Walgreen Co. officials sometimes call it “back then” or “a long time ago.” They mean the days of the one-size-fits-all, everything-for-everyone Walgreens store.
They mean the mid-1990s.
Click forward to now, when Walgreens, like other growing retailers, has exchanged the principles of uniformity for the profits of customization. The national retail pharmacy chain is in the middle of implementing a new integrated software system designed to micromanage its inventory on a store-by-store basis.
Walgreens executives expect that, by tailoring each store to the local market, they will achieve a more efficient operation and a more loyal customer base.
“A long time ago, the thought was you had to please everybody,” said Jeffrey Rein, vice president of marketing systems and services. “We now know that everything sells somewhere but not everything sells everywhere.”
Deerfield-based Walgreens used some outside software but stayed in-house to develop large portions of its new system, called “basic department management.” It analyzes customer demographics, from age to gender to ethnicity, and adds product history information, geographic factors, seasonal changes, store and shelf sizes, and more, so that every store can receive a personal merchandising blueprint.
Walgreens is not alone in employing technology to micromarket products. Most of the large chain retailers, such as Kroger and Wal-Mart, use computerized “space management,” which allows them to arrange items in their variably sized stores using tools such as “planograms”–diagrams of floor layouts and shelves that help retailers decide where to place products to maximize sales. According to a recent study by market researcher Chain Store Guide, a bit less than half of the overall retail industry uses space management software.
“Category management” software, tools that analyze product types and their profitability, also is used on average by about 45 percent of all retail segments. Department stores lead in the category management area, with 78 percent using the software, according to the study.
While the basic technology has been around since the early 1980s, it is moving ahead with the times. Like Walgreens, other large retailers are designing sophisticated systems that integrate category and space management software.
“Because of the integration, automation is touching every part of the business,” said Keith Realmuto, technology editor at Chain Store Guide. “The bigger and more complex an organization becomes, the better tools they need to become profitable.”
As prices come down and competition stiffens, smaller retailers also are showing interest in category and space management software, though many choose to buy simpler, less interconnected versions.
“In roughly the early 1980s, somebody probably had to have 100 stores or more” to have stock management software, said Kevin Stadler, managing director of JDA Software Group Inc.’s space management division, Intactix. “Today we see operators with 10 stores or less that use it.”
For Walgreens, a company that opened its 3,000th location in May and expects to add 300 more stores by January, more growth means numerous additional decisions about inventory. Store size also has become a more variable factor as the chain has opened shop in cramped downtowns.
For about a decade, Walgreens used the strategic inventory management system, or SIMS, which alerted store managers when stock was running low. About two and a half years ago, the company began developing BDM to ease its growing pains, one product and one store at a time. The rollout began early this year and will continue for at least two years. Walgreens will continue to use SIMS along with BDM.
“Walgreens tends to be a very precise company in terms of its selection and inventory,” said Tom Compernolle, vice president of national retail consulting for Cap Gemini Ernst & Young Consulting (the company name as published has been corrected in this text).
Walgreens officials say BDM is already enhancing their precision.
Earlier this month, the system noted that Gillette’s Good News disposable razors–in packages of five–were exceptionally popular in Walgreens stores in Puerto Rico. The analysis relied mostly on the sales history of the product and the strength of Gillette’s brand name. So now, instead of having just one package of the razors facing customers, the 49 Puerto Rico stores have made space for three facings and, at BDM’s suggestion, placed them at eye level.
In Miami, where there is a large Cuban-American population, Walgreens stores may get a BDM suggestion to stock up on a specific shade of darker hair coloring. A downtown Chicago Walgreens will likely end up with more pedestrian-oriented items such as cushioned insoles, while the suburban Walgreens will stock up on car merchandise.
“Our biggest opportunity is actually in the smaller stores,” Rein said. “There we have trouble deciding what we should carry. Now we’re able to do it on a factual basis with BDM. In the past, it was more gut feeling and sometimes who was in charge.”
The changes on a single Walgreens shelf anywhere can be communicated and executed in days, if not hours.
The adjustments are often the product of complex calculations. Graphics, databases, word processors and mathematical systems work together to produce charts, diagrams and more. Walgreens’ BDM uses everything from the company’s own Intranet to Microsoft Excel to planogramming software to an in-house technology that groups stores based on similar characteristics.
Space and category management software is Windows-based and rapidly improving. Whereas once they took in rudimentary inventory data and allowed employees to draw planograms on the screen, today’s powerful computers can project sales based on everything from the number of items in stock to whether national or local sentiment is against the item, something Stadler of JDA called “psychographics.” Cosmetics tested on animals, for example, would not find their way onto planograms of stores in animal-rights conscious localities, Stadler said.
The technology is also expensive. Walgreens would not say what it cost to develop and install BDM except that it ran in the millions, including training costs.
Industry experts said the software could cost a company $30,000 or $40,000, especially for more elaborate versions. For retailers planning to grow, the investment is well worth it, experts said.
“Consumers have less time. It gets down to they want it when they want it, how they want it, where they want it,” said Dale Achabal, director of the Retail Management Institute at Santa Clara University. “The challenge in the brick and mortar world is to be able to adjust the assortments to most closely match the needs of the consumers in their local market.”
Four companies dominate the market on space and category management software: JDA, A.C. Nielsen, MarketMAX, and Information Resources Inc., whose Apollo planogramming software is part of Walgreens’ new system.
The challenge for companies using the software is executing store layout changes quickly, which makes a healthy communication system imperative, experts said. “The efficiency of that inventory is critical for profitability,” said Allen Hill, executive vice president in charge of retail marketing for Information Resources. “Retailers are constantly processing new items. More than 1,000 new products a year are introduced.”
Walgreens said it expects to have few problems on the communications side, but that maintaining and upgrading BDM could prove challenging.
And despite the newly introduced science, there is still an art to store arrangement. Walgreens district managers can still overrule the computer.
“No matter how advanced the technology is it doesn’t take away the need for a merchant analyzing the data,” said Don Whetstone, Walgreens’ director of marketing research. “It’s still a decision being made by a human being.”
