Supermarkets are fascinating. We all use them, we all moan about their stranglehold on the retail market and small, local suppliers but we all love their convenience and low prices. Recently the Office of Fair Trading said it will look again at their dominance of Britain’s £95 billion grocery market, citing worries about the UK’s big four – Tesco, ASDA, J Sainsbury and Wm Morrison – driving local convenience stores out of business. Equally, this difficult market has bred highly competitive companies and that competition has been good for consumers offering them more variety and better quality goods.
IT has played a key role in the growth of supermarkets during the last 10 years, whether through increasing the efficiency of supply chains and checkouts or exploiting the power of the internet. The last year has been as busy as ever for supermarkets’ IT departments as they have grappled with increasing competition and higher basic costs, while at the same time installing chip and pin systems.
Most of the large stores are also making significant moves into the non-food arena, as the margins on staple groceries get tighter. This year non-food supermarket sales are expected to overtake those at department stores.
Supermarkets generated £13.5bn in non-food sales in 2004, according to market analyst Verdict Research – an increase of 94 per cent over the past five years. The reason for this is that the food market is saturated and prices are probably as cheap as they can be, so the supermarkets are looking at other ways to make their money. ASDA is opening several non-food specialist stores including its first ASDA Living in Glasgow and it will be following this with a couple of high street clothing outlets.
The innovative use of IT really makes a massive difference in this industry. Margins are very tight and costs are constantly being reduced so any increases in efficiency, no matter how small, have a big impact. But perhaps more important are the IT innovations that lead to increased sales and this is what the main players are aiming for. Online shopping is a good example and Tesco.com is probably the best case study of successful internet supermarket shopping, but other retailers are catching on.
Online shopping is a reality and most supermarkets are doing their utmost to increase their share of the market. According to Verdict Research, overall UK retail spending grew by a meagre 1.5 per cent last year but online retailing grew by a massive 29 per cent.
Key IT issues
Competition: A cut-throat market means ‘every little helps’ as Tesco would say. Tight IT systems and innovative business processes give organisations the edge over their competitors.
Online shopping: All major supermarkets are exploiting the massive growth of online retailing to some extent but those that can fully realise the potential of the internet win.
Supply chain: As Sainsbury found out the hard way a few years ago, you can have the best in-store customer experience, the best staff and the best prices but if you do not have the goods on the shelves the rest is worthless.
In the pioneer self-service industry, new ways for customers to serve themselves are emerging at the checkout. Sainsbury, Tesco and Somerfield have all increased their use of self-checkout technology in stores over the past few years. This can represent big savings. For example, one employee oversees four self-checkout terminals so retailers are able to hire fewer staff during unsociable hours or redeploy them to other activities on the shop floor. They also require less floor space than traditional checkouts.
At the basic data level IT is making a real difference too. Knowing what your customers are buying is critical when the competition is so tight. The Co-op has decided to make the most of what used to be one of its major selling points – customer loyalty through dividend stamps. But now it has updated the concept and will be using it across its range of different businesses. Good customer information is key and the Co-op will be embarking on a significant CRM project to deliver the anticipated business benefits.
On the other end of the equation is the supply chain. A poor supply chain system was a significant factor in Sainsbury’s troubles a couple of years ago. It cost the company £260m to write off, but more importantly it lead to a situation where there were not enough products on the shelves to meet the demands of its customers.
Sainsbury’s CEO Justin King believes the company has pretty much fixed its supply chains, even if it did need to override the systems with manual ones in the first instance.
- Headquarters: Manchester
- Number of employees: 68,000
- Last full-year revenues: £7.8bn
- Head of IT: Gerry Pennell, CIO
With the continuing ruthless competition in the supermarket sector, the Co-operative Group has decided to re-energise the membership ethos of the original Co-operative movement that was set up more than 150 years ago. This will require significant input from its IT operations as it needs a deeper relationship with, and understanding of, its customers. It also puts CRM firmly on the agenda for IT in the whole Co-operative group over the next couple of years.
"“We must be one of the rare cases where we have developed chip and pin initiatives from both sides of the counter”"
Gerry Pennell, CIO, Co-operative Group
In preparation, in August last year, IT for the Co-operative Group and Co-operative Financial Services (CFS) was merged. Gerry Pennell, who had been acting director of IS for the Co-operative Group, as well as ICT director for CFS became CIO of the single organisation.
The Co-operative movement in the UK consists of 38 independent co-operative societies, the largest of which is the Co-operative Group. This includes Food Retail, which operates 1,750 stores, Co-op Pharmacy, which has 360 outlets, Travelcare with 370 branches and Co-operative Funeral care, which has more than 600 funeral homes. CFS was formed in 2002 to bring together The Co-operative Bank, internet bank Smile and the Co-operative Insurance Society (CIS).
“We had two completely separate IT teams, so we have spent the last 12 months uniting the team and its functions together,” says Pennell. “The focus has been on consolidating the systems infrastructure where we can, and looking for synergies across datacentres, desktops and similar areas.”
There is now an integrated IT management structure reporting to Pennell, running the operations and then working with the businesses to form systems strategy at a group wide level.
“The role is very interesting,” Pennell says. “There is a wider vision for the Co-operative organisation which is very important going forward. This is for a membership proposition that goes across all our businesses and operates on a common structure.
“It will take lots of IT integration to keep to our membership agenda,” he adds.
The Co-operative Group wants to re-energise the membership ethos of the Co-op, and this requires a more intimate relationship with its customers. According to Pennell, this puts CRM firmly on the agenda for IT over the next couple of years as they try to pull all the information from the various Co-op families together.
Pennell now has an IT team of 900. As well as working on infrastructure consolidation and day-to-day IT operations, it is also continuing specific projects in the different business units. For example, in food retail it will be focusing on its warehouse management systems and in pharmacies it will concentrate on electronic transfer of prescriptions.
In financial services, Pennell’s team has been working on the faster transfer of funds initiatives and on new pension products.
“We must be one of the rare cases where we have developed chip and pin initiatives from both sides of the counter,” he says.
“Not only did we make sure our retail outlets and operations hit the February deadline, we also had to ensure our banking and financial services businesses did as well.”
As the different strands of the Co-op’s IT operations begin to bind together, it continues to develop new initiatives that will drive the business once the infrastructure changes are complete.
“We have been doing lots of product development and are also working on projects to integrate all of the back-office infrastructures,” he says. “We have already standardised desktops across all our businesses, and in financial services we have integrated general ledgers to Oracle-based systems. We will continue to look for shared services and further synergies across the Co-operative Group during the year ahead.”
The old Co-op ‘divis’ were the original customer loyalty scheme. With so many different but complementary business strands, if the IT can successfully support the whole group, the Co-op may well steal a CRM march on its newer, brasher rivals in the grocery sector.
- Headquarters: London
- Number of employees: 150,000
- Last full-year revenues: £16.3bn
- Head of IT: Angela Morrison, director of European strategy
Two years after chairman Peter Davis was forced out of Sainsbury by institutional shareholders, the 137-year-old Drury Lane start-up seems well on the road to recovery. Tipped by analysts to take back its second place in the supermarket retail ranking from ASDA by the summer, the turnaround has been swift and ruthless. CEO Justin King has overseen a three year recovery plan to cut £400 million from the supermarket’s costs by 2008, and has concentrated on a sales led recovery designed to grow revenues by £2.5 billion by the end of the 2007/8 financial year. Along with cutting costs, King has overseen what he sees as important long-term investments. Around 3,000 more staff in stores, investing and revamping 131 older stores across the country.
Sorting out supply
Supply chains were one of the biggest headaches. The systems did not work and cost the company around £260m to write off.
In the company report, King says: “We have already made great strides in sorting out this crucial issue but there’s more to do. We started with an initial review of our supply chains, from the time goods leave our suppliers to the moment they’re stacked on shelves in stores. This involved looking at areas such as depots and trucks as well as our in-store processes.”
The company employed a short-term fix to get the right goods on the shelves at the right time, including over-riding some of its systems manually. King says that in the long-term, the company will be looking at more permanent solutions and will begin by making sure it understands the processes from start to finish.
“In stores, we’re finding ways to make the jobs our colleagues do as easy as possible so they can continue to give customers an improved level of service,” says King.
“We’ve tested new ways of working which have helped reduce the number of products out of stock in our stores by 75 per cent. These are now being rolled out to all our stores.”
Although Tesco is still top of the supermarket league, with a 30.6 per cent share of the market, according to market research firm TNS, the measures Sainsbury has taken are having an effect. The company is only 0.3 per cent behind number two player ASDA with 16.3 per cent of the market and in the last year it has closed the gap by 0.7 per cent.
The figures may seem small, but the grocery market in the UK is valued at £95bn.
"“In stores, we’re finding ways to make the jobs our colleagues do as easy as possible so they can continue to give customers an improved level of service”"
Justin King, CEO, J Sainsbury
A year ago the company axed 750 staff from its head office and in October, in a move that surprised no one, it ended its 10–year outsourcing contract with Accenture three years early, bringing IT back in-house. It was no surprise because Sainsbury’s problems had been firmly blamed on failed IT systems, poor management and the disastrous supply chain systems.
The original deal with Accenture was expected to save about £35m a year but Sainsbury says its IT focus has changed.
Although Sainsbury will not comment on the anticipated savings from bringing IT services back in-house, analysts think it will cover increases in fixed costs like fuel and rates.
Between 500 and 600 employees are expected to transfer from Accenture back to Sainsbury by the summer.
More recently the supermarket began investing in improving its use of information to increase sales. It signed a deal with business intelligence company SAS to provide collaborative tools for securely sharing store layout and display data with its suppliers.
The software determines how the store will present its product lines based on data collected about buying patterns and predictive trends. Like the other big four, non-food sales are becoming more important and IT must support them.
Sainsbury has stated that non-food sales are expected to deliver £700m of the extra £2.5bn it is targeting.
It will focus on several non-food areas: core general merchandise, which includes items like cards, gift-wrapping, music and DVDs. Where space allows, it will also sell clothing and homeware ranges.
- Headquarters: Leeds
- Number of employees: 150,000
- Last full-year revenues: £13.3bn
- Head of IT: Howard Reed, IT director
IT is supporting the business and driving changes at Wal-Mart owned supermarket ASDA, according to IT director Howard Reed. “Our IT operations are closely aligned with our US parent company which handles significant global strategies and infrastructure as well as corporate IT,” he says. “But where there are country specific business requirements, these are handled on a local basis.”
Reed took over as IT director at ASDA six months ago but has been with the company for 15 years, so knows the business well.
It has been a busy year for IT. During the last 12 months the organisation has worked on a range of new projects designed to support the rest of the business, as well as completing a number of ongoing programmes.
For example, ASDA has finished replacing its handheld devices with new generation PDA-type devices across the whole of the UK organisation. This was begun the previous year and the devices will drive more information on to the shop floor, enabling managers to react more quickly. The company completed its chip and pin installation late last year and has now installed the systems at its unmanned petrol stations as well. “Now most transactions are chip and pin-based,” says Reed.
There has also been a strong focus on improving the organisation’s supply chains and distribution. It has installed RF and voice technologies at its distribution centres to improve accuracy and efficiency. It is using Wal-Mart’s experiences with RFID to drive ‘pick’ accuracy. Like its competitors, ASDA has also extended its online operations.
It uses the store-pick model similar to Tesco’s, rather than fulfilling orders out of distribution centres like Waitrose. This year it extended home shopping to another 30 stores.
Again, along with its competitors it has also ramped up its non-food offerings. This will play a significant part of ASDA’s future direction, according to Reed.
“In these new markets, fulfilment is the big challenge for IT going forward. But we are also able to exploit Wal-Mart’s expertise in these areas.” Its first ASDA Living store in Glasgow is opening any day now, and it will be followed by a couple of high street clothing shops.
The supermarket intends to take on another 7,000 staff to work at 25 new stores it plans to open this year. This will increase its capacity and five of them will have a discount store format, stocking mainly ASDA own brands.
The company has continued last year’s focus of using IT to manage its store space and drive up its sales per square foot, says Reed.
“We are looking at the availability of products and giving the right products the maximum space to meet demand,” says Reed. “Maximising shelf capacity is very important to the business, and we are just about to trial a new information-based module design.”
As well as driving up sales, the supermarket expects technology to improve the customer experience in stores.
This includes testing and installing self-checkouts and personal shopper scanners.
“We are looking at the ‘customer time to checkout’ and trying to eliminate queues with different checkout initiatives. Technology obviously plays a key role here,” he says.
In terms of the IT infrastructure, ASDA regularly carries out asset renewals at its 300 odd stores in conjunction with Wal-Mart and last year extended its systems to 13 new stores in Northern Ireland.
“This is a big undertaking,” says Howard. “They were bought from Morrisons and are all old Safeway stores. The implementation and transformation of these is going extremely well, with customers’ price and value perceptions at a good level.”