A SHOT AT

THE CROWN
C A S E

A
105
D I S S E C T I O N

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 Albertson’s, with “just” $36 billion in revenue,
the nation’s greatest grocer. He’s 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, can’t beat back the behemoth from Bentonville,
it’s quite possible that no one can.

BY MEL DUVALL AND KIM S. NASH

PHOTO BY TED MORRISON
BY MEL DUVALL AND KIM S. NASH
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ALBERTSON’S INC. BASE CASE

A L B E R T S O N ’ S

Headquarters: 250 Parkcenter Blvd., P.O. Box 20, Boise, ID 83726

Phone: (208) 395-6200
Business: The nation’s second-largest grocery and drugstore operator, with about 2,300 stores
in 31 states. Stores operate under the banners Albertsons, Osco, Sav-on and Sav-on Drugs,
Jewel-Osco, Acme, Max Foods and Super Saver Foods.
Chief Executive Officer: Larry Johnston
Chief Technology Officer: Robert Dunst, executive vice president
1 0 5

Financials: $35.6 billion in revenue for fiscal year ended Jan. 31, 2003; $485 million in net profit;
earnings per share $1.22; EPS growth of -0.8% over previous fiscal year.
Challenges: Boost profitability of existing stores, regain market share and resolve labor issues.
C A S E

Keep Wal-Mart Stores from eating into its business.

BASELINE GOALS:
Achieve $750 million in cost savings by the end of 2004.
Maximize return on invested capital, currently at 6.2% a year.
Maintain number one or number two share of market in cities in which it operates, or have
a plan for getting there.
Install 4,500 self-checkout terminals in stores, deploy a $50-million data warehouse and
replace 75% of computer systems within five years.

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 she’s willing to pay for it. She also has
no problem using technology, if she thinks it’s 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 sec-
tion 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 reg-
ister. She slides the Symbol handheld into a dock. Her to-
tal—$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, de-
BASELINE FEBRUARY 2004
remodeled outlet in a northwest Chicago bedroom com-
munity for close to 30 years. “My fruits and vegetables have
only been handled once, I know exactly how much I’ve
spent, and I can skip right by any lineups. I’d be disappointed
if they took it away.”
Ring one up for Larry Johnston, chief executive of Albert-
son’s, which owns Jewel. Bishop’s response is exactly what
Johnston wants: he hopes information technology will save
the company’s bacon. The third-largest grocer in the U.S. is
locked in a fierce battle with traditional competitors, partic-
ularly Kroger and Safeway.
But Johnston’s 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 Albertson’s,
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.

posits the coupon in a slot and, when done, sees the savings
applied to her bill. Bishop completes her purchase by swip-
ing a credit card through a magnetic reader; barely 30 sec-
onds after arriving at the register, she is heading out the door.
A cashier nearby could perform a random check to make
sure Bishop isn’t sneaking out with any unscanned products,
but doesn’t. Bishop’s entire trip is conducted without any
interaction with an Albertson’s employee.
36 “I love the system,” says Bishop, who has shopped at this
Now playing catch-up, Albertson’s is betting big—$500 mil-
lion 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 prospec-
tive customers.
The technology initiatives will impact every corner of its
stores, distribution centers and offices:
Speeding Up Checkout: Albertson’s is installing 4,500
NCR self-checkout terminals in its 2,300 stores at an estimated
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A L B E R T S O N ’ S
cost of $16 million to $20 million. The machines normally PLAYER ROSTER
cost about $20,000 each, but the company snagged the first
4,000 “for pennies on the dollar” from lessor GE Capital,
five-part plan for remaking
which had picked them up from bankrupted retailer Kmart. Albertson’s that included
The terminals will not only help customers with small num- closing money-losing
stores, unifying point-of-
bers of items get out of stores faster, they’ll help reduce Albert- sale technology and
son’s staffing costs. An Albertson’s worker makes an average of cutting waste from the

1 0 5
about $13 an hour, compared to $8.50 an hour for a Wal-Mart supply chain. The goal:
save $750 million by the
employee. In some regions, such as California, additional end of 2004—and outrun

health-care and pension benefits push the average Albertson’s
employee’s total pay package to about $24 an hour—a point
of contention in a four-month-old strike by California gro-
cery workers at Albertson’s and two other chains. While the
company says the goal is to improve customer service and not
eliminate jobs, analysts say the company’s not fooling anyone.
“That’s just nonsense. There’s no other reason to do it other
than save salaries,” says George Whalen, president of Re- Larry Johnston
tail Management Consultants. In fact, the technology could Chairman and CEO
Just two months after
help Albertson’s generate as much as $137 million in annual la- departing GE Appliances
bor savings, based on the elimination of two clerks per store. in April 2001, he outlined a
Boosting the Average Sale: Albertson’s wants to fill a
bigger portion of every shopping basket and to do that it’s Bob Dunst
Chief Technology Officer
going to get to know customers a whole lot better. It has in- Dunst is a grocer’s grocer,
stalled a $50-million NCR Teradata warehouse at its Boise having spent his entire
technology career with
headquarters to analyze a wide range of corporate and cus- various supermarkets, most
tomer information, such as which customers buy the most recently Safeway. He has
from Albertson’s and what products are typically in their methodically met Johnston’s
technology checklist, such as
baskets (See Dossier, p. 50). installing new NCR point-of-
Using data from customer-loyalty cards, Albertson’s can sale systems at Albertson’s
match individual buying preferences against store inventories. 2,300 stores, creating a data
warehouse, offering West
Data is available for analysis minutes after a customer leaves a Coast cities online shopping
via the albertsons.com Web
store. The goal is to ensure “the right product is on the right
site and experimenting
shelf at the right time,” Johnston says. If a new Wal-Mart is with self-checkout and
about to open in an Albertson’s market, Albertson’s will also be handheld computers for
customers to free up
able to launch preemptive strikes by rewarding its best and
in-store personnel.
most-loyal customers with special promotions and pricing.
Narrowing the Pricing Gap: Wal-Mart’s biggest ad- C.J. “Gabe” Gabriel
Executive Vice President,
vantage is that it can negotiate better prices with suppliers Supply Chain Management
and get those products to stores faster and more cheaply. Gabriel oversaw Albertson’s
effort to get suppliers to
Wal-Mart’s grocery prices are 20% to 25% lower than Albert-
send item data electronically,
son’s on average, according to UBS Warburg. Johnston is tar- by January 2004. The goal
geting costs throughout the supply chain by consolidating is to beat the rest of the
industry, which loses an
distribution centers and deploying supplier Web portals to
average of 3.5% of sales to
better coordinate shipments and to reduce billing and in- supply-chain inefficiencies.
voicing costs. Where it used to take days to analyze the results
Sean McKinless
of sales or promotions, the new data warehouse will provide Group Vice President,
answers within hours and pass those results on to suppliers. Procurement
Hired from Dell, where he
Maximizing Profits: Software from privately held served as director of world-
KhiMetrics of Scottsdale, Ariz., is being deployed system-wide wide logistics, he is helping
to keep prices competitive with Wal-Mart, while maximizing Gabriel convert Albertson’s
distribution facilities from
profits. The software will enable Albertson’s to determine, for profit makers to cost centers,
example, whether lowering the price of Quaker Oats oatmeal to improve their efficiency.
C A S E
Wal-Mart in the process.
Having studied life
and business under
motivational speaker
Ed Foreman, Johnston is
known as a perpetual
optimist who loves
technology. He encourages
grocery shoppers to
e-mail him on his
BlackBerry. When not
traveling for business,
Johnston drives around
Boise in a bright yellow
Hummer H2.
Mike Czuchra
Director, Logistics
and Transportation
Czuchra was recruited from
Wal-Mart, where he headed
the retail giant’s private
fleet of 3,000 trucks and
12,000 trailers. Albertson’s
distribution costs run as much
as 5% higher than Wal-Mart’s.
OUTSIDERS
Ed Foreman
Motivational Guru, Dallas
Foreman regularly leads a
three-day, $1,500 “Successful
Life Course” designed to
teach businesspeople how to
create happier lives at work
and at home.
Mark Hurd
CEO, NCR Corp., Dayton, Ohio
NCR is the single most
important technology partner
for Albertson’s, providing
it with a real-time data
warehouse as well as the
majority of its point-of-sale
terminals and helping roll out
new self-checkout systems.
Glenn DuBois
Executive Vice President,
UCCnet, Lawrenceville, N.J.
The nonprofit industry
organization provides
a central registry for
suppliers and retailers to
exchange standardized item
information, such as product
weight, size and pricing, plus
trading-partner information.
BASELINE FEBRUARY 2004

by 10 cents will bring in more profits by increasing sales than

Roe Cefalo
would, say, increasing the price by 10 cents. It will also tell Al- and Bob Butler
bertson’s which products, such as milk or bread, it needs to Executive Vice Presidents,
Operations
lower prices on to keep shoppers from jumping ship to Wal- Operations is where the
Mart, and which aren’t as critical. Wal-Mart threat is felt every
Modernizing the Head Office: Prior to Johnston’s ar- day. Albertson’s tack is to
abandon regions where it
rival in 2001, Albertson’s lagged most retailers in core tech- isn’t one of the top two in
nology. Now, it wants to be at the front of the checkout line. the market. Cefalo and Butler
Financial operations have been consolidated onto Oracle helped shut down 165 stores
after Johnston took over.
Rob Bonavito
CEO, iTradeNetwork
Livermore, Calif.
Supplies procurement
and logistics software
to Albertson’s to help
synchronize data files with
UCCnet standards. Also
works with competitors
such as Kroger, Food Lion,
37
Hannaford Bros. and Wal-Mart.
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DOES GE BRING GOOD CHIEFS TO LIFE?

A L B E R T S O N ’ S

Larry Johnston was hired as CEO at Albertson’s in part for his success at General Electric. But a GE pedigree guarantees
nothing. Several GE executives recently hired as turnaround CEOs failed to fix their new companies; others continue to try.

GE ALUMNUS COMPANY HIRED STATUS

1 0 5

Stephen Bennett Intuit January 2001 Smiling. After 2001’s loss of $83 million, the company booked
$343 million in profits in 2003. Sales are up 25% since 2001.
C A S E

Norman Blake Comdisco February 2001 Gone August 2002. The disaster recovery provider filed for
Chapter 11 bankruptcy protection in July 2001, and emerged a
year later with plans to sell all assets by 2005.

John Blystone SPX Corp. December 1995 Struggling. Sales are up 88% since 2000, mainly from
acquisitions. Operating results have been weak lately,
prompting a stock drop.

David Cote Honeywell February 2002 Struggling. Conglomerate lost $220 million last year on big
International asbestos liabilities and a depressed airline industry.

Glen Hiner Owens January 1992 Retired in 2002. Asbestos litigation spurred a Chapter 11 filing
Corning in 2000. Hiner left with a multimillion trust fund and guaranteed
severance of at least $435,000.

James McNerney 3M January 2001 Smiling. Though 2001 was an off year, the 3M conglomerate
remains largely strong. 2003 sales expected to top $18 billion.

Robert Nardelli Home January 2001 Working hard. Sales and profits are up under Nardelli but rival
Depot Lowe’s is attacking hard (Baseline, Case 075, June 2003, p. 64).

Tom Rogers Primedia September 1999 Gone April 2003. To pay down $2.5 billion in debt, company
steadily sold well-known bridal, parenting and other magazines.

Gary Wendt Conseco June 2000 Gone October 2002. Two months later, the insurer filed for
Chapter 11, one of the biggest bankruptcies ever.

applications. PeopleSoft software has been deployed for hu-
man 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; he’s 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 can’t 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 com-
panies, analysts say, Dunst was prized for his experience as
well as his knowledge of loyalty-card and analytical programs.
BASELINE FEBRUARY 2004
ply 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 Albertson’s lo-
gistics up to Wal-Mart’s level.
Gabriel, in turn, has cherry-picked from Wal-Mart di-
rectly, last September hiring away Mike Czuchra, Wal-Mart’s
divisional manager of global supply chain. Czuchra’s experi-
ence in managing one of the largest private trucking fleets
in the world will be used to reduce Albertson’s distribution
and transportation costs—which typically run 3% to 5%
higher than Wal-Mart’s.
Another first-stringer added to the supply-chain team last
year is Sean McKinless, former senior director of supply-chain

When he was hired in November 2001, Albertson’s 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 Albertson’s manages its re-
lationships with suppliers is C.J. “Gabe” Gabriel, former
head of a technology startup called Newgistics, which ad-
vises companies on how to manage product returns using
38 Internet technologies. This executive vice president of sup-
management at Dell, known for top-flight procurement and
logistics. Johnston wants McKinless to make Albertson’s pro-
curement 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 they’re 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
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ROADBLOCK: INTERNAL RESISTANCE
A L B E R T S O N ’ S
THE OBSTACLE
Albertson’s chief executive officer Larry Johnston recognizes that he can’t win the battle against Wal-Mart unless
he can rally his frontline troops to the cause. Not long after joining the company, he made “energized associates” a
strategic imperative for Albertson’s, and hired a motivational expert. But at the same time Johnston is trying to energize
associates, he is laying off thousands and attempting to hold the line on salaries and benefits. A bitter strike of workers in
California has ensued since October. Various technology initiatives, including the planned rollout of 4,500 self-checkout registers,
1 0 5
may only inflame an already tense management-employee relationship.
THE RESPONSE:
C A S E
Take a pay cut: For starters, according to experts
in corporate compensation, Johnston needs to set an exam-
ple by cutting back his own pay package. To his
credit, Johnston took a 57% pay cut to $12.2 million in the
company’s fiscal year ended Jan. 31, 2003, from $28.2
million the previous year. Still, Stever Robbins, an executive
coach with Boston-based Leadership Decisionworks, and
a co-developer of a Harvard Business School leadership
program, says it is unconscionable for Johnston to ask
California workers to sacrifice some basic health-care
benefits when his own pay package is so rich. In compari-
son, CEOs at Kroger and Safeway took home $1.9 million
and $1.3 million in 2002, respectively, although Safeway CEO
Steven Burd also capitalized on $11 million in stock options.
(That’s OK: Johnston’s $12.2 million was in addition to such
fringe benefits as $68,000 for the use of the company air-
craft and $28,000 for financial planning.) Robbins thinks
Johnston needs to tighten his belt a lot more to have credi-
bility with employees. “Johnston has said numerous times,
there are no sacred cows—well, he should start at the top
and look at executive compensation,” says Robbins.
Be honest: It’s critical that the rank and file believe they’re
all in the same shopping cart. That means laying the facts on
the line, as to where Albertson’s is winning and losing the
battles and being honest about how Wal-Mart is using its
cheap labor and systems to lower prices. Wal-Mart employ-
ees make an average of about $8.50 an hour and pay a
health premium while Albertson’s California workers earn a
salary, pension, and benefits package worth about $24 an
lengthy grocery-workers’ strike in California. Indeed, Albert-
son’s 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. Albertson’s stock price, too, has sagged
under Johnston, from $31 to $23.60—down 24%.
The question is, will technology and the smart applica-
tion 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.”
BASELINE FEBRUARY 2004
EXPRESS LANE TO BOISE
The problems facing Albertson’s 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. Albertson’s makes 1.4 cents on the dollar, Safeway
.78 of a cent and Kroger about 2 cents.
44 Still, with everyone operating on the same terms, there
hour. Robbins says that unless Albertson’s employees are
confident they’re getting the whole truth, even after a set-
tlement, achieving business objectives will be subject to
resistance—assuming the lack of confidence doesn’t scut-
tle the talks in the first place.
Be visible: If employees are going to agree to make
sacrifices, they need to feel a personal connection
to their leader. That means he has to be seen on the
frontlines, and take time to hear their concerns. That can
be as simple as spending time in the stores helping bag
customers’ groceries, or stopping in at the employee
lunchroom to chat with workers. The goal is to tap the
emotional connection people have with their company.
Enlist the troops: There are other ways to compete
against Wal-Mart than just on price. Johnston has to get
employees involved in finding creative ways to retain
and grow the customer base. And when employees do
come up with good ideas, they should be rewarded in
meaningful ways, such as cash rewards or bonuses.
Other companies reward employees based on a
percentage of the savings generated, such as 5%, or
a flat reward, such as $500 for every idea implemented.
Educate: Don’t simply roll out a new technology like
self-checkout registers—which take away jobs—without
properly conveying the reasons behind the decision.
Share information related to consumer trends, the
competitive landscape and the return on investment
it will provide the company. —M.D.
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 mas-
sive purchasing power, cheap labor, big-box stores and au-
tomated distribution centers
PROJECT PLANNER to outsell the old-timers. With
IS YOUR PALLET READY Wal-Mart’s prices so much
FOR RADIO-FREQUENCY lower than those of tradi-
IDENTIFICATION? PEOPLE, tional grocers, it will pull in
GET READY. (SEE FOLDOUT).
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 Albertson’s will book on its smaller
sales and thinner profit margin.
Yet Albertson’s biggest momentum-killer is not another
company’s chain of grocery stores, but its own. The com-
pany 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 em-
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GOTCHA! THE PROBLEMS WITH SELF-SERVICE CHECKOUT SYSTEMS
Self-checkout terminals are increasingly employed by retailers—particularly grocers. But many consumers remain
unconvinced about the convenience of checking themselves out. How well an organization fields the technology can make the
difference between whether customers walk away from the experience enthusiastic or discouraged.
PROBLEM: Erroneous or missing data can be a
show-stopper for a self-service consumer.
>> RESOLUTION: Iron out the kinks at manned cash
registers, before you open up self-checkout lanes.
Self-checkout scanners read a bar code on every product;
and for every bar code there’s a price in the store data-
base. “It’s a lot easier for a cashier to overcome a ‘not on file’
error than it is for a self-service [customer],” says
Dusty Lutz, product manager for NCR’s FastLane
self-checkout systems.
Analyze also how well the technology will fit into
existing store operations, says Roy A. Garver, a consultant
who has been involved in self-checkout implementations at
Wal-Mart, Kroger, Home Depot and other companies.
Retailers that fail to make that effort upfront will suffer
through more problems after the technology is deployed,
Garver says—and in the process will damage the
customers’ perceptions of the technology.
PROBLEM: Ease-of-use is critical—and largely
under the control of the vendor.
>> RESOLUTION: Do everything possible to
make your consumer’s first encounter positive.
“It only takes one bad experience to turn a user into a
non-user of self-service,” NCR’s Lutz says. Consumers who
become confused or embarrassed about their inability to
complete a transaction may never come back.
Stores can make systems friendlier with clear signs
describing the steps in the process—particularly those
steps that aren’t obvious, such as placing produce on a
scale during checkout.
ployees behind a single cash register. But the combination
did not go smoothly. Culture clashes between Albertson’s
and American Stores executives hampered efforts to cut a
promised $300 million in annual costs. In a financial filing for
the 2001 fiscal year, Albertson’s reported revenue of $36.8 bil-
lion, up 2.5% from $35.9 billion two years earlier. However, sell-
ing, 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 company’s
annual meeting in June 2001. By late 2000, Albertson’s 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 6’7”,
he was picked largely for his 28 years of training under tough,
profit-minded Jack Welch at General Electric (See “Does GE
Bring Good Chiefs to Life?” p. 38). Johnston had no experience
in the grocery business. But Albertson’s director Paul Corddry,
a former vice president at Heinz who led the search for the
new chief executive, lauded Johnston’s management record.
Welch had credited Johnston with saving a struggling
unit, GE Medical Systems-Europe, and for bringing labor
A L B E R T S O N ’ S
Jakob Nielsen, a human-factors designer, says brick-and-
mortar stores ought to offer more clues as to how things
1 0 5
work. But sometimes the physical design of a checkout unit
undermines the application, he says. “Like the screen will
C A S E
say, ‘Press “OK”’ to complete your purchase,’ but there’s no
‘OK’ button—it says ‘Yes’ or ‘Enter’ instead.”
PROBLEM: Your operations may not work the way
your customers do.
>> RESOLUTION: Think through what the customer—
and the system—has to do. Self-checkout requires each
item to be individually scanned. Deli items will have to be
identified by bar codes instead of hand scrawl. Shortcuts—
such as scanning a single jar of baby food 20 times to
represent 20 items—will have to be rethought. Project man-
agers also will have to figure out how to handle coupons
and loyalty-card discounts.
PROBLEM: Don’t let store personnel ignore
customers in the self-service lane.
>> RESOLUTION: Assign a friendly face to the technolo-
gy, says Greg Buzek, principal analyst with IHL Consulting
Group in Franklin, Tenn. Kroger employs some of its most
experienced cashiers to greet customers, show them how
to get through the process and overcome any snags.
Kate Delhagen, principal retail analyst at Forrester
Research, is surprised more stores don’t follow suit.
After all, showing customers how easy self-checkout can
be is a good investment. “People don’t like to feel
stupid or [as if] they did something wrong,” she says, so you
have to get them over that hurdle. —DAVID F. CARR
harmony to GE’s appliance division. The medical-systems
division had been losing money for a decade despite the ef-
forts 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 rak-
ing 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, peo-
BASELINE FEBRUARY 2004
ple guy, very approachable.”
Johnston’s persuasive optimism—honed during ongoing
study of the “successful daily living” strategies of a Texas mo-
tivational speaker—came in handy in November 1999. Welch
asked him to take over GE’s 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 bar- 49
 211851364675232564851956357363544859326434563954653065773675612543627457923152118513646752325
A L B E R T S O N ’ S

gaining had already been completed by the time Johnston DOSSIER: TERADATA
got there, union negotiators credit him with being able to fi-
nesse the agreement through the final stages.
“When he came on board, one of the first things he did
TOO RICH FOR YOUR BLOOD?
was hold a meeting with the union executive,” says Randy
Like the penthouse at the Four Seasons or a Gulfstream IV
Payton, president of the union local. “We saw that he jet, Teradata appeals to an elite and moneyed clientele.
wanted to get the deal done. He was a pretty straight Customers say its data warehouse, which provides a central
1 0 5

shooter.” Payton said the union feared Johnston would repository for analyzing business statistics, is peerless in its
come in and try to renegotiate the work done to date, but ability to process huge amounts of information—well beyond
C A S E

the capabilities of systems

Johnston quickly assured its leaders he wanted to wrap up
from IBM or Oracle. With a
the work and move forward. THE COMPANY Teradata warehouse, thou-
In the end, the two sides reached an agreement to elim- HEADQUARTERS: 1700 S. Pat- sands of people can simulta-
inate 400 jobs and in return GE committed to investing terson Blvd., Dayton, OH 45479 neously search through
$200 million in new plant equipment. To celebrate, Payton PHONE: (937) 445-5000 more than a quadrillion
TICKER: Unit of NCR (NYSE: NCR) pieces of data without so
and Johnston rode together into Appliance Park on top of a much as a hiccup.
URL: www.teradata.com
tractor-trailer bringing in the first batch. “You can scale the thing
EMPLOYEES: 4,200
While Johnston can sometimes come across as imposing, as big as you want it to go,”
BUSINESS: Data-warehousing says Mark L. Andrews, sys-
partly because of his frame, others say the Corning, N.Y., na- software, servers and analysis tems specialist with Fed-
tive can also let down his guard and have fun. Nathaniel tools, as well as related
erated Department Stores,
Stoddard, former chairman of GE’s Canadian appliance sub- consulting services
parent of Bloomingdale’s
sidiary, recalls the annual GE executive gatherings at the Boca FOUNDED: 1979; acquired and Macy’s, which runs a
by NCR in 1991 14-trillion-byte Teradata sys-
Raton Resort and Club, dubbed “The Pink Palace.” Johnston
TOP EXECUTIVES: Mike tem on 20 servers.
would pull out his guitar and lead a sing-along that would Koehler, senior vice president; That technical prowess
typically last for hours. Stephen Brobst, chief technology has won Teradata, a division
So, while Albertson’s knew it was hiring a CEO with no ex- officer; Mark Hurd, who ran of NCR, a customer list of
Teradata from 1999 to 2002, is
perience in the cut-throat grocery business, it was confident about 650 large companies
now NCR’s chief executive officer
Johnston had the right ingredients to fix the company. On and government agencies,
FINANCIALS: Sales of $1.21B, including Albertson’s,
his first day in Boise, Johnston walked into the chain’s Co- operating income of $145M for FedEx, Ford, the U.S. Postal
lumbia Village store and laid his cards on the table to store 2003
Service and Wal-Mart.
director Steve Oldenburg. “He said, ‘I don’t know anything PRODUCTS: Database and But such rarefied technol-
data-processing software, which ogy can cost a limb or two.
about the grocery business. You have to teach me,’ ” recalls
run on proprietary Unix servers Teradata, which until last
Oldenburg, who has spent 25 years with the company. as well as Windows servers.
year didn’t publicly disclose
The lessons have not been easy. Other software products include
its pricing, says a standard,
tools for data mining, customer-
relationship management and
two-server data warehouse
THE PROBLEM database querying. able to store 300 billion
A few miles west of the Columbia Village store, Colleen bytes starts at $486,000.
MARKET SHARE: 6% of the
While that includes Tera-
Godak struggles to arrange 15 bags of groceries in the back $3.6 billion data warehouse
management software market
data’s database software,
of her minivan. The mother of two has just completed her it’s as much as 10 times the
in 2002, according to IDC.
shopping at a Wal-Mart Supercenter, unloading $133 on a price of two fully loaded,
COMPETITORS: IBM; Netezza;
week’s worth of items. Godak no longer shops at Albertson’s dual-processor PC servers.
Oracle
because, she says, she can save a lot by shopping at this 24- Teradata’s software does
run on generic Windows
hour-a-day Supercenter. “The customer service here is awful, systems, but most customers opt for the company’s own
but I know where everything is, so I don’t have to depend on Intel-based Unix servers, which are specially tuned for
it,” says Godak. large-scale Teradata installations.
Godak is Johnston’s problem. She would be an ideal cus- Meanwhile, Teradata’s rivals are nipping at its heels with
lower-cost systems that are steadily climbing up the perfor-
tomer, but the convenience and smiling help at Albertson’s
mance curve. “The sweet spot for Teradata is shrinking,”
aren’t enough to outweigh the savings she can get at Wal- says Gartner analyst Kevin Strange. “They’re going to have
Mart. She’s far from alone.
In 2000, Albertson’s dominated the greater Boise market, MILESTONES
BRIGHTER PICTURE
population 470,000, with 21 stores and 65% market share, 1979: Founded to develop
$1250
according to Trade Dimensions International, a market re- first commercial paral-
$1213M
search firm in Wilton, Conn. Wal-Mart invaded that very lel relational database 1000
1991: AT&T buys NCR
BASELINE FEBRUARY 2004

same year, opening four 200,000-square-foot Supercenters. 750

$900M
Product and
1991: NCR acquires Teradata services revenue
A year later, Wal-Mart had stolen 16% of the market, almost
1997: AT&T spins off NCR as 500 Operating
all of it coming from Albertson’s. independent company
income/loss
(in millions)
Boise represents a microcosm of what is happening to 2002: Teradata Warehouse 7.0 250 $145M

Albertson’s and other grocers across the U.S. as Wal-Mart launched 0 –$142M
moves in. The latest figures on Albertson’s hometown show 2003: Mike Koehler appointed
-250
Wal-Mart’s share is now up to 28% while Albertson’s has head of Teradata
1999 2000 2001 2002 2003
fallen to 39%.
SOURCE: NCR
50 Albertson’s has been able to protect part of its territory
2564851956357363544859326434563954653065773675612543627457923151843212118513646752325648519563573635448593264345639546530657736756125436274579231521185136467523256485195635367

A L B E R T S O N ’ S
DATA WAREHOUSING

to bring down pricing, or they will hit overpriced, of course. Nationwide THE TECHNOLOGY
the proverbial brick wall.” Insurance, based in Columbus, Ohio, ANY DATABASE CAN CRUNCH NUM-
Teradata insists that the notion its has been a Teradata shop since 1998.

pricing is out of whack is more percep-
tion than reality. “This whole cost thing
“We still actively pursue other vendors,
but they can’t compare on price-perfor-
1 0 5
bers. What sets Teradata’s apart is its
ability to break complex problems into
small parts and deliver answers fast.

C A S E
has to be put into the proper context,” mance,” says Tobi Zappe, one of the
says chief marketing officer Bob Fair. firm’s data-warehouse architects. In The Teradata system takes a query
First, he says, the prices of Teradata’s 2002, Nationwide solicited a bid from and works on different parts of each
systems are in line with those of IBM IBM for a DB2 data warehouse running
answer in parallel. By breaking the
or Oracle systems that provide compa- on p690 servers. But Big Blue’s proposal
rable performance. was actually $1 million request into smaller components and
Fair says customers more than the approx- working on each of them at the same
also need to weigh imately $18 million time, Teradata software can probe
such factors as being the company had extremely large data sets with
able to create “a already invested in
single version of the its Teradata infra- unrivaled speed and agility. Within
truth” by consolidat- structure at the time, each chunk of work (known as a
ing disparate data Zappe says. “step”), the Teradata database also
sources into a single Customers also say processes multiple operations simulta-
warehouse. In other that the cost of own-
neously, using a technique known as
words, Teradata says, ing and operating a
you get what you Teradata system often pipelining. This way, Teradata’s soft-
pay for. is lower than that of ware can begin a new task before the
The pricing issue, other database sys- preceding one has been completed.
however, recently tems, requiring fewer In practice, this parallel execution—
came to a head at staffers to run
one of Teradata’s for- because it handles which was the primary design point
merly marquee ac- many tasks automati- when the database was developed 20
counts: J.C. Penney, cally. At Continental years ago—can dramatically reduce
which is in the midst Airlines, for example, the time it takes to process queries on
of moving the bulk of its four-year-old one database administrator spends
very large databases. Teradata cites
Teradata data warehouse to an IBM half his time managing a three-trillion-
DB2 repository. According to several byte Teradata data warehouse that the results of a 2003 benchmark test
industry executives, the Plano, Texas- contains 80% of the company’s data created by the Transaction Processing
based retailer is making the change assets. The airline says its transaction- Performance Council on a 10-trillion-
mainly because the Teradata system oriented Oracle infrastructure, by com-
I L L U S T R AT I O N B Y M I C H A E L S H U M AT E

byte database showing its system

is more expensive than IBM’s. J.C. Pen-
ney declined to comment to Baseline.
For its part, Teradata says that
J.C. Penney is still using several of
its applications, and that 120 compa-
nies have migrated to its systems
from other data warehouses.
All the same, customers continue
to press Teradata to bring its pricing
down. “The cost model needs work,”
says Mary-Jane Jarvis-Haig, senior
manager for data warehousing at
Hudson’s Bay Company, a Canadian
retailer. “The bill from Teradata is
always higher every year.”
Not everyone believes Teradata is
parison, needs around three times as
much staff time to maintain.
But in some cases, pricing is still
Teradata’s Achilles heel. BISYS, which
provides information-processing
services to 250 community banks,
switched to IBM’s DB2 in 1999 after
Teradata wanted roughly $750,000 for
an additional two servers, according
to Bill Johnson, the company’s execu-
tive vice president of operations and
technology. “DB2 does require more
care and feeding than Teradata, but
that’s a small price versus what we
were paying in both maintenance and
upgrade fees,” he says. —TODD SPANGLER
running 31% faster than a similarly
configured IBM DB2 system.
Moreover, Teradata’s parallel archi-
tecture allows it to handle huge, com-
plex queries that can cause competing
systems to seize up. “You can ask any
question of the Teradata database,”
says Alicia Acebo, director of data
warehousing at Continental Airlines.
“With other databases, you can run a
query—but you’re not necessarily
going to get an answer.” —T.S.

REFERENCE CHECKS
U.S. POSTAL SERVICE CONTINENTAL HUDSON'S BAY CO. NATIONWIDE COLE NATIONAL IOWA DEPT. OF
John Edgar AIRLINES Mary-Jane MUTUAL INSURANCE John Broerman REVENUE
Mgr., Enterprise Archi- Alicia Acebo Jarvis-Haig Tobi Zappe Senior Dir., I.T. Rhonda Kirkpatrick
tecture and Standards Dir., Data Warehousing Senior Manager, Data Warehouse johnbroerman Executive Officer
BASELINE FEBRUARY 2004

john.t.edgar aacebo@coair.com Data Warehouse Architect @colenational.com rhonda.kirkpatrick

@usps.gov Project: Allows 1,400 mary-jane.jarvis-haig zappet Project: Optical re- @idrf.state.ia.us
Project: Linked employees to use @hbc.com @nationwide.com tailer implemented Project: Agency spent
previously separate 40 applications for Project: Retailer con- Project: Keeps two-server data ware- $11.5 million on Tera-
sources of data in querying and cross- solidated inventory property and casualty house as part of a data warehouse and
departments using a referencing three tril- and sales information insurance policy infor- demand-forecasting software, which it used
62-server Teradata lion pieces of data across four stores mation on a 20-server application that to identify and collect
warehouse. Goal: To stored in a 12-server onto an eight-server system that processes affects inventory at $32 million in back
better manage costs. Teradata warehouse. Teradata system. 25,000 queries a day. 1,700 locations. taxes over three years.

51
 859326434592315769221185136467523256436354485932643456395465825436274579231571
A L B E R T S O N ’ S

BASE TECHNOLOGIES because it has more stores and shoppers can get in and out
of its smaller 45,000-to-60,000-square-foot outlets faster.
Albertson’s is spending But Wal-Mart now has an answer for that, too.
$500 million this year on a If Godak is the face of the ideal Albertson’s customer,
then Kelly Kirby represents the enemy.
technology overhaul. Kirby manages a new Wal-Mart Neighborhood Market
And its ‘Store of the Future’ is grocery store in South Ogden, Utah, a satellite community
1 0 5

of Salt Lake City. Wal-Mart Neighborhood Markets, with

still coming. their smaller, 40,000-square-foot design, compete head-on
C A S E

APPLICATION PRODUCT SUPPLIER against traditional grocers such as Albertson’s. They offer
the same basic grocery and drug merchandise found in an Al-
HEAD OFFICE
bertson’s, but without the frills such as gourmet cheese
Data warehouse Teradata NCR stands and Starbucks counters. There is no butcher; meat is
(Sales analysis) Warehouse shipped in daily. There is no real baker; bread and buns are
Database Oracle 9i Oracle shipped in partially baked each day as well.
(Global item repository)
There are also fewer live cashiers. Neighborhood Mar-
Data warehouse Microsoft Microsoft
(Marketing) SQL Server 2000
kets rely heavily on banks of self-checkout registers where
customers can scan and bag their own groceries. What shop-
Financials Oracle Financials Oracle
pers do get are Wal-Mart’s discount prices.
Integration WebLogic BEA Systems
software “Everything here is geared towards convenience,” says
Point-of-sale StoreLine Retalix Ltd.
Kirby, who has been in the supermarket business for 30 years
IBM 4690 IBM and was hired away from Smith Foods, a local competitor.
Supermarket Wal-Mart headquarters has “given me a lot of latitude to make
Applications sure we are very competitive in the marketplace,” he says, in-
Price Retail KhiMetrics cluding the ability to lower prices to match competitors.
optimization Revenue
Management There are just 60 Neighborhood Markets so far. But Wal-
Promotions Catalina Catalina
Mart says it will open another 30 to 40 this year and the
management Marketing Marketing same number in 2005, concentrating on one market at a
Network time. Meanwhile, other discount retailers such as Target,
Loyalty-card Preferred Catalina Kmart and even Sears also are rolling out grocery sections.
program Savings Card Marketing
Such is the hard reality facing Johnston and his team. Wal-
Floor, shelf- Intactix JDA Software Mart is attacking its core markets with a two-pronged approach
space planning
and more discount competition is on the way. Albertson’s costs
Human resources Human Capital PeopleSoft
Management are higher, its wages higher, its prices higher and its profit mar-
Hiring Manage- Unicru Inc. gins lower on equivalent prices to what Wal-Mart posts.
ment System Albertson’s has big technology ideas to address those
SUPPLY CHAIN handicaps. But it’s starting from a disadvantage there as well.
“When I came here,” Dunst recalls, “there was an I.T.
Category Proprietary Internal
management
organization primarily focused on trying to integrate a series
of acquisitions.” Albertson’s was “spending an awful lot of
Product Trigo Product Trigo Technologies
management Center time on maintenance and support as opposed to driving the
Data GLOBALregistry UCCnet business forward with new development,” he says.
synchronization Johnston says he was surprised at how big Albertson’s
Inventory control Proprietary Internal had grown without smart, efficient use of technology. So if
Logistics iTradeNetwork iTradeNetwork the company can apply it well now, his thinking goes, it will
Logistics be even bigger and stronger. “Technology drives every as-
Warehouse Proprietary Internal pect of how you create a great company,” he says.
management He has always thought so. In 2000, as CEO of GE Appli-
STORE OPERATIONS ances, he and Microsoft decided to develop computerized
appliances that use a wireless in-home network to hook up
Point-of-sale NCR NCR
terminals (various models)
to the Internet. Refrigerators would confer with microwave
IBM 4694 IBM ovens about recipes. Ovens would respond to human voices
BASELINE FEBRUARY 2004

Self-checkout NCR FastLane NCR or remote PC commands.

Personal shopper Symbol Portable Symbol As Johnston reportedly said at the time: “Imagine getting
Shopping System Technologies to work, turning on your desktop computer and getting a
Scanners NCR 787 series NCR message from your home-appliance network that you left a
burner on. With these networked smart appliances you can
INTERNET COMMERCE
send a direct command from your office PC via the Web and
Collaborative planning WWRE Network WorldWide Retail turn it off.”
and forecasting Exchange Four years later, such kitchens of the future are hardly per-
54 Albertsons.com Microsoft Microsoft vasive. Still, Johnston, with his penchant for technology big (a
SiteServer
Commerce Edition
 2118513646752325648519563573635448593264345639546530657736756125436274579231521185136467523256485195635736354485932643456395465306577367561254362740657457923151

ALBERTSON’S: CLEAN-UP ON AISLE ONE

A L B E R T S O N ’ S

00 01 02 03
Struggles to integrate
1999 purchase of
Larry Johnston is hired as
CEO in April.
Technology plan established. Workers’ strike in California
reduces gross profits by at
1 0 5

American Stores Co. Announces goal to replace least $70 million.

Five-point recovery plan 75% of systems within
Swallows $891 million announced. five years. Executives insist company on
C A S E

in merger costs. track to cut $750 million of

Safeway technology Sales and profit reporting costs by end of 2004.
Chief executive Gary Michael executive Bob Dunst named to be consolidated on
announces plans to retire. chief technology officer. Oracle Financials. Dedicates $500 million to
technology changes, including
4,500 self-checkout registers.

REVENUE GROWTH: ALBERTSON’S HASN’T KEPT PACE WITH WAL-MART.

15.9%
13.9%
15% 12.3%
WAL-MART 10.8%

10
5.0%
BASELINE* 3.1%
548165684

5 3.0%

1165684
1.5% 1.1%
-1.9% -6.0% 0.7%
84

0
ALBERTSON’S Rate of growth
in annual sales
-5

*INCLUDES COMPETITORS GREAT ATLANTIC & PACIFIC TEA CO., KROGER, SAFEWAY, SUPERVALU AND WINN-DIXIE.

RETURN ON INVESTED CAPITAL: ALBERTSON’S WANTS TO BE BEST IN CLASS. IT ISN’T CLOSE.

15% 14.0%**
13.4% 13.6%
12.4% Annual return on
equity and debt invested
12 WAL-MART in the company
10.1%**

854716547856456476574196548165684
9
6.5% 6.2%**
ALBERTSON’S BASELINE*
6 4.5% 4.6%
4.4%
74196548165684

3
0.2%
-1.4%
1419

0 ** TRAILING 12 MONTHS AS OF THE END OF EACH

COMPANY’S MOST RECENTLY REPORTED QUARTER

INVENTORY TURNS: BANANAS SELL FASTER THAN TVs. BUT ALBERTSON’S EVEN TRAILS OTHER GROCERS.

10x 148518954613294158716498
6135871649848418947473487682145194 48418
82145194148518284954 94747
16498484189474734876 34876
82145
19414 8.2x
9.4x BASELINE* 85189
54613
45821
26587

8
6.3x
7.4x
BASELINE FEBRUARY 2004

ALBERTSON’S
Number of times annually that
each dollar of inventory is turned
6 into a dollar of sales
WAL-MART
3.9x
4.8x
4

SOURCES: COMPANY REPORTS NOTE: ALBERTSON’S FISCAL YEARS END JAN. 31 OF EACH YEAR
55
 A L B E R T S O N ’ S
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 year’s plan to
spend $500 million—nearly 40% of its $1.3-billion capital
budget—on software, hardware and networking equipment.
Dunst is gleeful. Albertson’s has “an environment ripe
for improvement and the financial backing to make it hap-
1 0 5
pen—and a group of other executives who [are] very inter-
ested in engaging the I.T. organization to help them,” he
C A S E
says. It’s “a CIO’s dream.”
The trick will be dealing with the accompanying night-
mare. 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, Al-
bertson’s isn’t 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-Mart’s famed Retail Link network, which has been
continually improved since its launch in 1991, provides sup-
pliers 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, suppli-
ers 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 sys-
tem 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
2118513646752325648519563573635448593264345639546530657736756127457923156274579212118513646752325648519563573635448593264345639546530657736756127457923156274579212189
WAL-MART STORES:
THE ‘NEIGHBORHOOD’ BULLY
Wal-Mart’s new Neighborhood Market stores are
designed to go toe-to-toe and tomato-to-tomato against the
more traditional grocery stores that populate U.S. cities. By
all appearances they have the same products and services
offered by any Albertson’s or Kroger, from a bakery to a
full-service drug department. A peek at a recently opened
Neighborhood Market in South Ogden, Utah, shows aisles
that are wide, cement floors made attractive with a glazed
brown finish, and an open ceiling with steel beams painted
black. The store, open 24 hours a day, offers a drive-through
pharmacy and a pizza-to-go stand.
But the look of luxury hides unseen savings.
BASELINE FEBRUARY 2004
A glass window in the back of the store, for instance,
allows customers to watch an oven at work. The scene
leads to an obvious assumption: the bread, buns and other
baked goods stacked high out front are baked fresh on the
premises. Instead, bread and other baked goods are trucked
in daily in partially-baked form and finished off in a browning
oven. There is no baker.
The amply stocked meat and deli sections also seem to
56
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. It’s a recipe that could spell disaster for Albertson’s.
It may not be possible to beat Wal-Mart consistently on
price, but Albertson’s must be close enough that its pricing
won’t 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, Albertson’s has to get to know its in-
dividual customers better through its loyalty-card program
and to offer products they might not be able to find on Wal-
Mart’s shelves. Wal-Mart does an outstanding job of mar-
keting to the masses, McGarvie says, but it doesn’t 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
So far, Dunst has laid the framework to wean Albertson’s off
its mostly mainframe, mostly proprietary applications and
has taken the first steps toward replacing or upgrading 90%
of the company’s applications by 2007. He has installed Ora-
cle Financials, rolled out PeopleSoft software for human re-
sources and updated the company’s 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 net-
benefit from an in-store butcher. But as with the baked
goods, the meat, too, is shipped in daily—in pre-packaged
containers from Wal-Mart’s distribution facilities. Anyone
can put it in the freezer. The store avoids the cost of a
professional butcher.
More efficiencies can be seen at the front of the store.
A single clerk oversees a bank of six NCR FastLane
self-checkout registers. Two other lanes are staffed by
regular cashiers as manager Kelly Kirby leads a visitor
through the store. But the self-checkout registers cut
down on the need for salaried employees.
Like all Wal-Mart stores, the Neighborhood Markets are
plugged by satellite into the company’s famed Retail Link
network. That way Wal-Mart and its suppliers know exactly
what’s flying off the shelves each day, and can have trucks
loaded with fresh stocks on the road the next morning. It’s
the technological answer to an in-store butcher or baker.
The various measures mean that Wal-Mart is able to oper-
ate the Neighborhood Markets with about 10% less staff
than traditional grocery stores, says Kirby. He’s in a position
to know, having worked in the business for about 30 years.
The result: Neighborhood Markets can sell products
for the same low prices that Wal-Mart offers at its giant

work 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 Albertson’s will be
split 50/50 between old and new applications. Integration
software from BEA Systems is being used to assist the tran-
sition from the old COBOL programming world to the new
Java environment.
Speaking to investors last fall, “Gabe” Gabriel, the exec-
utive vice president of supply chain, said Albertson’s supply-
chain and distribution facilities were also essentially sound,
but as with other grocers, “there was a noticeable lack of at-
tention paid to such areas as technology in systems, inventory
management, procurements specifically through strategic
sourcing, and logistics optimization.”
For example, Albertson’s employed electronic data-in-
terchange 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 ini-
tiatives being undertaken, Gabriel said at the time, were de-
signed to help negotiate better deals on prices—lowering
the cost of getting products from suppliers and manufac-
turers to stores, reducing out-of-stock situations and help-
ing reduce vendor costs.
Albertson’s 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 com-
pany planned to begin accepting electronic invoices through
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Supercenters, and still maintain a healthy profit.
On this day, Jamie Hammond, with her two young boys in
tow, is making her first visit to the store. She usually shops at
an Albertson’s store closer to her home, but she was curious
to see what the Neighborhood Market had to offer. Her im-
pression: “The Albertson’s where I usually shop is more at-
tractive, and has a bigger selection,” she says, “but the prices
are definitely better here.” Will she switch to the Neighbor-
hood Market for the better prices? “I don’t know,” she says.
The Neighborhood Markets haven’t yet started to seriously
eat into the profits of traditional grocery stores. There are
only about 60 across the country, averaging 40,000 square
feet in size. Wal-Mart plans to open 30 to 40 of the stores
each year, usually targeting metropolitan areas such as Salt
Lake City or Dallas. As big as Wal-Mart is, the company sees
no reason to leave any part of the market on the table.
“Supercenters effectively serve a large trade area, but we
think there may be some business that we are not getting
purely because they may not be as close to the customer
or convenient for small shopping trips,” former Wal-Mart
chief executive officer David Glass said in explaining the
concept in the company’s 1999 annual report.
The jury is still out on how successful the concept will be.
A L B E R T S O N ’ S
the supplier portals by early February.
Two other key steps are being taken to streamline the
electronic exchange of orders and invoices. Albertson’s has
asked Trigo Technologies to provide a repository for stan-
dardized product information. The grocer also asked all of
its suppliers to synchronize their product information, such
as pricing, ingredients, descriptions, and packaging, through
1 0 5
UCCnet, a non-profit industry organization. UCCnet has cre-
ated a Web database of 14-character product codes that it
C A S E
hopes will eventually replace Universal Product Codes
(UPCs). The goal is to create one global language for retail-
ers and suppliers, so Albertson’s buyers can talk to suppliers
in China, Thailand or Brazil and know that they’re compar-
ing 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 regis-
ters and after hearing of their bankruptcy filing in January
2002, he immediately suggested to Johnston that Albertson’s
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.)
Albertson’s Store of the Future idea is fledgling—just
three stores are testing it and even those aren’t outfitted to
carry out Johnston’s full vision. But it’s likely to be one tech-
nology concept that won’t be emulated by Wal-Mart, which
prefers to keep technology out of customers’ eyesight.
Speaking at the CEO2CEO conference in New York in No-
vember, Johnston outlined his goals: Web shopping lists,
global satellite positioning systems tied to handheld devices
in shoppers’ hands, in-store mapping, personalized promo-
tions based on stored data, automatic checkout and custom-
stocked stores.
A customer’s shopping experience will begin at home
The company admits it makes more money from its
Supercenters, giant stores which range up to about 230,000
square feet in size with about 60,000 square feet dedicated
to groceries. An average 200,000-square-foot Supercenter
employs 350 workers, sells $61 million in goods each year
and makes a profit of about $2 million on those sales. By
contrast, a Neighborhood Market averages $19 million in
sales and employs about 90, but some analysts believe
Wal-Mart isn’t getting the same 3.3% profit margin on
those sales. A more conservative estimate of 2.3%—still
well above typical grocery-store margins—puts profits
at about $437,000 per store. On a per-employee basis,
the Supercenters earn about $5,714 compared to the
Neighborhood Markets’ $4,855. On a square-foot basis,
however, the Supercenters are earning only about $10
BASELINE FEBRUARY 2004
per square foot and the Neighborhood Markets $10.92.
Either way, Wal-Mart needs to open four Neighborhood
Markets to gain the same total profits as opening one
Supercenter.
But no matter how their earnings are tallied, the
Neighborhood Markets serve as a warning to Albertson’s
and other grocers that even the element of convenience is
no longer a safe defense against Wal-Mart. —M.D.
57
 A L B E R T S O N ’ S
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 in-
formation can be plugged in and menu choices suggested.
When she gets to the store, she’ll use a loyalty card to obtain
a handheld device, like the one used by Bishop in Barring-
ton, Ill. Loyalty cards have been deployed in all but one of
1 0 5
the company’s seven retail divisions, with Albertson’s col-
lecting data on 1.4 billion shopping trips in 2002.
C A S E
The handheld device will automatically reach out to the In-
ternet, grabbing the customer’s shopping list. Then it will log
into the store’s 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 pro-
motions on items that Albertson’s believes will be of interest
to the shopper as she walks through the store, such as the pa-
per-towel offer Bishop received. If the customer has a pre-
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A&P:
THE NOT-SO-GREAT RENEWAL
Four years ago, Great Atlantic & Pacific Tea Co., once
the largest supermarket chain in the U.S., was about
where Albertson’s is today.
A&P—as the company is commonly known—isn’t as big
as Albertson’s and Albertson’s hasn’t lost the millions of
dollars that A&P has, but Wal-Mart has hurt them both and
both have endured pinched margins due to flabby supply
chains and outdated information technology.
In 2000, A&P launched a giant technology makeover, just
as Albertson’s now has. A&P’s goal then, like Albertson’s
today, was to modernize store operations, financial reporting
and human-resources management; get rid of old custom-
built mainframe applications; and create more-efficient
supply-chain and logistics systems. A&P intended to spend
big on software and hardware to cut costs, regain market
share and discover new riches in groceries.
A&P hired IBM and Retek, a Minneapolis software
maker, for a four-year, $250-million technology overhaul.
The vendors were to install new warehouse and
transportation systems as well as category management,
merchandising, financial and human-resources software.
The project was part two of A&P’s grandly named Great
Renewal initiative to get the company back to glory. Great
Renewal Part One, a 1998 plan to close poorly performing
stores, had failed to renew A&P. Even after closing 165
stores in 1998 and 1999, sales in its remaining 750 stores
continued to be flat. Overall, annual sales plodded from
$10.2 billion in 1998 to $10.6 billion in 2000.
Goals for Great Renewal Part Two weren’t specific
BASELINE FEBRUARY 2004
but hit on key metrics, such as higher margins, lower
expenses, and to stop red ink. The project was supposed
to save $325 million in annual costs the first year, then
$100 million per year after that.
It wouldn’t be a cake walk. IBM, Retek and A&P
wanted to build an enterprise resource planning (ERP)
suite tailored to the way the supermarket business
worked, rather than just any old retailing endeavor.
58
scription to fill or photos to be processed, the Symbol device
will let them know with a text message when they’re 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, you’re going to kill your daughter,’ ” says
Johnston. “When you’re done, it will automatically put it on
your credit card and you’ll roll right through the front end,
through a speed gate, just like you would on the throughway.”
Though each Albertson’s store is connected to headquar-
ters 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.
“You’re 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, they’ll need the support of Albertson’s cashiers, stock-
At the time, none of the big ERP vendors—from SAP to
Oracle—had attempted that, in part because selling groceries
is one of the most complicated businesses going, with one of
the slimmest profit margins. Off-the-shelf software wasn’t
written to manage retail goods with sell-by dates.
The systems didn’t allow for buying goods in one form
and selling them in another. The technology couldn’t
handle some products being shipped back to suppliers if
not up to standards—or being thrown out if they spoiled.
ERP software at a clothing store, for example, tracks data
on the same red sweater from manufacturer to warehouse
to store to customer. Sweaters don’t change or rot.
But in groceries, a side of beef may be shipped from a
farm to a refrigerated distribution center where it’s cut
into and sold as roasts, steaks or burger patties. Unlike
milk and butter, sweaters have no expiration date after
which they have to be removed from store shelves.
A&P was Retek’s first major U.S. grocery contract. Nick
Ioli, at the time A&P’s chief information officer, told a
reporter that the project was “a huge, huge undertaking.”
By mid-2001, A&P had posted $21.6 million in quarterly
losses. By February of 2002, the company reported a net
loss of $71.9 million for its fiscal year ending February
2002, up from a loss of $25.1 million the previous year.
And it reported a profit of $14.2 million in fiscal 2000.
CEO Christian Haub said in a conference call in the
middle of 2001 that he was “disappointed” with how
the company was executing its plans. In 2002, Ioli was
replaced as CIO by John Metzger, who had been head of
logistics. The company then dropped the “Great Renewal”
name, instead using the simpler “business-process initiative.”
A year ago, A&P, IBM and Retek put out a press release
saying the project was complete and complimenting each
other profusely. They declined to talk about it further. The
grocer still won’t talk and has instructed IBM and Retek to
keep quiet as well. Ioli could not be reached for comment.
A&P continues to struggle. It lost $194 million in fiscal
2003; sales dropped 1.6% compared to the year before.
A&P stock trades at $8.31, less than half of what it was
when Great Renewal Part Two was announced. —K.S.N.

ers, baggers and managers—the people in stores to help cus-
tomers 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. Albertson’s, along with
Kroger and Safeway, wants employees to pay health-care pre-
miums of $20 to $60 per month, a practice Wal-Mart has
long employed. The companies are also fighting union at-
tempts 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 worker’s hourly pay-and-benefits package is almost
three times that of an average Wal-Mart worker.
Southern California is one of Albertson’s biggest mar-
kets and in just four months the strike has cost the company
$132 million in sales and $70 million in gross profits, ac-
cording 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 earn-
ings call that he’s willing to wait it out. “Despite [the finan-
cial 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 Albertson’s, he
hired motivational speaker Ed Foreman to hold workshops
with all managers and store directors. They in turn have been
directed to spread Foreman’s gospel—a relatively simple col-
lection of ways to make “every day a terrific day”—to the
rest of Albertson’s 200,000 employees.
Foreman, whom Johnston also used at GE, says he will
speak to close to 10,000 Albertson’s workers at seminars
that range from a few hours to three full days.
“There’s no secret formula to what I’m doing,” he says.
“It’s 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 Fore-
man’s teachings. He tells people to wake early, go for a morn-
ing 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 Albertson’s a
mission, a 32-word vision, 10 core values and five strategic im-
peratives. (The imperatives are emblazoned in posters on head-
quarters’ 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 Albertson’s
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-Mart’s
own supply-chain operations, for instance.
What Johnston does not have is time.
THE PAYOFF
Albertson’s 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,
A L B E R T S O N ’ S
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, Albertson’s 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
1 0 5
3% growth rate for five major competitors, including Kroger
and Safeway.
C A S E
Wal-Mart, meanwhile, stormed ahead over the same pe-
riod, growing 10% overall. Grocery sales now comprise
about 22%, or $56 billion, of Wal-Mart’s total annual sales.
Albertson’s has made gains on its technological revolu-
tion. Results from those efforts will start showing up in in-
creases 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 Albertson’s 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-Mart’s lead.
“It’s probably going to get worse for [Albertson’s] 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 Albertson’s 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 Albertson’s. However, he thinks
Johnston’s on target with his plans and results will follow.
“The previous management postponed the company’s tech-
nology problems. He’s had to make up for a decade of foot-
dragging,” says Flickinger.
One advantage Albertson’s does have is that unlike its
closest competitors Kroger and Safeway, it has strong drug-
stores among its holdings, operating under the Sav-on and
Osco brands. Margins are much better there than in gro-
ceries. Plus, many Albertson’s stores are in urban centers,
such as Chicago, which Wal-Mart has found difficult to pen-
etrate. “It’s a significant weapon, because whereas the gro-
cery 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-Mart’s charge into the mar-
kets Albertson’s most covets, particularly California, is only
just beginning.
BASELINE FEBRUARY 2004
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. He’ll enter
year four in April.  59