Supermarkets Are High-Tech Hotbeds

Kroger’s infrared cameras to shorten checkout queues is just one example

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Steven Cherry: Hi, this is Steven Cherry for IEEE Spectrum’s “Techwise Conversations.”

We’ve had a bunch of shows about data science, data mining, and databases; maybe it’s time we talked about the data itself. The fact is, we’re awash in it and creating more every second. Retail stores live and breathe data, none more than supermarkets—a business where profit margins are, literally and figuratively, thinner than a dime on the dollar.

A lot of supermarket tech is at the checkout area. Bar-code scanning was already old hat when U.S. president George Bush the elder was allegedly amazed by them in 1992, and retailers continue to experiment with the next logical step: self-checkout systems.

It makes sense. Checkout is one of the limiting factors in sales growth—people won’t shop if the lines are too long. So recently the U.S. supermarket chain Kroger took the dramatic step of installing infrared cameras. They use them to deduce how long the lines are by measuring how much body heat there is. It’s a development odd enough that when the Wall Street Journal reported it in early May, we had to follow up.

Here to tell us about the Kroger experience, and other supermarket technologies, is Kurt Kendall. He’s a partner and director at Kurt Salmon, where he heads the analytics practice there. Previously he was at McKinsey & Company, and before that, Sears. He’s a tech guy himself, with a Ph.D. in chemistry from MIT. He joins us by phone.

Kurt, welcome to the podcast.

Kurt Kendall: Thank you for having me today.

Steven Cherry: Kurt, I claimed people won’t shop if lines are too long, but that’s weirdly like Yogi Berra’s famous paradox: “Nobody goes there. It’s too crowded.” But Kroger has some experience that it’s making a difference, don’t they?

Kurt Kendall: They do. I think Kroger is one of those retailers who’s really at the forefront of understanding the consumer and customizing and personalizing the experience to really bring them into the store. And the last thing you want to do as that customer is leaving the store is leave them with a distasteful experience, such as long lines. So they and others are trying to figure out how to make that checkout experience as good as possible for the customer while minimizing the expense to themselves.

Steven Cherry: And I guess sales are up, and they’re crediting that to the system. So let’s talk about what they’re actually doing with these infrared sensors. How does it work?

Kurt Kendall: Well, there’s a lot of technologies out there right now that are being introduced into the retail space to understand what consumers are doing in the store, and heat-mapping is one of those technologies—using cameras in the ceiling to actually track where the consumer’s going. What this information tells the retailer is where a consumer is, how they’re moving around the store, whether they’re dwelling in certain places, like checkout or in front of specific merchandise. And with that information, then, you can get a sense of what the consumer is doing, and then ideally, in this case, taking some actions to improve the customer experience.

Steven Cherry: Now, in the case of the cameras in other parts of the stores, they can analyze that data later, I guess. But in the case of the checkout lines, they’d want to use that information in real time, right, to open up more lines or something like that. Do you know how the information flows? Is there some kind of real-time reporting that goes to a floor manager?

Kurt Kendall: My understanding of the technology is that it does provide the ability to have real-time alerts, so that the information could pop up on a smartphone or other type of device. There’s both the real-time application for this technology as well as a longer-term application. So even if you’re not responding immediately, you can incorporate the information into your store labor forecasting. And so, as you’re deciding how many people should be in the store manning the registers the next week, you can actually use this information as well.

Steven Cherry: Now, as I understand it, this whole infrared thing was developed in-house by the IT department. It seems kind of a level beyond what a lot of people think of as IT.

Kurt Kendall: It is, but at the same time I think you’re seeing retailers are being more innovative than I think historically they’ve been given credit. And IT organizations are really starting to be innovators in technology. Kroger is not alone. Walmart, for years now, has had WalmartLabs and has made investments, and just in the last several weeks, Target has made some investments in California, actually, to build out their technology. So retailers are both looking outside their organizations for innovative technology they could introduce, as well as building it internally.

Steven Cherry: Yeah, so some retailers are really doing a lot with data mining of customer information, I guess, especially the information they collect with those shopper discount cards. And I guess Target, for example, is an example of that. And you mentioned Walmart—one of their big things is the use of IT in logistics.

Kurt Kendall: Yeah. You’re really seeing the application of IT analytics and big data in all parts of the retail organization. Marketing has been at the forefront of that for years now, but you’re seeing it move into other places, like in the supply chain, in merchandising, in product development. I would certainly argue there’s really no place in a retailer that you can’t use the data and insights to actually make better business decisions.

Steven Cherry: Speaking of logistics, there’s like a decade of warehouse and retail experimenting with RFID. Has that gone anywhere?

Kurt Kendall: RFID is one of those technologies that’s sort of been on the horizon for many, many years. What’s interesting is that I do think you’re actually starting to see more implementations of RFID. And the business cases around omni-channel, where you’re actually being able to use the RFID information to allow you to ship products from the store, is one of the places where you’re starting to see the actual business case now support the deployment of that. And we’re seeing that more and more of our clients are looking into RFID as a potential technology that’s going to move sort of from the bleeding edge into something that they’re actually going to implement.

Steven Cherry: Now, RFID are these sensors or tags that go way beyond bar codes to track merchandise as it moves through the chain. A little in between RFID and bar codes is these QR codes. These are those weird children of a marriage of bar codes and Rorschach tests, I think, that you’re supposed to snap with your phone to get more information. Is anybody having any success with these?

Kurt Kendall: I think where you see the QR codes having the most traction is in the marketing space. And it allows the retailer who’s doing the marketing to connect a physical piece, a print piece, a poster, to bring that customer online and actually connect to the digital. So in that space, I think you are seeing a lot of traction. And you’re seeing retailers use that to, again, in this idea of omni-channel, bridge the physical world to the digital world.

Steven Cherry: Now, there’s a danger there, right? A little too much bridging might be dangerous. Amazon has an app, for example, that lets people walk around a store and photograph a bar code, and they’ll see the Amazon price for that article, right?

Kurt Kendall: Yes. And certainly in the last couple years you’ve heard a lot around the “showrooming” issue, and at one level you’d look at this and say, “Well, this is actually going to cause even more of that.” But I think when you look at the retailers who are doing well, they’re able to defend that showrooming issue well. And at the end of the day, I think what we see is the retailers who create a better customer experience—and we think an integrated customer experience is a better customer experience—are able to defend against companies like Walmart and able to hold that customer, and they’re not going to defect.

Steven Cherry: Yeah, so there is, though, this long-term trend of an increase in online shopping. Where do you see the balance of power right now, and where do you see it going?

Kurt Kendall: Well, I think there’s the pure players like Amazon, and I think people, I think rightly so, are going to continue to see Amazon be successful. Where we’re seeing a lot of actual traction in the online space is with the traditional retailers, who for many years had a very strong online presence, but that presence really lived in isolation from their physical stores. Those barriers are certainly breaking down. And we’re seeing a lot of the growth now being driven not just purely by online, but the interaction between the online and the physical stores.

Steven Cherry: Yeah, I’m amazed now to see a lot of stores or businesses that started out online, for example, the Territory Ahead, that are opening stores. Why take on the costs of real estate, liability insurance, distribution, and so on?

Kurt Kendall: I think what you see is that there is a role for the physical store. I remember years ago, when the Sears catalog was ended, people were talking about the death of the catalog. I think as the holidays come along, we all know that the catalog is not dead but is very well thriving. I think similarly with the physical store. It serves a very strong purpose. Consumers like the physicality of shopping. They do like to do it. It’s not a burden. It’s something that people actually look forward to. And by opening a physical store, you’re actually creating an experience that you can’t get online.

And so I think recently the CEO of Macy’s commented that he looked at his stores as a strategic asset. And we very much think that that’s the case, that there is a role today and there will continue to be a role for the physical stores. Even as you see the online sales increase as a percentage of overall sales, it’s really going to be the synergies between the two channels and not an us-versus-them type of situation that I think some people have discussed.

Steven Cherry: Yeah. You mentioned showrooming before, which is this wonderful example of verbification, I guess, where people are treating a store as a showroom and then go order online. But there are experiments now with stores that are just showrooms, right, where you don’t walk out with the merchandise, but you at least try it on. There’s a company in Manhattan, Bonobos, which is doing this. And you mentioned Sears, and Sears did this years ago, where they had these outlet stores, where you would basically shop the catalog, and they had a limited amount of merchandise that you could see and feel and touch, and then the stuff was shipped to you. Is this going to be a trend?

Kurt Kendall: I think you’re going to see more of it, and I think you’re also going to see a little bit more creativity in this idea of what is that physical experience? Do you need to have the merchandise? How much merchandise do you need? My team was actually the one who ran the Mygofer for stores, so I’m very familiar with sort of the concept. And it very much was around the idea that you don’t need to have huge depth in your inventory. If the customer wants to buy it, you want to give them access to it. There’s experiments in South Korea in the subways, where you’re literally able to scan an image, and the stuff is delivered to your house.

So when I talked about retailers sort of moving some more in the innovation front, it’s exactly these type of things. They’re exploring the space that the consumer is looking for. And I think the idea of, well, you’ll have a store, you may have an online site, that’s, I think, the old model. You’re going to see a lot more creativity in what it really means to be a retailer.

Steven Cherry: Yeah. The flip side of that is Amazon has been experimenting with same-day delivery, right? They’re building warehouses in big cities, and they expect a significant portion of their clientele to be able to receive merchandise the same day they order it.

Kurt Kendall: Yeah. I think you’re seeing an acceleration of the delivery time between when you order it. One of the reasons for companies implementing ship-from-store is it allows you to have a quicker delivery time. A lot of retailers might have one or two distribution centers around the United States, and so it’s hard for them to deliver next-day or even two-day. By having more distribution points, you’re actually able to get it to the consumer faster, and the consumer is going to migrate to you. And Amazon certainly is a retailer that other retailers are looking at because of their ability to deliver quickly. And so I think you’re going to see more of it.

There is, I think, a question of how much do consumers need everything delivered the same day. So I think you’re going to see sort of a balance between things that can be delivered that day, between the next day, but, again, more choice rather than less for the consumer.

Steven Cherry: And I guess you’re expecting to see some sort of balance eventually between online and physical, right? So online is up to about, I guess, 10 percent now. Where do you think it levels off?

Kurt Kendall: We have clients that are physical retailers but where the online sales are 40 percent. So I think you’re going to see that number continue. And I think certainly for—it will really depend on the categories. In things like groceries, I think it’ll be at the lower end. For apparel, you’ll see in the 20s and 30s percent. I think you’ll see some retailers you think of as store-based, where their numbers will be over 50 percent. So I really think you’re going to continue to see that grow.

Some of that growth is going to be in the sense of pure online, and a lot of it’s going to be really driven by this idea that it might be considered an online sale, but it’s really being fulfilled out of the store, or they came in the store and they ordered it online. So it won’t be as clean a delineation as it has been historically.

Steven Cherry: Yeah. I guess flat-panel TVs, nobody really wants to take these 90-pound behemoths home, so you just have it shipped. I started the show by talking about self-checkout, and maybe we’ll close there. It seems like it’s on the verge of being ubiquitous. I saw one report that said there’ll be 10 times as many by the end of next year as there are right now. But it seems a lot of shoppers hate it. I have to confess, I’m one of them. What’s going on here?

Kurt Kendall: Well, I think that there’s two things really driving the movement toward self-checkout. One is there’s a portion of consumers who like it. I’ll actually put myself in your camp. I tend to try to avoid it, typically because of some bad experiences I’ve had. But the other reason is from a cost standpoint, is that manning a checkout is more expensive than a self-checkout, even when you take into consideration the potential for loss and shoplifting.

What you are, though, also seeing is, again, more innovation in the space. They’re not just self-checkout, but the ability to use your phone for checkout. You’ve got mobile [point of sale]. Nordstrom, for example, has rolled that out in some of their stores, where someone’s got a handheld device and they’re checking you out with that. And you’re even having the scan and putting it in your basket, whether it’s a device the retailer’s providing or, again, you’re using your phone.

So there’s a lot of different options that are there to both keep the operational costs, if you’re a grocer, down, but also allow that customer to have an experience more along the lines of what they’re looking for. So, again, the idea of innovation and options.

Steven Cherry: Well, Kurt, although I bought my last three pairs of shoes online, I’m not ready to give up on the in-store experience, and I’m glad retailers aren’t either. Thanks for studying this, and thanks for joining us today.

Kurt Kendall: Pleasure to talk to you. Thank you.

Steven Cherry: We’ve been speaking with retail analyst Kurt Kendall about high-tech supermarkets and the future of retail shopping.

For IEEE Spectrum’s “Techwise Conversations,” I’m Steven Cherry.

This interview was recorded Wednesday, 22 May 2013.
Segment producer: Barbara Finkelstein; audio engineer: Francesco Ferorelli
Read more “Techwise Conversations,”find us in iTunes, or follow us on Twitter.

NOTE: Transcripts are created for the convenience of our readers and listeners and may not perfectly match their associated interviews and narratives. The authoritative record of IEEE Spectrum’s audio programming is the audio version.

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