Monday, November 19, 2012

Can A&P Renew Itself with New Information Systems?

Is A&P, the most famous supermarket chain in the United States, about to disappear? Maybe, but if it happens, it won't be immediately because management is fighting hard to survive. The Great Atlantic & Pacific Tea Co. (A&P's official name), headquartered in Montvale, New Jersey, had about 750 stores in 16 states, Washington D.C., and Ontario, Canada. These stores include the A&P chain but also the Food Emporium, SuperFresh, and Waldbaum's chains. They have about 24,400 full-time employees plus 56,600 part timers. 



This "granddaddy" of grocery store chains was founded in 1859 and has been a leader right from the start. In the 1920s A&P was one of the first chains to offer store brands, such as A&P's Bokar Coffee. In 1937 it launched its own magazine, Women's Day. A&P became so large that in 1950 its annual revenue was second only to General Motors in the United States. However, by 1990 its sales were no longer growing, and it was facing stiff competition from such giant chains as Safeway and Kroger.
In 1993, 34-year old Christian Haub became the CEO of A&P. Haub is a member of the family that owns Germany's Tengelmann Group, which in turn holds 53 percent of A&P. Tengelmann is one of the 10 largest retailers in the world, with annual sales of about $25 billion. Haub immediately began to address A&P's problems. He launched a program he named the "Great Renewal" and rapidly closed more than 100 "underperforming" stores, while establishing a number of "superstores." Next he reorganized management into regional divisions, and in mid-1999 he hired Nicholas L. Ioli as A&P's senior vice president and CIO. Ioli, with strong and active support from Haub, immediately embarked on a project to reconstruct and modernize the company, including its whole supply chain.
A&P was facing a number of serious problems in addition to its stagnant sales. Its obsolete information technology infrastructure was composed of a complex web of stitched-together old legacy systems. The company was primarily using 12- to 20-year old software running on two large mainframe computers. "We had extremely antiquated systems, from finance to merchandising to store and warehousing systems," explained Ioli. The company had fragmented distribution systems, resulting in little knowledge of what sells in which stores. Moreover, A&P's supply chain was not using the Web to work better and more inexpensively. The company also had outdated, ineffective business processes, such as not having systems to analyze data from either customers or suppliers.
The grocery business operates on high volumes of transactions and tiny profit margins of 1 to 2 percent of sales. In addition to traditional competitors, A&P was losing market share to new types of stores, such as Wal-Mart, that had entered the grocery business as part of their attempt to meet most home needs. Also the company was facing a challenge from discount club stores, such as Sam's Club, and from convenience stores such as 7-Elevens.
Haub's plan to revive A&P called for using new information systems to refocus the company on serving customers better and managing inventory more efficiently. Management expected the new systems to save about $325 million over four years by decreasing operating costs while making desirable products more easily available to customers. It also hoped the systems would eliminate inefficiencies in its supply chain. After that, Haub expected the project to result in an increase of $100 million annual pretax operating profits.
In March 2000, the company launched a $250 million project for a four-year redesign of its information systems. In describing the planned project, A&P estimated that, of the $250 million, 35 percent would be technology costs, whereas the remaining 65 percent would be for training, communications, and managing and measuring performance. One objective was to enable customers to use self-checkout lines to save time. Customers would even be able to order on the Web so, for example, they could order at work and pick up merchandise on the way home. Ioli expects the company to have store-specific data so that it can serve local customers. The project would also address A&P's technical staffing problems. Management plans to double A&P's IT department, from 150 people to 300. In addition, they will outsource noncore IT functions, which depend on the old legacy systems, so that A&P staff time is not wasted on such tasks. The project is planning for a Web-enabled, e-commerce supply chain and the modernization of other systems as well, replacing up to 95 percent of current applications. Ioli also expects to supervise training and other large-scale, change-management programs. Haub named the project "Great Renewal II" and set it up as a shared-risk partnership.
Wall Street's reaction was sharply negative. "The Great Renewal projects are absolutely needed, but they are significantly late," stated Mark Husson, a Merrill Lynch equity analyst. Analysts have criticized the project as being too expensive thereby reducing company earnings and reducing shareholder value. Many analysts recommended that their clients sell the stock.
Ioli quickly turned to IBM as a consultant and partner for the Great Renewal project. Developing software was a major challenge, partly because there is very little prewritten software available for the grocery business. Most grocery retailers have to write their own software, which would be extremely time consuming and expensive for A&P. If the company did try to use the best prewritten software commercially available, it would have to create additional software to link different portions of the system together so they could communicate with each other. Creating this interface software would consume a great deal of time in a project that needed to be completed rapidly. Another possible solution was an enterprise system to integrate data and business processes for different functions. However, no ERP system had ever been designed specifically for the grocery business with its special problems, such as its need to move perishable items (fruits, vegetables, milk, ice cream, and meats) rapidly through the supply chain. ERP software could not handle situations where some products had to be shipped back to suppliers if they were not up to quality standards—or where some products had to be thrown out if they were rotten. Many products have to be purchased regionally. As a result, this would be "the first attempt to strategically reengineer a company and get as close to an ERP as we can" in the grocery industry, said Ioli. However, he added, "We believe the technology and functionality will allow us to move ahead of the competition."
A&P wanted a core system where all of its item and merchandising information would reside; it also wanted functionality for category management, merchandising, procurement, promotion, pricing, and forecasting, including the perishable side of the grocery industry. Management selected Retek, a small Minneapolis-based software company that had developed systems for European and Asian grocery chains and for other major retailers, such as Ann Taylor and Eckard.
Retek provided a merchandising system that A&P could use to execute core merchandising activities; a demand forecasting system to produce accurate forecasts for supply chain planning, allocation, and replenishment; a merchandising planning application; a retail intelligence tool that identifies opportunities; and a data warehouse for analyzing vast pools of transaction data to discern patterns of customer behavior and sales trends.
Many observers considered the project risky; A&P was betting the future of the company on new technology. The whole grocery business is watching A&P's project very closely. A&P had invested comparatively less in information technology than its rivals. "If A&P does succeed, it will reinforce the inclination of grocery chains and their senior management boards to bet their thin margin businesses on IT investments," explained Greg Girard, an analyst at Boston's AMR Research. Observers feared that the project and its budget would grow beyond what was originally targeted. Yet another fear concerns training and support once the software portion has been completed. With 750 stores with a lot of part-time help and high turnover, A&P has a lot to absorb.
Numerous other companies have experienced enterprise system failures. Fox Meyer, a large drug distributor, was liquidated after its project failed, whereas profits for Hershey Foods were badly slashed when serious project problems forced it to miss the highly profitable Halloween and Christmas/New Year's rushes. In the grocery business, Nash Finch Co., a supermarket operator, lost more than $70 million when it abandoned its enterprise project, and A&P's project is much larger. To address these risks, the A&P project team has developed and uses an elaborate business plan that includes holding weekly meetings with top management, team leaders, and representatives from Retek and IBM.
The core portion of the project, retail application development, was divided into three stages: purchasing, merchandising, and inventory management. The new applications must communicate with several other major pieces of software: OMI International's warehouse management system, Manugistics's transportation system, and both Tomax's and SofTechnics's store systems. Oracle systems were selected for the financial and human resources functions. The first of the three development stages was scheduled to be completed by December 2000, and the transportation system was actually operating in Canada by February 2001. The project's primary teams included technical and development teams; a change management team; a business processes team; a team to oversee information technology; and a team of eight A&P employees who monitor the project, including its schedule and costs.
CEO Haub expressed disappointment in 2001 with how the company was executing its plans. In 2002 Ioli was replaced as CIO by John Metzger, who had been in charge of logistics. A&P stopped using the term "Great Renewal" and started talking about its "business process initiative." In early 2003 A&P, Retek, and IBM issued a press release announcing the completion of the project, but declined to comment further.
The company continues to struggle, reporting losses of $25.1 million for fiscal year 2001; $71.9 million for fiscal year 2002 and $194 million for fiscal year 2003. A&P stock had lost half of its value since the Great Renewal Part Two was announced.
Sources: "A&P: The Not-So-Great Renewal," Baseline Magazine, February, 2004; Susannah Patton, "Can I.T. Save A&P?" and "A More Perfect Union," CIO Magazine, February 15, 2001; Sami Lais, "A&P's $250M IT Plan Shunned by Wall Street," Computerworld, March 20, 2000; Retek Corp., "A&P's Project Great Renewal Powered by Retek and IBM," www.retek.com; and www.aptea.com

Questions to ponder:
1.      What problems did A&P have with its business? What management, organization, and technology factors contributed to these problems?

2.      To what extent was the Great Renewal project a solution to the company's problems? What problems could system modernization solve? What problems could it not solve?

3.      How would implementing new systems change the way A&P ran its business?

4.      Do you think the Great Renewal project was successful? Why or why not? What else do you think A& P needs to do if it is to be successful in redesigning its company? Explain your answers.





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