Supermarkets Spend Big On IT, Preparing To Fight Wal-Mart

With many trying to out-service and out-specialize Wal-Mart, grocery chains are looking to spend more than $9 billion over the next year, according to a new report from the IHL Consulting Group.

The grocery segment is consolidating through a series of closing and mergers, but the report says this may prove difficult for IT departments, at the exact time that IT will need to perform most rapidly.

"One aspect of mergers and acquisitions that doesn?t get much press is the IT impact of two (or more) supermarket companies coming together. More often than not, this involves different backoffice systems having to learn how to talk to a single headquarters system," the report said. "Further down the line, the POS systems must be configured so that the same data can be forwarded down the line and that price changes, taxes and WIC (Women, Infants and Children) products identifications must be continuously accurate. Although open systems are beginning to be far more common in the supermarket segment, the amount of legacy hardware and software at the store level is often a nightmare for the IT organization of the acquiring company."

One of the big trouble spots that IHL saw for grocery chains is the lackluster performance of many loyalty programs, which IHL President Greg Buzek attributes to most retailers deploying the packages poorly.

The programs are generally used more as discount programs ("come in with your card and you'll get discounts on 400 specially-marked items") than as an attempt to understand individual customer's buying habits and to make their experiences better, Buzek said.

Even the few chains that Buzek argues have deployed loyalty programs properly?including Meijer, Stop n Shop, Smart n Final and Safeway?have dropped the ball when it comes to letting customers know about the benefits being delivered.

For example, let's say a chain analyzes purchases at the end of the month and a manager is preparing to discontinue the weakest-selling products. Before doing so, the manager cross-checks the purchase history of those products with the purchase history of the store's 50 best customers. If Mrs. Jones happens to be the 9th top customer and she routinely purchases one of the low-selling products, the manager could choose to keep that product stocked so that the store doesn't give Mrs. Jones a reason to shop elsewhere.

But the benefit to the store would only truly be realized if Mrs. Jones knew about it. She needs to be told that the store is still selling the Avacado-flavored toothpaste solely because she is highly valued as a customer. If the store did that, it would actually have created loyalty.

Buzek points out that loyalty programs only works if it's seen as a two-way street. Often, grocery customers say "I gave you my information. Why am I not getting offers and discounts for the things I already buy?" Buzek said.

"Although successful in Europe and parts of the western U.S., loyalty programs have struggled to catch on in much of America. Some retailers have launched loyalty programs only to back out or marginalize them due to low customer participation. Others remain hesitant to implement," the report said. "Some customers are suspicious of giving the local grocery more information (does this mean more junkmail?) while others just don?t want one more card to carry in their wallets. Loyalty programs must be clearly defined, well marketed and provide immediate added value to customers to insure adoption and successful implementation."

But tech spending is still a grocery priority. "Supermarkets spent some $9.1 billion on IT in 2006, which is more than all but the Specialty Hard Goods and Convenience Store segments," the report said. "Hardware accounted for the largest part of this, about $3.4 billion (37 percent, of which Infrastructure and Store Systems make up the bulk). Services account for $2.7 billion (29 percent) and Software $724 Million (8 percent)."

The report identified Point Of Sale hardware as another ripe area for grocery IT spending, as some POS systems "are now reaching 10-12 years of age and are due to be replaced in the next two years. By our estimates, there are more than 100,000 POC units that can be replaced in the next three years."