Is Epicor Poised to Rule the Mid-Market Retail Sector? (Part III)

Part II of this blog topic analyzed Epicor's forays into the attractive retail sector via the CRS Retail acquisition two years ago. Most recently, with the acquisition of NSB Retail Systems, Epicor has further expanded its functional footprint, market share and geographic presence in the sector. Namely, NSB added over 200 specialty retail logos, thereby more than doubling Epicor’s retail install base.

While many analysts like Gartner, AMR Research or Aberdeen Group have quickly come up with their customary brief alerts, the usual-suspect bloggers have not seemed that interested in this event, with the notable exception of Frank Scavo in his Enterprise Systems Spectator blog post.

I concur with the assertion coming from both Epicor and the above analysts and bloggers that the retail sector is much more promising and with many more "greener pastures" than Epicor's traditional overcrowded manufacturing and distribution sectors. The retail applications market is indeed large (AMR Research is predicting its size to be over US$10 billion by 2011 from US$8 billion today), growing (at an estimated 7.1 cumulative annual growth rate [CAGR]) and quite fragmented (whereby Top 5 vendors accounted for only 33 percent of the market in 2006, and no vendor currently has over 10 percent market share).

Epicor also cites some favorable trends in the sector, such as that (as with other industries) the adoption of packaged software will become the common technology approach, and that retailers too have become more interested in acquiring an integrated set of applications from a single vendor.

Also, Epicor and NSB seem to have done their homework towards justifying the merger rationale in terms of possible opportunities and synergies. For one, the merger should create a larger, stronger, and more profitable Epicor with combined revenues expected to exceed $500 million, over 3,000 employees and immediate material earnings per share (EPS) accretion from NSB.

The combination should also create a powerhouse in the attractive retail software vertical by catapulting Epicor into the Top 10 of overall retail vendors (in terms of software licenses). Even more, Epicor/NSB should become a market leader in the highly fragmented specialty retail space (with US$ 157.4 million combined total retail revenue in 2006).

Especially important, according to IHL's September 2007 report on the point of sale (POS) software licenses to the Top 250 specialty soft goods retail segments, the Epicor/NSB combination would become the leader in the fragmented POS software market (for serving top-tier soft-goods retailers) with 26 percent market share (17 percent coming from NSB and 9 percent from Epicor/CRS).

This is more than SAP and Oracle combined, at 21 percent market share (13 percent coming from SAP Triversity and 8 percent from Oracle 360 Commerce). Other notable POS players, some of which can be checked out at TEC's POS Evaluation Center, are NCR, Gemmar Systems, JDA Software, Datavantage (MICROS) and Cornell-Mayo.

In addition, somewhat complementary product lines that are architected on the Microsoft.NET Framework technology and service oriented architecture (SOA) concepts, should eventually create a cohesive "one-stop-shop" retail product suite. Namely, despite some overlapping products (which will be tackled shortly), NSB adds the new capabilities/modules like Sales Audit, Planning (Store & Assortment), Commissions & Productivity, Data Exchange (Payment Switch) and Sourcing & Procurement.

Prior to the acquisition, NSB was offering the following applications either standalone or as an integrated suite under the Connected Retailer brand:

  • Planning: demand forecasting and inventory planning application;

  • Sourcing & Procurement: inventory procurement application;

  • Merchandising: application for synchronizing purchasing, receiving, inventory management and warehousing data (it also enables product pricing, invoicing, warehousing, and merchandizing analytics);

  • Sales Analytics: data warehousing for transactional data;

  • Store Solution: POS applications running on sales registers, integrated with back-office planning, sourcing and merchandizing applications; and

  • Retail Customer Relationship Management (CRM) application.

Provided successful SOA-based integration, these complementary retail products, many of which are in a software as a service (SaaS) deployment mode, could result in almost immediate cross-selling opportunities.

Given NSB's vertical focus on apparel, specialty, and department store retailers with implementations in all tiers, Epicor also hopes to accelerate entry into complementary retail markets. One should also not neglect the additional opportunity to cross-sell multiple Epicor enterprise resource planning (ERP) products to retailers, while Epicor's global infrastructure could accelerate international retail opportunities for NSB.

Namely, Epicor currently generates 36 percent of its revenues from Europe and Asia-Pacific, where NSB has had hardly any presence thus far. Cost synergies should come from shared administrative and research and development (R&D) departments, in great part by leveraging both public companies' offshore experience.

However, on the down side, the merger does not involve purely complementary product sets, because there is overlap in key products such as POS, merchandizing and retail CRM. It remains to be seen whether Epicor will go for product conversion and rationalization or it will try to position these products for different prospects with different needs.

Given the similar transactional functionality of Epicor/CRS and NSB POS offerings, the main distinction might come from the ability of the Epicor/CRS POS offering to handle centralized configuration and cross-channel enterprise selling. Still, NSB's payment switch and analytics capabilities are apparent (low hanging fruit) add-on's for Epicor.

If Epicor wants to become an integrated enterprise systems provider for retailers, it will have to opt for a single, rationalized and fully integrated merchandise planning and execution suite. This would be a similar feat to the upcoming converged Epicor 9 enterprise suite, which has taken some time and will be delivered later in 2008.

To be fair, Epicor might be the very first vendor to pull it off, in light of Oracle's repeated postponement of its Fusion Application suite's general availability date, while mighty Microsoft has long aborted its equivalent Project Green intentions. In any case, a converged ("fused") Epicor retail suite is not likely to happen in next few years in the least.

Until then, roughly speaking, midsize or smaller Tier 1 specialty retailers might favor the Epicor POS product over the NSB one. Conversely, larger Tier 1 department stores or apparel retailers will likely consider the NSB POS technology. On the merchandising side, the NSB offering seems more robust and attractive for midsize or larger apparel retailers that require planning and assortment functionality.

Also, while not cut-throat like in the manufacturing field, the competition for the retail sector is nonetheless fierce. Oracle, IBM (especially with the recent Cognos acquisition) and SAP are competing in that space as well, along with Retalix, 3i InfotechJDA Software, Microsoft Retail Management Solutions (RMS) and Lawson Software.

SAS, as the only large independent business intelligence (BI) & analytics provider has also long been present there via the acquisition of Dataflux, and retailers are all keen on discerning their customers' (consumers') behavior.

Infor is not to be overlooked either, since at the recent National Retail Federation (NRF) 2008 show, it announced the latest version of its outbound marketing solution, Infor CRM Epiphany Outbound Marketing 7.1, with retail-specific enhancements, as well as key, retail-specific enhancements to Infor HCM Workforce Management, formerly named Workbrain.

Further, Standard & Poor's Ratings Services recently affirmed its 'BB-' corporate credit rating on Epicor, and revised the outlook to negative from stable reflecting the company's increased pro forma leverage associated with its acquisition of NSB. This decision reflected the increased amount of secured debt expected to be in the capital structure.

The ratings on Epicor also reflected the vendor's Tier 2 presence in a highly competitive and consolidating industry, integration risk, and high financial leverage for the rating. Some competitors might even explore Epicor's possible loss of focus on manufacturing and distribution, given that the retail sector will now contribute to even 30 percent of total revenues.

What is your opinion -- is Epicor's retail opportunity worth all the possible risks?
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