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Wal-Mart only began selling groceries in 1988. Now it sells $56 billion of foodstuffs and household goods in its supermarkets every year. That makes Larry Johnston an underdog. The alumnus of the fabled Jack Welch era of General Electric management aims to make Albertsons, with “just” $36 billion in revenue, the nations greatest grocer. Hes assembled an all-star team in Idaho that combines top talent from Dell, Safeway and, yes, Wal-Mart to fulfill his quest. The moral of this story: if the boys in Boise, armed with technology and smart marketing, cant beat back the behemoth from Bentonville, its quite possible that no one can.
Cathy Bishop is a power shopper. Cruising the aisles of the Jewel supermarket in Barrington, Ill., she knows exactly what she wants and how much shes willing to pay for it. She also has no problem using technology, if she thinks its going to make her trip faster, or save her money.
As Bishop rounds the corner to the laundry-detergent aisle, she pulls a wireless handheld computer from a holster on her shopping cart and points it like a gun at a bottle of Tide with bleach. The Symbol 6553 device scans the bar code, displays the $12.49 price, then shows her total bill at this point, $28.13.
The computer beeps to alert her to a special on a nearby shelf for Bounty paper towels, but she ignores the promotion and moves on to her next destination, a newly installed section of toys co-branded with the Toys R Us chain. Bishop is thinking about presents for her grandchildren. The toy area could save her a trip to the mall. For now, she just uses the section for gift ideas.
After the final item is placed into a shopping bag already in her cart, Bishop proceeds to a self-service checkout register. She slides the Symbol handheld into a dock. Her total—$43.18 now—flashes on a touch-sensitive screen. The system asks her if she has any coupons. She scans a coupon for Dole frozen fruit-juice bars past a bar-code reader, deposits the coupon in a slot and, when done, sees the savings applied to her bill. Bishop completes her purchase by swiping a credit card through a magnetic reader; barely 30 seconds after arriving at the register, she is heading out the door.
A cashier nearby could perform a random check to make sure Bishop isnt sneaking out with any unscanned products, but doesnt. Bishops entire trip is conducted without any interaction with an Albertsons employee.
“I love the system,” says Bishop, who has shopped at this remodeled outlet in a northwest Chicago bedroom community for close to 30 years. “My fruits and vegetables have only been handled once, I know exactly how much Ive spent, and I can skip right by any lineups. Id be disappointed if they took it away.”
Ring one up for Larry Johnston, chief executive of Albertsons, which owns Jewel. Bishops response is exactly what Johnston wants: he hopes information technology will save the companys bacon. The third-largest grocer in the U.S. is locked in a fierce battle with traditional competitors, particularly Kroger and Safeway.
But Johnstons biggest worry is Wal-Mart Stores, which only began selling groceries in 1988. Already, the Bentonville, Ark., behemoth is the biggest food merchant in the U.S., selling more than $56 billion of groceries a year. Annual sales at Albertsons, by contrast, are $35.6 billion and its earnings of $485 million represent a profit of 1.4 cents on each dollar of sales. Wal-Mart, renowned for low prices, makes 3.3 cents on each dollar.
Now playing catch-up, Albertsons is betting big—$500 million this year alone—that technology can help keep its pricing competitive with the low-cost leader and make shopping at its stores more interesting and “vital” to both current and prospective customers.
Initiative Impact
Initiative Impact
The technology initiatives will impact every corner of its stores, distribution centers and offices:
- Speeding Up Checkout: Albertsons is installing 4,500 NCR self-checkout terminals in its 2,300 stores at an estimated cost of $16 million to $20 million. The machines normally cost about $20,000 each, but the company snagged the first 4,000 “for pennies on the dollar” from lessor GE Capital, which had picked them up from bankrupted retailer Kmart. The terminals will not only help customers with small numbers of items get out of stores faster, theyll help reduce Albertsons staffing costs. An Albertsons worker makes an average of about $13 an hour, compared to $8.50 an hour for a Wal-Mart employee. In some regions, such as California, additional health-care and pension benefits push the average Albertsons employees total pay package to about $24 an hour—a point of contention in a four-month-old strike by California grocery workers at Albertsons and two other chains. While the company says the goal is to improve customer service and not eliminate jobs, analysts say the companys not fooling anyone. “Thats just nonsense. Theres no other reason to do it other than save salaries,” says George Whalen, president of Retail Management Consultants. In fact, the technology could help Albertsons generate as much as $137 million in annual labor savings, based on the elimination of two clerks per store.
- Boosting the Average Sale: Albertsons wants to fill a bigger portion of every shopping basket and to do that its going to get to know customers a whole lot better. It has installed a $50-million NCR Teradata warehouse at its Boise headquarters to analyze a wide range of corporate and customer information, such as which customers buy the most from Albertsons and what products are typically in their baskets.
Using data from customer-loyalty cards, Albertsons can match individual buying preferences against store inventories. Data is available for analysis minutes after a customer leaves a store. The goal is to ensure “the right product is on the right shelf at the right time,” Johnston says. If a new Wal-Mart is about to open in an Albertsons market, Albertsons will also be able to launch preemptive strikes by rewarding its best and most-loyal customers with special promotions and pricing.
- Narrowing the Pricing Gap: Wal-Marts biggest advantage is that it can negotiate better prices with suppliers and get those products to stores faster and more cheaply. Wal-Marts grocery prices are 20% to 25% lower than Albertsons on average, according to UBS Warburg. Johnston is targeting costs throughout the supply chain by consolidating distribution centers and deploying supplier Web portals to better coordinate shipments and to reduce billing and invoicing costs. Where it used to take days to analyze the results of sales or promotions, the new data warehouse will provide answers within hours and pass those results on to suppliers.
- Maximizing Profits: Software from privately held KhiMetrics of Scottsdale, Ariz., is being deployed system-wide to keep prices competitive with Wal-Mart, while maximizing profits. The software will enable Albertsons to determine, for example, whether lowering the price of Quaker Oats oatmeal by 10 cents will bring in more profits by increasing sales than would, say, increasing the price by 10 cents. It will also tell Albertsons which products, such as milk or bread, it needs to lower prices on to keep shoppers from jumping ship to Wal-Mart, and which arent as critical.
- Modernizing the Head Office: Prior to Johnstons arrival in 2001, Albertsons lagged most retailers in core technology. Now, it wants to be at the front of the checkout line. Financial operations have been consolidated onto Oracle applications. PeopleSoft software has been deployed for human resources and the company plans to replace 75% of its information systems by 2007. More than 1,400 out of 7,000 employees above the store level have been laid off since 2001. Overall, Johnston aims to cut $750 million in costs by the end of 2004; hes cut $567 million so far.
Technology is only one-half of the game plan. The key to beating Wal-Mart is, you might say, mental. Johnston has hired logistics, marketing, finance and technology experts away from competitors or from companies widely viewed as best-in-class in other industries. If these brains cant beat the boys from Bentonville, it may well be that no one can.
Chief technology officer Bob Dunst came from Safeway, where he was vice president of applications development and advanced technology. With more than 25 years at grocery companies, analysts say, Dunst was prized for his experience as well as his knowledge of loyalty-card and analytical programs. When he was hired in November 2001, Albertsons had only begun testing a loyalty-card program in the Dallas area, while Safeway was running one of the most extensive programs in North America.
Leading an overhaul of how Albertsons manages its relationships with suppliers is C.J. “Gabe” Gabriel, former head of a technology startup called Newgistics, which advises companies on how to manage product returns using Internet technologies. This executive vice president of supply chain management earned his stripes in the Army as a member of the Rangers 101st Airborne Division and brought that logistics experience to the corporate world with supply-chain stints at Corporate Express, PepsiCo and American Hospital Supply. Lehman Brothers analyst Meredith Adler says Gabriel is viewed as an early adopter of technology and his addition was desperately needed to bring Albertsons logistics up to Wal-Marts level.
Gabriel, in turn, has cherry-picked from Wal-Mart directly, last September hiring away Mike Czuchra, Wal-Marts divisional manager of global supply chain. Czuchras experience in managing one of the largest private trucking fleets in the world will be used to reduce Albertsons distribution and transportation costs—which typically run 3% to 5% higher than Wal-Marts.
Another first-stringer added to the supply-chain team last year is Sean McKinless, former senior director of supply-chain management at Dell, known for top-flight procurement and logistics. Johnston wants McKinless to make Albertsons procurement more efficient, including the use of online auctions to buy everything from ice cream to armored cars.
Analysts agree Johnston deserves high marks for shaking up the 64-year-old supermarket chain and wrenching it into the modern world of retailing. But theyre much less impressed with the hard results to date. Sales growth has stagnated over the last five years and the company has been battered by a lengthy grocery-workers strike in California. Indeed, Albertsons finances have headed south since Johnston began his makeover three years ago. Since he arrived in 2001, annual profits are down 37% from $765 million to $485 million. Sales are flat at $35.6 billion. Albertsons stock price, too, has sagged under Johnston, from $31 to $23.60—down 24%.
The question is, will technology and the smart application of it—including so-called Stores of the Future such as the one in Barrington—be enough to beat back Wal-Mart?
“This is what we hope,” states Johnston. “Technology is really the key to it all.”
Next Page: Express lane to Boise.
Express Lane to Boise
Express Lane to Boise
The problems facing Albertsons are to a large degree the very same problems facing almost every major grocer. The industry operates on razor-thin profit margins. Most players make a little more than a penny for every dollar in groceries they sell. Albertsons makes 1.4 cents on the dollar, Safeway .78 of a cent and Kroger about 2 cents.
Still, with everyone operating on the same terms, there historically had been room to make respectable profits while paying employees decent wages and benefits.
But as in general retailing, Wal-Mart has changed the rules of the game in the grocery business. It is using its massive purchasing power, cheap labor, big-box stores and automated distribution centers to outsell the old-timers. With Wal-Marts prices so much lower than those of traditional grocers, it will pull in more than $1.1 billion in net earnings this year even if it makes just two cents on each dollar of grocery sales. That is twice as much profit as Albertsons will book on its smaller sales and thinner profit margin.
Yet Albertsons biggest momentum-killer is not another companys chain of grocery stores, but its own. The company is still recovering from the $12-billion acquisition of Salt Lake City-based American Stores in 1999.
The deal put more than 2,400 stores and 235,000 employees behind a single cash register. But the combination did not go smoothly. Culture clashes between Albertsons and American Stores executives hampered efforts to cut a promised $300 million in annual costs. In a financial filing for the 2001 fiscal year, Albertsons reported revenue of $36.8 billion, up 2.5% from $35.9 billion two years earlier. However, selling, general and administrative expenses had ballooned by 11.5% over that same period, from $7.8 billion to $8.7 billion.
In the midst of this, chairman and chief executive Gary Michael announced his intention to retire by the companys annual meeting in June 2001. By late 2000, Albertsons was on the hunt to replace him.
Johnston emerged onto the parched, scrub-grass landscape that surrounds Boise like a fresh spray of water. Standing 67″, he was picked largely for his 28 years of training under tough, profit-minded Jack Welch at General Electric. Johnston had no experience in the grocery business. But Albertsons director Paul Corddry, a former vice president at Heinz who led the search for the new chief executive, lauded Johnstons management record.
Welch had credited Johnston with saving a struggling unit, GE Medical Systems-Europe, and for bringing labor harmony to GEs appliance division. The medical-systems division had been losing money for a decade despite the efforts of four different chiefs. Welch sent him in to either fix it or shut it down. Johnston closed high-cost operations in places such as Belgium and opened plants in emerging Eastern-bloc countries. Over a span of three years, he made 29 acquisitions and GE eclipsed Siemens as the number-one vendor in the market. Most important, the unit began raking in $100 million a year in profit.
Executives who worked with Johnston at GE call him a “motivational” and “inspirational” leader. Robert Nardelli, chairman and chief executive of Home Depot and a fellow GE Appliance alum, says Johnston is “a real hands-on, people guy, very approachable.”
Johnstons persuasive optimism—honed during ongoing study of the “successful daily living” strategies of a Texas motivational speaker—came in handy in November 1999. Welch asked him to take over GEs troubled appliance division, a $6-billion unit mired in bitter negotiations with unionized employees at its massive appliance-manufacturing park in Louisville, Ky. GE had threatened to close the factory and move production to Mexico. While much of the hard bargaining had already been completed by the time Johnston got there, union negotiators credit him with being able to finesse the agreement through the final stages.
“When he came on board, one of the first things he did was hold a meeting with the union executive,” says Randy Payton, president of the union local. “We saw that he wanted to get the deal done. He was a pretty straight shooter.” Payton said the union feared Johnston would come in and try to renegotiate the work done to date, but Johnston quickly assured its leaders he wanted to wrap up the work and move forward.
In the end, the two sides reached an agreement to eliminate 400 jobs and in return GE committed to investing $200 million in new plant equipment. To celebrate, Payton and Johnston rode together into Appliance Park on top of a tractor-trailer bringing in the first batch.
While Johnston can sometimes come across as imposing, partly because of his frame, others say the Corning, N.Y., native can also let down his guard and have fun. Nathaniel Stoddard, former chairman of GEs Canadian appliance subsidiary, recalls the annual GE executive gatherings at the Boca Raton Resort and Club, dubbed “The Pink Palace.” Johnston would pull out his guitar and lead a sing-along that would typically last for hours.
So, while Albertsons knew it was hiring a CEO with no experience in the cut-throat grocery business, it was confident Johnston had the right ingredients to fix the company. On his first day in Boise, Johnston walked into the chains Columbia Village store and laid his cards on the table to store director Steve Oldenburg. “He said, I dont know anything about the grocery business. You have to teach me,” recalls Oldenburg, who has spent 25 years with the company.
The lessons have not been easy.
The Problem
The Problem
A few miles west of the Columbia Village store, Colleen Godak struggles to arrange 15 bags of groceries in the back of her minivan. The mother of two has just completed her shopping at a Wal-Mart Supercenter, unloading $133 on a weeks worth of items. Godak no longer shops at Albertsons because, she says, she can save a lot by shopping at this 24-hour-a-day Supercenter. “The customer service here is awful, but I know where everything is, so I dont have to depend on it,” says Godak.
Godak is Johnstons problem. She would be an ideal customer, but the convenience and smiling help at Albertsons arent enough to outweigh the savings she can get at Wal-Mart. Shes far from alone.
In 2000, Albertsons dominated the greater Boise market, population 470,000, with 21 stores and 65% market share, according to Trade Dimensions International, a market research firm in Wilton, Conn. Wal-Mart invaded that very same year, opening four 200,000-square-foot Supercenters. A year later, Wal-Mart had stolen 16% of the market, almost all of it coming from Albertsons.
Boise represents a microcosm of what is happening to Albertsons and other grocers across the U.S. as Wal-Mart moves in. The latest figures on Albertsons hometown show Wal-Marts share is now up to 28% while Albertsons has fallen to 39%.
Albertsons has been able to protect part of its territory because it has more stores and shoppers can get in and out of its smaller 45,000-to-60,000-square-foot outlets faster. But Wal-Mart now has an answer for that, too.
If Godak is the face of the ideal Albertsons customer, then Kelly Kirby represents the enemy.
Kirby manages a new Wal-Mart Neighborhood Market grocery store in South Ogden, Utah, a satellite community of Salt Lake City. Wal-Mart Neighborhood Markets, with their smaller, 40,000-square-foot design, compete head-on against traditional grocers such as Albertsons. They offer the same basic grocery and drug merchandise found in an Albertsons, but without the frills such as gourmet cheese stands and Starbucks counters. There is no butcher; meat is shipped in daily. There is no real baker; bread and buns are shipped in partially baked each day as well.
There are also fewer live cashiers. Neighborhood Markets rely heavily on banks of self-checkout registers where customers can scan and bag their own groceries. What shoppers do get are Wal-Marts discount prices.
“Everything here is geared towards convenience,” says Kirby, who has been in the supermarket business for 30 years and was hired away from Smith Foods, a local competitor. Wal-Mart headquarters has “given me a lot of latitude to make sure we are very competitive in the marketplace,” he says, including the ability to lower prices to match competitors.
There are just 60 Neighborhood Markets so far. But Wal-Mart says it will open another 30 to 40 this year and the same number in 2005, concentrating on one market at a time. Meanwhile, other discount retailers such as Target, Kmart and even Sears also are rolling out grocery sections.
Such is the hard reality facing Johnston and his team. Wal-Mart is attacking its core markets with a two-pronged approach and more discount competition is on the way. Albertsons costs are higher, its wages higher, its prices higher and its profit margins lower on equivalent prices to what Wal-Mart posts.
Albertsons has big technology ideas to address those handicaps. But its starting from a disadvantage there as well.
“When I came here,” Dunst recalls, “there was an I.T. organization primarily focused on trying to integrate a series of acquisitions.” Albertsons was “spending an awful lot of time on maintenance and support as opposed to driving the business forward with new development,” he says.
Johnston says he was surprised at how big Albertsons had grown without smart, efficient use of technology. So if the company can apply it well now, his thinking goes, it will be even bigger and stronger. “Technology drives every aspect of how you create a great company,” he says.
He has always thought so. In 2000, as CEO of GE Appliances, he and Microsoft decided to develop computerized appliances that use a wireless in-home network to hook up to the Internet. Refrigerators would confer with microwave ovens about recipes. Ovens would respond to human voices or remote PC commands.
As Johnston reportedly said at the time: “Imagine getting to work, turning on your desktop computer and getting a message from your home-appliance network that you left a burner on. With these networked smart appliances you can send a direct command from your office PC via the Web and turn it off.”
Four years later, such kitchens of the future are hardly pervasive. Still, Johnston, with his penchant for technology big (a Hummer H2) and small (an ever-present BlackBerry), likes the idea of putting technology at the customers disposal. Hence his Store of the Future concept and this years plan to spend $500 million—nearly 40% of its $1.3-billion capital budget—on software, hardware and networking equipment.
Dunst is gleeful. Albertsons has “an environment ripe for improvement and the financial backing to make it happen—and a group of other executives who [are] very interested in engaging the I.T. organization to help them,” he says. Its “a CIOs dream.”
The trick will be dealing with the accompanying nightmare. Wal-Mart uses technology at every stage of the retail chain, from acquiring merchandise from far-flung markets to ringing it in at the cash register. “As grocery retailers go, Albertsons isnt that far behind,” says Greg Buzek, principal analyst with IHL Consulting Group in Franklin, Tenn. “But Wal-Mart is in a league of its own.”
Wal-Marts famed Retail Link network, which has been continually improved since its launch in 1991, provides suppliers with an array of information on how their products are being sold in Wal-Mart stores.
Most retailers pull in sales data from their “point-of-sale system”—once known as cash registers—at the end of the day or twice a day. Wal-Mart pulls in sales from its electronic registers every 15 minutes. By 4 a.m. each morning, suppliers can see how their products sold the day before in every Wal-Mart store around the globe. According to Buzek, some suppliers are also allowed to see what other products were purchased by the consumer along with their own. The system is anchored by a Teradata warehouse that stores 200 trillion numbers and letters—the largest digital library of any company in the world.
And Wal-Mart never stands still. It is pressing ahead with what it believes will be its next big advantage, radio-frequency identification technology. All suppliers will be required to put radio tags containing electronic product codes on pallets and cases by the end of 2006.
As a result, Wal-Mart has been able to continually lower prices in the grocery aisles while maintaining a consistent profit margin. Its a recipe that could spell disaster for Albertsons.
It may not be possible to beat Wal-Mart consistently on price, but Albertsons must be close enough that its pricing wont put it at a major disadvantage, says Blythe McGarvie, a former chief financial officer and technology executive with Hannaford Bros., a supermarket chain based in Portland, Maine. McGarvie now heads the Leadership for International Finance and Enterprises, a management consulting firm in Williamsburg, Va.
Instead of trying to beat Wal-Mart on price across the board, McGarvie says, Albertsons has to get to know its individual customers better through its loyalty-card program and to offer products they might not be able to find on Wal-Marts shelves. Wal-Mart does an outstanding job of marketing to the masses, McGarvie says, but it doesnt even attempt to get to know its customers on an individual basis.
“Wal-Mart can be beaten, but you have to do it one store at a time and one customer at a time,” McGarvie says.
Johnston may have a vision for getting there, but he will need dozens of pieces of technology.
The Plan
The Plan
So far, Dunst has laid the framework to wean Albertsons off its mostly mainframe, mostly proprietary applications and has taken the first steps toward replacing or upgrading 90% of the companys applications by 2007. He has installed Oracle Financials, rolled out PeopleSoft software for human resources and updated the companys high-speed network infrastructure so sales information can be beamed to the company data warehouse for analysis. Over the past year, Dunst says, the company installed a redundant high-speed network throughout its operations, using a combination of frame-relay and small-aperture satellite-communication technologies.
As a result, sales data is ready for analysis “by the time the customer gets to their car in the parking lot,” he says. Before the upgrade, sales information was processed in batches overnight. It could take up to 48 hours for managers in Boise to see if sales promotions were working.
By the end of 2004, Dunst estimates Albertsons will be split 50/50 between old and new applications. Integration software from BEA Systems is being used to assist the transition from the old COBOL programming world to the new Java environment.
Speaking to investors last fall, “Gabe” Gabriel, the executive vice president of supply chain, said Albertsons supply-chain and distribution facilities were also essentially sound, but as with other grocers, “there was a noticeable lack of attention paid to such areas as technology in systems, inventory management, procurements specifically through strategic sourcing, and logistics optimization.”
For example, Albertsons employed electronic data-interchange technology to exchange orders and invoices with suppliers, but it had not yet made the next big leap (as Wal-Mart had) of automatically placing orders and sharing data with suppliers based on sales at the till. All the various initiatives being undertaken, Gabriel said at the time, were designed to help negotiate better deals on prices—lowering the cost of getting products from suppliers and manufacturers to stores, reducing out-of-stock situations and helping reduce vendor costs.
Albertsons is building iSupplier Self-Service Portals and opening them up on the Net for suppliers to view and accept purchase orders, as well as create shipping notices. The goal is to eliminate the current need for mailing purchase orders, and to cut down on costly phone and fax inquiries. The company planned to begin accepting electronic invoices through the supplier portals by early February.
Two other key steps are being taken to streamline the electronic exchange of orders and invoices. Albertsons has asked Trigo Technologies to provide a repository for standardized product information. The grocer also asked all of its suppliers to synchronize their product information, such as pricing, ingredients, descriptions, and packaging, through UCCnet, a non-profit industry organization. UCCnet has created a Web database of 14-character product codes that it hopes will eventually replace Universal Product Codes (UPCs). The goal is to create one global language for retailers and suppliers, so Albertsons buyers can talk to suppliers in China, Thailand or Brazil and know that theyre comparing apples to apples or shavers to shavers.
At the store level, the pennies-on-the-dollar purchase of 4,000 NCR “FastLane” registers from Kmart was a bit of a coup. Dunst says he knew Kmart had purchased the registers and after hearing of their bankruptcy filing in January 2002, he immediately suggested to Johnston that Albertsons make a low-ball offer for them. It took three months before Dunst was able to track them down to lessor GE Capital, but a deal was signed. (Five hundred additional FastLane units were acquired separately.)
Albertsons Store of the Future idea is fledgling—just three stores are testing it and even those arent outfitted to carry out Johnstons full vision. But its likely to be one technology concept that wont be emulated by Wal-Mart, which prefers to keep technology out of customers eyesight. Speaking at the CEO2CEO conference in New York in November, Johnston outlined his goals: Web shopping lists, global satellite positioning systems tied to handheld devices in shoppers hands, in-store mapping, personalized promotions based on stored data, automatic checkout and custom-stocked stores.
A customers shopping experience will begin at home with an Internet portal. The shopper will develop a shopping list using menu plans and shopping histories. If a family member has a peanut allergy or is on the Atkins diet, that information can be plugged in and menu choices suggested. When she gets to the store, shell use a loyalty card to obtain a handheld device, like the one used by Bishop in Barrington, Ill. Loyalty cards have been deployed in all but one of the companys seven retail divisions, with Albertsons collecting data on 1.4 billion shopping trips in 2002.
The handheld device will automatically reach out to the Internet, grabbing the customers shopping list. Then it will log into the stores inventory. Once it has matched the desired goods against the available goods, it will map the shortest route through the aisles for the customer to grab each item. Using patterns of past shopping, the device will present promotions on items that Albertsons believes will be of interest to the shopper as she walks through the store, such as the paper-towel offer Bishop received. If the customer has a prescription to fill or photos to be processed, the Symbol device will let them know with a text message when theyre ready.
There are other benefits, as well. “If you happen to pull a product off the shelf that has a peanut ingredient, it will say, Put this back, youre going to kill your daughter,” says Johnston. “When youre done, it will automatically put it on your credit card and youll roll right through the front end, through a speed gate, just like you would on the throughway.”
Though each Albertsons store is connected to headquarters via satellite and a frame-relay network, just a few have built customer portals and deployed handheld scanners. In the end, all that technology could be overkill, says Michael Lenz, a retail supply-chain analyst at Clear Thinking Group in Calgary, Alberta, Canada.
“Youre going to go to the store for bread, milk and eggs. It might be a little overwhelming for some folks,” Lenz says.
Even if the brains in Boise put in all the technology in the world, theyll need the support of Albertsons cashiers, stockers, baggers and managers—the people in stores to help customers every shopping day. Johnston may want to “energize” his “associates,” as workers are called, but he has laid off 35,000 since taking over and is trying to hold the line on salaries and benefits.
Twenty-four thousand workers in Southern California have been on strike since October. Albertsons, along with Kroger and Safeway, wants employees to pay health-care premiums of $20 to $60 per month, a practice Wal-Mart has long employed. The companies are also fighting union attempts to secure raises of 50 cents an hour in the first year and 45 cents an hour in the following two years. A California grocery workers hourly pay-and-benefits package is almost three times that of an average Wal-Mart worker.
Southern California is one of Albertsons biggest markets and in just four months the strike has cost the company $132 million in sales and $70 million in gross profits, according to Johnston. A federal mediator has taken over the contentious negotiations and asked both sides not to talk about it. However, Johnston indicated in a December earnings call that hes willing to wait it out. “Despite [the financial impact], we remain committed to making our labor costs more competitive,” he said.
Meanwhile, Johnston continues his pyramid program of organized optimism. Soon after he started at Albertsons, he hired motivational speaker Ed Foreman to hold workshops with all managers and store directors. They in turn have been directed to spread Foremans gospel—a relatively simple collection of ways to make “every day a terrific day”—to the rest of Albertsons 200,000 employees.
Foreman, whom Johnston also used at GE, says he will speak to close to 10,000 Albertsons workers at seminars that range from a few hours to three full days.
“Theres no secret formula to what Im doing,” he says. “Its about treating people the way they like to be treated, and showing them how to develop a positive, enthusiastic approach to life.” There really is no rocket science to Foremans teachings. He tells people to wake early, go for a morning walk or run, see the positive in any job they perform—no matter how menial—and to count their blessings at the end of each and every day. Laughter is the best medicine, preaches Foreman: “It relieves gas.”
Johnston is a true believer. He has created for Albertsons a mission, a 32-word vision, 10 core values and five strategic imperatives. (The imperatives are emblazoned in posters on headquarters walls, in screen backgrounds on corporate computers and as scrolling text messages on executives BlackBerries.)
He has stated publicly that his aim is to make Albertsons the number-one seller of groceries. Not “number-one after Wal-Mart”—just plain first. Therefore, he has to beat Wal-Mart, not just make a good go of competing with it.
Johnston has the drive to do it. He has the money to spend on technology. He has hired the people he thinks can beat any rival, dipping right into the expertise of Wal-Marts own supply-chain operations, for instance.
What Johnston does not have is time.
The Payoff
The Payoff
Albertsons has been able to cut costs in certain areas, most notably by getting rid of 165 money-losing stores. But even with the half-billion dollars of savings Johnston has achieved, some key costs are going up. Administrative and operating expenses rose 2.4% between fiscal 2000 and fiscal 2002, from $8.4 billion to $8.6 billion.
Sales have been hammered by the strike in California, but even before that, Albertsons managed only a 1% increase in sales in the first three quarters of 2003 compared to the same period the year before. That compared to a combined 3% growth rate for five major competitors, including Kroger and Safeway.
Wal-Mart, meanwhile, stormed ahead over the same period, growing 10% overall. Grocery sales now comprise about 22%, or $56 billion, of Wal-Marts total annual sales.
Albertsons has made gains on its technological revolution. Results from those efforts will start showing up in increases to same-store sales this year, Johnston promises. However, the strike has dealt a severe blow to his dreams of becoming the number-one grocery retailer. That ship has sailed, and Wal-Mart is firmly at the helm. Wal-Mart already sells 50% more groceries than Albertsons and with plans in 2004 to open 30 more Wal-Mart Neighborhood Markets and 210 Supercenters, the gap may become insurmountable. Combined, those stores will add about $4.5 billion in grocery sales to Wal-Marts lead.
“Its probably going to get worse for [Albertsons] before it gets better,” says Dan Geiman, a retail analyst with Seattle brokerage firm McAdams Wright Regan. “The whole sector is under some pretty severe price pressure and Wal-Mart just keeps rolling out into more of their markets.” Whalen, the California retail analyst, says the strike has gone on long enough for loyal Albertsons shoppers to develop other habits. “Some of those customers are not going to come back. It could take several years to repair the damage,” he says.
Burt Flickinger, managing director of Strategic Resource Group, a New York retail-consulting firm, agrees this will be another terrible year for Albertsons. However, he thinks Johnstons on target with his plans and results will follow. “The previous management postponed the companys technology problems. Hes had to make up for a decade of foot-dragging,” says Flickinger.
One advantage Albertsons does have is that unlike its closest competitors Kroger and Safeway, it has strong drugstores among its holdings, operating under the Sav-on and Osco brands. Margins are much better there than in groceries. Plus, many Albertsons stores are in urban centers, such as Chicago, which Wal-Mart has found difficult to penetrate. “Its a significant weapon, because whereas the grocery business is not growing, America is certainly keeping itself well-medicated,” says Neil Stern, a drugstore analyst with Chicago firm McMillan Doolittle.
All agree, however, that Wal-Marts charge into the markets Albertsons most covets, particularly California, is only just beginning.
The clock is ticking. At the same executive conference in New York where Johnston spoke, Dick Cavanaugh, president and chief executive of The Conference Board, discussed his research regarding “outsider” CEOs: Executives who switch industries when they take over a company “have really high performance during their first four years and relatively low performance during their last four years,” he said.
Johnston checked his watch and chuckled. Hell enter year four in April.
