Knowlan's Festival Foods: Extracting Value From Technology

MICHAEL GARRY

In 1991, when Lauri Youngquist joined Knowlan's Festival Foods, a seven-store, privately held independent based in Vadnais Heights, Minn., as controller, she brought with her a background in publishing and manufacturing and a bent for how technology can be applied to business.

So Youngquist, now chief financial officer of Knowlan's, was a little taken aback when she discovered that supermarkets, especially independents, are a little gun-shy about technology. "I noticed that in the supermarket industry, the attitude toward something like inventory control is, 'We have so many items, so we have to do it this way,"' she said. "But I said, 'That's not really true.' So we looked at what other best-in-class retailers and other industries were doing."

Since then, Knowlan's has pursued a notably aggressive path in technology — especially for a small independent — led by Youngquist, who is also the sister of Marie Aarthun, Knowlan's owner and chief executive officer; Ed Doud, its director of retail technology; and Tom Clasen, its director of category management. The company has adopted applications that few other supermarket operators — chain or independent — have tackled, such as perpetual inventory, computer-assisted ordering, price modeling, electronic shelf labels, self-checkout lanes and Web-based reporting.

And Knowlan's has gained a reputation for pushing the envelope on these applications, always seeking synergies among them and trying to maximize their value, with the ultimate goal of enhancing the customer experience. And the retailer always keeps all stores on the same level of technology to ensure the smooth running of corporate systems.

"What they've done exceeds what the mega-retailers do and is completely unheard of for small independents," said Ron Griffin, chief information officer for Fleming, Knowlan's wholesaler, and former CIO of Home Depot. "These guys represent the absolute gold standard for applying technology and extracting value from it."

For those reasons, SN has chosen Knowlan's as the winner of the first annual Technology Excellence Award in the independent category.

One of the primary motivations behind Knowlan's relentless pursuit of technology is what drives most independents today — survival in the face of Wal-Mart and other large competitors. "We've got to be leaner and meaner in everything we do," she said. "We take for granted slogans that say, 'If you don't have this operating by 2003, you won't be around.' So we didn't wait [to adopt technology] as a lot of independents did. We just said, 'Let's do our own thing."'

This often has the effect of making Knowlan's act and appear as though it were a bigger company, especially in relationships with product vendors, noted Doud, a 20-year veteran of Knowlan's with an educational background in information systems who transitioned from store management to IT four years ago. "When vendors show up with a new product line and we take it, we can put it in our set and order it in 24 hours," he said. "Most independents have a hard time guaranteeing execution like we can. This has kept our relationships with vendors positive."

Knowlan's, which operates five superstores stores under the Festival Foods banner and two conventional Knowlan's Super Markets, is also unusual for not relying on its wholesaler — Fleming, Oklahoma City, and previously companies acquired by Fleming, including Scrivener and Gateway — for direction on technology. That's because, as Youngquist explained it, it was hard for any wholesaler to accommodate a company as proactive with technology as Knowlan's wished to be, and at the same time cater to run-of-the-mill independents who simply want the least expensive solution. Moreover, Knowlan's didn't always want to accept vendors recommended by its wholesalers.

But Fleming did recommend the vendor that turned into one of Knowlan's most important sources of retail applications — Distributed Intelligence Systems, Lake Mary, Fla. Over the past five years, Knowlan's has adopted several modules from Distributed Intelligence's INGEN system, including perpetual inventory, computer-assisted ordering (CAO) and category/space management. In the past year, Knowlan's has also deployed a price modeling system from Distributed Intelligence called INGEN Price Plan.

Except for category and space management, none of these applications is standard fare in the food industry. But Knowlan's made a commitment to them, and the results have been substantial.

Unlike most stores, where orders are determined manually by employees roaming the aisles with handheld terminals, Knowlan's perpetual inventory system factors in all the elements that determine an item's inventory status at any given moment, including incoming shipments and outgoing sales, as well as shrink and erroneous orders, said Doud. Then the CAO system takes over, using the perpetual inventory data, prior rates of sale and space requirements to generate sales forecasts upon which orders are based. The system handles all products ordered from Fleming, except for fresh meat, produce and deli, and addresses direct-store-delivery items to a lesser extent.

Store employees have an opportunity to review and tweak orders to accommodate promotions and seasonal orders, which are not included in the perpetual inventory. Doud said that the system orders non-promotional goods with "a high degree of accuracy," keeping inventories low and out-of-stocks to a minimum.

Another effect of the system is that its orders to Fleming are very "steady," said Doud. "They don't see a heavy order from one store and then an order that's down from another," he said. "Because individuals are not involved, orders just happen."

On the pricing side, Knowlan's price modeling software analyzes how to increase a category's margin via price adjustments, supplementing its category management and space planning applications. The pricing system doesn't factor in projected demand in the manner of price optimization system; however, using historical sales, it is able to model the impact of price changes, including those handed down by Fleming and its suppliers, and it has improved category margins, said Doud. In the past, he said, Knowlan's category manager "was always reacting to cost changes, trying to figure out what to do, and was not able to see what price changes did to a category's sales and profits."

Knowlan's commitment to the Distributed Intelligence applications is reflected in the cultural changes it needed to make for successful implementations. "We had to struggle to get people to understand what this would do for our in-stock positions," said Youngquist. "It's tough to go from having someone walk with a handheld and place an order to saying we have a system that can do it better."

Another technology that Knowlan's has decided to use, though few other food retailers outside of Connecticut have, is ESLs (electronic shelf labels), the programmable wireless plastic LCD modules that replace paper labels at the shelf edge and enable rapid price changes. The company has deployed ESLs from NCR in its five Festival Foods stores, and the labor-saving benefits have proved valuable in the high-cost Minneapolis-area labor market.

ESLs represent a technology with the kind of synergistic relationship with other applications that Knowlan's covets. For example, they work in concert with the price modeling application, enabling category managers to readily see the results of pricing changes. On the ordering side, Doud has begun using the tags in his newest Festival store to show current inventory levels, which he said are about 90% accurate. He also plans to use the ESLs for planogram compliance.

Self-checkout is another in-store technology at Knowlan's that not many other small retailers are employing. Knowlan's has units from Productivity Solutions, Jacksonville, Fla., at three stores, where they're used for more than 25% of transactions, averaging in the middle range of $40 to $70, Doud said.

Another key technology in use at Knowlan's is a Web-based reporting system from S4, Aurorra, Neb. The system enables Knowlan's to consolidate front-end T-log and receive data in a SQL server at headquarters via an intranet and generate reports based on that data on sales trends within perishable departments not covered by the computer-assisted ordering system. "It gives department heads the best information to make the right decisions about ordering for an ad or to meet demand for a popular item," said Doud. And in typical Knowlan's style, "it complements the other systems."