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CASE STUDYCan Albertsons Trounce Wal-Mart with Advanced Information Technology?

With 2,305 retail stores in 31 states,Albertsons is one of the largest retailfood and drug chains in the world.Among these retail stores are 1,351combination food-drug stores, 707standalone drugstores, and 247 con-ventional and warehouse stores.Stores flying the Albertsons flaginclude Albertsons, AlbertsonsExpress, Albertsons-Osco, Albertsons-Sav-on, Jewel, Jewel-Osco, Acme, Sav-on Drugs, Osco Drug, Max Foods, andSuper Saver Foods.

Albertsons’ marketing vow is to“Make Life Easier for Our Customers.”This credo plays a large part in anotherof the company’s priorities, which is tomake Albertsons the number one gro-cer in the United States. Wal-Martcurrently holds that distinction with$56 million in annual revenue from itsgrocery departments. Albertsonsstands in third place, $20 millionbehind Wal-Mart in revenue.

Wal-Mart has been selling groceriesfor a mere 16 years, making it a rela-tive newcomer in the industry com-pared to most of its competitors. Ofcourse, Wal-Mart does have vast retailexperience, massive purchasingpower, and leading-edge systems toapply to its grocery business to cata-pult it ahead of the competition. Wal-Mart’s supply chain management sys-tems are extremely quick andefficient. They keep inventory down tothe necessary minimums and operat-ing costs low so that overhead takes amuch smaller chunk out of the com-pany’s sales revenue. Wal-Mart’sRetail Link network pulls in point-of-sale data from its retail stores every15 minutes, giving suppliers incrediblyup-to-date information on how theirproducts are selling. Other retailerscapture sales data only once or twiceeach day.

To move up to the top rung of theladder, Albertsons has borrowed apage from Wal-Mart’s book and writ-ten a few new pages of its own. Theauthor of these efforts is CEO andpresident Larry Johnston. Johnstoncame to Albertsons from a highly suc-

cessful corporate environment, havingworked under Jack Welch during thepeak of his tenure at General Electric.Johnston wants to use informationtechnology to keep prices competitivewhile making the shopping experi-ence more compelling. He also wantsto bolster the company’s leadershipwith the best minds available and usemotivational techniques to invigoratehis employees. By approaching busi-ness strategy on these two fronts,Johnston hopes to distanceAlbertsons from competitors such asKroger and Safeway and catch up toindustry leader Wal-Mart.

Albertsons earmarked half a billiondollars for technology advancementsin 2004. One goal of this investmentis to improve the company’s profit mar-gin. Profit margins are razor-thin inthe supermarket business, averagingaround one cent per dollar of sales.Currently, Albertsons earns 1.4 centsfor every dollar of merchandise that itsells. Wal-Mart is famous for keepingthe prices of its merchandise low, butstill manages to earn more than 3 centsfor every dollar of sales. Albertsonsmust close that margin if it is tobecome the number one grocer inthe United States. Working againstAlbertsons is the fact that its mer-chandise sells for 20 to 25 percentmore on average than Wal-Mart’sproduct offerings. Albertsons has awide gap to overcome.

The technology strategies put forthby Larry Johnston cover a wide rangeof the company’s operations.Albertsons has begun to install self-service checkout stations in some ofits stores. These stations enable cus-tomers to scan the items they arebuying to create a sales bill and payfor the items by swiping a credit ordebit card, all without the interven-tion of a cashier. Using a handheldscanner, customers may scan theirpurchases as they place them in theirshopping cart, resulting in a checkoutprocess that may take only a few sec-onds. Not having to wait in line to payat the supermarket can be a major

draw for customers. Albertsons viewsthis improvement to the shoppingexperience as exactly the type ofchange it wants to implement to keepits current customers happy, bring innew customers, and thereby increasesales revenue.

Of course, self-service checkoutstations provide Albertsons withanother benefit: They cut personnelcosts. The stations enable Albertsonsto replace human cashiers withmachines that do not earn wages.Cutting payroll is a critical aspect ofthe company’s repositioning, espe-cially when you compare wage num-bers with Wal-Mart. The average Wal-Mart worker earns about $8.50 perhour. Albertsons pays its averageworker in the neighborhood of $13per hour. In addition, Albertsonsextends benefits to its employees,including health insurance and retire-ment packages that, in some cases,nearly double the value of theemployee’s total compensation. Thecompany line says that installing self-service checkout facilities is intendedsolely to create a better shoppingexperience for the customer. Retailanalysts seem to think otherwise, say-ing that such claims are transparent;eliminating cashier positions couldproduce savings in excess of $100million for Albertsons.

Larry Johnston’s plans fortechnology-enabled grocery storesinclude a completely digital shoppingexperience that begins in the homeand involves the Internet and GlobalPositioning System satellite technol-ogy. Customers would be able to setup their shopping lists from homethrough an Internet portal that is con-nected to their local Albertsons store.They could also add information totheir accounts such as allergies anddietary restrictions. When customersarrive at the store, they would use acustomer loyalty card to obtain ahandheld device. The device woulddownload the shopping list and anyother important information, and thensync up with the store’s inventory. The

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device would guide customersthrough the store on the most effi-cient path to gather and scan all oftheir items. In addition, customerscould receive text messages notifyingthem about special offers, photos andprescriptions ready for pickup, andconflicts between scanned items andthe customer’s preset dietary orallergy restrictions. Under such a sys-tem, a customer account could belinked to a credit card and checkoutwould be reduced to passing throughan electronic gate.

Introducing such a radical changein shopping habits will not be easy.For now, Albertsons has deployedhandheld scanning devices in only afew stores. To roll out widespread useof the scanners and self-servicecheckout, as well as Johnston’sgrander vision of a wired supermar-ket, Albertsons will have to persuadetwo important groups of people thatsuch changes are a good idea. Thecompany will have to convince itsstore employees that a more inde-pendent customer is good for busi-ness. At the same time, the employ-ees know that some of their serviceswill be rendered unnecessary, thou-sands of their colleagues have losttheir jobs already, and they have runinto strong resistance in their pursuitof higher salaries and better benefits.The attitude of the employees is criti-cal to the success of the company andthere are no assurances of coopera-tion with a vision that could reducetheir role.

As if that weren’t enough of a con-cern, Albertsons’ customers alsowould have to buy into Johnston’svision for high-tech shopping. MichaelLenz, a retail supply-chain analyst forthe Canadian firm Thinking Group,notes, “You’re going to the store forbread, milk, and eggs. It might be alittle overwhelming for some folks.”Wal-Mart explicitly tries to keep tech-nology in the background to keepcustomer shopping experiences sim-ple. On the other hand, if Johnston’sfuturistic store proves to be success-ful, Albertsons would gain a signifi-cant edge over Wal-Mart.

Another Albertsons goal is simplyto have current customers buy morewhen they visit the store. The key to

such a goal is cataloging and analyz-ing purchase data. Albertsonsinvested $50 million in an NCRTeradata warehouse to examine cus-tomer buying habits. By providingcustomer loyalty cards, Albertsons cangive loyal customers special offersand track exactly what they buy andwhen they buy it.

Analytics software from KhiMetricsof Scottsdale, Arizona, enablesAlbertsons to determine, for example,whether lowering the price of a boxof Wheaties by 15 cents will bring inmore profits by increasing sales thanwould increasing the price by 15cents. The software will also tellAlbertsons which products, such asmilk and bread, need lower prices toprevent shoppers from defecting toWal-Mart and which items aren’t socritical.

Albertsons is working to reducecosts in its supply chain so that itsstores can offer prices that are morecompetitive with Wal-Mart’s prices.Johnston has consolidated distribu-tion centers and is using the Web tocoordinate shipments and to reducebilling and invoicing costs. The com-pany has also upgraded its core cor-porate systems, moving financialapplications to software from Oracleand its human resources manage-ment to PeopleSoft software.

Chief Technology Officer Bob Dunstintends to overhaul 90 percent of thecompany’s applications by 2007. Inaddition to the Oracle and PeopleSoftadoptions, he has also upgraded thecompany’s high-speed network infra-structure. Albertsons had alreadyadded electronic data interchange(EDI) capabilities, which enable betterprocessing of transactions with sup-pliers. However, Albertsons does notyet have a system comparable to Wal-Mart for sharing sales data with sup-pliers and for automatically placingorders in reaction to sales that aretaking place in the field.

Albertsons will not be relying solelyon computing power in its pursuit ofWal-Mart. CEO Johnston believes thatbrain power is just as critical to thesuccess of his company as technologyis. Johnston scoured corporateAmerica for the most talented andrespected executives in retail and

other industries. He hired CTO Dunstaway from competitor Safeway, whereDunst had 25 years of experiencedeveloping applications, working withloyalty card systems, and usingadvanced technology to analyze data.The supply chain management teamhas been stocked with technologypioneers and top guns who bringtheir expertise from such companiesas PepsiCo, Dell, and even Wal-Mart.

Analysts are impressed with thecrew that Johnston has assembledand believe that he is taking the rightapproach to competing with Wal-Mart, but the benefits of a first-ratestaff have been slow to materialize.The question remains whether a mas-sive investment in technology andintellect will be enough for Albertsonsto reach the top of the industry. Wal-Mart is a moving target and it contin-ues to move faster and farther.Johnston has saved Albertsonsapproximately $500 million already,but sales haven’t increased signifi-cantly. Meanwhile, Wal-Mart’s grocerysales continue to grow steadily.

Also worrisome is the introductionof Wal-Mart’s Neighborhood Markets.Wal-Mart is traditionally known for itsSupercenters, big-box stores thatcover expansive square footage andoffer extensive product selection. TheNeighborhood Markets are signifi-cantly smaller and are intended toreach the local markets that aren’talways covered by a Wal-Mart big-boxstore. In many cases, these marketscontain the customers that Albertsonshas targeted as crucial to its success.

Albertsons has already lost signifi-cant market shares to Wal-MartSupercenters in various parts of thecountry, including Boise, whereAlbertsons headquarters are located.Between 2000, when Wal-Mart cameto Boise, and 2004, Albertsons saw itsmarket share drop from 65 to 39 per-cent, with nearly all of the loss bene-fiting Wal-Mart. Wal-Mart’sNeighborhood Markets are strength-ened by the same low prices andpowerful supply chain that make thecompany’s Supercenters a seeminglyunstoppable force. Other than self-service checkout stations, theNeighborhood Markets are decidedlyno-frills in comparison to the average

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Albertsons store, which often has itsown butcher, baker, and gourmet cof-fee bar. Albertsons is betting that aspecialized, customized, and techno-logically advanced shopping experi-ence will be appealing enough tokeep customers from the allure ofWal-Mart’s lower prices and simplepresentation. It is not a sure bet.

Albertsons may not be able to beatWal-Mart consistently on price but itmust come closer than in the past.Albertsons can also use its loyaltycard program to obtain more preciseinformation about individual cus-tomers and offer products that theymight not find on Wal-Mart shelves.Albertsons has the financial backingto continue investing heavily inadvanced information technology,and it is fortified by strong chains ofdrug stores, which tend to see greaterprofit margins than grocery stores.The company has recently joined Wal-

Mart in requiring (by April 2005) itssuppliers to use radio-frequency iden-tification (RFID) tags on all productshipments. The use of RFID willincrease Albertsons’ ability to manageits supply chain more precisely.Additionally, Albertsons stores havefared well in urban markets whereWal-Mart has struggled. Overall, how-ever, Wal-Mart has set the bar veryhigh. Albertsons remains convincedthat it can soar to greater heights.

Sources: Mel Duvall and Kim S. Nash,

“Albertson’s: A Shot at the Crown,” Mel

Duvall, “Roadblock: Internal Resistance,”

David F. Carr, “Gotcha! The Problems with

Self-Service Checkout Systems,” and Todd

Spangler, “Teradata: Too Rich for Your

Blood?” Baseline Magazine, February 1,

2004; Jonathan Collins, “Albertsons

Announces Mandate,” RFID Journal, March 5,

2004; Associated Press, “Albertsons to Test

Handheld Grocery Scanners,” USA Today,

March 29, 2004.

CASE STUDY QUESTIONS

1. Analyze Albertsons using the valuechain and competitive forcesmodels.

2. What role do information systemsplay in Albertsons’ business strat-egy? How do systems providevalue for Albertsons?

3. Compare Albertsons to Wal-Mart interms of business strategy, currentsuccess, and future success.

4. Which management, organization,and technology factors hinderAlbertsons from achieving thegoals of its business strategy?Which management, organization,and technology factors helpAlbertsons achieve its goals?

5. Do you think Albertsons’ busi-ness strategy will work? Why orwhy not?

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