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Spending on retail information technology (IT) for the rest of 2001 will be driven by short-term tactical initiatives, with long-term projects making a comeback as the economy improves, according to a leading industry analyst.
In the last six months, long-term IT initiatives have been pushed to the back burner and short-term tactical initiatives have been moved to the top of most retail project list. Among the factors driving the change: retailers' need to meet financial analysts' expectations for gross margin, comparable-store performance, sales and top-line revenue growth; general unease regarding the U.S. economy and consumer spending; and the temporary return to a business-as-usual philosophy following three technology upheavals in the last two years.
"[We've experienced] the Y2K preparedness of '99, the rise and fall of pure play dot-com retail in 2000 and over the last quarter of 2000 and into this year, the failure of public trading exchanges, including several retail-oriented consortium exchanges, from gaining market dominance as fast as some had expected they would," noted Greg Girard, vice president, retail application strategy, for AMR Research Inc., a consulting firm based in Boston.
"Six months ago, more retailers were making investments and were more focused on longer-term strategic initiatives. [Now] they're focused more on short-term tactical ones for the remainder of the year. I expect the longer-term strategic initiatives will move up the priority list as the overall economic conditions improve."
Short-term, IT tactical initiatives will be influenced by the challenging structure of the retail industry. "The industry is characterized by the need to manage a diverse supply base ranging from global Fortune 100 companies to artisan suppliers of specialty products," Girard said, during a May conference call with IT industry players. "Secondly, there is competition from global-scale competitors in many sectors, including food and drug, home improvement, mass merchants and some big-box hard line specialty areas."
What's more, retailers are faced with accelerated numbers of new-product introductions. "In some product categories, there was a tenfold increase in new product introductions from the early 1990s to today. It's a very challenging structure that retailers deal with."
To deal with this competitive environment in the short term, retailers are focusing IT expenditures on cost centers: inventory, markdowns, promotions, stores, logistics and general and administrative expenses. The also are managing the supply base and spending through collaboration, ensuring their suppliers perform as expected and their products perform as expected, Girard said.
In a third strategic move, retailers are centered on the need to create sustainable demand, growing the top line though differentiated value-added services and assortments that are increasingly tailored to fragmented consumer demand.
Retailers will be looking to support these three short-term strategies with replenishment systems, store automation, markdown pricing and promotion optimization software, transportation management programs and sourcing and procurement technologies. "We've seen a focus on replenishment technologies across all retail sectors that involve basic products -- food and drug, apparel, small-ticket durables -- because replenishment technologies attack a retailer's biggest asset and cost-center, inventory," Girard said. "Improving replenishment processes and a retailer's in-stock position and having product available for customer purchase at the shelf generally leads to sales growth."
Markdown optimization has become especially important for retailers who sell short-cycle, fashion-oriented and seasonal products in push environments, Girard said. "This technology is new, but most early adopters are finding a quick bottom-line benefit."
In self-service retail sectors, where the checkout lanes are at the front of the store, store automation is attracting attention, Girard said. "We expect the grocery, chain drug, home improvement, and some big-box specialty retailers to start investing in electronic shelf labels. The costs per label are declining to a point where there's a labor savings return on investment."
What's more, electronic shelf labels are an enabler of the price management and markdown optimization technologies and allow retailers to drive optimized prices by locale, by store, right down to the shelf, in a more automated, quicker and cheaper manner.
The cost of self-checkout technologies has fallen, too. "Early adopters are demonstrating the reliability of the technology and consumer acceptance," Girard said.
To better manage suppliers and spending in the short term, retailers are expected to focus on exchanged-based strategic sourcing and procurement, as well as advanced retail planning systems, such as optimized space planning and localized assortment systems. "These technologies are new, but the results have been very promising," Girard noted.
To help support and create a sustainable demand, retailers are exploring technologies that can support new services and replace labor. "These technologies will make labor more productive in the delivery of differentiated services," he said. "Pricing and promotion management software will link pricing and promotion strategies to customer analytics. As a result, we see [greater demand] for data mining and analytics."
Beyond the next six months, information technology will disrupt 'business-as-usual" in retail, Girard predicted. "Based on the early indications of success many retailers have had with advanced retail planning systems, we are expecting technology to play an important role in the next retail disruption.
While the evolution of retail formats, including big-box stores and multi-channel formats, will continue to affect retailing, the next big disruption will be generated by technology, he explained.
"The biggest driver will be business on the [business-to-business] side, as retailers revolutionize their ability to manage supply chains to bring product and assortments to the shelf," Girard said.
Longer term, strategic initiatives will be pursued by two types of retailers -- market leaders who have dominant market share and better-than-average financial performance and some companies in turnaround situations. "These companies have been marginalized by their market-leading competitors," Girard said, "and are looking to use technology to catch and surpass market leaders."