS1 DataBar for coupons. Fewer respondents — 28% overall and 37% of retailers — said they can scan the GS1 DataBar for perishables. Of those retailers who can't scan either DataBar, about 60% said they did not know when they would be able to.

As product recalls continue to hound the food industry, the ability to trace a tainted product to its source in the supply chain has taken on greater importance.

The Produce Traceability Initiative, for example, made considerable strides last year in establishing standards for tracing produce cases. In the SN survey, 53% of respondents said they can trace a tainted product back in the supply chain, while 16% said this capability was under development.

As the Internet continues to become a more important vehicle for reaching consumers, retailers are adding new elements to their websites and online marketing. For example, almost one in five retail respondents (13% overall) offer blogs on their websites. Online coupons are becoming more popular, with almost one in five retailers offering them (15% overall).

More retailers are seeking input from their customers via the Web. For example, 32% of respondents receive email feedback from shoppers, while 19% are using customer testimonials on their websites.

Economic considerations are leading many retailers to adopt software-as-a-service (SaaS) — whereby an application is hosted by a provider and delivered to customers across the Internet — rather than invest in an in-house installation. According to Gartner, Stamford, Conn., SaaS models will see a 25% increase in adoption by retailers in 2009.

In SN's survey, a little more than a third (34%) of respondents do not have any of their application software hosted by an outside company. On the other hand, more than a third (37%) have up to half of their applications hosted by a third-party firm, and that percentage may well increase this year.

Another alternative to buying technology is to develop it in-house. About one in five (19%) of retailers don't go that route, but 43% of respondents develop up to half of their systems themselves.

HIGH-PRIORITY APPLICATIONS

Among applications that your company currently employs, which received the highest priority in terms of usage, expansion or upgrades in 2008?

Among applications that your company currently employs, which will receive the highest priority in terms of usage, expansion or upgrades in 2009?

*Percentage of respondents selecting application. Multiple answers were permitted.

NEW APPLICATIONS IN 2008

Which new applications were tested or launched in 2008?

NEW APPLICATIONS FOR 2009

Which new applications will be tested or launched in 2009?

WEBSITE FEATURES

Which features are available on your company website or via email?

About the Survey

SN's 15th annual State of the Industry Report on Supermarket Technology is based on a survey developed by SN editors and conducted by the research department of Penton Media, New York, the parent company of SN.

The survey, distributed online for the first time, was emailed on Dec. 8 to 12,640 subscribers of SN and SN's daily newsletter. Follow-up emails were sent on Dec. 18 and Jan. 6. Responses were received from 94 individuals, representing 38 retailers, 27 wholesalers and 18 combined retailer/wholesaler companies, as well as 11 companies that were not identified. Individual survey results are confidential and not tied to participating companies.

Respondents included directors (25%), chief executive officers (13%), presidents (12%), senior vice presidents or chief information officers (9%) and vice presidents (7%), among others.

For those companies submitting sales volume figures for 2008 (43 out of 94 respondents), the average was $1.33 billion. For those companies submitting figures on the number of stores operated and/or supplied (57 out of 94), the average was 519, and 361 for retailers only.