Tunnel Vision: Will Kroger Give Away Its Advantage?

When Kroger first began testing its high-speed "checkout tunnel" in a store in Hebron, Ky., it was an unusual case of a retailer's IT group actually creating a new system. The software reportedly came from IBM and the optics from Northrup Grumman, but the final system is all Kroger's—including patents on the technology for automatically scanning UPC codes at twice the speed of a regular checkout belt.

Now Kroger says it plans to turn the tunnel, dubbed "Advantage Checkout," into a commercial product to sell to other retailers, including competing grocery chains. But after all that effort to create something other grocers don't have and can't currently buy, why is Kroger giving away its competitive advantage?

Kroger certainly hasn't kept the tunnel a secret. Since last spring, any competitor has been able to walk into the Hebron store and watch the tunnel in action as customers put items on the double-speed conveyor belt, to be scanned by cameras and then bagged by employees while the customers use separate pay stations to scan their coupons and pay the tab.

But unlike most pilot deployments, this isn't just a handful of off-the-shelf products stitched loosely together that any competitor can copy. Kroger actually created an R&D lab four years ago to produce technology that the chain needed for its stores but IT vendors weren't offering. The tunnel is the most visible result, and it's something no other retailer has or can quickly reproduce.

That's the very definition of a competitive advantage. And it's something that's almost never seen these days in IT, where the rule is that you don't build, you buy—and whenever possible you buy the most mass-market, off-the-shelf products you can.

Kroger isn't saying how much it has spent developing the tunnel, but there's no doubt the investment is huge. Maybe it's not a surprise that Kroger feels the need to partner with Fujitsu to turn the tunnel into a commercial product to recoup at least some of that investment.

Then again, maybe Kroger isn't about to give away quite as much of its one-of-a-kind competitive edge as it might appear. Consider:

  • If Kroger wants to put tunnels in even a fraction of its 3,600 stores, it needs more tunnels built. Right now, the Hebron store has the only two prototypes. Hooking up with a manufacturer means Kroger doesn't have to be in the manufacturing business as well as in R&D. And Kroger is certainly in a position to be first in line for as many of the tunnels as it wants to buy. Competitors will just have to wait.

  • Fujitsu (or whichever IT vendor Kroger ends up partnering with) will most likely reengineer the tunnel to be more compact and less expensive to manufacture. But Kroger will be in a position to know the reengineered tunnel from the inside. That means Kroger could dictate design details that will make it easier for Kroger to add capabilities that aren't in the IT vendor's product.

  • Kroger's R&D lab is probably already working on the next generation of the tunnel. It can see the future.

  • Even when competitors get their hands on a commercial version of the tunnel, Kroger will have years of experience using the machines in stores—and knowing where they work best, how customers react, what kind of training employees need and when the technology will actually start to pay for itself. No doubt Fujitsu will get some of the basic information on how to set up the tunnels. The rest is proprietary to Kroger, and will remain an advantage.

    Result: Kroger could keep its competitive advantage from the tunnel for several years. That's the most any retailer (or IT vendor, for that matter) can hope for these days. There will be more tunnels from more vendors. Eventually, every grocery chain will use them—or not. But they won't represent a competitive advantage, just another product.

    Kroger does have one other competitive advantage it's not likely to lose. Unlike the vast majority of retailers, Kroger has a real R&D lab developing hardware. That in itself is a competitive differentiator. After all, nobody except an IT vendor develops hardware anymore. Software? Sure, though prevailing wisdom is that off-the-shelf is preferred over built-from-scratch.

    But hardware? When was the last time you heard of a retailer creating a hardware IT product to use in stores that's bigger than, say, a barcode scanner? That doesn't happen. (Even those custom handhelds are typically smartphones or PDAs with added software. Apple, one of the few retailers in a position to create retail IT hardware, doesn't bother; it just repurposes iPhones.)

    Only a handful of other U.S. retailers are rich enough and IT-sophisticated enough to try something like that (think Target, CVS and Walgreens for IT sophistication and Wal-Mart for money). They might decide to get into the IT R&D business, though it doesn't seem likely.

    But after four years in the R&D trenches, Kroger may have developed an advantage it literally can't give away.