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To serve

The drive to up the ante on service is evidenced by the increased deployment of customer-facing technology such as information kiosks, digital media displays, and marketing and promotion technology, all in essence dedicated to making more effective connections to shoppers and their needs. This high-touch environment also results in the avoidance of self-checkout technology, though, as the numbers show, most independents realize they'll eventually have to install these units for competitive reasons.

Service also means being able to have information on hand when it's required to serve the customer's needs. The result is a jump in mobile communications technology deployment, as decision-makers try to stay in touch with those in the trenches.

The message that's clear from the numbers, and the retailer insights behind them, is that independent grocers are strategically planning their technology around the unique positions they occupy in the market today—and where they'll be tomorrow.

Who are they?

This year's respondents are evenly spread across the country, with 24 percent in the Northeast, 19 percent in the South, and exactly one-quarter (25 percent) in the West. The Midwest has the largest percentage of respondents, at 32 percent. (See Fig. 1.)

The average number of stores operated by this year's respondents is 2.79, almost half of last year's average of 4.38. Just over half (52 percent) operate one store, while 11 percent operate seven or more stores. (See Fig. 2.)

Approximately one-third (33 percent) of respondents plan to add one or two stores within the next year, while 2 percent plan to add at least three stores. Only 1 percent have plans for five to six stores. In the long term these numbers change only slightly, with 38 percent of stores planning to add at least one store and 2 percent planning to add seven or more. Not surprisingly, respondents with more stores are more likely to report plans to expand. (See Fig. 3.)

Service rules

This year's respondents move service to the top of the list of competitive differentiators: It grabs 40 percent of respondents' votes and pushes store location and convenience to the second spot—albeit a close second—at 39 percent. Perimeter departments are selected by one-quarter of respondents (25 percent) as a differentiator, representing the same percentage as last year. (See Fig. 4.)

Service and location/convenience are particularly important to the single-store operator; when this group is separated from other respondents, almost half (46 percent) see service as their biggest competitive differentiator, compared with 33 percent of those operators with two to 10 stores.

It's clear that in an increasingly chain-dominated world, these operators see service as a key factor in separating themselves from the pack. Some focus on fresh foods, while others place emphasis on deli and catering. Still others serve ethnic markets.

The strong message in this study is that some retailers have found a variety of ways to leverage technology to make the most of these services.

Pasco, Wash.-based Fiesta Foods is an example. Currently a one-store operation with plans to expand to three stores next year, Fiesta is a Hispanic-themed supermarket with a heavy emphasis on service.

"We have a large foodservice deli operation, an in-store bakery, and a tortillería," says Fiesta's owner, Craig Gaylord. "In fact, I left the business a few years ago, and never would have come back if I couldn't specialize in some way."

Information kiosks and digital media are gaining in popularity among service-oriented independents, since many of their service or product offerings require a greater level of detail than is possible with traditional signage. Murphy's Markets, a four-store chain based in Medford, N.J., uses digital signage to provide details on its organic and higher-end products, for example.

"I think it's important even with our more affluent customers to continue to educate and reinforce that our competition is all about price points, and we have to let them know why we're 20 percent higher on meat, that there is a significant difference," says John Wachter, general manager at Murphy's. "Produce is one of our key features, as well as beef, [including] Black Angus, dry-aged, natural, and organic beef, and our prepared foods. We keep it strictly to signature items, educating the customer about our product, because they don't understand a lot of times why they pay so much more."

If any independents are able to lay claim to price as a differentiator, it would likely be larger operators. While only 1 percent of single-store operators claim price as a differentiator, one-quarter (25 percent) of those with two to 10 stores cite price as a differentiator.

The variety of differentiating tools is being wielded to meet similar competitive threats. Indeed, the order of threats is almost identical to last year's, with a couple of significant changes.

Of course, Wal-Mart tops the list: 55 percent of respondents name it Public Enemy No. 1, with almost no variance among operators, regardless of size. Large-chain supermarkets are seen by 26 percent of respondents as a top threat, a drop of five percentage points from last year, which transferred to the No. 3 competitive threat—other independent grocers—this year listed by 16 percent of respondents. However, single-store operators view larger chains as a greater competitive threat than operators of two to 10 stores do, while the larger operators are more wary of other independents. (See Fig. 5.)

This is indicative of a couple of changes occurring in the industry. As independents become more innovative to better compete with the big chains, they're also becoming stronger competitors to each other. Additionally, some independents are moving to markets that Wal-Mart doesn't serve, such as upscale or organic demographics, where, for the most part—excepting Whole Foods Market, Wild Oats, Earth Fare, and perhaps a few others—the only supermarkets serving them are independents.

It's important to note that wholesale clubs and dollar stores have also become larger competitive factors in the eyes of independent grocers, each garnering 6 percent of respondents' votes.

The average number of IT employees among respondents is 2.11, slightly less than last year's 2.35, which can be related to the increased number of respondents with single-store operations. Twenty-one percent have no full-time IT employees, meaning that the owners or operators handle IT matters themselves or, as in many cases, employ part-time help.

Thirty-eight percent list one dedicated IT employee, while 23 percent say they have two. Not surprisingly, more retailers with two to 10 stores employ two (28 percent) than do single-store operators (18 percent). However, 9 percent employ three staff members, and a few two-to-10-store independents even have as many as six IT staffers.

Like last year, these staff counts aren't likely to grow: Eighty-five percent of respondents say the number of dedicated IT staff will remain the same next year. Fortunately, none expect a decrease in the coming year, either, while 15 percent expect the number to rise. (See Fig. 6.)

Single-store operators often hire part-time help, or handle IT matters themselves and bring in experts on an as-needed basis. Many times the experts are students. In family-run businesses this person is often a son or daughter of the operator. Fiesta Mart's Gaylord, for example, employs his son as the dedicated IT employee, and doesn't plan on hiring any more staff as he adds two new stores this year. "Being a single-store operator, we are limited in the amount of resources we can devote to IT," he explains.

Killer apps

As was the case in last year's study, point-of-sale systems remain the most important application to the independent grocer's business. Sixty percent of respondents choose POS as the most important application to store operations in the next year. Over the next three years the number climbs to 66 percent. In both cases the numbers are higher among larger independents: Among those with two to 10 stores, 66 percent give POS top billing in the next year, vs. 55 percent of single-store operators, and in the next three years 72 percent vote for POS against 60 percent of those with one store.

Back-office applications rank second in importance, with 60 percent of respondents choosing them as most important for this year, and 62 percent for the next three years. Mobile and wireless applications are cited by 42 percent of independents, with only a slight increase over the next three years. Indeed, mobile climbs into the No. 3 slot as the most important application for the next three years. (See Fig. 7.)

Much of the mobile applications will include wireless communications, particularly in those operations with more than one store. Magruder's, a 10-store independent based in Rockville, Md., plans to invest in BlackBerry wireless e-mail units for executives and store managers, to enhance the efficiency of its communications.

"We control a lot from our corporate office, so we wanted to increase the efficiency of our communications between corporate and the stores," says Glenn Gibson, Magruder's v.p. and c.i.o. "We take a lot of orders for platters and catering. We move product around frequently, and we want to empower people using the information to make better decisions. What it came down to is what would be the medium that we should use for doing that."

While the units Gibson is evaluating have cell phone capability, the primary function he's interested in is pushing data from the POS and hosting systems—such as inventory levels and customer orders—to these devices in the field, though the stores will also be able to send requests to headquarters.

"With these mobile devices, we feel that we're going to be more effective, more productive, we're going to produce, we're going to reduce some of the paperwork, so our c.o.o. will be getting the sales information on an hourly or two- or three-hour basis out to the stores," adds Gibson. "The merchandiser will be able to look at his sales and inventory levels wherever he is and make adjustments. We're finding that to really push that information out and get responses is the most effective way for us to compete."

Self-checkout, while still at the bottom of the list for the coming year, jumps 10 percentage points from last year's 6 percent, and also moves out of the bottom slot for the coming three years. Many independents, particularly those focused on service, feel that self-checkout takes away from the service aspect of their operations. But they also realize that, as such systems become more commonplace, they'll need to be installed for competitive reasons.

That's why Magruder's installed its own self-checkout units. "We were very hesitant about it," recounts Gibson. "A high percentage of our sales is from produce, which many customers find difficult to ring at the self-checkout—an organic banana vs. a regular banana, for example. But the reason we went into it was because we felt we had to be there because of our competition."

More than half of respondents (57 percent) operate an open POS systems architecture, though these systems are even more prevalent among those with two to 10 stores. When this group is broken out, 63 percent use open systems. The remaining 47 percent of respondents have proprietary POS systems. Almost all respondents (96 percent) operate a client/server environment, while only 4 percent use thin-client solutions that are hosted at a central location. (See Fig. 8.)

What's an ASP?

Independents are still not fully aware of the Internet-based applications that are available to them, according to the data. Eighty-one percent of respondents say that they haven't considered using technology delivered via an application service provider (ASP) model, which was actually an increase over last year's 77 percent. The No. 1 reason for this is that they remain unaware of available ASP solutions in the marketplace. Indeed, some respondents say they don't even know what an ASP is, a sign that increased messaging may be needed on the part of Internet-based application providers to educate the independent grocer on these solutions and their benefits. Other concerns are data security (21 percent) and lack of bandwidth (14 percent). (See Fig. 9.)

Just as en-hanced service to customers is the No. 1 differentiator for independent grocers, customer service remains the top business need that these retailers are looking to address through technology in the coming years, with 64 percent of respondents choosing it as most important. Marketing, reporting, and loss prevention follow close behind, each chosen by more than half of the retailers surveyed. Marketing, however, rises from the fourth-place position last year to runner-up this year. (See Fig. 10.)

Digital media, in addition to being used for customer service to educate shoppers, is also—and often at the same time—being used for marketing an independent's products and services.

Donald K. Seehausen, president and c.e.o. of Peotone, Ill.-based three-store independent Seehausen's Market, recently contracted with Monarch Marketing for a digital media solution at the front end delis in his stores. "We're in smaller communities outside of Chicago, and Monarch will sell advertisements to local businesses that might want to reach our shoppers," he says. "We'll also advertise our own sale items or features of the week."

Other business needs mentioned by respondents include price-change downloads, bilingual information, and better EFT rates.

This year, theft topped the list of loss prevention issues that independent grocers are addressing through technology, with 69 percent of respondents choosing it as their chief issue, moving it from the No. 3 slot to No. 1, with virtually no difference between small and large independents. Productivity follows, chosen by 62 percent of respondents, with shrink and receiving next. (See Fig. 11.)

Fiesta Mart's Gaylord recently installed a camera system, created by his wholesaler, Supervalu, that he uses to tackle both theft and productivity issues at the same time. The system consists of approximately 30 cameras installed around the store to monitor areas where either theft or labor issues may occur, such as checkout or receiving. The cameras capture digital video that's optimized for easy searching.

"It's turned out to be a great training tool," says Gaylord. "We use it to highlight problem areas such as inefficient scanning."

Retailer/wholesaler relationship

Wholesalers remain an important part of an independent grocer's IT decision-making process, with about half of respondents (51 percent) reporting that their wholesaler recommends solutions, a slight drop from last year's 56 percent. Twenty-nine percent say that their wholesaler is more hands-on, actively installing solutions at their stores, and for 20 percent of the retailers polled, the wholesaler actually acts as an independent software vendor, implementing and managing IT solutions for them. (See Fig. 12.)

Commerce, Calif.-based Unified Western Grocers, for example, works in partnership with its retailers, even acting as a go-between on issues with resellers. "When the retailer has an issue or a problem, such as needing development done on software, they can come to us," says Mike Brown, general manager of retail technology. "We can then use the muscle of 2,500 stores vs. somebody who has a five-store chain."

In the case of Robesonia, Pa.-based Associated Wholesalers, Inc. (AWI), the wholesaler is not only the go-between between vendors and retailers, it's also the technology vendor. R.O.R.C. (Retailer Owned Research Co.) of Arlington, Texas is a software designer, owned by AWI and eight other cooperative warehouses across the country, that has developed its own POS software for its retailers.

Those wholesalers that work closely with retailers occasionally may get a bit overzealous on the sales side of the process. Some respondents note that their wholesalers should focus less on selling technology to retailers, and more on servicing their technology needs and educating them on installed applications.

It's important to note that not all wholesalers receive top billing: Fifteen percent of respondents say their wholesalers do little or no work with them on technology solutions.

It should come as no surprise that most independent grocers feel disadvantaged in the realm of technology, compared with larger chains. Fifty-eight percent say this is shown by their lack of technology expertise. Here there's a large difference of opinion between single-store operators and those with two or more stores. Sixty-four percent of operators with one store cite lack of expertise, vs. 50 percent of those with two to 10 stores. These categories trade spots on the list, which shouldn't be a surprise, given the high number of single-store operators in this year's study. Obviously this lack of expertise directly correlates with the size of the retailers' IT staff; lack of resources came next, selected by just over half (53 percent) of those polled, followed by lack of available solutions (47 percent). (See Fig. 13.)

Cost again leads the list as a technology barrier, with almost half of the respondents choosing it. This number is higher for those operators with two to 10 stores (52 percent) than for single-store operators (42 percent). Lack of a committed technology vendor, an increasing concern among independents, came in second, selected by 17 percent of respondents. While it gains just one percentage point from last year's 16 percent, retailers are beginning to be more vocal about the issue.
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