Initiative Impact

By Kim S. Nash  |  Posted 2004-02-05 Print this article Print

Is Wal-Mart an unstoppable force? Larry Johnston may be the yardstick. The former GE Appliance savior is now trying to beat the nation's largest grocer at its own game—with a combination of brains and technology.

Initiative Impact

The technology initiatives will impact every corner of its stores, distribution centers and offices:

  • Speeding Up Checkout: Albertson's is installing 4,500 NCR self-checkout terminals in its 2,300 stores at an estimated cost of $16 million to $20 million. The machines normally cost about $20,000 each, but the company snagged the first 4,000 "for pennies on the dollar" from lessor GE Capital, which had picked them up from bankrupted retailer Kmart. The terminals will not only help customers with small numbers of items get out of stores faster, they'll help reduce Albertson's staffing costs. An Albertson's worker makes an average of about $13 an hour, compared to $8.50 an hour for a Wal-Mart employee. In some regions, such as California, additional health-care and pension benefits push the average Albertson's employee's total pay package to about $24 an hour—a point of contention in a four-month-old strike by California grocery workers at Albertson's and two other chains. While the company says the goal is to improve customer service and not eliminate jobs, analysts say the company's not fooling anyone. "That's just nonsense. There's no other reason to do it other than save salaries," says George Whalen, president of Retail Management Consultants. In fact, the technology could help Albertson's generate as much as $137 million in annual labor savings, based on the elimination of two clerks per store.

  • Boosting the Average Sale: Albertson's wants to fill a bigger portion of every shopping basket and to do that it's going to get to know customers a whole lot better. It has installed a $50-million NCR Teradata warehouse at its Boise headquarters to analyze a wide range of corporate and customer information, such as which customers buy the most from Albertson's and what products are typically in their baskets.

    Using data from customer-loyalty cards, Albertson's can match individual buying preferences against store inventories. Data is available for analysis minutes after a customer leaves a store. The goal is to ensure "the right product is on the right shelf at the right time," Johnston says. If a new Wal-Mart is about to open in an Albertson's market, Albertson's will also be able to launch preemptive strikes by rewarding its best and most-loyal customers with special promotions and pricing.

  • Narrowing the Pricing Gap: Wal-Mart's biggest advantage is that it can negotiate better prices with suppliers and get those products to stores faster and more cheaply. Wal-Mart's grocery prices are 20% to 25% lower than Albertson's on average, according to UBS Warburg. Johnston is targeting costs throughout the supply chain by consolidating distribution centers and deploying supplier Web portals to better coordinate shipments and to reduce billing and invoicing costs. Where it used to take days to analyze the results of sales or promotions, the new data warehouse will provide answers within hours and pass those results on to suppliers.

  • Maximizing Profits: Software from privately held KhiMetrics of Scottsdale, Ariz., is being deployed system-wide to keep prices competitive with Wal-Mart, while maximizing profits. The software will enable Albertson's to determine, for example, whether lowering the price of Quaker Oats oatmeal by 10 cents will bring in more profits by increasing sales than would, say, increasing the price by 10 cents. It will also tell Albertson's which products, such as milk or bread, it needs to lower prices on to keep shoppers from jumping ship to Wal-Mart, and which aren't as critical.

  • Modernizing the Head Office: Prior to Johnston's arrival in 2001, Albertson's lagged most retailers in core technology. Now, it wants to be at the front of the checkout line. Financial operations have been consolidated onto Oracle applications. PeopleSoft software has been deployed for human resources and the company plans to replace 75% of its information systems by 2007. More than 1,400 out of 7,000 employees above the store level have been laid off since 2001. Overall, Johnston aims to cut $750 million in costs by the end of 2004; he's cut $567 million so far.

    Technology is only one-half of the game plan. The key to beating Wal-Mart is, you might say, mental. Johnston has hired logistics, marketing, finance and technology experts away from competitors or from companies widely viewed as best-in-class in other industries. If these brains can't beat the boys from Bentonville, it may well be that no one can.

    Chief technology officer Bob Dunst came from Safeway, where he was vice president of applications development and advanced technology. With more than 25 years at grocery companies, analysts say, Dunst was prized for his experience as well as his knowledge of loyalty-card and analytical programs. When he was hired in November 2001, Albertson's had only begun testing a loyalty-card program in the Dallas area, while Safeway was running one of the most extensive programs in North America.

    Leading an overhaul of how Albertson's manages its relationships with suppliers is C.J. "Gabe" Gabriel, former head of a technology startup called Newgistics, which advises companies on how to manage product returns using Internet technologies. This executive vice president of supply chain management earned his stripes in the Army as a member of the Rangers 101st Airborne Division and brought that logistics experience to the corporate world with supply-chain stints at Corporate Express, PepsiCo and American Hospital Supply. Lehman Brothers analyst Meredith Adler says Gabriel is viewed as an early adopter of technology and his addition was desperately needed to bring Albertson's logistics up to Wal-Mart's level.

    Gabriel, in turn, has cherry-picked from Wal-Mart directly, last September hiring away Mike Czuchra, Wal-Mart's divisional manager of global supply chain. Czuchra's experience in managing one of the largest private trucking fleets in the world will be used to reduce Albertson's distribution and transportation costs—which typically run 3% to 5% higher than Wal-Mart's.

    Another first-stringer added to the supply-chain team last year is Sean McKinless, former senior director of supply-chain management at Dell, known for top-flight procurement and logistics. Johnston wants McKinless to make Albertson's procurement more efficient, including the use of online auctions to buy everything from ice cream to armored cars.

    Analysts agree Johnston deserves high marks for shaking up the 64-year-old supermarket chain and wrenching it into the modern world of retailing. But they're much less impressed with the hard results to date. Sales growth has stagnated over the last five years and the company has been battered by a lengthy grocery-workers' strike in California. Indeed, Albertson's finances have headed south since Johnston began his makeover three years ago. Since he arrived in 2001, annual profits are down 37% from $765 million to $485 million. Sales are flat at $35.6 billion. Albertson's stock price, too, has sagged under Johnston, from $31 to $23.60—down 24%.

    The question is, will technology and the smart application of it—including so-called Stores of the Future such as the one in Barrington—be enough to beat back Wal-Mart?

    "This is what we hope," states Johnston. "Technology is really the key to it all."

  • <123456>
    Senior Writer
    Kim has covered the business of technology for 14 years, doing investigative work and writing about legal issues in the industry, including Microsoft Corp.'s antitrust trial. She has won numerous awards and has a B.S. degree in journalism from Boston University.

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