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Justification for Supermarket (Grocery Store) UPC Scanning circa 1977

Below are the handout copies from the study and presentation made to the Food Marketing Institute (FMI) UPC Scanning Committee sometime around October 1977 in Chicago, IL. I appolgize for the image problems. It was interesting trying to resurrect documents from the 1970's for presentation on the World Wide Web. This copy was rescued from a FAX.

The day after the presentation the McKinsey & Company Consultant, Tom Wilson, under contract to FMI to assist with industry automation, called Tommy Tomlin, Bill Selmeier's manager, to tell him that this presentation was adopted late the previous day as the official FMI justification for UPC Scanning. That marked an increasing rate of scanning store installations.

Introductory slide
This is to be a review of the status of Scanning in Supermarkets with particular reference to the benefits being achieved. The data presented is a result of a survey of supermarkets of a variety of size and types using IBM Scanning equipement from across the country. Some of their names are listed here
Current Grocery Industry Trends

During the 1960's Supermarkets experienced:

  • declining net operating profits
  • Erosion of an initial increase in sales per square foot
  • Although there were increases in Sales per man hour,
  • increasing wages actually resulted in higher labor costs as a percentage of sales
  • The net result was a decline in Gross Margin for the Industry
Industry Response

The industry attempted to combat these negative trends by:

  • Discounting and removing previous games, gift trading stamps, and other customer service add-ons to create a price leading image.
  • Closing smaller stores and opening larger stores that supported more sales per unit.
  • Introducing Private label product in most grocery catagories that provided a larger manufacturing margin while priced below comparable national brands
  • and Standardization, finding a way to reduce distribution costs by standardizing brand-size identifications.
Steps to Standardization

  • Formation of "Ad Hoc" Commmittee 5 Grocery Manufacturers, 5 Grocery Retaillers
  • Ad Hoc committee contracts with McKinsey&Company to form Study group. Prospective Equipment suppliers participate in detailed cost analysis of entire distribution chain from farm to grocery manufacturer, to retailer to customer.
  • Result of study shows that standardization would raise the cost to manufacturers, but that would be more than offset by savings in the retail areas of the distribution chain resulting in a lower cost to the final consumer. Benefit expectations were high.
  • Prospective equipment suppliers make several proposals for specific symbol standards which are used by the symbol selection subcommittee to create a standard of their own. This was announced in April of 1973.
High Original Benefit Expectations
We started with high expectations (Note we are expressing everything in percentages of sales, since most grocery chains think in those terms):
  • Front End Labor Reduction
  • Improved Store Labor Scheduling
  • Less Cashier Underring
  • More accurate Produce Scale weighing
  • More automated Store Accounting
  • Automated Routine Ordering
  • No Price Marking/Remarking for changes
  • No purchasing registers
  • No Ordering Terminal
  • Simpler Checker Training
  • in-lane Check Authorization and more accurate
The total pro forma benefit was projected to exceed 1.5% of sales. This is exceptional when the fact that the before tax profit the previous year was about 1.2% of sales. But over half the benefit was derived from a projected reduction in check out labor, which we know didn't occur to anywhere near what was projected.
Early Results

Getting benefit results in the initial scanning installations was very difficult. First there were very few items that had the symbol included in their brand packaging, forcing the scanning stores to apply expensive supplemental symbol labels to most packages. The industry had to rethink it's checkstand design and it took several iterations before productive designs emerged, Store management was unprepared to instill necessary discipline in scanning techniques, and elements in the scanning checkout equipment did not operate at the speed required for the task.

Price removal benefits became questionable as retal clerks encouraged consummers to fight Price Removal and some legislatures proposed laws mandating continued item pricing in Grocery Stores. A lot of shopper education was requried.

But that was 3 years ago, where do things stand now?

Front End Checkout Productivity

IBM recently surveyed stores with electronic checkouts across the country to attempt an update on the original pro forma projections based on actual experience. Here is where things currently stand in various benevit areas:

Checkout productivity gains have been far less than the original projection of 1.185% of sales. Although it varies from store to store, productivity gains have only be .43% of sales on average across the country.

Checkout Productivity

Several things contribute to the current state of productivity: IBM has noticed that it is necessary to scan and bag to achieve higher productivity. Scan then bag is only marginally faster.

Impressive productivity gains with electronic keying systems have been attained through well disciplined and enforced checkout training.

But significantly the time stamp nature of data in Checkout systems is letting all electronic system level stores achieve store wide improvements on when they bring people in, resulting in improved productivity results.

Produce Checkout

The results of Produce keying/scanning has been much better than originally projected. We found it ranged from a low of .07% at one store in the east to a high of .24% at a store in the west. Overall the average was .16%, significantly higher than the .10% originally projected.

Produce Gains

Produce gains arise from several affects:

  • Scale weight accuracy has resulted in a 1% of Produce Sales increase in revenue,

    using a product code instead of marking prices catches miskeys resulting in an additional .3% of Produce sales gain,

  • better labor management possible with more detail on timing of produce sales results in an additional .67% of Produce sales gain and

  • the ability to target specific producs helps improve specific spoilage items resulting in a .7% of Produce sales gain
Non Perishible Shrink

Non-perishible shrink came in just about where it was projected, although there were wide store to store differences

Shrink Reduction

  • The prices are in the system, removing problems of miss marking and miss reading prices on items. The change is calculated automatically

  • Price changes are implemented in a timely fashion

  • Detail checker average price expectation profiles can be developed then actual average price profiles can be compared to find training problems or worse checker sweetheart ringing

  • Bottle refunds, overrings and other corrections are specifically identified
Price Removal

Price Removal has been a benefit most have found difficult to achieve due to consummer resistance. But for those stores that have successfully removed prices, the benefit has been almost double what was originally anticipated.

Price Removal

  • The price removal benefit includes the cost of price labels and the labor to apply price labels

  • It allows for faster stocking of shelves. The cases unload more uniformly so they can be restocked quicker.

  • Warehouse stores claim a 1% total savings from price removal since they do not have to remove product from the shipping cases.
In-Land Check Authorization

System level products have check authorization data bases that speed up checkout settlement by avoiding having the customer go to a office window for check approval. Although a modest cost benefit, it greatly improves relations with the shoppers.

Office Savings

We were surprised to find that office savings were about 150% higher than originally projected

Office Savings

Office savings arise from savings through:

  • Automated data collection. The head Checker no longer has to walk out to each checklane to read the register values

  • Clearly formatted reports allow the head cashier to find and reconcile numbers more easily

  • Weekly reports are generated automatically, removing the occasional arithmatic error
Price Strategy

Now we come to some observed benefit areas that were not considered in the original pro forma analysis.

  • The first of these is improvements in a stores pricing strategy. The best example of this would be a test run at Ralphs Grocery in Los Angles. Ralphs had been selling a half gallon of Orange Juice for 83 cents next to Birds-eye at $1.05. The price of the Ralphs Orange Juice was raised 3 cents to 86 cents and unit volume, recorded by the scanner, increased 2%. They raised the price on the Ralphs Orange Juice an additional 3 cents to 89 cents and unit volume went up again an additional 1%. When they raised it a third time 3 cents more to 92 cents, unit volume dropped 1%. We are not saying why this happened, just noting that it did happen.
  • a different California chain store used the detailed item movement to learn how products sell as they are moved to different parts of the store. It became apparent some product sales where increased much more when moved to an end aisle display than others. As a result the end aisle display program was significantly changed.
  • Products are promoted for a variety of reasons, but the expectation is that general sales will go up as a result of the promotion and the product selected for promotion will benefit from the promotion after it concludes. Scanning store itme movement has permitted some interesting analysis, shown here, that indicates some products benefit much more than others.
  • The message is detailled item movement can help you to maximize today's profits without stealing from the future.
Incremental Sales

This benefit was a surprise that we didn't anticipate. We don't know why it happens, but in most cases the volume of sales in a store goes up after a scanning system is installed. This is a very healthy benefit, .631% of sales on average. That is because these are the most profitable sales you can make. You have already paid for the Advertising, Store Manager, Rent, electricty and so on. The net profit on additional sales is much higher than on the original base.

Incremental Sales

As I mentioned we can't really explain it, but generally within about 5 weeks of starting scanning, store sales will start up and level off on average 10-12% above the prescaning level. We haven't had any drop off reported.

Levels of Automation

Before we sum up the benefits let's consider the many alternatives open to Grocery stores today. There is not just one type of automation.

  • At the lowest level there are stand alone ECRs, essentially an electronic equivalent of the electro-mechanical cash register.

  • Next we have the connected ECR. These machines are able to share subtotals but generally have limited data storage for price lookups, etc.

  • The first system is the minicomputer ECR. These can handle a large PLU file, check authorization files, etc.

  • and at this point I'd like to factor in another new technology that is now available, the ability to electronically transfer information from the store to a regional or headquarters location to assist them with their operations. So the next level is a communicating ECR (You won't be surprised that all IBM key entry systems are of this type.)

  • The next technology jump is to add scanning, which brings the detailled item movement capability.

  • and at the highest level the communicating Scanning system such as the IBM scanning system.
Benefits Summary

This is a summary of the previous listed benefits. First, this is a summary of benefits achieved today at some scanning store. There is no score that is achieving all the benefits, but every benefit included is being achieved by some store.

Since we collected details about how the benefits occur, we've appropriately assigned partial benefits to stores with less than a full communicating scanning system. An example would be the electronic scale accuracy benefit occures for all systems, the benefit from better pricing and PLU lookup depends on having an adequate PLU capability, etc. So partial benefits are awarded.

It is also true that some beneits are more easily achieved. Some benefits require coordination between different parts of the chain to achieve, Price Strategy for example. Store Managers do not set the item prices. This benefit requires communication of in-store information to regional or headquarter personnel responsible for priceing. To reflect this difficulity, we have applied a factor to benefits in the summary: Easily attained in-store benefits are 100%. Benefits that might require a higher level of discipline, manager sophistication,etc but are still principally contained within a store, are factored at 70%. If the benefit requires coordination with personnel beyond the store to attain, it is factored to 40%.

If you can follow along at the bottom, you see reported the Gross Benefit summation for each level of automation and the factored level. Note that because of all the additional significant benefit areas that have been achieved, the factored level scanning benefits is greater than the original projection even though achievenment on the specific benefit areas has generally been much less than originally projected. What does this mean?

Cost/Investments

Before we can know the true bottom line, we need to net out the expenses of each level of automation. In this we use Depreciation (covers cost of acquistion), Regular Maintenance, Taxes and Insurance, Headquarter Application Programming expenses to use the data, and the telecommunications costs. Summing the costs and netting them against the Gross Factored Benefits, we get net benefit that range up to slightly over 2% of sales for a communicating Scanning System.

Profitability Model

Now rather than just consider this in traditional payback or return on investment terms, let's look at how this impacts the financial operation of your business. To do this we're using this economic model: Return on Sales times Asset Turnover equals Return on Assets. That number times the Equity Ration equals the Return on Equity. If we put industry average numbers in for each term it works out to slightly under 20% Return on Equity for the Supermarket Industry. Of course you can substitute the nunbers for your company.

Impact on Profitability

Applying the net benefits from the levels of automation to the model, it shows us that benefits doen't really start to jump until there is communication of information out of the store and used to staffing, pricing, merchandising. When scanning is added there is another significant jump so that a communicating scanning store can potentially more than double the industry average for return on equity.

Summary

In summary this shows us that automation can enhance financial results. The benefits are real and can be most significantly achieved with communications and scanning.

As was earlier noted, this presentation received immediate official acceptance and recognition. But, although everything had been stated as a % of sales to avoid comments such as "my stores are larger or smaller", we still got resistance in the form, "my stores have more/less produce", "different pricing policies", etc. After about two weeks we started applying the results in a new manner. An IBM Systems Engineer from Toronto assisted in developing an on-line program/tool that operated like an electronic spreadsheet. Those were almost unknown in 1977. The model became known as SPIFI, Supermarket Performance Investment Financial Indicator (the SE came up with the name) allowed anyone to take the starting position in this presentation and adjust any of the numbers and then see the results. It was demonstrated at the FMI show the following Spring and installed on the IBM internal continent-wide sales assistance tool, HONE, so that any sales/system engineer could develop "What If's" with his prospect/customer.

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