MARGIN MINDER

MICHAEL GARRY

When it comes to technology, most independent operators rely on their wholesalers for guidance and support, while some are turning to technology suppliers to host their IT operations.

On the other hand, Van's Markets, a family-owned food retailer based in Bozeman, Mont., with eight stores in the central part of the state, is that rare independent that largely manages and even develops its own technology applications. One application in particular, a three-year-old database management system created under the direction of general manager Frank Cannon, has proved to be a powerful asset for Van's, enabling it to boost both sales and profits.

Cannon, who oversees technology and operations for Van's, views technology as an indispensable means of survival in a market where it competes "toe to toe" with powerful chain operators, including Wal-Mart Stores, Albertsons and Safeway. Van's, which operates seven IGA stores (including one it just acquired in Great Falls) and one Thriftway store, is owned by the VanderJagt family, which has had it for four generations.

"We use as much technology as necessary to keep us in the game and maintain enough gross profit to survive," he said in a recent interview with SN. "It's important for us to have the same functionality that Wal-Mart and Albertsons have, but fit to our smaller operation."

And while Van's does receive some "significant" help from its two wholesalers (Minneapolis-based Supervalu for its IGA stores, Associated Food Stores, Salt Lake City for its Thriftway store), "it's important for us to manage some functionality ourselves," said Cannon, who has been with Van's since 1983.

In addition to the database management application, called the Category Management System (CMS), another, older system - dubbed Track - helps Van's stores manage their Profit & Loss Statement each week. Track was also internally developed by Van's.

Last year, Van's ventured into the third-party software world, adopting a price optimization system, from Revionics, Sacramento, Calif., designed for the independent operator. (See "Pricing Op Not Just for Big Retailers Anymore," SN, Aug. 21, 2006, Page 94.)

But CMS is the linchpin of Van's operation. Cannon sees it as providing a counterpoint to chains that can hire "a lot of people to set prices, monitor new items and manage categories."

Van's had used a different database management tool, developed by Supervalu, during the 1990s. That system, which Cannon said was not as powerful as CMS, was made obsolete in 2000 by the so-called "Y2K" bug, which required all IT systems to be updated.

Cannon then decided to develop his own database system. "We worked with a vendor for a while, but that didn't work out," he said. "So we took our vision and contracted out our programming needs." Van's IT director, Tracy Kjorstad, now works with Cannon in supporting CMS and developing its features.

CMS, based on the Microsoft Visual FoxPro database tool, is designed to be used every day by key personnel at Van's stores, including store managers, assistant managers and even department managers. Cannon has completed about 75% of the training necessary for complete utilization of the system. "We want our stores to be aware of where their targets are and understand how their departments come together for sales and gross profit," Cannon said.

Maximizing Margins

Each day, Van's collects sales data from the stores and brings it to the CMS database at Cannon's office in Helena. He recently deployed a Web-based virtual private network (VPN) to facilitate the data movement, replacing a much slower 56K frame-relay network.

CMS organizes the data into myriad reports, including sales by store, groups of stores, product categories, subcategories, items and vendors. Its analytical capabilities give Van's store management a host of ways to look at and respond to market conditions.

"It allows you to increase sales in certain categories, price model so you're competitive where you need to be, maybe increase margin here and there to make up for ad losses, or manage your ads so you're not giving profit away," Cannon said. "It's the way we manage the stores, to maximize as much profit as possible."

In one example of the system demonstrated to SN, Cannon zeroed in on the milk category at Van's IGA store in Great Falls, showing how margins could be tweaked. Instead of the 21% gross margin garnered for 2% gallons of milk, he changed it to 25%. That changed the margin for milk as a whole from 29.26% to 30.25%. "Or, let's say the competition is beating us up on [homogenized milk] gallons," he noted. "We're getting 34% [gross margin], but we go down to 28% to be competitive. This measures the effect on overall gross."

In another example, by rounding up prices such as $2.96 to $2.99, he changed the gross margin for a category from 41.89% to 42.52%. Van's directly manages prices in this way for direct-store-delivery items (such as milk, soft drinks, beer, wine, snacks) and perimeter departments (deli, bakery, meat, produce), while relying on Revionics to handle pricing for wholesaler-delivered products.

"It's up to each store to decide what works in their departments," Cannon said. "[CMS] allows them to analyze what sells, what isn't selling, and to develop a plan to create a profitable department and get as many sales as they can out of a department."

Cannon also demonstrated how CMS can be used to understand margin losses due to ads. For butter, an ad accounted for 23% of sales, at a gross margin of 14%; the rest of butter sales were at regular price, with a margin of 37%; the combined gross margin was 31%. "You can adjust the discount on ad items, so you're not giving away [too much] gross," he said. "Or if sales are down, you may need to heat up ads."

For shrink control, Cannon showed how CMS can build a "shrink sheet," listing how much loss each produce item has suffered for a given day. In one case, $120 worth of grapes was discarded. "So now we need to figure out what needs to be done with grapes - a shorter display, less on the floor, a different price," he said.

Cannon estimates that CMS has enabled Van's to reduce shrink by about 3%. "Just the savings in produce shrink more than pays for this system," he said.

Has CMS positively impacted Van's overall sales and profits over the past three years? Yes, Cannon said, declining to provide figures. "It's helped tremendously, especially with DSD items." In the past, some DSD vendors were pricing items below what Van's preferred. "We were watching a lot of sales dollars go by the wayside," he added. "Now we make those decisions."

Van's Track system, developed years ago by Cannon, complements CMS by creating a weekly P&L for store managers. "It keeps track of everything a grocery store needs to know by department," he said, including all gross profits, sales, inventories, advertising, supplies and labor expenses.

But Van's developed CMS to give store managers more management capabilities than Track has. While Track may indicate the gross profit for a department is off target, CMS "allows you to figure out why," Cannon said. Moreover, CMS is able to analyze sales and gross profits in a more granular fashion than Track.

Optimizing Prices

Van's uses Revionics' Retail Advanced Pricing System (RAPS) on a weekly basis to help set zone pricing at five of its seven IGA stores. The system, which is managed by Revionics for Van's, is applied to core Supervalu-delivered items, which make up about 50% of its SKUs.

Supervalu's pricing structure works well, but "we wanted to take it to a little higher level," Cannon said. "There was a sales advantage and a gross margin advantage that we weren't taking advantage of, so we needed to use some technology." Van's still uses Supervalu for temporary price reductions.

Van's was one of the first IGA retailers to employ RAPS, leading the IGA Northwest Supermarkets board of directors to endorse it for its members.

"Frank leaped on the Revionics program when it was presented," said Rudy Dory, chairman of the IGA Northwest Supermarkets board of directors and owner, Newport Ave. Market, Bend, Ore.

Jeff Smith, founder and vice president, business director, Revionics, also took note of Cannon's efforts, calling him "one of the leading-edge people in the independent retail space in terms of wanting to do all he can for his business."

Cannon finds the Revionics system, which Van's has now used for about a year, to be an effective tool. "It tests each item five or six ways, and tells you where it thinks the item's price should be, based on your target for the category." In part, items are assessed by their sales history.

In using RAPS, Van's sends Revionics its weekly Supervalu item price file, as well as weekly sales data and current prices. Revionics sends Van's its recommended price changes on 500-600 items, which can be reviewed before they are put into effect.

"We were careful [about reviewing prices] at first, but we're more comfortable now so we're letting the system do what it needs," Cannon said. Feedback from stores is still considered, however.

Cannon said that the Revionics system has improved sales and gross margins in some categories, but he declined to provide specific figures. In some cases, margins were improved by just rounding up prices or making sure items were priced correctly. "For the most part it does what it says it will do."

To make its service affordable for small retailers, Revionics charges a base rate of $150 per store per week, following a $1,500 setup fee.