In 10 years heading up information systems at Kroger, the $56 billion grocery chain, Michael Heschel has learned a thing or two about introducing new technology: Test to make sure it works; test to make sure shoppers will accept it.
“People do not like complexity,” he warns in a tone so grave that one wonders what painful technology implementation he’s privately reliving.
As executive vice president and chief information officer at Cincinnati-based Kroger, Heschel oversees technology for more than 3,700 stores selling grocery, apparel, consumer electronics and fine jewelry. His million-dollar pay package keeps him in Ralph Lauren suits and makes him among the most richly compensated technology executives in retail, according to the 2005 CIO Compensation Survey conducted by Baseline magazine.
Next year, Heschel will retire, a move that will bring freedom from the rigid no-press policy enforced at Kroger. In an exclusive interview with WWD, he begins to stretch his vocal chords on everything from self-checkout technology to Sarbanes-Oxley and mergers.
WWD: Cio’s in apparel tell me they look to the food sector for smart technology strategy and innovation. Why is that, when grocery’s slim profit margins don’t leave much to spend on technology?
MICHAEL HESCHEL: There are a couple of reasons. Although our margins are thin, we are a highly competitive industry, so we have to do all we can to attract the customer. We have to keep our costs down, and one of the ways to do that is through use of select technology. For example, bar codes at checkout reduced our labor costs dramatically. Automated concepts in the supply chain cut cost of delivery of product from manufacturer to our stores.
WWD: You were an early advocate of self-checkout technology, where shoppers scan, bag and pay for their items without cashier assistance. Was that risky?
M.H.: Yeah, there was some risk involved, but we took a fairly disciplined approach to evaluating it over a period of time in small test areas, so we could see what the customer reactions were and to make sure the technology was reasonably stable, because it was a new system.
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You know, when some of the point-of-sale systems first came out, they were a disaster. They did not work properly and it was frustrating for the customer. So you’ve got to have that as the foundation, that the technology is in fact stable. And after that, the key was to see what the customer reaction was. We were very concerned about the senior citizens and whether they would accept it.
WWD: Were you surprised at their reactions?
M.H.: Yeah, in fact they are the ones who like self-checkout most. People like to be in control. And they think they are getting in and out of there faster because they are doing it themselves.
WWD: What are your biggest concerns with radio frequency identification?
M.H.: First of all, let me say that I think this technology is here to stay and at some point, it’s going to be a revolutionary kind of thing in the whole retail supply chain. However, if you take a technology that is not mature and try to implement it too quickly, you are liable to incur a lot of cost and added complexity in your operation. I see that as a real issue here because certain companies are demanding that their suppliers use certain aspects of RFID on certain products assuming there are certain benefits there. And there will be benefits over time, but the problem is that this technology is not mature yet. It is still not totally reliable. It still is relatively costly.
My real fear is that we as an industry go too fast and maybe don’t get out of it what we want, some of which I hope we learned from the old bar codes. When we first [used bar codes], we had lots of problems and customer service issues.
Sometimes things don’t work quite the way you thought, especially if you don’t have perfectly accurate data. And RFID demands perfectly accurate data. If a retailer has one numbering scheme and a supplier has another numbering scheme [to identify a particular product], you are not going to know what you are dealing with. Data synchronization is absolutely imperative and we don’t have that yet.
WWD: How far along are we in achieving the data accuracy that’s necessary for RFID?
M.H.: I’d say we are 25 percent of the way there.
The second obstacle to RFID is we are not exactly sure where the benefits are. I don’t know if you remember ECR. [Launched in 1993, Efficient Consumer Response was a U.S. food industry initiative projected to slash supply chain costs by 10 percent, or $30 billion.] The problem with ECR is the program stated, ‘OK, there is $30 billion in benefit to the industry.’ But as each individual company began to peel back the onion, what they could not see is where the benefits were for the next couple to three years. As a result, ECR died under its own weight.
WWD: Do you see any parallels between the early adoption of self-checkout technology and RFID?
M.H.: You learn some lessons that are transferable to RFID implementation. It can’t create complexity for the shopper. People do not like complexity.
I’ll give you an example: electronic shelf tags [which are devices attached to store fixtures that display price and other information]. The consumer hated them. You couldn’t read them very well. You had to bend down. You couldn’t see. They had these buttons you had to push to see what the price was. And people said, ‘Wait a minute. This is taking time. It’s hard to see them.’ I don’t care how good the technology is, how cheap it is; if it’s too complex or changes the shopper experience in a negative fashion, the consumer is not going to accept it and you will find yourself having to de-install what you put out there.
WWD: Complying with the Sarbanes-Oxley Act is not optional. Can cio’s calculate a return on investment for those technologies that support regulatory compliance?
M.H.: I would say that is an unnecessary effort. What cio’s have to focus on is that they satisfy it in the most cost-effective fashion possible. What you need to do is automate fulfilling the SOX requirements as best you can through proper security, computerized reporting and controls, so that you don’t have to go through all this manual stuff. That is where you can calculate some ROI.
WWD: Kroger will be testing encoded audio to measure consumers’ interaction with in-store media as part of the Arbitron Portable People Meter trial in Houston. Is there a resurgence in in-store media?
M.H.: I see a place for in-store media, but it is going to have to be done in such a fashion that the consumer doesn’t find distracting and irritating. To take a TV set and jam it up on the wall and put an ad on there is not going to cut it.
It has to be something that enhances the shopping experience. If you do it right and really are selective in what you do and how you do it, I think it can be of value. The other thing you’ve got working for you — wireless. With next-generation cell phones, you will be able to drive some of that stuff right down to the consumer who signs up for it. Then you can target things specifically to a consumer, you know. The whole media thing is going to reach out much further than just inside the store. You have got to be careful, though. You can get consumers angry if you start sending them stuff over the cell phone they don’t want. Like stuff you get on your PC — there are days when I want to smash it, when I get stuff coming in.
WWD: You were at Kroger in 1999, when it acquired Fred Meyer for $13 billion. In any massive merger, what are some of the technology issues that too often take a back seat?
M.H.: Usually, the company being acquired and the technology it has is significantly different from the company that is acquiring it. You have got to make a decision about what you are going to do in your applications and systems environment. Are you going to say, ‘OK, you guys are going to use our systems’ and that’s it? Or, are you going to say, ‘Well, we are going to sit down and figure out what the best of both worlds is, and select best of breed.’ Or, are you going to say in select cases, ‘Gee, neither [company’s] system is really that good. Let’s take this opportunity to get another one.’
The answer is probably all of the above. You have a big, big integration issue there.
And then you’ve got the issue of people and culture. I’ve been through a couple of big mergers and I will tell you that is the biggest one. You have got to make sure what the surviving company stands for becomes the culture of the company that has been acquired. And I’ll tell you: people fight change. They will come up with every possible reason why they shouldn’t do this. There comes a point in time when you just have to dictate what has to happen.
Mergers are done not only to increase sales but also, importantly, reduce costs. If you don’t get the technology right and your costs aren’t right, what do you got? You’ve got a mess. Companies then have to admit they should never have done it. And what do they do? They say let’s agree this was a bad deal and get divorced.
A tough job, I’ll tell ya. Mergers are a tough job.