No less than chain operators, independent grocers need to harness the power of technology to remain relevant and competitive. But unlike their chain counterparts, smaller retailers may lack the resources to invest in the in-house expertise needed to drive an up-to-date IT program.
Still, many independents are showing considerable resolve and ingenuity in adopting a wide range of applications, often with the help of their wholesalers. In this special report, assembled in collaboration with the National Grocers Association, SN has convened a panel of independents and wholesalers to discuss how smaller grocers are leveraging technology to stay competitive, meet industry mandates and connect with their shoppers.
The panel consists of Rudy Dory, owner, Newport Avenue Market, a single-store operation in Bend, Ore.; Jeff Bennett, information technology director, Market of Choice, an eight-store operator based in Eugene, Ore.; Eric Anderson, executive vice president, sales and marketing, Fresh Encounter, Findlay, Ohio, which runs 32 stores under five banners; Glenn D. Kriczky, vice president of information systems, Associated Wholesalers Inc., Robesonia, Pa.; and three representatives of Unified Grocers, a wholesaler based in Commerce, Calif.: Joshua Hartinger, electronic payment systems product manager; Dan Swofford, retail technology products manager; and Brian Legate, preferred point-of-sale program manager.
Via email, the panelists entertained questions on their major IT investments, how retailers and wholesalers collaborate on IT, how they measure their technology investments, and how they are adopting mobile and social media applications, among other topics.
SN: What is the most significant technology investment that your company has made in the last year in terms of its impact on your business?
DORY, Newport Avenue Market: The most significant technology investment was the commitment to a person — Patrick Lehman — to run our new Foodie Flash Card loyalty program. The card includes an RFID chip used to identify shoppers at the POS and reward them with rebates on purchases — six cents for every $5 spent. We launched the program Dec. 5, 2009, and made the decision that to launch and keep up with this type of program we needed to commit the resources and manpower to hopefully make it successful.
BENNETT, Market of Choice: I suppose the single most significant technology investment in the last year is a series of upgrades to an MPLS private-port WAN (wide area network) for data communications between headquarters and stores. We are transitioning from a collection of DSL and T1 Internet connections into a standardized high-speed network. When you look at the round-trip times between sites, we're going from between 60 and 100 milliseconds to 9 milliseconds. That's a huge difference.
The WAN is like plumbing — you never see it but it has a big effect on things. We haven't implemented it totally but we're finding big returns on it. Fast site-to-site networking has allowed us to reduce downtime and travel among stores, and implement cost-saving technologies like hosted credit card processing, enterprise-wide data analysis and voice over IP. We're in the process of moving it to all the stores.
KRICZKY, AWI: Many of our retail customers have added a gas program to their businesses. Basically it's based on spending dollars to get gas discounts, but some stores are allowing additional gas points to be accumulated by purchasing certain items. The programs are currently being run with local gas stations.
The second most popular is adding apps for the iPhone, Droid and Blackberry phones. We have one large account — Rutter's Farm Stores — that has a really nice app that provides store locations, gas pricing, prices on in-store specials plus their own gas program. The app is easy to use and looks good.
Another is developing e-coupon programs on their websites in conjunction with a couple of third-party companies. For example, we are working with Valassis and VRMS to roll out an e-coupon program integrated with our viPOS register system from RORC (Retailer Owned Research Co., Fort Worth, Texas). Final testing is being completed.
AWI with its partners in RORC is ready to release the fourth generation of our front-end and back-office register system. We've been in the business for over 28 years and we are excited to start installing our new fully updated system for our independent retailers. RORC also includes Associated Food Stores, Salt Lake City, and URM Stores, Spokane, Wash.
HARTINGER, Unified Grocers: Unified's largest technology investment over the past year has been helping our retailers comply with the PCI DSS (Payment Card Industry Data Security Standard) and the PCI PED (PIN Entry Device) regulations. We look at this investment in security and PCI compliance as an investment in our retailers' success. By making one set of investments at the wholesale level and charging out the service to our retail users on a weekly fee basis, we enable the retailers to move into greater levels of security and PCI compliance without the significant front-end cost and hassle they would have individually.
SN: To what extent is technology development and investment done independently by retailers or in concert with wholesalers — or both?
DORY: We work with our own resources, our industry and our wholesaler, Unified Grocers, on technology. Since we're a single-store operator, it just doesn't make sense or cents (to us anyway) to try and go it entirely alone on technology.
BENNETT: We do both. We have several partnerships with vendors in addition to our wholesaler, Unified Grocers. We do a lot of ordering through Unified and we use their proprietary ordering system, which works pretty well.
ANDERSON, Fresh Encounter: We do not collaborate with our wholesaler, Nash Finch, on technology improvements. We generally search out technology suppliers specific to our industry and needs.
KRICZKY: Many of our customers use our help when it comes to technology. As a wholesaler, we have the ability to look at various programs, such as the gas and e-coupon programs, and leverage the larger group of retailers as we negotiate for better pricing. We also have in many cases the communications and information resources to help run new programs.
SWOFFORD, Unified Grocers: I would say that relative to the “development” part of your question, this varies among our retail customers. Some have information systems people on board that allow them to develop or buy their own systems. But many do not have this type of resource and rely upon us much more heavily to provide them with needed systems and support. Even those who do their own development and maintain their own systems will generally still look to their wholesaler for some systems — at least where it is just more cost effective to do so.
As far as the “investment” part of your question, I think the answer is similar, but there is an important point to be made relative to up-front investments and ongoing labor investments and how we as a wholesaler can help. As a wholesaler we have the opportunity to develop and invest in systems and then to provide these to the retailer on a subscription basis. This is a win-win. It allows us, as a wholesaler service department, to standardize on systems so that our help desk and implementation staff can better support them. It also allows us to leverage our purchasing power by procuring systems in greater numbers. It allows the retailer to get started with and maintain systems without much up-front investment or ongoing labor investment. And lastly, it eliminates a lot of risk for the retailer that they would incur if they made these decisions on their own.
We currently supply an electronic payment system (ReadyPay), our proprietary item and price management system (ULINK), a broadband network (uNET, from MegaPath) and our proprietary InterActive Ordering System (IOS), and other solutions under this type of subscription model.
SN: What technology has been used to compete better with chain competitors?
DORY: Our Foodie Flash Card allows us to know in dollar and cents who our best customers are. For me as a single-store operator, or for anyone on our staff, the knowledge that we get from the card allows us to be closer to our customers. In the end we are still in the people business.
BENNETT: I don't know if our differentiator is technology. Chain competitors pretty much have us beat in the scope and scale of technology. We have been very fortunate, however, in identifying and staying in touch with customers via our website and through social media.
ANDERSON: We pull Nielsen data and resources, including regional item and category movement data. We are not a leading edge user of technology internally.
KRICZKY: Moving to a gas program is one example. We have seen the chains moving faster in this arena, but our retailers are now capable of providing their customers with this type of program. Phone apps plus Web-based programs are all being used to keep competitive with our chain competitors.
SWOFFORD: When you think about how an independent can best compete with chains in today's marketplace, specifically regarding technology, you find that there are fundamentally three ways that they can do that and all three ways can be facilitated by their wholesaler:
They must compete on cost for solutions. Using their wholesaler to standardize, buy in volume and even develop systems for use by many independents allows them to keep the cost side of the equation right.
Using wholesaler experts to analyze and make selections on systems that have significant value is something that many independents do not have the time, expertise and resources to do themselves.
Many solutions these days are aimed at consumer marketing. Making use of a wholesaler's retail marketing and retail services teams can help them set a direction for marketing to their customers, whether it be via websites, electronic promotions, making use of social networks, etc.
While all of this is true, independent retailers still want independence and flexibility to drive their own unique competitive strategies. They don't always want to be locked into only what their wholesaler might offer. An example of where we have been successful in offering a low-cost, highly functional solution to retailers that allows them to compete flexibly like this is the deployment of broadband network connections to several hundred of our retailers. This was a move away from a traditional frame relay network.
This broadband network eases PCI compliance for our retailers, allows them to cost effectively utilize a high-speed network, allows us as their wholesaler to give high levels of support (network monitoring and management), and yet still gives the retailer the flexibility to use the network for unique third-party solutions that they might feel they need and that may be fairly unique to their operation.
SN: How do you measure the success of a technology investment? Do you look at hard ROI numbers or are there other factors you consider?
DORY: To be honest with you, I cannot truly measure the success of our technology investments. I am just not smart enough to figure out the hard ROI numbers. Technology is evolving so fast I am not sure I will ever be able to figure out the hard ROI numbers.
BENNETT: Unfortunately, we are not now looking specifically at ROI of technology other than how a given technology reduces the cost of an established process.
For example, we're changing from printing shelf tags at our corporate headquarters and sending them via FedEx to stores, which is pretty expensive. With the help of our POS vendor, IT Retail of Riverside, Calif., and their Enterprise pricing system, we are sending the pricing file electronically to our new store in Corvallis, Ore., which is printing it out there just for what they need. There's less waste — we're seeing a 40% to 60% reduction in paper costs — and lower shipping costs. We're still implementing the system and all the stores will be connected.
ANDERSON: We look at whether technology can reduce costs — efficiency and overhead reductions are critical. Our investments to date have been “no brainers” in terms of resource reductions. For example, we are doing more billing and reporting via electronic options, rather than using manual means. This has allowed us to reduce headcount and reallocate resources. We do conduct ROI analysis. The initial analysis is the easy task; the difficult payback is the long term.
KRICZKY: Measuring success is usually based on the reaction of retailers' customers to the program. As shopper usage increases, we also measure the cost of the program vs. the sales lift the retailers have achieved. We do look at the hard numbers on some programs but also at how the program relates to the market and what the competition is doing.
LEGATE, Unified Grocers: With the difficult economic conditions facing us and our retailers, evaluating ROI is important with any product and/or service we are considering for our customer base. As a wholesaler that develops co-marketing programs with technology vendors, financial analysis has to take into consideration both hard (cost-reduction, revenues and ROI) and soft (employee satisfaction, competitive needs) benefits for both the retailer and the wholesaler side.
SN: How much has social media such as Facebook and Twitter factored into your business?
DORY: Social media is an interesting topic. Patrick Lehman, who runs our Foodie Flash Card, also runs our social media such as Facebook and Twitter. It appears to me that for the near term, it is going to be probably the best way to communicate with younger shoppers.
BENNETT: We are making extensive use of Facebook and Twitter to keep our customer base updated. We outsource Facebook, Twitter and website development to a marketing agency in Eugene, Ore. They seem to be doing a really good job of communicating, with lots of back and forth and chatter on the different social media sites. That's pretty cool.
ANDERSON: We maintain a presence with almost all social media channels through our advertising agency, AR Marketing. They are leading edge on social marketing, assisting us with new technologies. Facebook often represents a constant customer feedback forum for customers and us alike.
KRICZKY: To date, we haven't seen a real push towards Facebook or Twitter usage in our retail businesses. We have retailers using Facebook but haven't really seen a major impact from these sites as it relates to doing business.
SN: Are your stores interacting with shoppers through their cell phones?
DORY: We have run a couple of promotions involving cell phones and none has been what I would call successful. We gave away some merchandise but had no noticeable jump in sales. I believe, though, that this technology will become as important as Facebook and Twitter for reaching your customers.
BENNETT: We do through Facebook and Twitter. We have talked about creating mobile apps but have not yet translated the idea into a project.
We also distribute Internet-only coupons called Webbie Deals to customers, who can receive them by email and display them on their mobile device. We have 3,053 people signed up to receive Webbie Deals via email. We don't have the ability to tell how many receive it on their phones, since we send it as an email, not a text. It's safe to say, though, that many have smart phones and can access their email. We tell them to either print the coupon or tell us the code and they will receive the discount.
ANDERSON: We text weekly, with offers ranging from free items (such as milk and soft drinks) to 5% off a total purchase of $50 or more. To cash in, shoppers present their cell phone to the cashier, showing a PLU number in the text message. We also send out occasional texts at 2 p.m. with dinner suggestions.
We also interact with Foursquare. We have a default offer that informs customers that they can save 10% on full-case wine purchases at their current check-in.
KRICZKY: In addition to mobile apps, we have a few retailers doing text messaging with their customers but it's very limited. We are developing some programs and looking at companies that can provide easy access to this type of technology. We haven't seen a major interest from our retailers at this point, but will react as the interest increases.
HARTINGER: We are having regular conversations with our payment partners regarding mobile payment solutions. We are actively looking for the right mobile payment solutions that fit the needs of our retailers. For our retailers, a lot of this is going to depend on consumer demand to use this form of payment. We see mobile opportunities in three broad categories:
Traditional credit/debit/EBT payments using a mobile device.
Contactless payments via a mobile device.
Mobile payments that bypass traditional interchange.
SN: How secure are your in-store systems? Are they PCI-compliant?
DORY: Both our front- and back-ends are PCI-compliant. We worked with (our wholesaler) Unified Grocers' processor so the card numbers do not stay in the store at all. The numbers are up in “the cloud” somewhere.
BENNETT: Our systems meet the basic PCI standard. We became subject to a higher tier of PCI compliance in 2010 and this greater stringency will be a major focus for us this year. We're adding a position to work on PCI compliance. There's so much to be done and we have some remedial work to do. Generally speaking we're secure, but we would have holes if we had an audit.
One thing we're going to do is have fewer firewalls and therefore fewer ways to access the Internet. Right now we have a firewall at each of our eight stores and at our headquarters, warehouse and catering facility. Our strategy is to make it a single point of control from our corporate data center. For example, our newest store, which is on our MPLS private port network, gets Internet via our corporate office. By doing this we're hoping to reduce the effort it takes to keep credit card traffic separate from the rest of the corporate network — and be able to pass audits more easily.
We've also got wireless remediation to do at older stores; we need to boost the encryption on the wireless set-up. Another PCI requirement is segregating server functions. In most stores we have one server that handles everything for the store, but to be more PCI-compliant we need three servers, one for POS, one for the network and one for utility files. We're going to use virtualization to cut down on the hardware costs — we'll spend $20,000 instead of $30,000 on three different servers. There's still some debate about how well virtualization lets you comply with PCI. We're trying to understand that by working with consultants to make sure we meet the audit requirements.
ANDERSON: We conduct outside penetration tests constantly and maintain extremely secure systems. We are not PCI-compliant yet; this is in the very near future.
KRICZKY: Being a wholesaler that also owns and resells our front-end systems through RORC, we have taken it upon ourselves to work with our retailers with a full program that has put our retailers in full compliance with PCI and 3DES requirements. We have seminars and work individually with our retail customers as compliance requirements are made and modified. We've created a group within our retail technology department to handle security and compliance for our retailers.
HARTINGER: I would say we are in the business of providing solutions that enable our retailers to become PCI-compliant most easily. Since we offer our ReadyPay electronic payment solution under a subscription fee basis, we need to make sure these systems comply with PCI standards. Some of the things we have done are:
Moved off a proprietary network and onto MegaPath's broadband network (uNET). MegaPath maintains PCI compliance on its network.
Moved to StoreNext's Connected Payments and MTXEPS's ServerEPS solutions (these are Web-based). They keep cardholder data outside of the store, encrypt the cardholder data from the point the card is swiped, and use tokenization for storage at the server level.
Rolled out PCI-compliant terminals to our ReadyPay stores.
Shared an investment with other wholesalers to enlist a preferred QSA (qualified security assessor) to provide our stores with policy templates and do audits and scans.
SN: Are your stores' front-end systems ready for the new GS1 DataBar that will appear on coupons without the traditional bar code this year?
DORY: Our front-end systems are ready as of the last few weeks for the GS1 DataBar. We had to install four new scanners for our conventional checkouts. (Our U-scan self-checkouts were newer and already prepared.)
BENNETT: Not currently. We are working with our POS vendor, IT Retail, to address this. We've not gotten into it significantly yet, but we need to deal with it this year.
ANDERSON: We are about 80% compliant at this point. This is a current initiative.
KRICZKY: We have our retailers' front-end systems fully updated and ready for the GS1 DataBar. We have worked with our retailers to make sure they are ready for this new coupon bar code as it starts rolling out.
To accomplish this, we had to do some code development, plus we worked with all our retailers to upgrade or even update their scanners or scanner/scales in order to be able to accept the new DataBar.
LEGATE: As a wholesaler servicing strictly independently owned grocery stores, we have made it a priority to notify our retailers of the upcoming change with the GS1 DataBar coupons in 2011. Our publications regarding this change strongly recommend that our retailers contact their POS dealer to have their current POS solution evaluated for GS1 DataBar compliance. This includes such things as making sure the POS software is current and the scanner/scales are capable of reading and interpreting the new bar code. In addition to our publications, Unified works closely with our preferred POS dealer channel to communicate changes — such as the GS1 DataBar — to the appropriate individuals at retail stores.
SN: How have you improved your website to connect better with shoppers?
DORY: We just recently started selling gift cards on our website. It has always been our hope or goal that our website at some point would be able to drive some revenue. We hope by the end of 2011 to be able to sell merchandise like gift baskets and other items.
BENNETT: We have added links to Facebook and Twitter and provide frequent content updates (including recipes).
ANDERSON: Our new website, www.communitymarkets.com, just went live. Our site is much more consumer-centric with focus on services at store level such as catering, fuelperks, floral, deli, pharmacy and many others. But we have pulled away from online ordering; we want customers in the stores.
KRICZKY: We have seen a lot of action taken by our retailers to update their websites. Some are offering online shopping, community rewards programs, e-coupon programs, displaying their weekly sales ad and providing up-to-date information on programs being run at their stores. Some of our retailers have seen good increases in the use of websites by their customers. We keep looking for new programs to add to websites so interest keeps growing and customers don't get bored with the sites.