super market strategic alert

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FROM THE REGULAR AND SPECIAL EDITIONS January through December 2002

SupermarketTechnology

Supermarket Strategic AlertSpecial Report

2003



F R O M T H E 2 0 0 2 R E G U L A R A N D S P E C I A L E D I T I O N S

Special Report: 2003

Supermarket Technology

Pollack Associates, 2003P. O. Box 331

New York, NY 10021-0331Phone (212) 734-0753 • Fax (212) 202-3501

E-mail [email protected]



Table of Contents

Pricing & demand management 1 Electronic shelf labels gain acceptance 2 Not your father’s ATMs any more 3 22 nd century paging 4 Smart pallets 4

Tasty food wrap 4 Praise for early adopters 4 Pepsi uses wireless communication 4 Biometrics update 5 e-Learning: from CDs to streaming video 5 Finally: Guilt-free Bar Codes 6 Customer strategy: Importance of process change 7 Customer strategy: Likening cement to supermarkets 7 Demand management: Understanding the process 8 Demand management: Business results 9 Instore self-service: Kiosks and their descendents 9 Instore self-service: Self-checkout 10 Warehouse logistics: Basic background 10 Warehouse logistics: Current status and future innovation 10 Knowledge Discovery: Datamining versus knowledge discovery 11 Knowledge Discovery: Critical data relationships 12 Knowledge Discovery: Market experience 12 Wireless Technology: Consideration and Implementation 12 Embedded RFID: Science fiction arrives 14

Biometrics spread 14 Avatars at kiosks 15 Europe CPFR: Second generation ECR 15 US CPFR: Most alliances with mass merchants 15 Equipment reduces human intervention 15 Safeway centralizes procurement 16



Schneider Trucking: Using the right data 16 Tapping third-party providers 16 Albertson’s contracts with Fleming 17

7-Eleven centralizes fresh distribution 17 Tracking shopping carts 17 Second generation ATMs 18 Cheaper RFID tags possible now 18 Talking credit cards 18 SpeedPass on your wrist 19 Ceiling surveillance 19 Biometrics: Thrift Way and C-stores 19 Security flaw in ‘smart’ cards 20 Borders & Category Management 20 Accuracy coalition in Canada 20 Self-checkout spreading 21 Reducing Out-of-Stocks with DSD 21 Point-of-Sale update 22 RFID: Bright future as costs fall 23 Optimizing truckloads 23 Embracing UCCNet 24 Speedier mobile commerce 25 Digital receipts 26 Bar codes: Growth & evolution 26 Refocused to bottom line 27 Strategic planning role 28 Food Lion: EDI & the Internet 28 Marrying bar codes and RFID tags 28 Crossdocking Revisited 28 Savings available from improving invoice accuracy 29 Savings available from reducing out-of-stocks 29 Smart shopping carts 29 Laser self-scanning 30 Instore Ads Build Sales…But 30 Assortment optimization at Meijer 31 Home Depot and self-scanning 31



Supermarket Technology

To outsiders, supermarket technology may sound like space age innovation, butinsiders know it is directed against improving razor-thin margins by improving

productivity, reducing shrink and often reducing labor or shifting it to thecustomer.

In the area of productivity, supermarketers embraced e-learning, shifting someof the CD-based training programs to interactive applications on the Web toimprove employee understanding and provide for greater feedback andtracking. To improve overall store productivity, chains increasingly adoptedpricing and demand management—so prices can be adjusted in response todemand for individual item, optimizing overall sales. Electronic shelf labels alsogained popularity as demand management programs appeared to ease the labor involved in handling electronic shelf labels.

Shrink reduction initiatives included adopting more biometrics for employeeand shopper identification. And shopping carts could be trackedanywhere…from parking lots to the aisles to determine shopping patterns.

Increasingly, retailers pursued technology that would have shoppers take over labor-intensive store tasks. Kiosks and ATMs began handling more customer service functions and offering additional products, while self-scanning and self-checkout became fixtures everywhere.

The key enabling technology was radio frequency identification (RFID) which,when broadly implemented when costs go down, will allow product to betracked from raw materials to checkstand without manual intervention.

Pricing & demand managementPricing software can help retailers achieve better control over revenue and margin while maintaining acompetitive position in the market. Industry insiders believe that the use of price optimization software willspread as it proves itself.

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Supermarket Strategic Alert…2

Today, non-computer pricing schemes are often as simple as marking up products a straight percentage overcost, varying that markup by category. By contrast, the software uses advanced algorithms and complexcomputer modeling to optimize prices. The mathematical model takes into account competitor pricing,location and product availability. Demand management software has many variations and can forecast

weekly consumer demand by crunching numbers like market volatility, competition, and seasonality. These

models can be finetuned to fit a retailer’s strategy—to maximize margins, dollar sales or unit sales—to setfinal pricing. The most important element is determining consumer demand elasticity for a product topredict whether lowering a price will increase movement or raising it will reduce movement, ultimately affecting total revenue.

Evidence of the effectiveness of price optimization software is spreading: (1) Larchmont, NY-basedD’Agostino Supermarkets used it in 10 of its stores in a three-month pilot. Profitability rose by 2.5%. Among the findings: increasing the price of vegetable baby food a few cents over the fruit selection didn’t affect sales.

The software provided the reassurance to adjust prices. Now the 22-store chain changes prices on 800 to1,000 items per store each week as the process is rolled out.

(2) Big V Supermarkets (Florida NY-based owner of 31 Shop Rites) discovered it could raise the price of itsprivate label pregnancy test, which sold for much less than national brands. The software also uncovers therelationship between competitive brands, such as Tide and Cheer—and how changing the price of oneaffects the sales of the other. The company still checks prices at competitors, but lets the software set theprice depending on the objective, perhaps beating competitors’ prices for an entire product group.

(3) According to the consulting firm Arthur Andersen, a price increase of just 1% can create operating profitincreases of 11%+ if unit volume is maintained. AMR Research (Boston) says that because the software canbe tweaked to support retailer strategy, the breakthrough is that margins and revenues can be increased. Untilnow the focus has been on reducing costs. AMR has monitored revenue increases of 2.3% and net margingains of 9.1%. Today, software providers include DemandTec, KhiMetrics, Manugistics and ACNielsen. Fortheir various products, these companies report boosting profits 5 to 10% and sales 1 to 7%, achieved by increasing prices on 57% of a store’s items and decreasing them on 17%, and improving gross margins 4.5%.

Demand management is a radical concept for the supermarket industry. Among the challenges the industry faces in moving toward this model are: (1) Cleaning up the data available, because bad data will lead to baddecisions. (2) Abandoning entrenched attitudes about rules-based linear pricing models. (3) Understand thatdemand elasticity is key, with some products and categories having a lot, others little. (4) Accepting the pricetag on these software pricing systems of upwards of $1 million, and pilots costing in excess of $100,000.Grocers are notoriously reluctant to try new things—especially expensive things.

Source: Progressive Grocer , January 2002. Prices and possibilities, by Connie Gustke, p. 66-8.

Electronic shelf labels gain acceptance Although electronic shelf labels have been around for almost two decades, retailers have been reluctant toeven test them because of price. These LCD modules replace paper labels and are controlled by a store’scentral computer. The systems have fallen in price from $12 a tag five years ago to about $5.50 currently.Still, with a typical supermarket stocking 30,000+ SKUs, the cost boggles most operators. Labels can now

withstand harsh environments such as freezers and produce areas.

Early adopters have achieved the following improvements: (1) elimination of scanner errors by coordinating the shelf prices with the POS server’s price file, (2) reduction of labor costs at the store level, particularly forchanging paper labels. ESL systems can change prices storewide or chainwide in one step, eliminating thecost of re-pricing shelves by hand. The tags also display stocking information, indicating how many units of the item are in the stockroom, and how they should be displayed, and (3) time flexibility in instituting pricechanges for quick response to competitive situations. Tags also allow for promotional pricing by day part.





Still, skeptics argue that until prices drop to $2-$3 a unit, ROI is not achievable for larger chains. Otherstumbling blocks include vendors’ financial stability, Y2K compliance and use of latest radio-frequency technology.

Until now, item pricing legislation in Connecticut and Rhode Island exempting stores using ESLs has beenthe biggest boon to the manufacturers. However, since such laws requiring retailers to price individual itemsunless they use ESLs have not expanded, ESL acceptance has been slow. In those states, capital recovery takes less than a year, based on labor and material cost savings. Elsewhere, the ROI time frame is intensely debated.

Telepanel is the oldest ESL vendor. Started in 1982, it has marketing support from IBM, but relies on venture capital for most of its funding. Telepanel counts A&P, Stop & Shop, Loblaws, Big Y, Reasor’s, Stew Leonard’s, Grand Union, Wakefern and SPAR among its customers. Despite support from IBM and itsability to interface with other store systems, Telepanel continues to be a difficult sell—primarily becauseretailers want a quicker payback on ESLs, especially in the current economic environment. ElectronicRetailing Systems (ERS), another early entrant in the field, announced last spring that it would close down,although it is continuing to support its existing customers.

Industry observers say that the financial difficulties encountered by the early entrants allowed NCR, a morerecent entrant in 1993, to rise to prominence with its DecisioNet line. NCR wireless ESLs connect directly toa store’s POS system. Safeway and Giant (Ahold division) are lead customers of NCR. Giant is expanding ESLs chainwide after a six-month test, which revealed that the tags will save 15 to 20 man-hours per week inlabor costs in each store, or 780 to 1,040 man-hours per year, while providing a tool to implement a moresophisticated pricing strategy. Paper labels will remain on some health and beauty care and generalmerchandise products.

Additional providers of ESLs include Pricer (Swedish company), Eldat (Israeli company) and Display Edge Technology (an independent company within Hobart).

Source: Stores , January 2002. Electronic Shelf Labels Draw New Interest as Prices Fall, by Bruce Fox.

Not your father’s ATMs any more While some look to ATMs as the technological breakthroughs of the 1970s, others are less charitable, saying that they remain locked in time. Wells Fargo and other banks are about to change all of that by Web-enabling some of the 800,000 ATMs in the US. Already units allow consumers to receive news updates, printcoupons, pick up movie and airline tickets. Other ideas being tested or on the drawing board includepersonalized stock quotes, sports scores, map directions, bill payment and calling up a cancelled check froman individual’s account—all activated by inserting a bank card of some sort.

For banks, Web-enabling is a boon: it allows them to add products and services through software, ratherthan requiring service calls to the machines. Retailers also benefit. Already companies, including 7-Eleven inpartnership with American Express and Western Union, are experimenting with providing automatedmoney orders, wire transfers and check cashing. Still, it will be a delicate balance for the banks and machinery manufacturers. To be sure, consumers want additional services, but consumers also want convenience and

no waiting. This means even basic Web-browsing is not an option. A line at an ATM would be the kiss of death. Manufacturer NCR reports that potential services being developed include downloading music andprinting digital photos.

The key to broadscale changes will be machines using Windows NT, versus IBM’s OS/2 operating system. Windows machines support standard Web technologies and languages, including video files…making themmore personal computer than ATM. With the added functionality also comes improved security, since the





new machines will be able to identify users and log patterns to a central archive, instead of cumbersome videotapes.

Source: The New York Times , January 17, 2002. Going to the A.T.M. for More than a Fistful of Twenties, by DavidMargulius, p. D7.

22 nd century paging Item Velocity Monitoring is a paging system that alerts store clerks via email to their pagers when sales ratesof selected products change suddenly. Developed by Microsoft, Procter & Gamble and Data Ventures, thesystem is in test with four unidentified retailers and is capable of tracking sales of up to 1000 fast-moving items to identify unusual selling patterns. The anomaly detection algorithm was developed by Data Venturesfor the New York Mercantile Exchange. P&G sponsored the store tests but will not be involved in selling the technology, which could be available as early as next month.

Source: Executive Technology , January 2002. P&G Ready to Roll Out POS Alert Tool to Cut Out-of-Stocks, by JoFleischer, p.34.

Smart palletsChep is testing pallets with embedded radio frequency identification (RFID) tags. The objective is real-timetracking of goods at any time throughout the distribution cycle. Trace-and- track software is underdevelopment for shipper use and as an extension of services provided by Chep.

Source: Grocery Headquarters , January 2002. Trading Assets-Or Where's My Pallet? by David Litwak, p. 96.

Tasty food wrapUSDA scientists have developed a food wrap that protects food, keeps it fresh and acts as a condiment whenheated. The wraps are made from a variety of fruits and vegetables, and take on the related colors and smells.

The overall project was designed to provide nutritional options for consumers and reduce waste traditionally associated with packaging. Tough to imagine: think about leftover pasta or pizza stored in a tomato puree

wrap, which when reheated later transforms into sauce.

Source: Just-food.com , January 3, 2002. USA: USDA scientists create edible wraps for leftover foods. MorningNewsBeat.com , January 7, 2002. Your Tax Dollars At Work: Edible Wrapping Paper.

Praise for early adopters Executive Technology praised five retailers for ‘adopting technology to operate their businesses more efficiently and more profitably.’ The oft-reported retailers and their best practice areas are Food Lion for self-checkout,Hannaford for its high-speed wireless network, Schnucks’ proprietary home shopping program, PriceChopper’s RF (radio frequency) store replenishment system to reduce out-of-stocks and Dorothy LaneMarkets for pioneering work with EAN 128—reduced-space bar codes that carry manufacturer, production,

weight and lot data.

Source: Executive Technology , February 2002. Five Retailers Leverage Best Practices, by Deena Amato-McCoy, p. 26-8.

Pepsi uses wireless communication The growth in wireless adopters is attributable to plunging equipment prices, new standards for radio-linkedand improved cellular coverage. In-office WiFi technology is simplifying installations—with such networksestimated to double in the next year to 12 million. Although some companies are waiting for higher-speed

wireless networks before adopting them, other have already experienced savings.





Pepsi-Cola Bottling Group was one of several companies profiled in Business Week/e.biz for its early experience and savings. Prior to adopting wireless technology, the company’s 7000 technicians phoned in toget service call particulars and then faxed back billing information. After wireless, the service person’shandheld receives service details and the device sends billing back to the office. This has cut service responsetime by 20% (saving $7 million), reduced errors from the old system and ensured that correct parts are ready

for pickup (100% of the time versus 85%).

Source: Business Week/e.biz , February 18, 2002. Winging Into Wireless, by Heather Green, p. EB8-9.

Biometrics update The International Biometric Industry Association estimates sales at $170 million in 2001. As a result of new security concerns at airports and elsewhere, sales are expected to grow to $1 billion by 2004. Already companies are using finger-scan devices for office and factory entry. The New York State Lottery uses irisscans for employee access to secure areas. Practically speaking, Gristede’s in New York City uses afingerprint scan to replace time cards, recipients enroll in the New York State public assistance program witha scan and world travelers use INPASS. Skeptics say the systems are far from perfect, can be fooled and

violate sacrosanct individual privacy protection. Hairdressers and others who work with harsh chemicals are

poor prospects, as are the elderly with worn prints. Fully 12% of prints collected are unusable. And deliberatehackers use gelatin finger prints. Face and iris scans are more accurate than finger or hand prints, but can bethrown off by lighting variation, require expensive hardware and significant reader training. Signature and

voice scans change over time and under stress.

Supermarkets are increasingly using biometrics, specifically fingerprints, to reduce fraud and speed up thefront end. Fingerprint scanning at checkout can cut transaction processing time to five seconds, does notrequire scanning or reading of cards by either the clerk or customer, eliminates checkbooks and thecumbersome filling out process, and lowers fraud rates to 1 in 10,000, since fingerprints are hard to‘duplicate.’

Consumer acceptance is the wild card, but early tests show that ease makes up for other characteristics. At Visa headquarters, 400 employees used their index fingers for 50,000 cafeteria purchases and 93% said they were very satisfied. The fingerprints were linked to their credit cards. Reader manufacturers say that front-end productivity improves and that retailers can save $20,000 in fraud.

Retailers do say that enrolling customers takes patience. However, once in place, the customer’s full IDcomes on the screen so shoppers can be addressed by name...or denied check privileges if earlier ones havebounced. Voice recognition is an unlikely alternative, and people still balk at iris scans that they believe areinvasive and are costly. Facial scanning tends to make women feel uncomfortable. Eventually, the solutionmay be smart cards that carry fingerprints. Since the 9/11 attacks, fewer customers are balking at fingerprintscanning.

Source: Progressive Grocer , February 1, 2002. Pressing the flesh, by Constance Gustke, p. 20. US News & World Report ,February 18, 2002. Body of Evidence, by Dana Hawkins, p. 60-2. SN , February 25, 2002. Fingering Crime, p. 17.

e-Learning: from CDs to streaming videoHigh employee turnover and scattered locations have made supermarketers uncharacteristically interested ininnovating — with e-learning, at least. CBT (computer-based training) is particularly well-suited to teaching repetitive and predictable tasks — common in supermarkets. The technology allows employees to learn attheir own pace, skip areas they are familiar with and devote extra time to train where gaps exist. Thetechnology has paid off in better customer service, lower turnover levels and overall performanceimprovement, according to developers. Trade associations now provide department- and function-specificmodules.





Initially, CD-ROMs were state of the art and allowed employees to practice skills in non-threatening ways.Next came ‘b-learning’ —where modules were customized to the company for culture and specifics, yielding blended learning. Now simulations are taking off, allowing employees to test drive their new skills. Coming next: streaming video—allowing training to take place in real time. Insiders warn that costs can rise unless theproper equipment/facilities are planned at the outset, and training professionals consulted to ensure focus

and measurability.

Source: Progressive Grocer , February 1, 2002. E-Learning becomes essential, by Meg Major, p. 35-6.

Editorial Alert: For the in crowd, ZMET (Zaltman Metaphor Elicitation Technique) has alreadyreplaced focus groups and questionnaires to better understand why consumers buy what they do.

It uses neuroscience to explain behavior, not what people say. Relying on paid volunteers and pictures, Coca-Cola learned it stands for not just the invigoration and sociability, but also calm, solitude and relaxation. Developed 10 years ago with the help of Buddhist monks. Procter &Gamble, Nestle and others have used it, but decline to be specific about learning. The price tag was not disclosed. (The New York Times, February 23, 2002. Penetrating the Mind by Metaphor,by Emily Eakin, p. A17, A19.)

Finally: Guilt-free Bar Codes The US Court of Appeals in Nevada upheld the appeal of seven companies that the estate of JeromeLemelson was not entitled to royalties from scanning of products. In 1999 Symbol Technologies and sixother companies filed a lawsuit contending that the Lemelson estate intentionally waited until scanning technology had become widespread before sending letters demanding royalty payments. The estate is acting on a patent filled by Lemelson in 1954, saying it is entitled to full rights over scanning technology. Tradeassociations spoke ‘as friends of the Court’ representing their constituencies, who have millions of dollars atstake. Complicating the situation is the fact that the estate has received more than $1 billion in royalty payments from automotive, semiconductor and electronics businesses that have not challenged the claim.

Still, the grocery industry has the most at stake with so many relatively low-cost items carrying bar codes.Fortunately, the conclusion of the court was that there had been an unreasonable delay between the time

when the patent application was filed and the time the estate started claiming the royalties. In essence, thedelay means the inventor could lose the patent rights if intervening adverse rights can be established. If theestate elects to appeal the decision to the Supreme Court, the process begins anew. However, if the estatedoes not appeal, the ruling in favor of the scanning industry will stand as precedent. Should the estate elect totake the case to the Supreme Court, the scanning industry will have to prove the delay and the deliberatenessof it. The grocery industry is particularly hopeful that the latest appeal decision will put the matter to restbecause of the millions at stake.

Lemelson holds 566 patents, second only to Thomas Edison. Colleagues, observers and engineers aredivided on whether Lemelson was truly an inventor or just an exploiter of the patent system, which allowedhim to file applications for ill-defined technologies, then go back after those technologies were developed toamend his filings. Skeptics say those who have paid off in Lemelson Foundation lawsuits judged the priceless than that of litigation.

Source: SN , February 4, 2002. Court Ruling May Head Off Threat to Bar-Code Users, by Martin Schneider, p. 1, 37.U. S. News & World Report , February 11, 2002. Powers of invention, by Janet Rae-Dupree, p. 66-7.





Customer strategy: Importance of process changeBased on almost ten years of proprietary research, Adrian Slywotsky of Mercer Management concluded thatthe rules that define business success are ever-changing. The most significant change is that thinking aboutsuccess has shifted from processes to customers.

Using General Electric as an example, Slywotsky noted that the company changed strategies several timessince 1981. At that time, the espoused strategy was to be #1 or #2 in the category in profitability. By 1987,the business model had changed to a work out model because the company recognized that there was toomuch capacity worldwide. By 1999, the company was focussing on services and solutions. Managers wereasked to figure out how to destroy their businesses, how their competitors might destroy them, and then

what they would do to rebuild them.

In examining successful businesses, Slywotsky suggests five metrics: customer selection, brand image, valueproposition, profitability and strategic control. He argues that companies that fail to monitor these factors aremore likely to crash. Examples include Aetna, Kodak, P&G, Lucent, Xerox and others. Their failure:forgetting to protect value and reinvent the fundamental ways they do business. All the companiesmentioned suffered serious stock price declines in the 1990s because of this oversight.

Slywotsky likened today’s situation to 15 years ago when companies could not get marketing and R&Dpeople to talk to each other. Today, the challenge is keeping the business strategists and the IT professionalson the same wavelength. He highlighted several other companies that have made the transition to a customerfocus successfully: Microsoft, Dell, Cisco, Fedex, Cemex and Schwab. His analysis demonstrated thatcompanies that recognized the importance of integrating smart business design with customer needspreserved their value proposition, brand image, profitability and strategic control, as demonstrated by having pretax profit percentages significantly higher than their nearest competitors.

The other common element these successful companies shared is that they used PCs as business andcommunication devices—not as machines. By converting their businesses from conventional to digital, they achieved order of magnitude improvements in cost, capital and cycle time that left their competitors in thedust. Examples include Fedex, which reduced the cost of a customer tracking inquiry from $2 on the phoneto 10 cents on the Web. Oracle reduced its cost of serving the average customer from $350 to $20.

Critical to successful digitalization of a company is determining which dimensions are important tocustomers. Spending time and money on the wrong ones guarantees failure. Interestingly, customers show great willingness to do certain things, such as use the Web at their convenience. This means is that throughdynamic price optimization, it is possible to make more money. Extending this concept to supermarkets, theopportunity exists to price by product and by store depending on the local competition.

Customer strategy: Likening cement to supermarketsFurther underscoring the opportunity for supermarkets, Slywotsky spoke about Cemex, a Mexican producerof cement: a low-margin, commodity, capital-intensive and low-growth business. In analyzing customerbehavior, Cemex learned that customers kept changing their orders. Their solution was to put GPS systemsin their trucks and use a central tracking and redeployment system. That way, even if the order changed,Cemex could deliver more quickly than its competitor. It reduced its delivery window from 203 hours to 20minutes, reduced its truck fleet by 3% and improved reliability from 34% to 98%. Its learning came from

meeting with Fedex to see how it tracked merchandising and from meeting with the Houston PoliceDepartment to learn how it predicted law enforcement demands.

Cemex correctly identified its critical IT and business priorities. Its analysis was typical of most businesses inthat it learned that, left to their own resources, projects would multiply and profits would decline. Instead thecompany analyzed its 300+ current IT projects in terms of value to the customer, resource burn and possibleproductivity improvements. Cemex stopped 140 projects, slowed down 30 slowed down, maintained 80,





accelerated 20 and added 5. Slywotsky said Cemex’s findings are not surprising and carry across otherindustries.

Slywotsky believes the winners in the supermarket industry will be those that use new digital tools to create acustomer-responsive way of doing business. Retailers and manufacturers will have to share data efficiently and effectively manner so they communicate fully. Transactional data ‘is just a subset of what you really wantto know.’

Slywotsky acknowledged that making changes to go digital are significantly easier in boom times that in thecurrent recession. However, the economy is no excuse. Slywotsky pointed to the fallacy of recession-relatedmyths: (1) Recessions are not rare: they occurred in 1982, 1987, 1990 and 1997. (2) The economy will notrebound sooner, we just need to focus faster and better. Most important, chance favors a prepared mind.Recession favors a prepared company. Therefore, those companies that can improve their relative positionduring hard times gain a clear edge. During such situations, it is increasingly important to improve morale,make people active rather than passive and to recognize that communication is self-fulfilling. This is the timeto stress differentiation over productivity and focus on value-added differentiation—since price competitionis a business assumption and not a strategy.

Source: FMI MarkeTechnics presentation: ‘How Digital Is Your Business?’ Adrian Slywotsky-Mercer Management.

Demand management: Understanding the process After ECR’s strong focus on removing costs from the supply chain, demand management—using customerbehavior to guide merchandise decisions—was inevitable as a means of building top line sales. Demandmanagement as it exists today adjusts four factors (price, promotion, assortment and space) to optimize goalof sales and/or profits.

Mike Neal, president/founder Demandtec, explained that demand management has recently come into itsown because of (1) availability of large-scale computing and advanced statistical modeling, (2) ability topredict consumer acceptance based on past behavior, (3) a more efficient supply chain and (4) broad anddeep data availability. Retailers need sales trends over the past weeks, last year’s results, seasonal demand,projections and pipeline data to capitalize on demand management software. Critical components in the

analysis are product elasticity, promotions, cross-elasticity, competition in the area, seasonality and productsubstitutes. Currently retailers are doing this kind of analysis for a small percentage of lead items. Thesoftware can do it for all items within a category, not just the top tier. Put simply, there are three ‘engines’driving the precision of forecasting: (1) financials—such as activity-based costing and net profit data, (2)optimization—which deals with perceptions and (3) demand—dealing with sales.

The modeling software can determine the relationship between complimentary and substitute items. Out of necessity, retailers must stock items in categories ranging from low to high net profit, and low to high salesper store. Plotted on a grid, the most desirable items would be those that generate high sales per store andhigh profits. Still, price adjustments (up or down) in all quadrants can alter demand and overall category profitability.

Neal presented two examples of the simplest analysis that demand management software can generate— reiterating that the beauty of the software is not two-product comparison in the same or complimentary categories, but how it can crunch vast amounts of data across an entire store of 30,000+ SKUs. For a simpleanalysis of two brands in the same category, lowering the price of Crest by a penny and raising the price of Gleem will enhance category profitability. Although a simplified analysis, the beauty of demand-basedmanagement software, is that it can create optimization scenarios based on a variety of actions, or businessobjectives. In the end it delivers shortened cycle times by allowing technology to do the work faster andmore accurately.





A more complex example demonstrates the win-win capabilities of demand-based management. From priordata, a retailer can determine the price two shoppers would be willing to pay for Tide and Bounce, using complimentary products from the demand engine, fully loaded costs from the financial engine and thenallowing the optimization engine to determine what would happen at various prices.

Complimentary product scenario

Tide Bounce data source Shopper A $2.75 $1.50 demand engine Shopper B $2.50 $1.00 demand engine Fully loaded cost $1.75 $1.50 financial engine

Demand management outcomes

Optimize profit Optimize Tide Bounce Tide Bounce

Price $2.25 $1.50 $2.50 $1.00

Units 2 1 2 2 Revenue $6.00 $7.00 Net profit $1.75 $2.00

Average $2.00 $1.75

Formerly, such analysis would be excruciatingly complex to generate and questionable because of the humanassumption inherent. Demand-based management can create these comparisons by item, by store, as well asmany others based on hard data manipulated against objectives by item, by store.

Among the advantages of DBM: (1) frees time for merchandisers to work on strategic issues instead of manipulating data, (2) facilitates execution of strategic objectives deep into all categories, (3) providesprecision in achieving objectives, (4) creates a mechanism for measuring results and (5) supplements

experience across all levels of the organization that transcends specific personnel.

Demand management: Business resultsKevin Sterneckert, svp/cio-Big V Supermarkets, identified the barriers to successful demand managementimplementation. He focussed on the organizational challenge of getting merchandising and pricing personnelto agree to objectives. He confirmed that the software is 90% predictive and applicable broadly across thestore. The technique is applicable for perishables such as dairy and packaged meat and cheese. Sterneckertexplained there was no experience in using the software for items manufactured inside the store, primarily because activity-based costing data was not available or reliable. He bases his confidence in the technique onthe reality that the modeling changes slowly over time, because consumer behavior does. Therefore, it is only the optimization segment that needs to be run more frequently as competitive conditions or businessobjectives change.

Source: FMI MarkeTechnics presentation: Store Specific Merchandising & Replenishment, Mike Neal-DemandTec,and Kevin Sterneckert-Big V Supermarkets.

Instore self-service: Kiosks and their descendentsLee Cuthbert, Scent Air Technologies, and John Stevenson, PSI, reviewed successes and failures in self-service instore technologies. All successful instore technology has two common elements: (1) it saves time— the primary consumer motivation for using it, and (2) it provides information or entertainment. Examples of





successes include automatic teller machines, lottery machines and Coinstar. These examples also have anadditional advantage: they allow shoppers to do something else—which would have required an extra tripand additional time—while grocery shopping. Among the supermarket failures are Qcoup and Comp-u-Cook, both of which embodied things that frustrate shoppers: slow printouts, little or low value incentivesand frustrating interfaces.

Several areas in supermarkets lend themselves to future self-service technologies. They are: (1) anyplace thatrequires order taking and custom service such as the deli, bakery and service meat departments, (2) pharmacy for prescriptions, (3) rain check requests and video rentals at customer service counters and (4) reporting systems for frequent shopper/loyalty programs.

As straightforward as kiosks appear, there are many costs and challenges to consider: (1) system design,including hardware and software, (2) user interface, (3) networking, (4) printing, (5) unit production, (6)installation (including an analysis of what the space occupied could have been used for), (7) employeetraining, (8) maintenance and (9) building customer awareness.

Instore self-service: Self-checkout After more than a decade of just watching, retailers are now buying self-checkout. The acceptance comes

from a market need (labor shortage), available technology (integrating payment, security and random weightcapabilities) and consumer demand for speed and shorter lines. Retailers are beginning to see that self-checkout can offer a competitive advantage. It improves service levels and attracts customers because itshortens lines and evens traffic flow.

Self-checkout appeals to consumers from all age groups and demographics. The trait users share is a desirefor control. Although shoppers are rarely as fast as trained checkers, shoppers believe they get increasedconvenience, more privacy, greater speed, better product handling—all if they do it themselves. Interestingly,experience at Giant Eagle suggests that the elderly are particularly fond of self-checkout because checkersoften move too fast for them.

Retailers who have been successful with self-checkout do more than just install it. They educate customers tothe benefit through instore demonstrations and advertising. They encourage, but don’t force usage. They maintain consistent service levels, especially with baggers. Interestingly, self-check shoppers very often preferto bag their own groceries—control again. Successful retailers also incorporate self-checkout into theirongoing labor scheduling and training procedures.

Future self-checkout applications are expected to move beyond the front end as transactions get easier andfaster, especially in deli and pharmacy areas.

Source: FMI MarkeTechnics presentation: Self-Service Technologies, Lee Cuthbert-Scent Air Technologies and John Stevenson-PSI.

Warehouse logistics: Basic backgroundPeter Abell of AMR Research reported on trends and issues in warehouse and logistics management. He saidthat logistics remain the primary source of enterprise cost reduction, because they encompass three broad

areas: logistics and transportation costs, material and inventory planning costs and process cycle timereduction. Properly implemented, logistics can create a competitive advantage, as evidenced by Wal-Mart’sstrong position. Challenges in this area include e-business and how to leverage the Web. Finally, logisticsoffer a logical place for collaboration, always a challenge in the grocery industry.

Warehouse logistics: Current status and future innovationCurrent warehouse logistics systems are for the most part heterogeneous and unintegrated. This stems frombuyers wanting to use ‘best of breed’ applications and the high cost of integrating and supporting systems not





designed to work together. Further, data is everywhere and equally hard to collect and integrate. Furthercomplicating the situation is that reporting is usually functionally driven, and not across an enterprise, further‘hiding’ potential savings. Given the economics, most companies cannot support the constant need tosupport both business and process changes.

As a backdrop, Abell pointed out that 70% of items stocked in a supermarket move less than one case amonth. He believes this fact has prompted current interest in several areas: supply chain event management,demand replenishment, inventory optimization and private trading exchanges. Put simply, supply chainimprovements are in place among the largest manufacturers and the largest retailers, but the next round of gains must come from smaller players on both sides.

Logistics is now a hotbed of innovation. Abell predicts that planning, executive and service systems will beoverlaid on basic warehouse management systems for better overall review and control. Realistically, he pointout that current costs do not make real time reporting affordable, but for the most part, harnessing theinternet for email reporting of exceptions will work. This exception reporting will allow manufacturers andretailers to monitor, notify, measure, control and simulate more efficient solutions as product moves throughthe system.

Eventually, technology will allow the placement of sensors on cases and pallets that will track the movementof product from manufacture to shelf. These sensors will also be able to distinguish temperature changes thatmight result in spoilage or activity that could cause product damage. Through the tracking of each case,additional disciplines will emerge, including supply uncertainty planning, distributed order fulfillment andmore. To accomplish this, a 28-digit character set will be required, so Abell cautioned participants to makesure databases and warehouses were being configured now to accommodate this.

Further into the future, Abell said there would be retail applications that would determine how many products are left on the shelf, track consumer/employee theft, allow picking by date in warehouses, providefreshness alerts by product by store, permit cart tracking through stores and eventually create a checkoutlessenvironment because all components could be tracked.

Lest anyone believe that this will not happen in the next 10 years, Abell reminded the audience that largemanufacturers are already coding pallets and sometimes cases for Wal-Mart.

Source: FMI MarkeTechnics presentation: Warehouse Management: Key Developments in Logistics Systems, Peter Abell-AMR Research.

Knowledge Discovery: Datamining versus knowledge discoveryPeter Wolf-vp business development, Triversity, and Pat Iasillo, director-consumer relationship marketing,Remke Markets, explained how data mining can lead to stronger customer relationships. They pointed outthat the key to this is properly using the data, not merely having it.

As background, they noted that the amount of data in the world doubles every 20 months. To date,customer relationship marketing has promised a lot, but delivered little because of improper use of the data.

They describe this condition as ‘data rich, but information poor.’

Data mining tools are the first step. They can extract useful knowledge from large collections of data andenable users to easily and selectively extract and view data from different points of view. They represent agroup of technologies and applications that collect, manage, process and present multidimensional data foranalysis and management purposes. Knowledge discovery builds on data mining by allowing an ongoing process to find hidden patterns in large data sets that can build business.





Knowledge Discovery: Critical data relationshipsKnowledge discovery looks for certain data characteristics. They are: (1) Associations—data patterns linkedin a single event that result in rules correlating the presence of one set of items with another. Theseassociations are most useful when applied to large sets of detailed transaction data. (2) Sequentialnumbering—data relationships that identify sequential patterns such as customers who buy one thing at acertain point in time buy something else at a later time (disposable diaper buyers ultimately buy cold cereal) .

These observations are best applied to large sequences of transaction data. (3) Classification—data that mapsa data item into one of several predefined categories and identifies characteristics that indicate to whichgroup each case belongs. This process can examine already classified data to find predictive patterns. Anexample would be what differentiates frequent, moderate and infrequent customers and predicting how they

would respond to incentives. (4) Clustering—groups records that have similar characteristics withoutpredicting a target value. Unlike classification, where you know categories at the outset, clustering creates itsown categories. It is useful to determine defection analysis, when shoppers change past patterns.

Knowledge Discovery: Market experienceRemke Markets, a seven-store operation in Northern Kentucky and Cincinnati, has stores averaging morethan 50,000 sq ft that have strong perishables departments, are clean and offer good service. As conventionalstores, they compete against strong chains including Kroger, Winn-Dixie’s Thriftway, Meijer and Biggs.

Remke, the first operator in the area to introduce a frequent shopper program in 1996, now tracks 75% of transactions and 85% of sales among card holders.

During the first stage of the program, Remke issued cards and gave cardholders three types of one-to-oneoffers: free items to the top third of shoppers, inducements to modify behavior in favor of the chain by department or category and inducements to perform better for suppliers (branded offers). Monthly newsletters contained free items with the value increasing as spending increased. Redemption for freeproduct ranged from 30-70%.

During the second stage of the program Remke examined the data to determine shopper behavior down tothe household and UPC level. During this phase, shoppers received one-to-one offers designed to alter theirbehavior to increase overall sales or profits. Among the offers various groups received: (1) to light or non-users of departments, dollar discounts off a threshold level of purchase,, (2) to non-users or to users of competitive brands, dollar incentives from vendor, (3) to non-customers, postcards with introductory offers,(4) to new area residents, postcards with introductory offers, and (5) to shoppers who have defected to otherstore, postcards with offers to return. Redemption rates for the above activities ranged from 3 to 10%.

The third stage of the program utilized the Triversity Promo Coach to finetune offers and better targetthem—highlighting the difference between basic data mining and knowledge discovery. Across a variety of promotions for the salad bar, deli department, snack foods and elsewhere, results were compared for using straight data mining (identifying a group) versus knowledge discovery (further segmenting the target by thetechniques detailed above). Across all promotions, the target group could be better defined to produce ahigher redemption rate, greater dollar purchase during the promotion and higher dollar sales after thepromotion when knowledge discovery tools were applied. Specifically, the average redemption rate forknowledge discovery groups was 14.2%, compared with a data mining redemption rate of only 4.5%. Sales tothe knowledge discovery group were 22.5% higher. After the promotion, sales were over 400% higher using the knowledge discovery methods, and the average household spent 400% more.

Source: FMI Presentation: Knowledge Discovery vs. Data Mining, Peter Wolf-Triversity and Pat Iasillo-RemkeMarkets.

Wireless Technology: Consideration and ImplementationDavid Baker, partner-Diamond Cluster International, and Kevin Carleton, director retail automation-Hannaford Brothers, discussed advances in wireless technology at or coming to your local store.





Baker identified changes in culture and technology that raise three key questions for retailers: (1) Is the retailexperience sufficiently personal? As shoppers look for products and services that address their specific needsin personalized ways, winners will be Web sites that can identify the user and customize offerings, stores with

Web kiosks that personalize offerings and catalogs that segment to personal tastes—all making the retailexperience more personal. (2) Is the shopping experience building loyalty? Predictably, customers prefer

shopping where they feel appreciated and now expect more from their favorite stores. The bar has beenraised to include personalized store credit cards, tiered loyalty programs, specialized and value-added services.Retailers must continually innovate to retain current customers and attract new ones. (3) Is technology being used in the best way possible? Retailers must harness the new technologies throughout their businesses toinclude suppliers and customers. E-business is the new standard and offers tremendous growthopportunities.

The combination of consumer demographics, shopping trends and technology create challenges andopportunities for retailers—and mobility is key. In addressing mobility, retailers must consider applications,devices and connections. (1) In designing mobile applications, Baker urged retailers to focus on new interfaces that would provide mobile access to existing applications and data, instead of focusing on new applications. This means taking into account the time and location where the application will be most useful,seamless processes and the elimination of redundancies and inefficiencies. Freeing employees from theirdesks means open connections, regular uploads and synchronization of data, automated identification anddata collection (barcodes and radio frequency ID tags), object-to-person notifications and alerts and security.(2) In addressing devices, input mechanisms include voice, stylus and keyboards. In general, displays must bebright and usable in their environments, devices must be durable and withstand dropping on concrete floorsand varying temperatures and must be compact and easy to carry and use. The operating system the devicesuse must accommodate current and potential software applications. (3) In deciding on connectivity, it is likely that devices will accommodate more than one form of communication, especially if internal, vendor andconsumer contact is an objective.

Kevin Carleton, director retail automation at Hannaford Brothers, discussed how that subsidiary of Delhaize America operating 115 stores in New England and the Northeast is integrating wireless technology. As afoundation, Hannaford has a Cisco/Symbol wireless network that runs an enterprise-wide customerdemand-driven replenishment system. It integrates information from point-of-sale, store-specificplanograms, perpetual inventory system and store-level forecasting. Hannaford believes in wireless because it

extends the supply chain strategy to the last yards, in sub-second response time delivers information to thestore aisle and leverages the asynchronous transfer mode (ATM) communication network.

Specific Hannaford uses of wireless technology include: (1) Non-perishable ordering, in which wirelesshandhelds directly connect to the mainframe for real-time ordering. A two-store pilot is underway where asuggested order is calculated using minimum, maximum and on-hand inventory balance. (2) Enhancedperishables ordering: this replaces printed order guides and provides immediate online access to sales history for 8 and 13 weeks, sales promotions and seasonal items. New items are automatically added to the database;suggested orders are based on average movement and on-hand inventory. (3) DSD ordering for eggs, milk and ice cream is in development. The process will allow associates or vendors to create and send an accurateorder. (4) Meat department shrink control uses a wireless handheld and a mobile printer to produce a UPClinked to bargain pricing at the item level within the perpetual inventory system to provide item levelmarkdown information. (5) Scan-out-shrink, which captures the item-level retail value of discardedperishable product and lowers shrink without impacting sales by completing the loop between production,mark down and throw-away. (6) Product reclaim processing, where the network electronically captures andtransmits information to the product reclamation center system and to vendors for credit. (7) Automatedplanogram audits performed against the store-specific planogram database so that UPC tags can be printedfor missing items in real time. In addition to sales increase from improved execution, this allows improvedspeed-to-shelf for new items and faster removal of discontinued items. (8) Two-dimensional barcodes thatperform price verification as a background process to order entry. This results in labor savings of about 4hours per week per store, almost $290,000 annually for all stores. Subsequent wireless reading of two-dimensional bar codes will be used for sign making and other shelf audit and maintenance functions.





Hannaford is also piloting additional wireless functions, including interactive deli selling, vendorcollaboration, checkout, customer price verification, customer surveys, inventory cycle counting, instore signmaking, kiosks and PDA communication.

Source: FMI presentation: Wireless Technology Advances in Retail, David Baker-Diamond Cluster International

and Kevin Carleton-Hannaford Brothers.

Embedded RFID: Science fiction arrives The new generation of technology is in stores today. And within ten years, hand counting of inventory willbe a distant memory. Imbedded RFID chips will replace the barcode and will not only allow retailers to track

what is happening instore, but also what customers are buying. The chips eliminate the labor of scanning. Asa result, manufacturers will have fewer inventory problems and retailers lower losses to shoplifting. Procter &Gamble estimates such technology could reduce each dollar transaction by 4 cents. Higher priced items willcarry these tags first, as demonstrated by the designer Prada’s current use of the technology on $700handbags.

MIT’s Auto-ID Center and its corporate partners have one overriding objective: merge the physical world with the information world. The dream-maker is ePC, known to insiders as the electronic product code ormicrochip that identifies every individual product manufactured. This translates to real time informationabout a product’s location, which can have significant impact across the entire supply chain from inventory to forecasting to cycle times to spoilage. Many manual tasks could be eliminated. From a consumerperspective, these tags could include appliance instructions, care data, automatic generation of a shopping listand checkoutless shopping. Insiders believe the technology will be cost-effective within two years.

Refined at the MIT AutoID Center, such radio technology has been around for a while. ExxonMobil’sSpeed Pass is used by 6 million gasoline purchasers to speed the process at the pump. As chips becomesmaller and cheaper and radio receivers cheaper, use of such technology will grow. Already Gap is testing tracking jeans from distribution to sale; McDonald’s is using keychains linked to credit cards to speedpayment.

Remaining obstacles: (1) cost of the chips, which some believe will be only 5 cents near term,, (2) software

that will read and differentiate between all the chip-carrying devices, even credit cards, and (3) privacy concerns, since anyone with the right receiver will be able to track virtually everything a person is wearing forplace of purchase and more.

Source: Forbes , March 18, 2002. The Internet of Things, by Chana Schoenberger, p. 155-160. Grocery Headquarters ,March 2002. Checkout-less shopping? By Jim Swoboda, p. 12. Context Magazine , February/March 2002. Tags,

You’re It, by Bob Diddlebock

Biometrics spreadBiometrics, reading body parts such as fingers, eyes or faces that are unique for identification, may not be thepanacea for security that it once seemed to be. Although the likes of McDonald’s, Blockbuster, Walgreen,Kroger and HEButt are testing biometric readers as part of the checkout systems, broadscale acceptance isnot assured.

For starters, there are competing companies offering the service, which means that although you have only two thumbs to be read, you may have to enroll in multiple plans to be able to use them. Second, as morepeople enroll, software will have to be speeded up to ensure that transactions really are simpler than creditcards. The incentive for retailers to adopt this technology is basic: saving money. Credit and debit cards stillinvolve interchange and banking costs of $25 billion annually, which can be reduced if shoppers usebiometric ID linked to their checking accounts

Source:. Forbes , March 18, 2002. Rule of Thumb, by Daniel Lyons, p. 162-4.





Avatars at kiosks Avatars—cartoon likenesses that talk with shoppers—are now on kiosk screens. They are produced by combining sophisticated speech recognition, facial animation and lip-synching software. Sensory, the

company that produces the first system for supermarkets, has demonstrated ‘Doc,’ who can converse withshoppers about cereals. Doc recognizes 200 brands, and in a 15-minute demonstration for The New YorkTimes , Doc found every one on the store shelves. The system is as yet untested in a true retail environment

with other noises and activities going on.

Source: The New York Times , March 7, 2002. ‘Attention, Shoppers, Don’t Use That Tone With Me,’ by NeilMcManus, p. G3.

Europe CPFR: Second generation ECR According to Harvard Business School visiting scholar Dirk Seifert, there are key success factors. Seifertdefines ECR as a vertical collaboration between suppliers and retailers to fulfill consumer needs better, fasterand at less cost. Optimally, the concept improves the supply chain using a seamless flow of information.Seifert’s study is based on 52 personal interviews with leading European ECR experts at supplier, retailer andconsulting companies.

He found that the relationships between suppliers and retailers are still based on confrontation rather thancollaboration. Still, he identified the most important success factors: (1) involvement of top management, (2)mutual trust between collaborating partners, (3) early success, (4) continuous measurement of progress, (5)use of information technology, (6) customer orientation, (7) change in organizational structure, (8) staff training and (9)modern cost accounting methods.

Not surprisingly, Seifert found the major barrier for ECR in Europe is the lack of trust between suppliersand retailers. Yet he believes that the second generation of ECR will take hold in the form of collaborativeplanning, forecasting and replenishment (CPFR).

Source: HBS Working Knowledge , March 18, 2002. Is Your Organization Built for the Consumer? by Martha Lagace.

US CPFR: Most alliances with mass merchants According to a GMA study, 19% of GMA members have moved beyond pilot studies to implement CPFR. About two-thirds of GMA member companies are involved in some form of CPFR. Early results arepromising: 67% report an improvement in forecast accuracy, 56% report inventory reductions. GMAmembers are optimistic, with 86% saying they expect forecasting accuracy as the most anticipatedimprovement.

Noteworthy—given the G-grocery in GMA—71% report they are in alliances with mass merchants andonly 35% say they are in alliances with grocers. Roadblocks to greater implementation cited include cost of implementing CPFR, lack of technology standards and hesitation share proprietary information. The study

was underwritten by Syncra Systems and conducted by KJR consulting for GMA.

Source: GMA Press Release: Manufacturers Test CPFR Waters, 19 Percent Implementing Initiatives With Trading Partners.

Equipment reduces human intervention As prepared foods become more prevalent in supermarkets, equipment manufacturers are addressing foodsafety concerns—eliminating where possible human error or ongoing supervision. Since the retailerultimately takes the rap for any problems, equipment manufacturers are ensuring that employee interventionis required if anything goes amiss. Among the innovations: (1) ovens and fryers that cook for a





predetermined amount of time to a predetermined internal temperature. Any problems, alarms alertemployees, (2) data collection capabilities on such equipment to keep historical logs for ongoing monitoring,(3) Internet interfaces so that data collected can be easily transmitted for analysis, (4) cooking equipmentredesign to make sure cleaning complies with standards already set for refrigeration equipment, including easy disassembly and re-assembly and round corners on inside surfaces.

Source: Grocery Headquarters , March 2002. Building in Food Safety, by David Litwak, p. 63-66.

Safeway centralizes procurementSafeway is centralizing procurement with the objective of reducing buying locations from 14 to one. Thecentralization is part of an all-over effort to reduce expenses by $1.6 million over five years. Analysts weresurprised that perishables categories (meat and produce) would be among the centrally purchased because of freshness and regional taste preferences.

Source: SN , March 4, 2002. Safeway Is Expanding Centralized Procurement, by Elliot Zwiebach, p. 1, 38.

Schneider Trucking: Using the right data There is little dispute that the data exists to streamline almost any organization these days. There is alsoagreement that getting the data is the challenge. Fortune highlighted just this challenge for SchneiderInternational, a leading trucking company, which hired an ex-Army colonel to figure out how a company ‘drowning in data’ could be ‘starving for information.’

Schneider, like many companies, had the raw data, analyzing it was the problem. In part, this challenge isgenerally due to processes associated with getting at the data, which can be complicated, cumbersome,imprecise and plagued by multiple databases that don’t communicate well with each other—let alone humanbeings. Another common problem: the people who know how to get the data are not the same people whoknow how to use it.

Enter business intelligence software. Schneider analyzed 23 solutions before committing to a suite fromCognos. The software takes records from the company databases and places them in specialized information

arrays that can be easily manipulated. The software was operational after five months, but that was because60 people spent two years before that in a massive overhaul of the databases. The PowerPlay software wasable to isolate enough payments that slipped through the cracks to pay for the Cognos software in just two

weeks. Now Schneider is offering its customers access to the software by subscription for better tracking andcontrol.

Source: Fortune , March 18, 2002. Slow road to fast data, by Eryn Brown, p. 170-2.

Tapping third-party providers Third-party logistics providers include any firm that provides rail freight, trucking, local delivery, packing,consolidating, warehousing, inventory management, distributing or accounting services. These companiesexist to transfer products from manufacturer to the retailer in a less costly and more timely manner. Theneed exists because as shipments get smaller—due to anything from the size of the retailer to the need fordirect-to delivery to greater frequency—efficiencies for first-party systems diminish quickly. The third-party market is growing at 20% a year.

Among the third-party services increasing today are: (1) Breaking down shipments for stores: Formerly, thedomain of a chain’s warehouse personnel, demand is increasing for pooling of shipments to a store withouteven passing through a warehouse. This is often referred to as the difference between warehousing andfulfilling. (2) Crossdocking: This allows for consolidating of shipments for multiple manufacturers for directforwarding to stores. (3) Providing technology and information: Third-party providers can help establish





standardized platforms that create supply chain savings. With reusable pallets, the ability to track them real-time is an example of how technology and information streamline the process.

Source: Grocery Headquarters , March 2002. Leveraging PL opportunities, by David Litwak, p.83-88.

Albertson’s contracts with FlemingFleming will provide procurement and distribution services to Albertson’s stores in two states. Theagreement makes Albertson’s one of Fleming’s five largest customers at $250 million. It also solves aproblem for Albertson’s—exiting several markets that have been served by its Tulsa distribution center.Under the five-year agreement, Fleming will acquire that distribution center to supply the 28 Oklahoma

Albertson’s stores. Fleming’s Lincoln Division will supply 11 Nebraska Albertson’s stores—all beginning July 2002. Industry insiders see this as a logical move as self-distributing companies look to optimize theirlogistics and supply chains. A significant issue arises however. The distributor can end up supplying competing customers in a particular geographic area…and the first customer may not welcome thearrangement.

Source: RetailWire.com,March 19, 2002. Fleming Strikes Supply Agreement with Albertson’s. SN , March 25, 2002.'New Albertson's' Adopts Old Distribution Strategy, by David Ghitelman, p. 1, 58.

7-Eleven centralizes fresh distribution7-Eleven will begin daily deliveries of fresh foods to 700 southern California locations in May through acentral distribution center in Fullerton CA. The center accommodates time-sensitive products from multiplemanufacturers, eliminating individual direct store deliveries which can not be centrally controlled. Thedistribution includes proprietary 7-Eleven products from nearby bakeries and commissaries. Stores placeorders electronically for next day delivery.

Source: SN , March 18, 2002. California 7-Elevens Will Get Fresh Daily, by Sarah Mulholland, p. 21, 23.

Tracking shopping carts

PathTracker, the brainchild of wireless technology company WhereNet and Sorensen Associates (researchcompany), is the brand name for radio tags (Real Time Location System Radio Frequency Tags) attached tosupermarket shopping carts and hand baskets. PathTracker gives retailers and their suppliers a clickstreamreport on locations in a store each shopper visits and how long they stay at each one by reading thecart/basket location every four seconds. PathTracker costs $5,000 per month for a 40,000-70,000 sq ft store.

WhereNet radio tags transmit the container ID to seven sets of antennas around the store, and triangulatethe exact location. The antennas are hardwired to a system that produces 3-D electronic planograms for the30,000 products on the shelf. This data is integrated with the shopper scanner data to map the exact routeand progression of shoppers.

Up till now conventional wisdom has been that shoppers travel up and down each aisle. Early data suggeststhe contrary: part way up and back is the dominant form of shopping. Also counterintuitive is that mostshoppers shop the perimeter of the store, or ‘race track,’ rather than the entire store. Further, most shoppersenter an aisle from the back rather than the front, going only four feet down the aisle. Data also suggests thatshoppers make their purchase not by product but by its location in the aisle and on the shelf.

Changes made in the pilot store as a result of data that built sales: (1) the store moved its bakery further back in the store because morning commuters came to the front of the store where the bakery was located to buy coffee and a donut. By placing the bakery farther back and relocating the snacks along the aisle on the way tothe bakery, sales of candy bars and chips increased dramatically. (2) Some displays now face the back of theaisle instead of the front to better accommodate shoppers’ arrival.





Source: Info World , April 2, 2002. Tracking technology sheds light on shopping habits, by Ephraim Schwartz.

Second generation ATMs There are more than 300,000 ATMs in the US…but the number of transactions per machine has fallen 50%from 1996. Even those who are computer-illiterate love them for their simplicity. This is inspiring banks tocome up with more ways to get customers to use the devices—since they get transaction fees for doing so.

Already machines cash checks and dispense postage stamps. The latest generation is connected to theInternet…and herein lies the opportunity.

The machines can be used to pay insurance premiums and utility bills, print cashier’s checks and road mapsand sell virtually anything worldwide. Wells Fargo, Bank of America, Fleet and Citibank are all moving tomake their ATMs Web-integrated. The bottom line: anything you can do on the Internet, you could do at an

ATM…and someone could collect a fee. A well-publicized test is 7-Eleven’s pilot, which allows check cashing and money transfers, targeted at those households without bank accounts and Web-junkies who areon the move. Event tickets, phone bill payment and other features will be deployed during the nationwiderollout later this year.

In Denmark NCR is testing a Bluetooth-enabled wireless device that can be used in place of a card—

suggesting wireless possibilities. Only 500 machines worldwide use this wireless approach, but that isexpected to grow to 8000 in three years.

Source: TIME, April 8, 2002. A Mini-Mall in Your ATM, by Julie Rawe, p. 61.

Cheaper RFID tags possible nowRFID tags, the predominant methodology today for tracking items, still cost almost $1 per tag. The price isexpected to drop precipitously as popularity grows. Still, there is a cheaper, faster way to accomplish the samething: an organic or plastic circuit printed directly onto a package surface by a fancy inkjet printer.

At less than a penny, it is made of carbon and hydrogen, is soluble and can be affixed to plastic, paper orcloth (materials that would wither under the high heat print required for silicon). An added benefit: RFIDtags for a supermarket required 5000 transistors processing, whereas a system using organic circuits used 40,along with a Pentium 4, power circuitry and wireless communication circuitry.

Organic transistors have their downsides, despite price. Their processing speed is inferior and they canbecome useless in days or weeks if exposed to air or water. But they may have a place in supermarkets: Anexample is determining the presence of e coli. Those working with these transmission devices are focusing on spray coatings to extend food stability and longevity and may use the transmission devices to supporttheir efforts. They may appear fairly soon on cell phones, handheld organizers and computers, becausesilicon must be printed on glass versus lighter-weight plastic. You may even see them on billboards and otherplaces: blood tests, biometric sensors, anti-counterfeiting currency, luggage tags. IBM, Lucent, Mitsubishi,Philips and Xerox are already working on such devices.

Source: The New York Times , April 4, 2002. With an Organic Sensor, a Food Wrapper Sniffs Out Trouble, by DavidMargulius, p. G7.

Talking credit cardsRemember Priceline’s WebHouse Club and its founder Jay Walker? You may figuratively and literally behearing more about him. He is one of three patent holders on a new credit card that beeps when a wallet isopened. This represents the latest step beyond bonuses, cash back incentives and everything else to getshoppers to remain loyal to a single card. The invention uses a sensor to detect physical changes aroundit…and can emit ‘different tones or phrases’ or ‘intermittent light or pulses.’





Source: The New York Times , April 8, 2002. Which Card to Use? Listen to the Beep, by Sabra Chatrand, Patents, p.C2.

SpeedPass on your wrist

Exxon Mobil gas stations and 400 McDonald’s in Chicago are testing a version of the SpeedPass chipembedded in Timex wristwatches. The chip enables wearers to pay for purchases either by debit or creditcard just by waving their wrists.

Source: Card Marketing , April 2002. SpeedPass Chip Can Be Placed In a Wristwatch, 8.

Ceiling surveillance Welcome Brickstream to the list of technology suppliers to retailers. The company hides cameras inthe ceilings of supermarkets and other retailers to follow individual shoppers and analyze overalltraffic patterns, thus determining a store’s ‘hot zones and cold zones.’ Retailers and manufacturershire Brickstream to gain clues about why certain products sell and others flop. The technology measures how many people pass by a given section of the store, how fast they are moving, how long they stop at a given display.

A soft drink company uses the data to determine where to locate displays to maximize sales. Abrewery company uses the data to determine if beer in a refrigerator sells better than beer sitting onthe shelf at room temperature.

Canadian lawyers warn that monitoring customers raises legal and ethical questions. There, theCriminal Code prohibits third-party interceptions of oral communication, and some provincesprohibit the use of surveillance video for other than security reasons. The Retail Council of Canada isnot aware of any Canadian retailers using this ‘observational research’ or ‘retail ethnography.’Nevertheless it is a growth industry in the United States, because traditional market research is losing its effectiveness and privacy laws are less stringent.

Focus groups are losing popularity because consumers often say what they think the researcher wantsto hear, so Fame, a Minneapolis retail-branding agency, opened a store called Once Famous that

doubles as a consumer observation laboratory. It sells home and gift merchandise and is wired with video and audio surveillance equipment to collect consumer information. Lessons learned: shelf placement is critical—ideal height for items is at eye-level. If the store is operating its surveillance, itposts a sign at the front door telling consumers they are being watched. Generally, after shopping fora few minutes, people forget that they are on camera.

Source: Toronto Globe and Mail , May 3, 2002. Some retailers watching your every move, by John Heinzl, p. B10.

Biometrics: Thrift Way and C-stores This month a Seattle Thriftway unveiled biometric payment initiation for shoppers. The system, fromIndivos of Oakland CA, requires shoppers to enroll by placing an index finger on a small scanner five times,typing in a phone number in a key pad and swiping a debit card through a reader—a process which took three minutes. On subsequent shopping trips, payment is triggered by placing the finger in the scanner,typing in a PIN and phone number. Automatically the debit card is charged.

Retailers pay per transaction that goes through the terminals. At this site, about 70% of transactions are onplastic. These transactions are costly to retailers because of bank and interchange fees. Gas stations, fast-foodrestaurants and supermarkets are target locations because of transaction volume. Such systems have beenpiloted at a San Francisco-area fast-food chain and at McDonald’s in Fresno CA. Visa also piloted the systemfor three years in its company cafeteria, where it handled more than 12,500 transactions and the wrong account was never billed.





Shoppers’ advantages are security or convenience, ranging from not worrying about misplaced credit cards,not rummaging through pockets for cards or cash. Some shoppers are not fond of having to enter both thePIN and phone number.

Attendees at NACS.tech (National Association of Convenience Stores Technology meeting) concurred thatbiometrics were the way of the future and that implementation was accelerated by the events of September11. For convenience stores, the advantages of biometrics include faster transactions, elimination of fobs andkey cards and avoidance of card fees charged by financial institutions.

Source: Seattle Times , May 2, 2002. Mission Impossible technology at supermarket’s checkout line, by Amy Trask. SN Daily News , May 17, 2002. Thrift Way Store Signs Up Over 1,000 Customers for Biometric Payment, by MichaelGarry. Executive Technology , May 2002. Biometrics Get Thumbs Up, by Chad White, p. 22.

Security flaw in ‘smart’ cardsSmart cards—widely used in Europe and gaining acceptance in the US—may not be secure as theirmanufacturers would like people to believe. Two separate groups of scientists have found ways to attack their security: the most troublesome requires only a $30 camera flashgun. The jury is out on how serious theflaws really are, since card manufacturers are downplaying their concern and because the scientists areproposing countermeasures.

Source: The New York Times , May 5, 2002. Vulnerability Is Discovered In Security for Smart Cards, by John Markoff,p. C2.

Editorial Alert: In an article about ‘Next Frontiers’—companies using technology to build business, ‘transform their industries and change our lives,’ Newsweek highlights Target for its useof smart cards to carry customer-selected coupons and other incentives for personalizing

promotions. Over two million such cards are in distribution. (Newsweek, April 29, 2002. Moving Into the Future, by Suzanne Smalley, p.47-8.)

Borders & Category Management Borders is anointing category captains, following the example of the grocery industry. By instituting category management, the bookstore chain hopes to cater more to the taste of readers rather than to the publishers’promotion spending. Space allocations and genre position within stores will be part of the job description.

The idea comes from the ceo, who arrived after 22 years at Albertson’s in its Jewel/Osco division. Anotherlesson learned from the grocery industry: get the manufacturers—in this case publishers—to pay. Publishers

will be charged $5000 per employee for training in the new system, and up to $110,000 to help defray marketing costs associated with setting everything up. Publishers (as manufacturers) will have to play ballbecause they need to be present when the section titles are picked.

Source: The Wall Street Journal , May 20, 2002 Borders Sets Out to Make the Book Business Businesslike, by Jeffrey Tractenberg, p. B1, B6.

Accuracy coalition in Canada Four Canadian industry groups have developed a code of conduct to ensure retailers give shoppers money back if there is a scanner mistake. A Competition Bureau study found that more than half of Canadian

retailers flunked a scanner accuracy test. Under the new guidance system, disputes will be resolvedimmediately by the cashier in the consumer’s favor. Customers will be compensated if they are charged aprice that is different from the one on the shelf or the one advertised in a flyer.

The industry groups participating include the Canadian Council of Grocery Distributors, Canadian Association of Chain Drug Stores, the Canadian Federation of Independent Grocers and the Retail Councilof Canada. The groups downplayed the number of scanner errors and the magnitude of the discrepancies in





announcements, press conferences and interviews, despite the federal study released in early 2000 thatshowed some retailers overcharging customers 10% of the time.

Source: Toronto Globe and Mail , June 10, 2002. Retailers establish code over faulty scanner prices, by Marina Strauss.

Self-checkout spreading Labor shortages during recent years have given new life to self-check, as has refined design. Early units couldnot handle payment and had little built-in security. Now the leading manufacturers—Productivity Solutions,NCR and Optimal Robotics—all offer design variations that take multiple forms of payment, have built-insafeguards to ensure what is scanned or bagged is paid for, deactivate electronic security devices and arepaying out more quickly.

Among retailers using the technology: (1) Food Lion began testing self-checkout in 1999 and reportsbetween 25% and 30% of customers consistently use self-checkout stations. Most customers use the unitsfor smaller orders, although they can handle an order of any size. (2) K-VA-T Food Stores started self-checkout in 2000 and notes that some customers choose self-checkout even if there is only one person

waiting at a traditional lane. (3) Giant Eagle reports its self-checkout customer usage rates as high as 30% insome stores, although the average is 22% of customers. Giant Eagle non-users like the technology because

they perceive their wait for manned lanes is shortened when others use the self-service units. According to the National Retail Federation, shoppers embrace technology they can relate to and like self-checkout because it puts them in charge. Self-service technology provides the advantages of privacy, choiceand perceived speed to get out of the store faster.

Depending on number of lanes and locations, self-checkouts cost between $85,000 and $100,000 per store.Returns on investment come between nine and 18 months. On average, retailers need $15 per transaction tooffset lane maintenance, cashier salaries/benefits and other front-end labor costs. Self-checkout costs coulddrop as low as $6 or $7 per transaction.

Second generation self-checkout is adding shopper and retailer advantages including loyalty card reading thatresults in targeted shelf messages, smaller footprints to give more footage back to selling, integration withexisting POS system and totally unsupervised designs.

Shoppers—at least those within reach of The New York Time s—no longer have any delusions about the speedof self-checkout. In a mechanical expose showing the inside of the typical machine, the Times explains the‘psychological effect.’

Source: Grocery Headquarters , June 2002. Self-checkout shows promise, by Deena M. Amato-McCoy, p. 43-6. Self-checkout—not so fast but a lot of fun, by Deena Amato-McCoy, p. 48. The New York Times , June 6, 2002. The Self-Checkout: Lots of Swiping, No Stealing, by Matt Lake, p G7.

Reducing Out-of-Stocks with DSD A new GMA study, ‘Full Shelf Satisfaction: Reducing Out-of-Stocks in the Grocery Channel,’ offers adetailed look at direct store delivery (DSD) categories. 92.6% of food and grocery products in the top 25categories are in stock at any given time. In 1996, The Coca-Cola Research Council reported this number at

93.5%. When looking for out-of-stocks, 40% of shoppers either postpone the purchase or go elsewhere— putting a total of 3% of a typical supermarket’s sales at risk.

The study conducted by Roland Berger Associates tracked 1600 items in seven DSD categories in 20 storesand included 1000 interviews beyond the DSD categories. Other findings:

• On average, the top 10% of the fastest-moving items accounted for 45% of the out-of-stock products. Out-of-stock rates nearly double during store promotions, jumping from 7.4% to 13.1%





out-of-stock. During Saturday promotions out-of-stocks averaged 8.3%, jumping to 17% onMondays.

• Reasons for DSD out-of-stocks include increased product promotions, space constraints on theshelf and higher frequency of product purchase.

• Product availability during a store promotion ranged from 10% out-of-stock (pre-packaged bread)to 25% out-of-stock (frozen pizza).

GMA’s DSD committee recommends six steps for improving product availability: (1) optimize delivery,merchandising schedules and back-door procedures, basing DSD deliveries on consumer needs and flexibleback-door operations, (2) improve physical space constraints to better control out-of-stocks and surpluses,(3) develop better communication between DSD manufacturers and retailers, especially during promotions,to ensure better product forecasting and ordering accuracy, (4) align DSD manufacturer and retailer in-storemerchandising practices to critical trading hours, so back-room stock is fully utilized, (5) define planogramand shelf tag compliance to minimize confusion and (6) create joint scorecards to monitor and assessproduct availability and quantify out-of-stock items.

Source: SN , June 10, 2002. New GMA Study Shows Rising Incidence of Out-of-Stocks, by Barbara Murray, p. 1,32. MorningNewsBeat.com , June 12, 2002. GMA Study: Reducing Out-Of-Stocks to Boost Retail Sales.

Point-of-Sale updateRetailers have consistent expectations of their point-of-sale (POS) systems. They want speed, productivity,reduced labor and a positive customer experience. The last big change in front-end solutions came with theadoption of PC-based systems replacing DOS-driven hardware and software, which was of unknownreliability with Y2K. These new PC-based systems interoperate with different brands of peripherals, serversand databases for seamless communications between store systems, headquarters and the front end.

Self-checkout is now pervasive in grocery stores: 70% of the top 10 retailers have it, and 100% of the top fivehave installed units—all because it is a natural extension of self-service. The next generation of self-checkoutuses new software so that data can seamlessly flow data between the front-end and back office operations.

Outside the grocery industry at JCPenney and Sears, technology vendors have sold the newest version of open standards: JavaPOS. This allows front-end peripherals to link to other Java-coded POS applicationsand add POS functionality with Web-enabled services and customer assistance features. In grocery, wheretransaction speed is the primary driver and margins thin, the large IT investments in Java have not yet beenjustified—despite the fact that as a language, it provides portability between systems and bridges to Linux-based systems.

Some believe Linux-based front end systems will intrigue cost-conscious grocers. Centralized Linux-POSsystems have dumb registers (thin clients) sitting in the lane powered by a centralized server at headquarters.By connecting a Web-based terminal in the stores, all data is instantaneously moved and consolidated in realtime at a centralized server. The real appeal of Linux is that it runs on a free or very low-cost platform. Oneestimate suggests that POS costs could drop by two-thirds, and these POS costs account for more than 60%of all grocery IT budgets.

The next vision of faster and more accurate checkout called auto-ID relies on electronic bar codes that canbe scanned without human intervention as shoppers push their carts through a properly equipped ‘tunnelreader.’ Orders can be totaled and payments transferred from accounts already on file. The consensus is thatthis will be reality on five to ten years using radio frequency identification (RFID), developed at the Auto-IDCenter at Massachusetts Institute of Technology (MIT).





outbound operations, and converting their inbound freight from pre-paid (manufacturer-controlled) tocollect (retailer-controlled).

Retail chains are increasingly turning to solutions providers (Elogex, i2, and Manugistics) to achieve theseincreased efficiencies and cost savings in transportation. These suppliers offer software programs and Web-based management systems aimed at seizing tight control of the shipping and receiving process. Among thetechnologies contributing to this trend: global positioning systems, bar codes and radio frequency ID tags.

These, coupled with software-based decision aids, provide real-time information for optimization software.

Cross-docking has the potential to save shipping miles and man-hours and improve in-stock situations by eliminating unnecessary inventory and optimizing transportation assets. It coordinates the flow of in-boundand out-bound shipments, eliminating the unloading of an in-bound truck and stacking its entire contents ina warehouse for redeployment later on.

Some industry insiders, however, think that the current warehousing infrastructure is all wrong forcollaborative transportation management. That’s why C&S Wholesale invested in a new, high-tech,

warehouse tower aimed at third-party, just-in-time delivery of freight. The reality is that there are no morethan 100 items that move two pallets a day, although warehouses were built to accommodate items that

moved four pallets a day. As large supermarket chains shift their freight to collect from pre-paid, third-party shipping is likely tobecome much more popular in the food business. Today analysts estimate 60% of shipments are controlledby manufacturers and figured into the grocer’s cost of goods. The grocers want to take control of the freightto get product at a lower rate and have more direct control over shipping costs. The desire to achieve greatercontrol is one area where retailers agree, especially since most already use a combination of their privatetrucking fleets and third parties. The retailers understand that manufacturers can profit from freight activitiesby including an up-charge in their cost of goods. Large retailers with huge volumes believe there is anopportunity to reclaim some of their transportation costs by seeking deeper discount rates from carriers andusing more backhauling.

There is precedent for this outside the supermarket industry: JCPenney, Best Buy and Home Depot havebeen moving from pre-paid to collect freight. However, to do this, chains must make the investment toduplicate the technological infrastructures of these retailers. History shows that grocery retailers are slow todo this. It is both the money involved and the secrecy surrounding internal operations that preventcollaboration and big potential cost savings. Contrary to what industry insiders believe, there is a competitiveadvantage in being #1 in logistics…unlike in other areas where supermarketers wait for the competition toget the bugs out before becoming #2.

Source: Progressive Grocer , July 2002. The masters of their freight, by Al Urbanski, p. 30-5.

Embracing UCCNet Just as enthusiastically as Wal-Mart embraces UCCNet, Randy Salley, Wal-Mart’s vp-merchandising systems,criticized UCCNet’s self-promotion. Salley emphasized that UCCNet has not properly differentiated itself from the other exchanges and therefore is falling short of its goal of retailer and manufacturer enrollment.UCCNet representatives said they are working at spreading the work and making explanations of the system

less technical. To date, UCCNet has 120 subscribers (110 manufacturers and 10 retailers, among them Wal-Mart, AholdUSA, Food Lion, Hy-Vee, Meijer, Supervalu, Schnuck, Shaw’s and Wegmans), far short of its goal of 600.

An ATKearney study suggests that broadscale enrollment in UCCNet could save $40 billion annually, about3.5% of total sales, by eliminating supply chain inefficiencies. Salley noted that acceptance of UPC scanning and EDI were also slow, suggesting that a faster than glacial pace acceptance of UCCNet is unlikely…but

would be good for everyone’s business. Salley claims the advantages of UCCNet are: (1) Because it is





computer-to-computer, it avoids manual keying, which is error-prone. (2) Its standardized data elementsmake for better reporting.

Source: SN , July 8, 2002. UCCNet Needs Better Message, Say Wal-Mart VP, by Michael Garry, p. 1, 27.

Editorial Alert: Executive Technology has identified the following as the ‘top 10 technologies towatch’ in retail: CRM, RFID, price optimization software, biometrics, Web personalization, B2C m-commerce, voice-directed picking, advanced point-of-sale, business intelligence applicationsand kiosks. (Executive Technology, July 2002. Top 10 Technologies to Watch, the editors, p. 14-19.)

Speedier mobile commerceMobile commerce is changing the way people pay for things beyond the grocery store. In the Northeast,estimates say more than half of the population has accepted E-ZPass, electronic toll stations that deductpayments from motorists’ accounts, up from the original estimate of one-third.

What E-ZPass and so many other systems have in common is RFID—radio frequency identification—atechnology that identifies customers who have set up credit or debit accounts with the issuer and charge

them for their purchases. Stored-value or decrement cards were the forerunners. What makes RFID thepreferred method today is speed and convenience: A shopper need only carry a transponder…no card, no wallet, no PIN, no signature, not even a cell phone keypad.

One early success is ExxonMobil’s Speedpass payment system, first used to pay for gas and conveniencestore purchases at gas stations, now in test at McDonald’s. Already, more than 5.5 million people nationwidehave signed up for Speedpass since it was introduced in 1997. It can currently be used at 7,500 of the 16,000Exxon and Mobil locations. Tests of similar systems are going on at Phillips 66, Taco Bell and KFC.

RFID technology was born in the 1940s and used by the government to identify aircraft. Early, simplersystems identified and tracked livestock and other goods in transit. (Think Wal-Mart.) The giant step,however, was using it for merchandise payment…and tracking shopper spending habits. Speedpass wasconceived at Mobil in the early 1990s as a combination of a speedier payment and loyalty system. Today ExxonMobil says Speedpass customers tend to make an additional visit a month, which translates into a 20%increase in their spending. Although the use of Speedpass in convenience stores is still fairly low, the averagesale tends to be larger than those by cash or credit card. A typical cash transaction is $3 to $3.50, on average,

while credit card sales tend to be 60% higher. The average Speedpass transaction is more than double thecash amount.

Among the merchant benefits: (1) collecting data that are untrackable through cash purchases, (2) moving customers through more quickly, (3) saving on labor costs and (4) saving on processing versus credit cardpurchases. Currently, Speedpass charges a one-time licensing fee, not a cut of each purchase.

Another measure of RFID success: McDonald’s is conducting two tests, one at 32 outlets in Boise ID andanother using E-ZPass in suburban New York City. RFID suppliers say it has speeded transaction time up35% at McDonald’s.

Shortly after The New York Times mentioned that ExxonMobil said talks were underway with other potentialpartners, including a major pharmacy and grocery chain, Ahold announced that it was testing SpeedPasstechnology at a number of checkouts in selected Stop & Shop units in New York and New England, withchainwide expansion dependent on success. Shoppers will pay for groceries and receive loyalty pointsthrough a single SpeedPass waving at checkout. MorningNewsBeat.com is partial to the concept becauseSpeedPass has such broadscale consumer acceptance already and is a guaranteed winner.





Source: The New York Times , July 7, 2002. Tollbooth Technology Meets the Checkout Lane, by Amy Cortese, p.BU4. MorningNewsBeat.com , July 11, 2002. Speed Passes Muster At Ahold. SN , July 22, 2002. Stop & Shop to TestElectronic Checkout Wand, by Stephanie Loughran, p. 12.

Digital receiptsSpeaking at the Retail Systems 2002 conference, Bob Graham, vp-store technology at Smart & Final,explained that converting receipts to a digital format and offering them online to customers reducedaccounting department labor and increased market share. Last month, Smart & Final rolled digital receipts to189 stores after testing since January 2002. Under the system, Smart & Final gets a data feed from store POSterminals to headquarters, where it converts that data to a digital format and posts it to a Web server.Customers can log on and view receipts. Once in the actual receipt, they can click on marketing-orientedlinks within the receipt for special offers.

Smart & Final customers include government bodies, school districts and caterers that make multiplepurchases and often need receipt information to review spending or to charge expenses to correct divisions.

These digital receipts are helpful to these large customers who have questions about or want to review purchases.

The savings to Smart & Final comes from not having to retrieve receipts for customers. The digital receipts were part of a larger company effort to establish a data repository that centralized transaction information inreal time.

MorningNewsBeat.com points out that currently Smart & Final uses the technology for business customers,but it offers possibilities for consumers as well. Individuals could track purchases over a period of time forfinancial or health reasons, to access loyalty marketing programs, etc. The downside of course is privacy concerns. SN-Supermarket News emphasized that the system can build customer loyalty without discountsand build brands as well.

Source: Internet Retailer , June 27, 2002. Digital receipts reduce labor and increase sales, says Smart & Final. MorningNewsBeat.com , July 1, 2002. Digital Receipts: Are They Smart? And How Final? SN , July 8, 2002. Smart &Final Rolls Out Digital Receipts, by Michael Garry, p. 25, 27.

Bar codes: Growth & evolutionIn a little more than two years, retailers in the United States and Canada will face another technologicalchallenge. At the beginning of 2005, the 12-digit bar codes retailers use to identify everything will include a13th digit. The additional number, with its associated bars and spaces, has the potential to upset the entiresupply chain, in part because many retailers have yet to focus the time and capital on solving the problem.

Although leading retailers (including Wal-Mart and Target) say they have begun to address the issue, mostretailers tend to live from quarter to quarter and will address the change at the last minute. Experts estimatethe upgrade will cost at least $2 million for a chain of 100 stores with 10 checkout lanes a store. Costs willobviously vary by hardware (more if it’s 3+ years old), software (more if it’s 5+ years old) and otherindividual company considerations. Bar codes are the underpinning of retail management. They have beenused on everything form food to clothing beginning in 1974 and provide information to a store’s databaseused to assign a price and track sales and inventory.

The reason for adding the 13th digit in the UPC is twofold. First, there is a shortage of UPC numbers.Second, 13-digit bar codes are the standard almost everywhere else in the world. Currently, foreignmanufacturers pass on to consumers the cost of getting an additional bar code and creating special labels forproducts sold in the United States and Canada. Many foreign manufacturers believe adapting their bar codesare not worth it to sell in the US. It has not been as difficult for American and Canadian exporters becauseforeign retailers can easily incorporate a 12-digit number into their 13-digit databases by making the first digitzero. As a result, American and Canadian products that now have 12-digit codes will be unaffected by the





code expansion. American products will keep the same UPC, adding a zero to the beginning of each barcode number in product databases.

One retailer planned way ahead: Ace Hardware, which has 5,100 stores and sells some 65,000 codedproducts, revamped its computer systems to accept longer bar codes in 1999. The project took almost twoyears to plan and execute. Among the things Ace did: equipment upgrades, modifications to more than 500software programs in various company divisions (50 in distribution alone), and most tedious of all— adjustments to databases. Spokespeople for Ace say the journey was worth it, but urge others to get startedquickly, since it is a long and complex undertaking. The efficiency gains will be worth it.

Already The Universal Code Council and EAN International are advising manufacturers and retailers toprepare their systems to accommodate a 14-digit code. This newly patented bar code takes up less space,making it more suitable for small items, and also allows a retailer to track additional data such as batch and lotnumbers. Today, shipping container bar codes already have 14 digits. These different bar code standardsrequire retailers to use different computer systems for shipping and receiving, inventory and sales. Using a14-digit standard, retailers should be able to put all the information into a single database. (Ace had added thecapacity to scan and store 14 digits when it added the 13th and says the cost and work of making thetransition to 14 digits was the same as it would have been for a change to 13 digits.)

In response to The New York Times article, John Terwilliger-vp, Market Development for the Uniform CodeCouncil, noted that the big change in January 2005 will be that non-North American producers will nolonger need to relabel products for sale here. Further, most of today’s scanners can already handle the 13digits; it is product databases that need the updating. Terwilliger recommends expanding databases to 14digits to accept next-generation bar codes like RSS (Reduced Space Symbology, which encodes 14 digits) anduse all of the standards and symbologies of the global EAN-UCC System. He further notes that while theremight be some consumer inconvenience, the issue itself is minor compared to Y2K.

Source: The New York Times , August 12, 2002. Bigger Bar Code Inches up on Retailers, by Kate Murphy, p. C3. Morning NewsBeat.com , August 19, 2002. UCC Fires Back at Times Over Bar Code Article.

Refocused to bottom line

Flush times and fear of the Y2K unknown led to retailers in general and supermarketers spending close to3% of their budgets on information technology in the late 1990s. Their updates included point-of-sale units,inventory management systems, payment authorization networks, back office operations and refrigerationsystems. Tougher times, according to experts and industry insiders, mean that IT spending will now slow to1.2% of budgets. Now the focus is on IT that will add directly to the bottom line.

During the technology bubble, some retailers developed a fascination for complex projects, not looking carefully at long-term implications. Recent studies from Forrester Research, MIT and Cap Gemini Ernst &

Young all confirm that IT spending will increase slightly in the coming year. However, the studies furthersuggest that retailers will likely not be paying higher price tags up front, but instead negotiate for ‘pay onperformance’ deals.

The focus of these deals is likely to be: (1) Customer relationship management (CRM) to achieve better stock

levels and incremental sales. CRM uses data warehouse analysis to measure the value of customers. CRM canimprove decision making and merchandising and potentially improve market share. (2) Point-of-sale (POS)to accommodate loyalty programs and inventory interface. (3) Loss prevention activities to reduce shoplifting and sweethearting. Expenditures are predicted to decline for enterprise resource planning and supply chaininitiatives. Experts say this reflects a shift from operational to analytical strategies.

Source: Grocery Headquarters , October 2002. Is it tech time again? by Deena M. Amato-McCoy , p. 18-22.





Strategic planning roleSpeaking at FMI’s I/T Leadership Forum, Ed Crenshaw-president Publix, underscored the pervasive role of technology at Publix today. He highlighted the Information Technology Business Alignment Group, whichis charged with ensuring the strategic use of IT in all of Publix’s business areas to make sure IT strategies andplans are part of overall business planning.

Among Publix’s technology programs across various areas are: (1) a planning tool to capture informationfrom departmental plan to create a total enterprise snapshot, (2) self-service human resources applications,including employee information and benefits review, (3) store-level space and mix planning applications, (4)supplier trading infrastructure, (5) IT outsourcing capabilities and (6) WWRE participation.

Source: SN , October 7, 2002. Publix President: IT Key to Company’s Profitability, by Michael Garry, p. 1, 4.

Food Lion: EDI & the InternetFood Lion announced all of its EDI transactions will be conducted over the Internet by November 2003.

The objective is for more small suppliers to benefit from lower transaction costs and faster and moreaccurate transactions. Today, 94% of purchase orders—primarily from larger manufacturers—are already

handled via EDI. One quarter of those EDI transactions are handled over the Web currently. Using theInternet allows both large and small suppliers to take advantage of EDI without having to purchase andimplement new software.

Source: Internet Retailer , October 9, 2002. Food Lion gets small suppliers into Internet EDI.

Marrying bar codes and RFID tagsNCR and Alien Technology introduced RealScan 7875, a scanner/scale capable of reading radio frequency identification (RFID) tags as well as bar codes at store checkout, at the Frontline Solutions Expo in Chicago.

The hybrid test unit will read RFID tags on individual items in stores and support the eventual migrationfrom bar codes to RFID tags on all packaged goods. Initially, this prototype will be used for conceptrefinement.

Source: SN Daily News , September 25, 2002. ‘Hybrid Scanner’ That Reads Bar Codes, RFID Tag Is Unveiled.

Crossdocking RevisitedExperts estimate that today only 5% of SKUs are being cross-docked in supermarket operations. Grocershave done a better job using crossdocking programs for products that need quick delivery, for seasonalmerchandise, for promotional units and sometimes produce. Like other logistics disciplines, successfulcrossdocking is highly dependent on accurate and timely data. Often proprietary or homegrown datamanagement systems hobble the effort.

Still, there is consensus that any step that can be eliminated in the supply chain reduces costs.Implementation is the challenge. And crossdocking is the perfect example. There are four different types of crossdocking: (1) Distributor crossdocking, where inbound products from different vendors are consolidatedinto a multi-SKU pallet. This pallet is delivered as soon as the last product is received. (2) Transportationcrossdocking, where shipments are consolidated from different shippers in the less-than-truckload (LTL) toget economies of scale. (3) Retail crossdocking, where product from multiple vendors is received and sortedonto outbound trucks for different stores. Think Wal-Mart. (4) Opportunistic cross docking, where in any

warehouse an item is transferred directly from the receiving dock to the shipping dock to meet demand. Thetwo best-suited warehouse functions for crossdocking are storage and order picking because they are socostly. Put simply, with properly executed cross docking, the need for warehouse space and the cost of carrying inventory would decline dramatically.





Source: Grocery Headquarters , October 2002. Fleet optimization done painlessly, by David Litwak, p. 115-19.

Savings available from improving invoice accuracy According to a GMA Invoice Accuracy study conducted by Prime Consulting, invoice deductions in 2001cost consumer products manufacturers 9.9% of annual sales. Of the disputed volume, 82% were resolved infavor of the retailer, 14% in favor of the manufacturer and 4% written off by manufacturers. Data camefrom 25 consumer products manufacturers and the study focused on the ten companies ranking highest inefficient invoice accuracy practices. The study defined invoice accuracy as a complete match between thecustomer’s purchase order and the manufacturer’s invoice.

Respondents cited (1) complexity of pricing, promotions and deal structures, (2) poor internal/externalcommunications and (3) lack of information synchronization as the primary obstacles to invoice accuracy.

Although respondents said promotions, billbacks and pricing errors caused invoice deductions 65% of thetime, separately 64% said authorized invoice deductions were a preferred method of payment to their retailcustomers.

Other study findings include: (1) As in the 2000 GMA Invoice Accuracy Survey, just over half the

respondents measure invoice accuracy. (2) Of those, 64% measure purchase order accuracy when the invoiceis received by the manufacturer and 57% measure invoice accuracy when sending it to the retailer.

Source: MorningNewsBeat.com , October 9, 2002. From GMA: New Study on Invoice Accuracy.

Savings available from reducing out-of-stocks A new GMA, Food Marketing Institute and CIES study found that approximately 47% of out-of-stocks arecaused by inadequate store ordering and forecasting and 25% by poor shelf management—suggesting that70-75% of worldwide out-of-stock products are triggered at retail. This results in an average loss to retailersof 4% of sales when consumers are disappointed.

The study, funded by Procter & Gamble and conducted at three universities, gathered data from 52previously published reports to develop an overall picture of out-of-stocks globally. Despite advances insupply chain management, category management and inventory-tracking technology, the overall out-of-stock level has not declined over time. The world average rate for out-of-stocks is 8.3%—highest in SoutheasternEurope at nearly 11% and lowest in Northwestern Europe at about 7%. When faced with an out-of-stock situation, 31% of consumers worldwide said they go to another store, 26% substitute a different brand and9% forego the purchase entirely and said they do not purchase any items at all.

Source: GMA Press Release , October 14, 2002. Up To 75 Percent Of Global Out-Of-Stock Issues Must Be Corrected At Retail.

Smart shopping cartsSafeway is testing shopping carts that trace a shopper’s route through the store and flash personalized ads.

The carts include a touch screen and scanner, where shoppers can swipe their Safeway Club Cards, which

keep track of everything their holders buy in exchange for merchandise discounts. As customers shop, thescreen flashes promotions based on buying history. For Safeway, on the surface this is a tool for improving customer convenience, enhancing the overall shopping experience. Behind the scenes, Safeway is gathering data on consumer buying habits to boost profits, better tailor its inventory to customers’ desires and toimprove supply chain efficiency.

For shoppers, there are advantages but with the advantages come heightened privacy concerns. Realists arguethat although data is being gathered and offers targeted, shoppers have a choice and can elect to use a





conventional cart for shopping. Those with long memories might recall VideOcart, which provided carts with store maps to facilitate finding items. Forward thinkers suggest that cart screens that carry nutritionalinformation—and the ability to compare it among brands—might also be an improvement. Others note thata cart that can scan a shopping list and provide the most direct shopping path would be a hit. Skeptics arguethat retailers do not do an adequate job of letting shoppers know when such ‘services’ are available. More

important, for most people grocery shopping is a necessity, not a sport, and they just want it over. That said,dealing with cart alternatives is just one more irritant to getting in and out of the store.

Source: Business Week Online , October 29, 2002. “Smart” carts on a roll at Safeway, by Alorie Gilbert. RetailWire.com ,October 29, 2002. Is Big Brother in Shopping Carts, by George Anderson.

Laser self-scanning Jewel is testing a laser self-scanning device. The seven-year-old wireless, handheld machine with a screen isfrom Symbol Technologies and is used in over 500 supermarkets in Europe. The device has been tested forself-scanning elsewhere in the US (Hannaford, Stop & Shop, Sam’s HEButt and Marsh), but the Jewel test isthe first one to tie it to a loyalty program. The Preferred Card Shop ‘n Scan device can be used by any loyalty cardholder who identifies himself by scanning a card in the device. The device can print out a receipt at theend of the shopping trip to be taken to a dedicated checkout lane where a cashier completes the transaction.

At that time, scanning any products the cart was unable to scan, ID checking for age-based products andcash/check processing is undertaken. The new twist is that the screen displays ‘point of decision’ offersbased on what the shopper scans, including size upgrades and directions to complementary products basedon purchase history.

Source: SN , November 4, 2002. Jewel Tests Device for Self-Check, Promotions, by Michael Garry, p. 37, 39.

Instore Ads Build Sales…ButOnvance is the latest in a string of companies to go the way of Ted Turner’s Supermarket Channel. Onvance

was founded by convenience store and oil company alums who knew that most purchase decisions are madeinstore. They further reasoned that television monitors in those stores with the right combination of news/weather and ads could build sales. So they did: in 34-store Denver test, sales of candy and snacks rose4.9% to 7.7%—staggering increases in the slow to no-growth category. Sales for Coke rose 11% in Raleighduring a test.

The company started out with backing from major oil companies, which had lots to gain by increasing salesthrough their c-stores and building their network of such stores. McKinsey was the project consultant and

was paid with a 50% equity stake. The formula is familiar to those who have been around: satellite broadcastsof news and ads to instore TV sets; customers less antsy while waiting for checkout and dollars pouring infrom sponsoring manufacturers to influence sales at the critical point-of-purchase.

With 20/20 hindsight it is obvious that even if average monthly store sales rose 6.8% to $76,900, that wouldyield only an additional $1400 in profit. And for advertisers, even if sales increased 10%, the incremental salesdid not cover the cost of the ads as the program was structured. The dreamers of Onvance also hurtthemselves by spending lavishly on travel, staff, office rent and corporate apartments so the Chapter 11

(bankruptcy) to Chapter 7 (liquidation) filing is not surprising. Still, the failed company proved once againthat advertising at point of sale builds pullthrough of the advertised products and more.

Source: Forbes , November 25, 2002. Unplugged, by Emily Lambert & John Turrettini, p. 239-242.





Assortment optimization at Meijer As chains add more stores to boost the top line, they are increasingly acknowledging that retailing remains alocal business. This reality and dropping cost of hardware and software has led the way to pricing andassortment optimization by company, by clusters and even by individual store.

Meijer, the privately held 156-store Grand Rapids MI-based chain, is one success story, despite its carrying over 250,000 SKUs. For Meijer, the bottom line improvement came from standardizing merchandising processes and adding data mining. Data mining uncovered global market optimization and local marketassortments across the entire chain.

In truth, data mining has limitations but it can sort through huge amounts of detailed data stored in a data warehouse. It uses pattern recognition and mathematical recognition techniques to uncover hidden datapatterns that may not be obvious to people. Then people take over by adding in knowledge about new products coming to market, competitive assortment and activity.

The result for Meijer was creating an assortment of core items for all stores, then adding items that met twoscorecard criteria: (1) category level of importance, meaning sales or margin contribution to the corporation,and (2) variability in sales patterns within that particular category. Meijer developed planograms for clusters

of stores combining core items and allotted space for local assortments using test and control stores. In thetest stores where local assortments were adjusted from the basic planogram, sales and margins increased. Inaddition, inventory went down because low-turnover merchandise was not stocked.

Source: Progressive Grocer , December 1, 2002. Mining with Meijer, by Joseph Tarnowski.

Home Depot and self-scanning As part of a major computer overhaul, Home Depot announced plans to install self-service checkouts in 300high-volume stores by the end of this year, in another 500 stores next year. After testing in 17 stores, thehome improvement retailer confirms that shoppers like to feel in control—especially on weekends whenlong lines are frustrating. Random weight items won’t be a problem at Home Depot, but large items usually stacked outside the store for easy car loading will be. In those cases, shoppers punch the item into atouchscreen. One employee per four scanners plus belts that weigh what has been scanned will keep shrink

down.Source: The Wall Street Journa l, December 3, 2002. Home Depot Sets Plan to Install Self-Serve Aisles, by DanMorse, p. B3.



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