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RECONSTRUCTION

The internal overhaul of the grocery industry through re-engineering, restructuring or Efficient Consumer Response initiatives is in full throttle, and there's no end in sight, a variety of industry observers told SN.Over the past two years or so, most companies at all industry levels have been in an ongoing state of flux as they've sought to remove costs from their businesses by making their own

Elliot Zwiebach

May 8, 1995

9 Min Read
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ELLIOT ZWIEBACH

The internal overhaul of the grocery industry through re-engineering, restructuring or Efficient Consumer Response initiatives is in full throttle, and there's no end in sight, a variety of industry observers told SN.

Over the past two years or so, most companies at all industry levels have been in an ongoing state of flux as they've sought to remove costs from their businesses by making their own operations more efficient and their interactions with each other more productive.

Those interactions may be as basic as revamping delivery schedules or adopting category management, and as technologically advanced as computer-to-computer communications.

But companies have only begun to scratch the surface on numerous projects, which ensures that the focus on these initiatives will continue for years to come, observers said.

Quantifying exact levels of industry restructuring is hard, said Robert E. Stauth, chairman, president and chief executive officer of Fleming Cos., Oklahoma City, in an interview with SN.

"Not too many companies talk about it openly," he explained. "It's different with ECR initiatives, because there's an understanding in the industry to share that information.

"But most CEOs see restructuring as part of a unique corporate strategy, and they don't want anyone else to know what's going on until they know for sure that it's going to work." While large segments of the industry are in agreement on the need to remake operations, many disagree about how to refer to the process. Some call it re-engineering, others restructuring and others ECR. One company is calling its initiatives "reinvention."

The terms are generally used interchangeably.

Whatever they are called, these projects are moving ahead at a rapid clip, industry observers stressed. According to Roger E. Stangeland, just-retired chairman of Vons Cos., Arcadia, "ECR has moved into the real world, and people are doing real things with it.

"And I think the term 'ECR' may become less important as the real work becomes more important and as trading partners find ways to use systems and technology as the vehicle to improve their relationships and get costs out of the system, which is what has largely happened over the last two years.

"We're out of the phase of finding examples and running projections. Now it's down to the fact that we see ways for all companies to work together with trust to take costs out."

Companies that have been engaged in restructuring for a while are beginning to see results.

Kroger Co., Cincinnati, for example, has been able to reduce the cost of products and has become more efficient and productive in its distribution methods, inventory and warehousing through restructuring efforts over the past couple of years, Paul Bernish, director of public relations, told SN.

"We're in the midst of an aggressive new-store program, and we're finding more efficiencies in opening stores, including the ability to use less working capital, because we're getting smarter about the way we order inventory and other needs to prepare for an opening.

"And as we get more into category management and partnerships with suppliers, we're finding ways to order, warehouse and ship that are more effective and productive."

Bernish said Kroger has committed $120 million to technology and logistics applications over the past two years and will continue to invest large amounts "because our investments are paying off already, and we anticipate they will continue to do so."

American Stores Co., Salt Lake City, has found that benefits from its re-engineering efforts are offsetting the costs of those efforts, prompting the chain to accelerate those programs, said Victor L. Lund, president and chief executive officer.

American's re-engineering -- referred to by the company as the Delta project -- consists of efforts to develop common systems, business processes and technologies for its operating segments to enable the chain to consolidate certain aspects of supply-chain management and operate on a common basis for buying, warehousing and distribution.

Lund said the $5 million American invested in restructuring during the fourth quarter was matched by corresponding cost savings during the same period.

"The Delta project, particularly the integration of the supply-chain functions, is critical to the future success of the company," he said. "The very visible and tangible benefits that will result convince us that we should accelerate this effort."

According to Jonathan Ziegler, a securities analyst with Salomon Bros., New York, retailers are already seeing the impact of restructuring "in terms of strong earnings and margin improvements, despite little top-line growth."

What companies are doing with re-engineering often has a lot to do with where they were when the recession hit and the search for cost-containment became crucial, Ziegler said.

Kroger, which goes head-to-head with supercenters more than any other chain, had to focus on removing costs from its systems, while American Stores, which grew through acquisitions in different parts of the country, faced the need to centralize its buying programs, he explained.

"Safeway had problems with service levels, so it's been working to improve that, while Winn-Dixie, which has established itself as the low-price leader in its operating areas, has had to refocus on removing costs," Ziegler added.

Gary Giblen, managing director of Smith Barney, New York, told SN there's very little resistance by most chains to restructuring, "although some companies, like Albertson's, might say they're happy with what they're doing and don't have to restructure, while others that are already super-efficient, like Hannaford Bros., have no problems with it."

According to Giblen, "Everyone is concerned with warehouse logistics, and everyone wants to cross-dock because it's better, and everyone wants to reduce back-room space and get just-in-time deliveries and lower their health and medical expenses.

"But it's a chicken-and-egg thing. Not all retailers and not all vendors are at the same point in their involvement."

The industry's focus on restructuring is not likely to disappear in the foreseeable future, observers agreed.

According to Ed Comeau, an analyst with Lehman Bros., New York, "The focus on productivity has moved front and center, and it will be tough for it to ever go away.

"Re-engineering for productivity improvement will be a major issue for several years. After that we'll see incremental benefits from refinements and small improvements as we move forward."

He compared the process to a football team moving from one goal line to the other. "It will take another two or three years to go the first 70 yards, and then we'll see very slow progress as the industry covers the final 30," Comeau explained.

"Category management is just

beginning, and one result is the increasing development of store brands and the elimination of unproductive stockkeeping units.

"Paperless invoicing is coming along and streamlining the distribution process, though it still has a way to go. And we're just scratching the surface on cross-docking, which is mostly in an experimental mode now."

Giblen also said the search for greater productivity and efficiency will be an ongoing process. "While re-engineering may have a definable end, the re-engineering mentality must remain.

"Even if the industry is able to achieve all the productivity and logistics gains for which it's currently striving, it will have to remain constantly vigilant, because once it decides the process is finished, then waste will find its way back into the system."

Stauth of Fleming Cos. told SN, "Re-engineering becomes the way you manage your business, and it never ends because you're always looking for ways to improve.

"Once we get through the first phase of what we're doing, we'll see what we've learned and perhaps decide to apply that information to some of the projects we completed earlier in the cycle."

Ziegler said he agreed that re-engineering is not a finite undertaking. "Even Wal-Mart is still searching for ways to make its business run more smoothly, and supermarkets are coming from further back because it's only in the last few years that they moved from being deal-based to becoming more productive," he noted.

According to Tim Hammonds, president of the Food Marketing Institute, Washington, "ECR has changed the way trading partners do business together, and that is a continual process.

"So even once they're all in place, ECR efforts will serve as a jumping-off point for a lot of other changes in the way we do business together."

One area of change may be packaging, Ziegler said. "Once you've achieved all the benefits of category management, just-in-time deliveries and electronic data interchange, I see a whole new area that has not yet been explored involving packaging changes designed to take labor costs out of the system by making it more efficient to stock shelves," he explained.

Such changes may involve better accommodations for J-hook displays, less frequent use of corrugated shipping containers and different fixturization for shelving, Ziegler said.

"And instead of 24-count packages, it may make more sense to utilize continuous replenishment and go down to an 8-count package for certain products, to make packaging reflect what the register tells you about sales movement," he added.

According to Bernish, Kroger has encountered differing levels of interest from suppliers concerning cooperation in the chain's restructuring efforts. "Some companies come to us, and we are a responsive audience," he said.

"But some suppliers are not as interested or as eager to respond as others, and we try to show them the benefits of partnering relationships. It's a competitive marketplace, however, and if we find we can reduce our cost of product by dealing with another supplier, then that's what we're doing."

Bernish said Kroger has found private-label suppliers to be most responsive to partnership arrangements. He also noted that Kroger has changed sources of supply when a supplier was reluctant to assist the chain in seeking more efficient ways to operate.

Explaining the impetus for restructuring, Stangeland told SN, "I think there was a time when we sat on our haunches too long -- a time when it was easy to get sales increases through inflation -- and we didn't weed our garden too well. Suddenly we said to ourselves, 'Our garden is overgrown and we have to weed it,' and we called it restructuring."

According to Comeau, the impetus for overhauling the way business has been done for more than 50 years was the cost crunch created by the recession in the early 1990s.

"In the last two or three years, business has slowed and the cost structures of the 1980s went up, so retailers began looking with more vigor at ways to reduce costs, improve productivity and improve their existing operations.

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