Last April, the largest food marketer in Washington, Giant Food Inc., installed electronic checkout systems in its 125 stores. Within weeks, grocery prices in the area fell 2.7 percent -- the steepest decline since the US Department of Labor began recording prices there in 1953.
To realize full savings from its new equipment, Giant stopped putting price tickets on each item. And to show customers how valuable the new system is, it shared its savings by slashing prices.
Giant's actions triggered a reaction -- a price war -- by competing stores, and Washington shoppers have been enjoying its benefits ever since. Now the competitors are speeding up their own plans to install electronic price scanners -- which have been called the biggest revolution in the food industry since self-service.
Scanners -- which cost about $200,000 per store -- may not sound like a quantum leap in sophistication. But consider these two estimates and their implications:
Computerized checkout can double a grocer's profits, according to Jan Charles Gray, vice-president of Ralph's Grocery Company, a 98-store California chain.
More than 5,000 stores are expected to be scanner-equipped by the end of the year. That will be a 60 percent increase this year, a 150 percent rise since Jan. 1, 1979, according to Dr. Gordon Bloom, a senior lecturer at Harvard's Sloan School of Management. In giant territory, the nationwide Safeway chain will more than double its scanning capabilities by year end.
The computers transfer several tasks from the bookkeeping ledger to the microchip: inventory control, test marketing, and labor scheduling. It puts the scanner-equipped grocer days or weeks ahead of his competitor who figures inventory and reordering by hand.
Most of the advantages of computer scanners do not automatically translate into lower prices for the consumer pushing his or her cart down the aisles. However, there are management advances that do ultimately affect him. And industry officials insist that intense competition won't allow grocers simply to pocket the scanning profits.
A tip-off to the industry's excitement about scanning devices is its reluctance to reveal just how much money the computer is saving in a business that sees no end to the upward spiral of food prices. Indeed, such information is regarded almost as a trade secret.
Industry estimates of computer efficiency vary, but there is a consensus on the minimum savings computerization can effect. It is agreed that a scanner-equipped store that does $200,000 worth of sales a week can save an amount equivalent to 1 to 1.5 percent of its total annual sales -- that's $104, 000 to $156,000. (Total annual sales in the industry as a whole amount to $220 billion, so a 1 percent savings industrywide would total $2.2 billion.)
A representative of one large West Coast supermarket chain offers data from a study showing a "conservative" breakdown of annual savings from scanners, again based on a store with $200,000 weekly sales:
* $31,000 in increased productivity. This includes $7,000 saved by eliminating one checkstand made redundant because checkout with scanners is 25 percent faster. About $4,000 more is saved in labor no longer needed for checking prices on items that aren't marked or have smudged price tags.
* $30,000 a year in improved accuracy. The study showed that scanners, programmed to identify the price of an item, eliminate 98 percent of the errors made by hand on traditional key-punch registers.
These sums do not include the savings in labor if individual item pricing is removed. About 45 percent of all grocery items already have computer codes on their packaging, so hand-stamping prices becomes unnecessary. So does the switching of price tags by hand whenever prices change. This pricing on the items themselves -- as well as the posting on shelves -- can be accomplished through computer programming.
However, consumer protection groups, concerned that shoppers may be unable to detect computer inaccuracies without a price tag to help them, have prevented the removal of individual item pricing in many states and municipalities, so the savings in that area have not been fully tested.
But, says Robert E. O'Neill, executive editor of Progressive Grocer, a trade magazine: "There's a real cost factor here. It's rather obvious there's going to be a change in costs if you didn't have to mark or change the prices on a quarter of a million packages [the average supermarket stock]."
"Soft savings" -- those that can't be measured in dollars and cents -- have figured heavily in the shift to computerization. A scanner instantaneously records data on each sale, including the time of day, description of size, price , and brand of every product -- even the number and type of coupons used.
With this information at his fingertips, a grocer knows what the peak shopping hours are and so schedules his labor more efficiently. Sales descriptions allow him to keep better track of inventory, so he rarely runs out of stock or over-orders. Eventually, says Dr. Bloom, much of a store's reordering will be automatic, as scanning computers are hooked up directly with manufacturers.
"It really saves labor in this area, too, because you know exactly what was bought, you know the slow movers, what collects dust on the shelves and where your money is coming from," Mr. O'Neill says.
"Suppose I run a sale or offer coupons on something. Without a scanner and without considerable and laborious manual checking of inventories, it would be impossible to know how much of an item I'd sold as a result of the 'special' -- and I don't know how well it worked," explains Dr. Bloom.
The same applies to test-marketing new products, Bloom notes, adding that only 10 percent of new products ever succeed. Manufacturers are using scanner-equipped stores in a number of US cities to study how their promotions are affecting the shopper. The speed of the computer can offer hour- by-hour details on how a product is selling. Without computers, it could take weeks to calculate a success or a failure. A long time lag can mean unnecessary expenditures that are absorbed in the costs of other grocery items.
But what is the bottom line for shoppers? Can they ever expect to benefit from all the savings?
"The misapprehension people get is that there will be some kind of absolute decline in prices," explains Mr. Gray. "If we gave our entire profits [one penny on the dollar] back, it would still only be a 1 percent drop [in prices]."
That savings, Gray adds, would be swallowed up by inflation (8.4 percent for May, according to Bureau of Labor Statistics figures released Juned 23).
There won't be an across-the-board decrease in prices, says Bloom. Marketing strategy, he says, goes something like this: "The average price per item in a store is about 90 cents. If a scanner reduces the cost of each by one penny, that's a lot for a supermarket. But in actual practice, I wouldn't reduce the price of every item by 1 percent. I'd increase the savings on the price of popular items."
What the consumer is likely to see, says O'Neill, are dramatic price cuts on a few items. For example, the Giant chain attempted to quantify its computer advancements into the dollars-and-cents terms shoppers understand.
Giant, the first major chain to use scanners and the first to remove item pricing, slashed prices on about 2,000 items. Attributing the lower prices to the savings attained by eliminating item pricing and using scanning, says Giant spokesman Barry Scher, the chain offered such price cuts as:
* One gallon of the chain's own brand of milk, regularly selling for $2.09, reduced to $1.89.
* One-pound package of high-grade Ball Park Franks, regularly $2.09, reduced to $1.75.
* Two-pound box of Velveeta cheese, regularly $4.39, reduced to $3.23.
* A 6 1/2-ounce can of Starkist chunk light tuna, regularly $1.19, reduced to 79 cents.
Why would a store pass these savings on to the consumer rather than pocket them as profits?
It's because competition is so stiff, industry observers say. It takes just one market reducing prices a little for others to respond with a flurry of advertising and special prices to get the shoppers' attention.
But with only about a penny profit on each dollar of sales as an industry-wide average, the key to making profits is not in higher markups but in a high sales volume, explains Bloom.
"Two cans marked up a half-cent apiece rather than one can marked up one cent" is the high-volume theory supermarkets work on, explains Jeff Prince, vice-president of the Food Marketing Institute. "The idea is to make so many sales that you don't have to mark items up too high," he explains. But the reverse is true, too: A grocer can afford to mark down only if he sells a high volume.
The more ingenuity grocers apply to computerization, the more savings consumers will see at the checkstand, says Wisconsin grocer William J. Brodbeck, who owns Dick's, a five-store chain. Even his small chain "would hardly compete" with the majors if it wasn't computerized, he says.
Grocers have recognized the checkout stand as the last point in the food-marketing process where the upward price spiral can be attacked. Key indicators Real growth, GNP 1st Qtr. 4th Qtr. Past year Percent, annual rate 8.6 3.8 3.6 Index of leading indicators Latest Month ago Year ago Seasonally adjusted 138.3 137.8 126.2 'Discomfort' index Inflation & unemployment 16.0 12.4 18.7 Dow-Jones 30 industrials 992.87 991.75 881.83 New-York Stock Exch. Composite index 76.97 76.99 66.34 Unemployment Percent 7.6 7.3 7.8 Civilian employment Millions, seasonally adj. 99.2 99.0 97.1 Auto production Units 647,261 649,794 524.609 Average weekly wages In 1967 dollars $93.66 $94.07 $94.28 Housing starts Millions of units 1.152 1.340 0.938 Productivity 1st Qtr. 81 4th Qtr. 80 Last year % change, annual rate 4.3 -1.2 -0.3 Savings rate 1st Qtr. 81 4th Qtr. 80 Last year Percent of salary 4.7 5.1 5.6 Net farm income 1st Qtr. 81 4th Qtr. 80 1st Qtr. 80 Billions, 1967 dollars 6.7 8.5 10.7 Corporate profits Billions, after taxes $168.3 $164.3 $182.9 New plant & equipment 2nd Qtr 81 1st Qtr 81 2nd Qtr. 80 Invest., non-farm, bills. $317.3 (e) $310.1 (e) $294.4 US crude oil inventories Latest Month ago Year ago 335 Million/barrels avg. 411 408 369 US crude oil production Millions/barrels/day 8.6 8.6 8.5 US oil imports Millions/barrels/day 5.4 5.4 6.5 Prices Consumer price index Latest Month ago Year ago %change, annual rate 8.4% 5.1% 10.9% Gasoline Per gallon, unleaded $1.400 $1.417 $1.266 Home heating oil Per gallon $1.267 $1.290 $1.011 Wheat Per bushel $4.07 $4.41 $3.99 3/4 Gold Latest Month ago Year ago London close, oz. $442.00 $472.00 $637.50 Silver New York close, oz. $9.30 $10.92 $16.65 Existing homes Latest Prev. month Year ago Median US sales price $66.400 $65,300 $61,200 Implicit price deflator 1st Qtr 81 4th Qtr 80 1st Qtr 80 %change, annual rate 10.0 10.7 9.3 INTEREST RATES Prime rate This week Month ago YEar ago Percent 20.00 20.50 11.50 AAA corporate bonds Percent yield 13.80 14.20 10.45 Treasury-bill rates 90-day, percent yield 14.337 16.750 7.077 Home mortgages latest month ago Year ago 25% down, 25 years Avg. 'quoted' rate 15.67 15.10 15.28 Avg. contract rate 14.01 13.86 13.59 New car loans Avg. %, 5 Boston banks 17.20 15.16 16.60 Money market funds 7-day 30-day 12-month Percent, avg. yield 17.05 16.85 12.68
Sources for table
Tables and graphs above are based on data from the American Petroleum Institute, Board of Trade of the City of Chicago, Comex Inc., Donoghue's Money Fund Report of Holliston, Ma 01746, Federal Home Loan Bank Board, Federal Reserve Board, Massachusetts Commissioner of Banks, Moody's Investor Service, Motor Vehicle Manufacturers Association, National Association of Realtors, New York Stock Exchange, US Census Bureau, US Commerce Department Bureau of Economic Analysis, US Labor Department Bureau of Labor Statistics, US Department of Treasury.