Supermarkets Lead Industry in Front-End System Innovation

By  Greg Buzek, President, IHL Consulting
By any measure the last 12 months have been a roller coaster ride for retailers in any vertical segment. For the Supermarkets, the market basket mix has moved from less national brands to more private label, with competition increasing all the more from discounters, supercenters, and warehouse clubs.

A recent report from IHL Group looks at these changes and the impact that IT is having on increasing the efficiencies of retailers in this lucrative segment. The ninth annual study looks at the trends and includes rankings of the top 20 companies selling grocery items and how they are investing in IT to improve their bottom line in perilous times.

Before discussing the specific IT trends, let's look at the key market drivers.

It's the Economy, Stupid
A full analysis of the economic problems faced by the US is beyond the scope of this summary. That said, it is safe to say that the combined foolish decisions made by elected officials, lenders, and subsequently consumers caused a rather dramatic reversal of the worldwide economy in the past year.

The impact of these economic issues on retail has been very clear. Walmart was among the first to recognize the tough times ahead, slowing their domestic expansion and instead focusing upon their international markets. Few other retailers were as prepared and well positioned.

Specifically for Supermarkets as more families chose to eat out less, the grocery bills at the local supermarket were poised for growth. Which in and of itself would have been a great thing for grocers. However, those same consumers flocked to discounters and traded down to lower cost items (particularly as commodity prices climbed as well), creating a rapidly changing market basket for many retailers. This has been so dramatic that even Safeway, considered a leader in premium based loyalty shopping has recently announced a move to Every Day Low Pricing - betting that that change in the consumer of the last 12 months is here to stay.

Increased Competition and Margin Pressure
Supermarkets continues to be characterized by intense competition, not just from other Supermarkets, but also from Convenience Stores, Warehouse Clubs, Specialty Retailers, Supercenters, Restaurants and Fast Food outlets, and large-scale Drug Chains. While we want to get away from saying, "It's all about Walmart," the fact is that Walmart has stormed into the front of the pack in a very short period of time (jumping from 5% to an estimated 37% share of grocery dollars within the decade), and we don't see any change to this in the future.

Click here to view a comprehensive chart on Walmart's Store Count.

The figure above speaks volumes. Simply, Walmart opened their very first supercenter in 1988, and as they found success with this format, their focus shifted from the discount store to the Supercenter. New Supercenter construction accelerated, and existing stores were remodeled or relocated to accommodate the new format. The impact on other Supermarket retailers has been noticeable, and throughout the nation, retailers like Kroger, Albertson's, Safeway, Publix and Winn-Dixie all face some sort of direct competition from a Walmart Supercenter or Neighborhood Market.

Technology Adopters and IT Spend
Supermarkets have been and continue to be early adopters of technology solutions to a variety of problems. At the same time, they have some particularly old technology in mission critical areas since their margins tend to delay technology upgrades.

Leading the pack among several areas of significant investment have been Self-Checkout Systems, Thermal Printing solutions, Online and Offline Debit/EFT/EBT, Electronic Check Conversion, and Biplanar/360 degree scanning. These are specific Front-End systems where Supermarkets have led the retailing industry in innovation. Because of the penny-profit issues, perishables, and increased competition from Discounters, Supermarkets have also been innovators in the area of the supply chain with Category Management, Inventory Control, Warehouse and Transportation, and Price Management systems. Another technology that has promise is electronic shelf labels (ESL), though margin/cost issues have yet prevented its widespread adoption.

All this said, Supermarkets spent some $16.1 billion on IT in 2008, which is more than any other retail segment but Specialty Hard Goods.

Key areas of investment for the next 12 months will be in the area of Private Label Management, Business Intelligence/Analytics, and Fresh Item Management according to recent surveys. Fresh item management is a key area for margin improvement, as results drop quickly to the bottom line for retailers that get this under control.

If you would like more detail, IHL Group's IT and the North American Supermarket study is available for purchase at www.ihlservices.com and includes technical profiles of the top 20 retailers from IHL's Sophia system.