NEW YORK -- Minimizing the effects of the year-2000 problem remains a top priority for information-technology executives, but the vast majority -- nearly 95% -- are more concerned about their trading partners' state of readiness than their own ability to safeguard mission-critical systems.In addition, with Internet sales moving rapidly into the retailing mainstream, many companies are launching or

NEW YORK -- Minimizing the effects of the year-2000 problem remains a top priority for information-technology executives, but the vast majority -- nearly 95% -- are more concerned about their trading partners' state of readiness than their own ability to safeguard mission-critical systems.

In addition, with Internet sales moving rapidly into the retailing mainstream, many companies are launching or expanding their electronic commerce efforts. Supermarket IT executives, however, believe on-line grocery sales, while on the increase, may not grow as quickly as nonfood sales. More than half of IT executives, 53.6%, believe home-shopping's share of all grocery sales won't exceed 5% within the next five years. Nearly one-quarter, however, believe home-shopping's share will be in the 6% to 10% range by 2003.

And in an indication that enthusiasm for the Efficient Consumer Response initiative is waning, nearly half of IT executives, 47.3%, said that ECR is no longer relevant to their company's strategic plans. The initiative clearly remains focused on supply-chain improvements, with a larger percentage of wholesalers than retailers finding continued relevance in ECR for their own operations.

Competition both from other retail channels and from surging on-line sales has supermarkets seeking a competitive edge by working more closely with their trading partners. Interest in collaborative planning, forecasting and replenishment and scan-based trading initiatives, both of which require detailed information sharing between retailers and manufacturers, is on the rise, with about 30% of distributors planning a CPFR test in 1999 and nearly half participating in SBT programs.

These were among the key findings of SN's fifth annual State of the Industry Report on Supermarket Technology. Based on a nationwide survey of supermarket chains, independent operators and wholesalers, the report tabulates responses from 95 senior executives at companies representing more than $120 billion in total sales.

The survey was developed and conducted by technology editors at Fairchild Publications here, publisher of SN and Executive Technology, with responses tabulated by an independent third-party firm.

Survey respondents indicated that information-technology budgets are on an upward trend, with retailer IT executives predicting larger increases -- and fewer decreases -- than their wholesaler counterparts. Just over 30% of wholesaler respondents said their IT budgets would stay the same or decrease in 1999, and no wholesalers indicated their budgets would increase 25% or more.

Among all respondents, the largest group, 43.6%, is forecasting budget increases in the 1% to 10% range. Approximately 35% foresee double-digit increases for 1999, with about 16% predicting increases of 25% or more.

Beyond dealing with the year 2000, IT executives' top priorities for their own organizations reflect supermarkets' top priorities: moving customers efficiently through the point-of-sale, employing category management to determine which products should be on the shelves, and cultivating customer loyalty through frequent-shopper programs.

In addition, the spate of mergers and acquisitions in the supermarket industry has helped make systems integration -- the effort to link numerous disparate systems within a company as well as between companies -- among IT's top five priorities for both 1998 and 1999.

Besides ranking IT priorities for their own organizations, respondents also identified the biggest challenges facing information technology in general. Systems integration and year-2000 concerns also topped this list, with 36.3% and 34.1% of respondents, respectively, naming them among the toughest IT issues.

Nearly as many respondents, 31.9%, said that hiring and retaining IT professionals would be a significant challenge in 1999. Employment experts have identified a serious shortfall in the number of qualified people to fill IT jobs in all industries, a continuing problem that has only been exacerbated by the demand for people at all levels to deal with the year-2000 problem.

Growing consumer acceptance of on-line sales is another area of concern for the supermarket industry. This past holiday season saw big jumps in Internet sales, both in terms of the number of people shopping on the Web and in the variety of products being offered to the growing number of on-line shoppers.

Customers who get a taste of shopping for nonfood items via the Internet may demand the same offerings and service level from supermarket retailers -- or may bypass them altogether in favor of third-party companies, some of which have already established a strong presence on the Web.

Several of these on-line food retailers are seeking to establish niches, such as offering gourmet food or items in bulk quantities, while others are working hard to solve the logistics problems of providing home delivery in a fast, cost-effective manner.

While e-commerce has shown impressive increases, however, it still represents only a fraction of all retail sales. More than half of the survey respondents, 53.6%, predict home-shopping services -- both those offered by traditional retailers and by third-party companies -- will account for no more than 5% of total grocery sales within five years. Nearly one-quarter of respondents, 23.2%, forecast these services will take a 6% to 10% bite of total sales, and approximately the same percentage predict their share will be in the 11% to 25% range.

Even though dealing with the year-2000 problem remains top-of-mind for a large percentage of respondents, the vast majority believe their efforts to fix the problem are on track. Nearly 85% said their company's progress in ensuring that mission-critical systems will work properly in the new millennium was on target, with testing either scheduled or already under way.

An additional 13.4% of respondents acknowledged that their Y2K efforts are behind schedule, but still expected to meet their deadlines.

Indeed, respondents' worries about this issue have turned outward, to the readiness level of their trading partners. Only 5.2% of respondents said they were not concerned about this, and more than 60% expressed moderate or extreme concern, with 14.4% in the latter group. No one wants to be caught short by a vendor who can't supply, or a customer who can't pay. However, overcoming the mistrust engendered by the Y2K problem could be a problem that extends far beyond the calendar turn Jan. 1, 2000.

Among distributors who have already experienced Y2K-related problems, credit- and debit-card acceptance has been the most common difficulty, named by 73.5% of respondents. General point-of-sale problems have been seen by 17.7% of respondents, and 14.7% of respondents' supply-chain operations have been affected in some way, with a larger percentage of wholesalers -- 28.6% -- than retailers identifying a supply-chain snafu.

Respondents asked about specific tests or launches of a variety of technologies showed strong support for tools that can extract workable information from the mountains of data distributors collect. Plans to use decision-support systems increased dramatically in 1999 compared with 1998: 34.8% of respondents plan to launch these analytical tools this year, up from 23.1% in 1998.

Use of executive information systems is also on the rise, with 31.9% of respondents planning tests in 1999, a significant increase from the 16.9% who did so in 1998. Wholesalers showed a strong commitment to the technology, with 47.4% planning launches compared with 26.0% of retailers.

The percentage of respondents planning to launch a Web site in 1999 declined from 1998's figure of 55.4% to 31.9%, although this may be because many companies have already established an Internet presence. Approximately the same percentage of respondents planned to launch an Internet-based home-shopping service in the coming year as last year: 27.7% in 1998 and 29.0% in 1999.

In-store kiosks may be gaining in popularity, with 28.0% of retailer respondents planning to use them this year, compared with 14.6% in 1998. The level of interest in self-checkout technology will remain about the same, with usage plans dropping from 15.4% in 1998 to 14.5% in 1999.

Companies continue to seek systems integration solutions that will forge a seamless flow of data between a variety of store systems, both at headquarters and store level, and allow people throughout an organization to access data from a common repository. Achieving these synergies is becoming even more important as mergers and acquisitions create larger and larger corporate entities.

While virtually everyone agrees that systems integration is a laudable goal, however, respondents are almost evenly split about the best method to achieve it. Half believe using "best-of-breed" integration is the most effective method, while the other half are taking an enterprise-wide solution approach.

Retailer respondents are leaning more toward enterprise-wide solutions, with 56.1% identifying this as their preferred method of application upgrades. In contrast, 68.2% of wholesaler respondents are opting for a best-of-breed approach.

In an indication that the effect of the Efficient Consumer Response initiative is diffusing, only 52.7% of all respondents indicated that ECR was still relevant to their company's strategic plans. Wholesalers ranked ECR's importance slightly higher than retailers: 57.1% claimed the initiative still had relevance for them, compared with 51.4% of retailers.

Respondents incorporating ECR initiatives into their operations may be extending its principles beyond the supply chain. While the largest single percentage of respondents, 45.1%, said efficient replenishment would be their top ECR priority in 1999, efficient store handling practices, efficient promotions and efficient new product introductions -- all of which involve some store-level activities -- showed increases of 10 or more percentage points between 1998 and 1999.

Electronic data interchange, identified early on as a key technology for achieving the efficiencies promised by ECR, has still not achieved widespread use in the industry. However, EDI may be receiving a boost from the Internet's growth. Many IT executives believe EDI and the Internet will prove to be complementary, providing cost-effective business-to-business communications to a larger group of companies than EDI alone.

More companies are planning to use EDI in 1999 than 1998: 68.1% of respondents used EDI last year, but 84.3% plan to use the medium this year, with wholesalers' usage outstripping retailers' for both years.

In addition, the types of data sent via EDI are expanding as well. While purchase orders and invoices will remain the top uses of EDI in 1999, with 76.1% of respondents using the medium for transmitting each of them, nearly as many respondents plan to use EDI to transmit price change information: 70.4% of respondents in 1999, up from 42.2% in 1998.

Another significant increase is predicted for EDI's usage to send promotional information, jumping from 32.8% usage in 1998 to 62.0% in 1999.

Just over half of respondents reported that they currently offer a card-based customer-loyalty program: surprisingly, wholesaler respondents outnumbered retailers, 60.9% to 47.9%. The satisfaction level with these programs is quite high, with 55.1% of respondents rating them "highly successful" and another 42.9% terming them "moderately successful."

In addition, 15.1% of respondents plan to launch a customer-loyalty program in 1999, with another 38.4% planning to revamp or expand their existing programs.

As such programs mature, retailers and wholesalers are using them for purposes beyond simply creating customer loyalty. While the largest percentage of respondents, 70.9%, say their program's primary goal for 1999 is to retain their best customers, this represents a decrease from 1998's 89.4%.

The goals of winning new customers and boosting total gross margins are both on the increase. Winning new customers rose from 25.5% in 1998 to 56.4% in 1999, and boostingmargins jumped from 25.5% to 41.8% during the same period.

Another sign of these programs' maturing is the large number of transactions distributors are tracking via their customer-loyalty programs: 40.4% of all respondents are collecting data on 76% to 90% of customer transactions, and 31.9% of respondents are collecting data on 51% to 75% of transactions.

Frequency of visits, response to targeted promotions and market basket size are the top three types of information distributors are tracking via their customer-loyalty programs. Half of all respondents track market-basket margins, and 43.5% examine the data for category-specific purchases, with retailers more likely to do so than wholesalers.

Such data is being used by a few retailers as part of their category management efforts, to help ensure that the products bought by their best customers are always available on the store's shelves.

IT executives' ranking of the point-of-sale as a top technology priority is reflected in their ambitious upgrade plans for both POS hardware and software. Respondents made significant improvements in both areas in 1998, and are planning even more in 1999. Only 20% of respondents plan no front-end upgrades in the coming year.

Many factors may be converging in this area, including concerns that existing POS technology is not year-2000 compliant, as well as retailers' desire to gather more information about customers during checkout without sacrificing throughput speed.

In addition, newer technologies may make it easier for retailers to feed POS data to other systems, including customer loyalty, category management and trading partner programs such as CPFR and SBT.

In the area of loss prevention, retailers continue to rely on a variety of technologies to limit both internal and external theft. The percentage of respondents using some form of loss-prevention technology will increase to 79.3% in 1999, up from 73.9% last year. Electronic article surveillance systems will also continue to be used by a majority of supermarket companies, although the percentage will decline slightly this year, from 57.8% usage in 1998 to 55.9% in 1999. A majority of both wholesalers and retailers are using this form of loss prevention, the survey finds.

In addition, source tagging -- the process of placing the tags that activate EAS systems on products at the manufacturing or wholesale level -- seems to be on the increase. While just over one-quarter of all respondents participated in a source-tagging program in 1998, 37.5% plan to do so in 1999.

As with cashier-monitoring systems, source tagging offers potential benefits beyond making loss-prevention efforts more effective. If the process becomes widespread, the tags could provide a means of tracking cases, or even individual products, throughout the entire supply chain, aiding both logistics and automated inventory systems. Source-tagging's growth in the supermarket industry has been hampered by the relatively high costs of the tags themselves, as well as by disagreements about who should pay for the tagging process. If the use of source tagging increases, however, loss-prevention experts believe the per-tag cost will drop to a level that will accelerate the technology's adoption.

Dealing with the Y2K issue continues to be top-of-mind for IT executives as the millennium countdown continues. The point-of-sale, always a technology hot spot, is also commanding enormous attention. Retailers and wholesalers alike will be focusing on customer-loyalty programs.

Which areas will command the highest priorities at your company in 1999, and which commanded the highest priorities in 1998? (Multiple responses allowed.)

It's Top Priorities

1999 1998

Total Retailers Wholesalers Total Retailers Wholesalers

Year-2000 Compliance 70.5% 75.0% 56.5% 79.6% 77.1% 87.0%

Point-of-Sale Systems 49.5% 51.4% 43.5% 43.0% 44.3% 39.1%


Program 41.1% 36.1% 56.5% 29.0% 34.3% 13.0%


Management 37.9% 37.5% 39.1% 32.3% 30.0% 39.1%

Systems Integration 37.9% 37.5% 39.1% 23.7% 27.1% 13.0%

Data Warehousing 35.8% 27.8% 60.9% 20.4% 17.1% 30.4%


Analysis 30.5% 31.9% 26.1% 8.6% 10.0% 4.4%

Upgrading Human

Resources 28.4% 31.9% 17.4% 23.7% 25.7% 17.4%

Upgrading Financials 27.4% 26.4% 30.4% 38.7% 37.1% 43.5%

Computing Platforms/

Scalability 23.2% 25.0% 17.4% 26.9% 27.1% 26.1%


to-Business 23.2% 19.4% 34.8% 9.7% 10.0% 8.7%

Electronic Payment

Systems 23.2% 23.6% 21.7% 25.8% 21.4% 39.1%


Web Sites 20.0% 13.9% 39.1% 14.0% 17.1% 4.4%


Management 19.0% 13.9% 34.8% 25.8% 21.4% 39.1%

ECR Initiatives 17.9% 15.3% 26.1% 16.1% 12.9% 26.1%

Warehouse Management 17.9% 6.9% 52.2% 23.7% 15.7% 47.9%

Enterprise Resource

Planning 5.3% 4.2% 8.7% 4.3% 4.3% 4.4%