The Problem

By Kim S. Nash  |  Posted 2004-02-05 Email 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.

The Problem

A few miles west of the Columbia Village store, Colleen Godak struggles to arrange 15 bags of groceries in the back of her minivan. The mother of two has just completed her shopping at a Wal-Mart Supercenter, unloading $133 on a week's worth of items. Godak no longer shops at Albertson's because, she says, she can save a lot by shopping at this 24-hour-a-day Supercenter. "The customer service here is awful, but I know where everything is, so I don't have to depend on it," says Godak.

Godak is Johnston's problem. She would be an ideal customer, but the convenience and smiling help at Albertson's aren't enough to outweigh the savings she can get at Wal-Mart. She's far from alone.

In 2000, Albertson's dominated the greater Boise market, population 470,000, with 21 stores and 65% market share, according to Trade Dimensions International, a market research firm in Wilton, Conn. Wal-Mart invaded that very same year, opening four 200,000-square-foot Supercenters. A year later, Wal-Mart had stolen 16% of the market, almost all of it coming from Albertson's.

Boise represents a microcosm of what is happening to Albertson's and other grocers across the U.S. as Wal-Mart moves in. The latest figures on Albertson's hometown show Wal-Mart's share is now up to 28% while Albertson's has fallen to 39%.

Albertson's has been able to protect part of its territory because it has more stores and shoppers can get in and out of its smaller 45,000-to-60,000-square-foot outlets faster. But Wal-Mart now has an answer for that, too.

If Godak is the face of the ideal Albertson's customer, then Kelly Kirby represents the enemy.

Kirby manages a new Wal-Mart Neighborhood Market grocery store in South Ogden, Utah, a satellite community of Salt Lake City. Wal-Mart Neighborhood Markets, with their smaller, 40,000-square-foot design, compete head-on against traditional grocers such as Albertson's. They offer the same basic grocery and drug merchandise found in an Albertson's, but without the frills such as gourmet cheese stands and Starbucks counters. There is no butcher; meat is shipped in daily. There is no real baker; bread and buns are shipped in partially baked each day as well.

There are also fewer live cashiers. Neighborhood Markets rely heavily on banks of self-checkout registers where customers can scan and bag their own groceries. What shoppers do get are Wal-Mart's discount prices.

"Everything here is geared towards convenience," says Kirby, who has been in the supermarket business for 30 years and was hired away from Smith Foods, a local competitor. Wal-Mart headquarters has "given me a lot of latitude to make sure we are very competitive in the marketplace," he says, including the ability to lower prices to match competitors.

There are just 60 Neighborhood Markets so far. But Wal-Mart says it will open another 30 to 40 this year and the same number in 2005, concentrating on one market at a time. Meanwhile, other discount retailers such as Target, Kmart and even Sears also are rolling out grocery sections.

Such is the hard reality facing Johnston and his team. Wal-Mart is attacking its core markets with a two-pronged approach and more discount competition is on the way. Albertson's costs are higher, its wages higher, its prices higher and its profit margins lower on equivalent prices to what Wal-Mart posts.

Albertson's has big technology ideas to address those handicaps. But it's starting from a disadvantage there as well.

"When I came here," Dunst recalls, "there was an I.T. organization primarily focused on trying to integrate a series of acquisitions." Albertson's was "spending an awful lot of time on maintenance and support as opposed to driving the business forward with new development," he says.

Johnston says he was surprised at how big Albertson's had grown without smart, efficient use of technology. So if the company can apply it well now, his thinking goes, it will be even bigger and stronger. "Technology drives every aspect of how you create a great company," he says.

He has always thought so. In 2000, as CEO of GE Appliances, he and Microsoft decided to develop computerized appliances that use a wireless in-home network to hook up to the Internet. Refrigerators would confer with microwave ovens about recipes. Ovens would respond to human voices or remote PC commands.

As Johnston reportedly said at the time: "Imagine getting to work, turning on your desktop computer and getting a message from your home-appliance network that you left a burner on. With these networked smart appliances you can send a direct command from your office PC via the Web and turn it off."

Four years later, such kitchens of the future are hardly pervasive. Still, Johnston, with his penchant for technology big (a Hummer H2) and small (an ever-present BlackBerry), likes the idea of putting technology at the customers' disposal. Hence his Store of the Future concept and this year's plan to spend $500 million—nearly 40% of its $1.3-billion capital budget—on software, hardware and networking equipment.

Dunst is gleeful. Albertson's has "an environment ripe for improvement and the financial backing to make it happen—and a group of other executives who [are] very interested in engaging the I.T. organization to help them," he says. It's "a CIO's dream."

The trick will be dealing with the accompanying nightmare. Wal-Mart uses technology at every stage of the retail chain, from acquiring merchandise from far-flung markets to ringing it in at the cash register. "As grocery retailers go, Albertson's isn't that far behind," says Greg Buzek, principal analyst with IHL Consulting Group in Franklin, Tenn. "But Wal-Mart is in a league of its own."

Wal-Mart's famed Retail Link network, which has been continually improved since its launch in 1991, provides suppliers with an array of information on how their products are being sold in Wal-Mart stores.

Most retailers pull in sales data from their "point-of-sale system"—once known as cash registers—at the end of the day or twice a day. Wal-Mart pulls in sales from its electronic registers every 15 minutes. By 4 a.m. each morning, suppliers can see how their products sold the day before in every Wal-Mart store around the globe. According to Buzek, some suppliers are also allowed to see what other products were purchased by the consumer along with their own. The system is anchored by a Teradata warehouse that stores 200 trillion numbers and letters—the largest digital library of any company in the world.

And Wal-Mart never stands still. It is pressing ahead with what it believes will be its next big advantage, radio-frequency identification technology. All suppliers will be required to put radio tags containing electronic product codes on pallets and cases by the end of 2006.

As a result, Wal-Mart has been able to continually lower prices in the grocery aisles while maintaining a consistent profit margin. It's a recipe that could spell disaster for Albertson's.

It may not be possible to beat Wal-Mart consistently on price, but Albertson's must be close enough that its pricing won't put it at a major disadvantage, says Blythe McGarvie, a former chief financial officer and technology executive with Hannaford Bros., a supermarket chain based in Portland, Maine. McGarvie now heads the Leadership for International Finance and Enterprises, a management consulting firm in Williamsburg, Va.

Instead of trying to beat Wal-Mart on price across the board, McGarvie says, Albertson's has to get to know its individual customers better through its loyalty-card program and to offer products they might not be able to find on Wal-Mart's shelves. Wal-Mart does an outstanding job of marketing to the masses, McGarvie says, but it doesn't even attempt to get to know its customers on an individual basis.

"Wal-Mart can be beaten, but you have to do it one store at a time and one customer at a time," McGarvie says.

Johnston may have a vision for getting there, but he will need dozens of pieces of technology.

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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