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Challenges in Today's U.S. Supermarket Industry

 

Thom Imlay
Solution Specialist
Microsoft Retail and Hospitality

May 2006

Applies to:
   Application Architecture

Summary: This article provides an overview of the challenges facing the supermarket industry in the U.S. from a technological perspective, and it provides recommendations for how retailers can gain a competitive advantage through the effective use of current and emerging technologies. (7 printed pages)

Contents

"How Do We Differentiate Ourselves When Every Other Retailer Seems to Be a Grocer?"
Grocers Are Stepping up to the Challenge
Supermarkets Will Continue to Redefine the Ways They Do Business with Their Customers
Existing Store Systems Technology
Some Examples of Systems in Typical Supermarkets
New Technologies Will Enable Innovation and Differentiation
Customer Relationship Management Solutions
Customer Service Kiosks and Digital Signage
Self-Checkout Systems
Using Customer Terminals and Phones
The Point-of-Service Application Must Be Updated
Mobile Terminals Will Put Employees out on the Sales Floor
Traditional Supermarkets Will Survive but They Will Be Different Than Today

"How Do We Differentiate Ourselves When Every Other Retailer Seems to Be a Grocer?"

Competition in the U.S. supermarket industry has never been greater. In addition to traditional grocers, there are now dozens of different types of retailers attempting to gain their share of the food wallet. It is estimated that shoppers spend over $500 billion annually on food in various store formats. The conventional supermarket and food/drug combination stores typically associated with grocery shopping have lost a great part of their market share to retailers like Wal-Mart Supercenters, Sam's Club, Costco, and a variety of Dollar Stores. Convenience stores and fast food restaurants have dramatically expanded their reach into this competitive space in recent years. Alternative shopping formats continue to lure value-driven shoppers. In 2001, Wal-Mart became the largest seller in food.

The supermarket industry is faced with the challenges of maintaining market share and profits while attempting new concepts and store formats in an effort to differentiate themselves from other types of retailers. Major demographic and consumer lifestyle changes have affected not only how consumers shop, but also where they choose to shop and eat their meals. Traditional supermarkets have seen a decline in how much shoppers spend and how frequently they shop in a particular store. While some supermarket operators continue to attempt to cut costs so they can offer reduced everyday prices, they find this to be a tough approach when competing with low cost operators like Wal-Mart and Costco.

Grocers Are Stepping up to the Challenge

Many have learned that establishing clear points of differentiation is the best offense for a highly competitive price/value-based environment. Most believe that focusing on their primary shoppers and offering products they want to buy, at fair prices, and treating these customers with lots of tender, loving care will be the key to successful growth. To find a niche, some supermarkets are experimenting with diverse "neighborhood markets," and/or up-scale stores offering more natural, ethnic, and organic foods.

Many shoppers are turning to "destination stores" in search of a different shopping experience. These specialty grocery stores offer more personalized service, higher-quality fresh products, expanded wine and cheese selections, and takeout gourmet foods. Shoppers are encouraged to "hang out," eat, and have fun.

There is a trend in conventional supermarket store formats that reflect a shift in merchandising approach. "Center Store" aisles, where canned goods, detergents, and other products now offered by other competitive outlets at deep discount prices are found, are shrinking in size. This floor space is being replaced with larger fresh perimeter departments, such as bakery, deli, produce, and service meat, poultry, and seafood counters. Supermarkets have increased their offerings of fully prepared foods, semi-prepared foods, and food service operations.

Customer's hectic lifestyles mean that they have less time to prepare meals in today's world. It is estimated that 40 percent of the population says that it has no idea of what it is having for dinner at 4:00 pm. Supermarkets are constantly striving to capture the booming market in ready-to-eat food. It is also estimated that 45 percent of food dollars are spent away from home.

There has been much consolidation in the supermarket industry in recent years. The surviving players have realized that they cannot be all things to all people. Instead, they are attempting to do the things they do best better than their competition. Nearly every survey consistently indicates what today's customers are looking for in their shopping experience:

  • Sell what they need and have it in stock when they want it.
  • Make it easy for them to shop and find what they are looking for.
  • Provide all the information they need in order to quickly decide what to buy.
  • Have friendly helpful people available to make the shopping experience a pleasant one.

Controlling operational costs is certainly one of the biggest challenges that any retailer faces. Since supermarkets typically run on extremely low profit margins, the need for a lean and efficient operation is critical. Labor costs are the single greatest controllable expense. Some supermarket operators have a tendency to cut labor during tough times. If labor cost reduction is not managed properly, customer service and store conditions may suffer. This, of course, results in lost customers and sales. Retailers that do not properly budget for necessary training programs will most likely see both increased employee turnover, which becomes very costly over time, as well as reduced customer service, due to a lack of training.

Supermarkets Will Continue to Redefine the Ways They Do Business with Their Customers

Competition has raised the bar for supermarket retailers. Perhaps some have simply lost sight of what the customers needed and wanted. Regardless, today's customers have less time, and are more intelligent, than ever before. Supermarket retailers will continue to face increasing survival pressures. Consolidation in the market space will continue to affect existing supermarket chains, both large and small. The top-tier supermarket chains that have increased the size of their store base through recent acquisitions are struggling to absorb what they have bought while trying to defend market share against the low-cost operators. Those chains that remain standing will be the ones that learn how to reinvent themselves. Successful supermarket chains will become experts at targeting specific consumer segments. Some are proving that being willing to target and settle for a smaller piece of the pie can be a winning formula. This becomes an iterative process that takes time, effort, resources, and—perhaps most the most difficult thing of all—a change in culture. Each retailer must search for its own winning formula to compete. To succeed, supermarket retailers must take advantage of new innovations, to create customer experiences that deliver true differentiation. Technology will play a major role in enabling these new innovations.

Existing Store Systems Technology

Generally speaking, most supermarket retailers have added technology at a conservative pace over the years, mainly due to stringent ROI requirements. It is an industry that runs on razor-thin profit margins. New solutions need to demonstrate quick payback through increased sales and profits, and/or reduced costs to the operation. Technologies designed to improve the customer's experience in the store, such as faster checkout, or ways to provide additional information to the customer are sometimes difficult to justify when chains are focused on their bottom line. The impact of new system deployment, training, maintenance, and support can add to a retailer's reluctance to simply accept the "next new thing."

As technology has evolved over the years, most retailers have created a patchwork of disparate systems on different platforms throughout the store. The amount of hardware has also increased to include servers, PCs, printers, and wireless handheld devices. Many systems either do not connect, or are connected in a cumbersome manner that requires manual processes. Information is difficult to retrieve, and new releases are resource-intensive to manage. Some applications purchased through software vendors lack consistency in capability, have overlapping scopes, and are rarely integrated in terms of function or data. Many older applications are based on outdated architecture and are inflexible, making it difficult to change processes and business rules, add new devices, and so on, without touching the source code. This can present a competitive disadvantage for retailers as new innovations are made available over time. Older hardware is difficult and costly to maintain. IT departments have grown in size as technology has been deployed over the years. According to several studies of IT leaders, as much as 70 percent of a retailer's information technology resources are devoted to sustaining and running existing capability, leaving only 30 percent for exploring and implementing new capabilities.

Some Examples of Systems in Typical Supermarkets

  • POS Checkout (including electronic payments)—System that records sales and financial information, and that collects detailed customer and product related data.
  • Self Checkout—Self-service POS station where customers ring up and pay for their purchases.
  • Cash Management—System that controls the cash handling processes from POS to the back office, and to the bank.
  • Pharmacy—System that manages a customer database for prescription drug verification, dispensing, inventory, third-party insurance billing processing, and accounts receivable.
  • DSD (direct store delivery)—System that supports the receiving of product distributed directly from manufacturers or suppliers on their own trucks, by-passing retail warehouse facilities.
  • Labor Scheduling—Application that creates work schedules for employees and departments, based on defined parameters.
  • Time & Attendance—System that is used to plan, monitor, and report employee's work hours.
  • Scale Management—System that links different weigh scales and labelers throughout the perishable departments in the store.
  • Order Entry/Inventory Management—System that supports the process of inventory replenishment; an approach that combines perpetual inventory and reorder point calculations.
  • Item Price Verification—Wireless handheld devices that are connected to POS and used to audit prices on the shelf.
  • Shelf Space Management—System that helps manage the amount of shelf space allocated to each category, and to each product within the category.
  • Loss Prevention—Auditing tool that analyzes data to identify irregular and fraudulent activities, in an effort to reduce lost profits.
  • ESL (electronic shelf labels)—LCD shelf tags that are linked to a backroom computer and POS, and that automatically display price changes.
  • Video Rental—System that tracks video rental inventory and customer historical information.
  • Learning Management (LMS)—Computer-based training course software that delivers local or online content for new and existing employees.
  • Forecasting Systems—Systems that projecs expected sales of products for given time periods.
  • Shelf Tags/Signs—Software that is used for printing in-store tags and signs.
  • Kiosks—Freestanding, interactive terminals that display products and information on a video screen; they typically use a touch-screen for customers to make selections.

New Technologies Will Enable Innovation and Differentiation

Supermarket retailers need real-time information in order to provide customers with the shopping experience they are looking for. Creating this positive shopping experience, and creating the perception of value in the customer's mind, will be the absolute key for traditional supermarkets to succeed in the marketplace. Ideally, retailers need to know who their customers are and the products they want to buy.

Customer Relationship Management Solutions

Customer Relationship Management (CRM) programs are becoming more of a business strategy for supermarket chains. CRM applications will give retailers a real-time view of customer behavior and wants. Supermarket companies have maintained loyalty programs for years. Valuable customer purchase information has been collected, but little has been done with the data. For example, existing loyalty marketing programs have provided retailers the view that the top 30 percent of their customers account for approximately 75 percent of their sales. To capitalize on this opportunity and truly understand their customers as individuals, grocers must take the next step to better analyze each interaction with the customers. Grocers must find more effective ways to reach their top customers across multiple touchpoints, in order to influence their shopping behavior, and drive more sales and profits. This will require a robust integrated infrastructure throughout the enterprise. At the store level, technology platforms must be in place to enable the flow of real-time information. Grocers with eCommerce sites must collect customer information in order to maintain a single view of the individual across channels.

Customer Service Kiosks and Digital Signage

New capabilities at the store level, to provide more personalized service to customers, will continue be a major key to creating a positive shopping experience and the perception of value. Labor budgets will always be major challenge for retailers attempting to build their value proposition around "great service," in order to distinguish themselves from the competition. Technologies such as informational and self-service kiosks will become more pervasive throughout the store. Kiosks are not new to the supermarket space. Many retailers have struggled with the ROI of such devices, and the perceived value from a customer's point of view. Also, kiosks take valuable sales floor space. As more effective applications of kiosks evolve through better use of technology, and as grocers see the customer acceptance, they will become commonplace in supermarkets. Supermarkets will deploy more Digital Signage devices as the cost of this technology decreases. The use of digital media is quickly becoming an attractive method of improving promotion effectiveness and communicating with the customer in an entertaining manner at the point of product selection.

Self-Checkout Systems

The number of self-checkout systems will continue to grow in supermarkets. Retailers who develop a balanced customer service strategy around their conventional lanes and self-checkout stations will drive the perception of "fast checkout." Upon entering a store, customers gauge how much time they will spend by a glance at the front-end traffic. Retailers who master the balance of maximizing customer throughput while minimizing the appearance of long lines will succeed over their competitors who simply add self-checkouts and cut back on cashiers. Workforce Management applications can be helpful in achieving this balance based on the retailer's customer service philosophy and labor budget. From a front-end layout point of view, the proper ratio of conventional lanes to self-checkout stations is also a major consideration in maintaining the customer's perception of "great service."

Using Customer Terminals and Phones

Some supermarket retailers will find ways to effectively deliver content to customers inside the store, through their own PDAs or Smartphones. Customers will "opt in" to receive personalized information upon entering a store when the retailer can demonstrate the value of providing meaningful and relevant information. Personalized shopping lists and promotions will be at the customer's fingertips. Today's consumer is very hungry for information before making purchase decisions. The Internet has created a new generation of information-savvy shoppers. This creates another opportunity for enhancing a customer's shopping experience.

The Point-of-Service Application Must Be Updated

The POS system remains the most mission-critical application in any retail environment, and it must support the way customers want to interact with the retailer. It must be available 100 percent of the time. POS is the base platform that is enabling several other applications around it.

Many of the top-tier supermarket chains are running on older, industry-hardened platforms that will simply "run out of gas." The functions and capabilities of these older POS applications are limited. Integrated Electronic Payment Systems add to the complexity of this environment. Point-of-Sale technology is already going through another evolution. To mitigate the risk of riding older technology too long, and the problem of supporting an "orphaned OS," many supermarket companies are developing migration strategies to move to newer platforms.

Newer operating systems that enable easier development, device "plug and play" capability, integration with other systems, flexibility, and manageability offer lower lifecycle cost opportunities. Cutting-edge POS systems are self-managing, self-diagnosing, and, in many cases, self-healing. Many retailers view POS as a commodity. This thinking will change as retailers adopt newer-generation POS systems and find ways to enable more "customer-friendly" interactions with customers. The result will be a better shopping experience for the customer and a strategic advantage for the retailer. POS requires a major investment on the part of the retailer, and it is absolutely essential that supermarket companies that find themselves behind the technology curve begin their move towards the new generation POS technology. It is important that retailers choose a platform capable of supporting legacy POS applications, in order to provide an easier migration path to the future, and to help control capital expenditure costs.

Mobile Terminals Will Put Employees out on the Sales Floor

From a store employee point of view, new technology will emerge in ways to help workers and managers do more with less. Wireless technologies and mobile devices will continue to allow employees to spend more productive time out on the sales floor where the work needs to be done. More importantly, managers can better focus on what is important to the business, and spend more time in face-to-face, personal interactions with customers on the floor. Real-time alerts can greatly reduce unnecessary out-of-stock conditions, one of the biggest complaints customers have in supermarkets today. Other key performance indicators will be at managers' fingertips. This will empower front-line managers to be proactive rather than reactive on key decisions that affect the operations in the store.

Traditional Supermarkets Will Survive but They Will Be Different Than Today

To survive, traditional supermarket retailers will reinvent themselves over a period of time, in order to attract and maintain a loyal customer base. New concepts, neighborhood marketing, and innovation will be the key to success over the next decade. Some will make it work. Others will fail. There will be more consolidation in the marketplace. Successful players will capitalize on the strengths of the value proposition they choose to drive, and they will learn to do it well. In the customers' eyes, it's all about how well a retailer can satisfy what they are looking for in their shopping experience, and how well the retailer does at creating the perception of value in their minds. Technology and innovation will serve as the fuel in enabling the customer's shopping experience. Retailers cannot implement technology because of industry hype, or simply because the competitor "down the street" has it. Prudent decisions on the retailer's part must govern what technology is right for the business needs, in order to allow them to grow and prosper.

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