Battle for the fridge
April 9, 1999
by Alice LaPlante
(IDG) -- You're about to pour the last ounce of milk into your late-night bowl of cereal. Oops — looks like there'll be none left for your morning coffee! All the stores are closed. What's a hungry night owl to do?
Pour away. By 6 a.m., a new gallon will be on your doorstep, thanks to a microchip sensor embedded in the milk carton and transmitted to an Internet device on your kitchen counter.
It's the latest battle in cyberspace. And it's coming soon to your refrigerator. Grocery manufacturers, supermarkets and online grocers are scrambling to figure out how to leverage emerging technologies so they can place their products directly in your home. By offering enough convenience and time savings, they hope you will remain a loyal customer.
What's information technology got to do with this? Everything.
CIOs in the grocery industry are putting in the proper technical infrastructure to collect and consolidate customer data. New point-of-sale systems that interact with fledgling Web-commerce ventures, coupled with new database mining tools, are letting companies analyze customer behavior to an unprecedented degree.
Look at the "intelligent" refrigerator that Frigidaire Home Products debuted last month. Equipped with a microprocessor, touch screen, bar-code scanner and communications port, the refrigerator — developed by Frigidaire and ICL, a London-based technology company — allows consumers to automate their grocery shopping. Whenever someone is low on a given product, they simply swipe the carton past the refrigerator's bar-code scanner, which adds that item to a list. When the consumer is ready, the list can be transmitted to the local grocer. The groceries will either be delivered to the consumer's door or packaged for pickup. The fridge can be connected to the Internet via a standard phone line or to an Ethernet network.
Although this particular product is a prototype, the concept has been technically viable for some time, says Jeff Smith, managing partner of electronic commerce at Andersen Consulting's Global Food Practice in Detroit.
What Andersen dubs "the consumer response model" to grocery shopping would encompass many activities — including automatic replenishment and online purchases delivered to the home or picked up at the store.
We've already seen preliminary steps toward a more customer-focused food chain: So-called smart cards that can be swiped at the checkout counter for quick, coupon-less savings; electronic coupons that can be automatically credited to shoppers' bills the next time they come to the checkout counter; Internet grocery delivery services such as Peapod Inc., NetGrocer Inc. and Streamline Inc. that allow you to submit your grocery order and specify delivery instructions online.
One possible next step, of course, is not even having to ask for groceries. Your pantry, refrigerator and bathroom cabinet could be filled automatically and immediately with the help of bar-code readers in your home like those used by warehouse workers, says Stephen Craig, a manager at A.T. Kearney Inc., a consulting firm in Alexandria, Va.
Industry participants are quick to caution that that's just one scenario.
"There's a very important message to hear: These are not mass-market issues," Smith says. "We're talking about micromarkets or solutions designed to fit the very specific needs of specific kinds of consumers." Cultural, cost and lifestyle factors will determine which technological option is right for each household, he says.
Take Brodbeck Enterprises Inc.'s Dick's Supermarket, a grocery-store chain based in Platteville, Wis., which has begun to explore several different technologically enabled alternatives. It has a Web site that sells Wisconsin specialties such as local cheeses for out-of-towners to buy. It offers customized Web shopping lists for "loyalty club" shoppers who buy at least $25 in goods every week and electronic coupons and promotions targeted to those shoppers' buying patterns.
"We're monitoring all sorts of other services — including home delivery," says Kenneth L. Robb, senior vice president of marketing at Brodbeck.
Whole Foods Market Inc.'s Wholefoods.com, an Austin, Texas-based food chain that specializes in natural and organic products, opened its online store last month. Currently, only dried and canned goods delivered to customers via United Parcel Service of America are being offered.
Because it's a vastly more efficient way of doing business — no actual stores to maintain, no expensive staff needed — the Web store offers better prices than traditional outlets, says Carl Morris, president of Wholefoods.com. The goal is to develop a loyal online customer base — shoppers are encouraged to "register" and provide information about themselves — that will enable Whole Foods to develop customized interfaces matching customer preferences and needs. During the next decade, Morris hopes to move a significant percentage of his traditional customers to the online store.
Though much of the required technology already exists, challenges abound in making that food chain a reality. There are cost issues — the biggest of them involving the distribution of goods. None of the current home-delivery businesses has yet turned a profit.
"Route density — or lack of it — is a major challenge in consumer deliveries," says Larry DeJarnett, managing director of enterprise solutions at A. T. Kearney. "It's all too easy to lose money."
For example, Dick's Supermarkets serves a dispersed rural population in southwestern Wisconsin. It would be difficult to deliver groceries profitably to this spread-out customer base, Robb says. That's why the Peapods and NetGrocers have yet to penetrate his and other rural markets.
But other efficiencies from automating the supply chain could make up for that. For example, a device like the intelligent refrigerator "eliminates a lot of the guesswork of retailing," Robb says. Suddenly the retail grocer has an idea of what the consumer is likely to need a day or two in advance.
Another challenge is installing the necessary network and software. Before the advent of "loyalty programs," there was no way to capture individual buying patterns. Now stores must integrate point-of-sale data from loyalty programs with back-end systems and the data streaming in from online stores.
Currently, says Carlene Thissen, president of Retail Systems Consulting in Naples, Fla., the data derived from online shoppers rarely can be combined with in-store data collected by point-of-sale systems. In-store and online systems are separate and hardly equal. Online stores tend to be much more sophisticated; in-store, cash-register systems are being upgraded so they can be integrated more easily with online and back-end systems.
The ability to combine that information with data from Internet shopping is "the obvious next step," Thissen says.
Shopping today or just buying?
Extending the supply chain to refrigerators will only heat up the competition among supermarkets and online grocers and grocery manufacturers.
Today, the company closest to fulfilling that automatic-replenishment vision is Streamline, a Westwood, Mass.-based Internet grocery business that offers its Don't Run Out (DRO) automatic-replenishment feature based on customer buying patterns. Under DRO, a "standing order" for anything from milk to laundry detergent to razor blades is programmed into a customer profile. The customer can change it at any time; Streamline will monitor usage to make sure the current DRO is correct.
For example, a standing DRO might be to deliver a dozen large eggs every other week; if Streamline notices this need varies, it will e-mail the customer to suggest adjustments. The order is delivered weekly to a refrigerated box in the customer's garage.
Between 40% and 50% of Streamline's subscribers will use DRO on at least one item, says Gregg Kaplan, vice president of operations at Streamline. Why not more items? "It's a matter of control," he says. "People who want total control can always go to the supermarket themselves. At the other end of the control spectrum, you could allow Streamline to decide what to deliver to you every week."
A replenishment model like Streamline's spells opportunity for IT departments at brand-leader companies. It's a chance to "lock consumers into a pattern in which they automatically order your product every week and not even consider others," says Eric Kirby, vice president of the interactive division at Brierly & Associates, a Dallas-based brand-marketing consulting firm.
But with the online retailer's help, "[other] manufacturers can target potential customers more precisely, based on the retailer's knowledge of what they've done in the past," says Tim Harmon, a vice president at IT research firm Meta Group Inc. in Stamford, Conn. A Peapod or Streamline, for example, would possess enough data to know when a certain customer would switch brands to get a better price, he says.
Those who like playing with new technology and don't mind paying a premium could have any number of devices installed at home or have Internet-based services vying for their business within the next 12 months.
"Technically, the idea of automatic replenishment is quite feasible," A. T. Kearney's Craig says. "Precisely how this will play out — from cultural and business perspectives — remains to be seen."
LaPlante is a writer based in Woodside, Calif. Her book, Playing for Profit: How Digital Entertainment is Turning Child's Play into Big Business, will be published by John Wiley & Sons next month.
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