The Great Enigma of Retail Technology
No much new in here, but it does offer a nice recap of the industry over the years. I wonder if the author used our thread in his research.
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Electronic Shelf Labels Draw New Interest as Prices Fall
While ESLs are a promising technology for the future, many analysts see them as a giant sinkhole into which vast sums of capital have been poured
By Bruce Fox
Some 20 years after the technology was first introduced, electronic shelf labels finally appear ready to deliver on what many consider to be their great potential in supermarkets.
A reduction in cost is the key reason. Where ESL units only five years ago were priced at about $12 each, they now are down to about $8 each, and even as low as $5.50 each with volume discounts.
ESL tags essentially are a high-tech alternative to the adhesive paper labels used by supermarkets and other mass retail stores to indicate product pricing ever since the development of bar-code scanning made it no longer necessary to price items individually. The information displayed on the electronic LCD modules housed in the ESLs is controlled through the use of a central computer and either hard-wired or RF communications.
Proponents of ESLs see the rapidly falling cost of the tags as an example of Moore's Law, which suggests that chip-based technologies will inevitably become faster, better and cheaper over time. And they note that retailers who previously couldn't justify the cost now finally can do so.
Nonetheless, while many observers contend that ESLs are a promising technology for the future, there is also a widespread view that ESLs are a giant sinkhole into which vast sums of venture capital have been poured to no avail. About the only agreement is that ESLs have a proven value in Connecticut and Rhode Island, two states where legislation encourages their use.
Thus, ESLs remain one of the great enigmas of retail technology -- offering apparently great potential, but taking seemingly an eternity to deliver on it.
To date, the number of ESL systems that have been installed in grocery stores in the United States has been relatively low, but predictions indicate that it is time for growth.
Two supermarket executives who have gotten in on the ground floor of that growth are Ed Doud, director of retail technology at Knowlan's Super Markets, Vadnais Heights, Minn., a 14-store independent, and Jim Whittaker, director of management support services for Giant Supermarkets, Binghamton, N.Y., a 12-store independent. Both companies have decided to install ESL systems, and both executives agreed that the drop in price was a key reason why they now choose ESLs.
SCANNER ERRORS
The chains are users of the NCR DecisioNet ESL solution, which employs wireless spread spectrum technology.
The major benefits of ESLs touted by Doud and Whittaker include:
-- Eliminating scanner error by coordinating the prices that exist on the shelves with the prices that exist in the POS server's price file. In most cases, ESLs are linked to the same computer file used by the POS server, so shoppers are assured that when their purchases are scanned at checkout, the price will match the price in the aisle.
"ESLs are a symbol of a retailer's commitment to its customers," says Whittaker. "Customers are constantly reminded that they're going to pay the correct price for every item every time."
-- Reducing labor costs at the store level, particularly for changing paper labels. Indeed, analysts say that labor savings are the main reason why ESLs have been embraced more widely outside the United States, where labor costs tend to be high. Doud notes that the ability to change prices storewide, or even chainwide, at the touch of a button eliminates the threshold retailers face in weighing the cost of re-pricing an item against the labor cost associated in doing so.
The information made available by the tag also helps workers do their jobs more effectively, Doud adds. For example, the tag can display information indicating how many units of the item are in the stockroom, and how they should be displayed. "In 2000, our two stores with ESLs had people spending 3,400 fewer hours making price changes than the stores without ESLs," he notes.
-- Enabling price changes to be made at any time. This can help the retailer respond quickly to price reductions by a competitor, for example. Or the retailer can promote creatively by offering temporary price reductions during days of the week or times of the day that are normally slow. Other functions can be designed into ESL tags. For example, the tags can flash when an item is on sale. Or they can be programmed to let retailers know when they have to reorder an item.
Both Doud and Whittaker believe ESL technology will eventually be mainstream. But a different perspective comes from Robert Loeffler, executive vice president for supply chain of San Antonio-based HEB. Loeffler argues that ESLs still lack the "solid return-on-investment" that would make them a standard weapon in the supermarket retailer's arsenal. ESLs would need to be priced at $2-$3 each to reach that kind of ROI, Loeffler estimates.
HEB completed a test of ESLs in a small group of stores about two years ago. But with the current recession, retailers in general, and HEB in particular, are reluctant to continue or begin tests of technologies that are considered experimental and that lack a proven ROI, Loeffler suggests. ESLs remain "highly experimental," so retailers are hesitant about testing them.
Founded in 1905, HEB is an independent supermarket chain with 280 stores in Texas, Louisiana and Mexico. It is one of the largest privately-held supermarket companies in the United States, and is generally regarded as an innovator.
There were several other reasons why HEB decided to end its test of ESLs, Loeffler recalls.
One factor was that HEB's ESL vendor, which he declines to identify, was not on "solid financial ground."
Loeffler also complains that the vendor's ESL tags were not Y2K-compliant and "weren't going to be made that way," and that the tags were hard-wired into the shelf rather than taking advantage of a radio-frequency architecture that would have made them easier to move. In addition, he says, HEB, as an everyday-low-price rather than high-low operator, had limited use for the ability to make frequent price changes facilitated by the tags.
STATE RECOGNITION
A number of states, including Connecticut and Rhode Island have item-pricing laws that require retailers to place a price label on each product package. These states are unique, however, in that they also have laws recognizing the pricing accuracy provided by ESL systems, and exempting retailers from item-pricing requirements if they install ESLs.
As a result, in those states, capital recovery for an ESL system can easily take less than a year, based on labor and material cost savings. Outside of those states, the length of time it takes to achieve an ROI is a source of intense debate.
The oldest of the ESL vendors is Telepanel, based in Toronto. Started in 1982, it has the marketing support of IBM. But market analysts also point out that it relies on a great deal of venture capital, has experienced considerable senior management turnover, and has yet to turn a profit.
Among Telepanel retail customers are A&P, Stop & Shop, Loblaws, Big Y, Reasor's, Stew Leonard's, Grand Union, Wakefern and SPAR.
Telepanel says its system is said to be easily incorporated into existing in-store communication networks such as the Spectrum 24 network offered by Symbol Technologies, a Telepanel business partner.
Greg Thompson, a communications manager for IBM, which also partners with Telepanel, acknowledges that Telepanel has been a tough sell, since retailers are "generally not finding that the payback on ESLs is quick enough to justify the cost, particularly in the current economic environment."
Telepanel's most bitter rival had been Electronic Retailing Systems, based in Norwalk, Conn. Until recently, Telepanel and ERS spent considerable resources making adverse claims about the efficacy of the other's technology. However, ERS announced last spring that it would wind down its ESL operations, although it would continue to support its small group of existing customers.
In a statement, ERS based its withdrawal on "apparent insufficient interest in the retail community for ESL systems to justify or attract further economic investment in the reasonably foreseeable future."
Greg Buzek, president of IHL Consulting Group, in Franklin, Tenn., an expert on the ESL industry, acknowledges that both Telepanel and ERS have suffered from "financial issues" in recent years. That, he says, has allowed NCR, a relative latecomer to the industry, to achieve prominence.
Buzek notes that supermarket retailers have faced a serious labor shortage in the last few years, which has led them to give ESLs more serious consideration based on their purported labor-saving aspects. While admitting that the tags are currently still too costly to offer a good return on investment, he insists that they are "getting close to the magic number, which I would say is under $5 per tag."
Bert Flickinger III, a Westport, Conn.-based consultant, agrees that the labor shortages experienced by many retailers have greatly boosted the prospects for ESLs. He notes that while an estimated 5 percent to 10 percent of retailers are short-staffed, that number can be as high as 20 percent in the supermarket business.
NCR, which has offered an ESL product since 1993, now boasts the largest number of recent installs, including one of the largest supermarket chains, Safeway. The ESLs operate on a wireless system that is directly connected to the store's POS system. Transmitters and antennae are installed in the ceiling.
Pete Bartolotta, vice president and general manager of NCR's ESL business, known as DecisioNet, argues that the ROI of ESLs is simple to calculate in Connecticut and Rhode Island, and is getting easier to calculate in other states, as retailers seek new ways to gain efficiencies.
"No one has ever disputed the advantages of ESLs. Rather, it was the cost of ESLs that hampered widespread acceptance," Bartolotta says.
Bartolotta points out that in Europe, where a dozen countries are currently in the process of converting to a new form of currency, the euro, DecisioNet tags can display the cost of an item in both the euro and the national currency. That should help retail customers make the value connection more quickly and easily, he suggests.
OPERATIONAL EFFICIENCY
Giant Supermarkets, meanwhile, recently announced that it would roll out the DecisioNet system chainwide by March 2002.
"We did the math," says Giant's Whittaker. "A six-month pilot in our flagship store clearly demonstrated the ability of ESLs to improve operational efficiency and provide a sound ROI. Once all our stores are installed, we look forward to implementing pricing strategies that can drive benefits."
Customer reaction to the tags in the pilot store had been excellent, he adds.
Whittaker estimates that the tags will save 15 to 20 man-hours per week in labor costs in each store, or 780 to 1,040 man-hours per year.
Not every item in every store will be represented with an ESL, however, with scattered paper labels remaining on some health and beauty care and general merchandise products. "Sometimes we're dealing with a very compacted item. It just didn't seem conducive to electronic labeling," Whittaker says.
According to Bartolotta, other important features of NCR ESLs include the fact that they can withstand harsh environments such as freezers and produce areas. In addition, smaller labels are available for pharmaceuticals, spices and other small-size facings.
Typical store installations take just three to five days and can be performed during non-productive hours without rearranging fixtures or shelf items, Bartolotta adds. Afterward, store layout changes and resets can be made with minimal disruption to operations.
Besides Telepanel and NCR, other competitors in the ESL industry include:
-- Pricer. This Swedish company has a strong following in Europe, but has yet to make a profit, according to marketing manager Thomas Lundgren.
-- Eldat. Based in Israel, the company, established in 1994, has developed unique capabilities in the infrared communication field, based on experience from the development of electronic defense systems and integrated circuit design. So far, Eldat is concentrating on the European and Japanese markets.
-- Display Edge Technology (DET). This company was formed as the result of a partnership between Hobart, based in Troy, Ohio, and EST, based in Geneva, Ill. In 1995, Hobart, a refrigeration company well known in the supermarket industry, purchased a majority interest in EST and formed DET as a subsidiary. In 2000, DET was realigned as a company independent of Hobart.
What makes DET unique is its use of a power source technology called inductive coupling, which Andy Austin, vice president of marketing and business development for DET, describes as being similar to the system that powers an electric toothbrush. It is far more reliable than the battery or standard AC power used with other ESL systems, he contends.
DET currently does not have any retail customers, but expects to do so shortly.
© 2002 NRF Enterprises, Inc.
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