Revolutionising the Way We Shop: Products Talking to One Another

Presentation to ‘Connecting the Dots’ a conference to celebrate the 30th anniversary of global standards (bar codes) in New Zealand. 25 February 2009.

Keywords: Business & Finance;

 I cant remember bar codes and scanners being introduced into my shopping life. Except when I try really hard I cant REALLY remember what went before. Thirty years ago we used a corner store which overlooked a pleasant river bank on the Heathcote. During the time we were there the entire building was rebuilt to a superette, where you took things off the shelves and up to the counter at the door where the shopkeeper – Johnny Martin – priced each item individually at the till. It was all a bit labourious so you bought a few things often. And you trust the person at the counter to put in the right prices – Johnny Martin was a part of the local community.

 That world has gone from most of our lives. There is still the odd corner store, but mostly we do a weekly shop in a supermarket, where we trundle a trolley with a pile of goods that even the Johnnies of the world could not have cope with; nowadays the assistant is anonymous. We dont trust her or him to get the price right – somewhere there is a computer which works it out, giving us automatic discounts and specials. The superette has gone; Johnny Martins is today a coffee shop-restaurant.

 There may be considerable nostalgia for the old shopping ways, but it was we consumers who caused the change. Supermarkets felt pressured to provide us with cheaper services – another factor was that with more women working there was less time to shop so we demanded quicker, higher volume services.

The margins a supermarket gets above the wholesale cost are small. It needs to seek productivity improvements to make its operations profitable. The oddity is that the fierce competition in the industry means that ultimately it is the consumer which benefits. If retailer one gets a productivity improvement, it can lower its prices to undercut retailer two, making a profit from the higher volume. But few of these methods of productivity gains are so secret that retailer two cant also make them and their prices fall wiping out the profit gains of retailer one.

There is a lag of course when the innovator may make a super-normal profit. But ultimately it is the consumer that benefits in lower prices from the productivity gain, not the producer, even though the producer cant help implementing them. Not to do so threatens the loss of market share, even bankruptcy. That is what market capitalism is about. Making a profit being first or second to innovate, making a loss if you are last.

The bar code system is interesting because the innovation came from a group of American supermarkets rather than from a single innovator. When they calculated the gains they ignored the benefits to producers from the system, who also lowered their costs from better inventory management. The supermarkets sole aim was to get their cost margins down.

The notion of a bar code is over fifty years old, but initially they were a curiosum because there were not the cheap scanners to read them and the cheap computers to interpret them. They are really a language which enables products to share information with – to talk to – one another. As such a common language is just as critical in conversations between products as it is in human languages.

It turns out the originating supermarkets underestimated the productivity gains even to themselves. That is quite normal during the introduction of effective fundamental innovations. Nobody foresees all the savings. The original savings were thought they would reduce costs by about .8% of turnover, a productivity gain on the super market’s margin of about 4.5%. Twenty-five years later, a retrospective study estimated the gains on turnover, including the cost reductions by producers were over 5% – six times as much.

What that savings means in New Zealand is a price reduction and productivity gain of over a billion dollars a year, or $280 a New Zealanders. It is almost as if the average shopper for a family of four goes into their supermarket once a week, and is handed a $20 note. The superettes found it it hard to compete against that sort of incentive.

Other retailers were forced to compete. If hardware stores and discount stores had not adopted bar codes, their prices would have been higher and they would have been vulnerable to supermarkets undermining their market share in some products. Imitation is the best form of flattery.

Really big customers can impose such requirements on the their suppliers. Those at the retailer end forced the technology on producers, who benefited from productivity gains too. The demands of Wal-mart and the US Department of Defense have shaped the supply changes of the businesses which provide for them. You may not think that your business will ever supply them, but like as not you will be will be competing against one of their suppliers or in a supply chain in which their suppliers oare competing against you or assisting you. They are setting the international standard and in a globalising world you have little option tbut to respond to them.

So while we may celebrate the achievements of the last thirty years, albeit with a touch of nostalgia for that which went before, we need to also to reflect on the lessons we might apply to the next thirty years. I want to emphasise two.

The first is that innovation is ongoing. You might think that the bar code story is at its end, that just about all the productivity gains have been made and perhaps all that is left is application to some other retail outlets and production. But technological innovation is restless, and just when we think it has settled down another initiative appears.

I cant tell you all the changes of the next thirty years, but a key one is already evident. That is he radio frequency identifier RFID. My guess that it will steadily spread through the retailing industry, its supply chains and it’s the production process. At first the gains will seem small, but there will be surprising ones. Recall that it appears that the original calculations for bar codes underestimated the return to the shopper by a factor of six. I was struck that Eastpack introduced RFIDs as a means of handling their season peaks but the gains included reducing their numbers of forklifts, and avoiding wastage.

The pressure to improve supply chains is relentless. It’s a fine judgement for any business when to introduce a new technology. You want ta competitor to have ironed out the glitches, but not to be so far ahead as to diminish your market share.

But there is a second crucial lesson in my report. It is easy to to have an in-house bar code, but when you start interacting with businesses and products outside you need a common language. Sure you can have your own gibberish within the firm, but you need English if you want to talk to someone outside. That is why a universal product language like GS1 is so critical to the development of supply chains based on RFIDs.

Thirty years ago your business wouldnt envisaged how its supply chains would evolve, Many will have made dreadful commercial mistakes since; under-estimating the speed which competitors would take it up, underestimating or not identifying the potential and getting tangled up with a house code which cost a fortune to transfer to a universal one are but some of the obvious mistakes. Some businesses that made those mistakes are no longer with us. The competitive market is a cruel master – and sometimes an unforgiving one.

That is why you have to go to conferences like this …. to find out what is going on.

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