GHQ: Crunching the numbers
By Kim Ann Zimmermann
Through a special arrangement, what follows is an excerpt of a current article
from Grocery Headquarters magazine, presented here for discussion.
According to FMI’s Food Retailing Technology Benchmarks 2008 report, 56.8 percent of food retailers allocated the same amount of money for technology investments this year as in 2007, and 34.1 percent budgeted an increase. Only 9.1 percent planned to decrease IT spending. Overall, however, retailers are being more selective around IT investments.
“We’re seeing pretty strong spending, but there is a clear recognition that in an environment where consumers are spending less, plus all the pressures of energy costs, health care and interchange fees, supermarkets have to be selective as to where they focus their capital investments,” said Pat Walsh, vice president of industry and trade development for the Food Marketing Institute (FMI). “We’re finding that retailers are willing to spend on IT-related investments if those investments can drive costs out of the supply chain.”
Randy Evins, industry principal, food and drug for SAP America, sees more point solutions requests for specific warehouse management and workforce management solutions.
“We’re not seeing a lot of holistic overhauls of the entire technology infrastructure, but retailers are still making strategic investments,” said Mr. Evins.
One area experiencing a surge in investment is fresh item management technology to properly forecast and manage their deli, bakery, produce, and other perishable departments. “This one is an absolute must and the ROI from the projects we have seen has been tremendous when implemented properly,” according to Greg Buzek, president of IHL Group. “This can drop millions of dollars to the bottom line through better forecasting, pricing, and lifecycle management.”
Task management is another area where retailers are installing or upgrading technology, Mr. Buzek said. “This is a technology that initially puts everyone on the same page as the store and the home office,” he said. Since promotions and in-store displays are timely, there is a focus on better communication between the stores and headquarters, he said.
Mr. Evins agreed that store visibility is an issue that is garnering greater attention in terms of IT investment. “They are absolutely dying to have store visibility and they recognize that they can’t do it with legacy systems.”
Technology to better help understand shopper buying habits is another key area of investment. While retailers have been collecting frequent shopper data for many years, that information has not been heavily utilized, according to industry observers.
Said Madhu Janardan, associate vice president, retail unit for Infosys Technologies, “Consumers are going to the store much less often, and retailers are trying to find ways to improve the basket size and there are a whole host of IT initiatives ramping up to help this effort.”
Discussion Question: Are you noticing a reticence in retail spending on IT investments given the tougher economic conditions? Where should retailers be focusing their IT investments?
Our 2008 IT Spending Report shows similar results. We had a total of 278 respondents. These were chains that operated 25 or more stores (no franchisees). Out of the 278, 32% planned to increase IT spending, 4% planned to decrease, and 62% indicated there would be no increase or decrease.
Bill comments made me think of the clients we have dealt with on ERP and WMS solutions. All think it’s a panacea to all problems, millions are spent on an off the peg solution with some bespoke modules, maybe. Implementation happens and over time, less than 50% of the systems functionality is being used. Reviewing what you have in house and its capability and add on modules rather than complete change in these times may be a good answer.
A level trend in IT investment may be taken as an indication that retailers are not backing off in their quest for more effective operations.
The good news is that the focus has broadened considerably from its 15-year focus on POS and supply chain. The next opportunity lies in the stores.
Store visibility and task management represent the next frontier. When enabled by on-demand business intelligence, the result is more effective in-store implementation and enhanced customer experience.
It is critical that retailers focus IT investments in areas that can take costs out of the system and improve overall efficiencies, especially in a tough economic environment.
Retailer data continues to improve but there are still many areas where technology can play a bigger role. A key focus should be on collecting as much customer feedback and data as possible and then looking across merchandising, in-store and marketing strategies to ensure that you are delivering an ever improving customer experience but also doing so in a manner that improves efficiencies, speed to market and competitive pricing for your customers.
There is another area to consider when evaluating this study. Technology investments are certainly increasing among the retailers that have not enhanced or improved their technology infrastructure over the past 8 to 10 years. Technology has changed so rapidly that a system installed 10 years ago is no longer supported, or is an antique.
There is no doubt we are in challenging times. So if you look at the software listed, Fresh Item Management, Task Management, Warehouse Management, Workforce Management. All these packages, if employed correctly, should decrease cost by 15-40%.
All of these are tools for becoming more efficient and effective and are good moves depending on the operation and return on investment. The only one that’s marketing/sales oriented is customer database mining.
Retailers, like most all of us, when perceiving or actually feeling economic pain in their operating statements and balance sheets, have a greater concern for their immediate preservation than in how to prioritize IT dollars with the necessary tools of their survival. That may not be sophisticated methodology, but it is human, and it may help explain why all retailers aren’t increasing their IT budgets to stay ahead of the curve today.
There is a whole lot that retailers can gain by making better use of their existing technology before they go and spend a lot of money on the latest gizmo (i.e. RFID).
One bind that retailers have gotten themselves in is that fixed fee software licenses which have no basis on sales volume or profits must continue to be paid. This has made a large portion of their IT budget fixed, so even if a retailer stops all its new projects the cost of existing licenses continues to go up. It makes sense to consider owning some of the currently “leased” applications. New and existing contract extensions should include the option for the retailer to buy the source code of the application. Just as a car owner may decide to buy their car at the end of a lease, a retailer should have the option to purchase and maintain the software they are using and avoid future maintenance and licensing fees. This also puts the whole “Software As A Service” model up for reevaluation.
Hardware costs are constantly declining. This is the old “Moore’s Law” which states that computer speeds will double every two years. Virtualization, the use of one large computer as opposed to many independent servers, can have a huge impact on both utility and hardware costs. This lets the retailer run a variety of operating systems and applications on the same computer.
With the current economic climate, it is a good time to reassure your employees that, as best as you can, you want to provide them job security. A win-win here is to invest in training on many of the applications you already have in place. This means both in-house and purchased applications. Often, because of transfers, resignations, and other turnover, the person now working with an application is not the one who was there when it was created or initially installed. The current user may have been trained by their predecessor, or just had to take over one day. Now is the time to review who is using applications, were they trained, what are the training requirements, etc. It might even be worth investing in the development of online training tools that can be used repeatedly, especially for in-house applications.
There is a real opportunity here for a “Green” approach to IT spending. I am sure all retailers can find a way to better utilize what they already have in house.
While we have also found the same to be true–maybe it’s not “full steam ahead,” but it’s certainly not “run for the hills”–I would also add that I think the wind is starting to shift. I have a feeling that the uncertainty has gone on long enough that retailers are going to put unprecedented emphasis on how back-to-school turns out, using it as an indicator for whether the holidays will be “OK” or terrible. I haven’t met anyone lately who thinks this year’s holiday season will be “great.”
Well-run retailers flex their IT budgets upward when multiple projects arise with good ROIs. Poorly-run retailers keep their IT budgets flat (or they grow only with wage inflation), so most opportunities are lost through delay. The “iceberg of unfulfilled desire” is largely below the water line (invisible) because folks stop proposing anything new.
I believe it is a huge mistake for retailers to do anything but increase spending on IT. If you speak with the employees of almost any company and ask them what are the top challenges the company faces, consistently it will be technology and communication. This will be true 5, 10, and 50 years from now. Especially when times are tough, increase communication and increase the investment in IT.