Retail Market Dynamics for Software Vendors Part One: Software Requirements for Retail
Written By: Predrag Jakovljevic
Published On: September 2004
are some interesting dynamics within the retail market segment. On one hand,
the market is has been penetrated less by enterprise applications than most
other economic sectors, in part because retailers have largely been remiss in
leaving mainframes and other legacy technologies behind. Also, the sector has
shown some resilience even during the recent and potentially ongoing economic
malaise, in part as the consumers have been stretching their credit card balances
and limits. Generating more than $3 trillion (USD) annually in sales, retail
is the second largest industry in the US, as reported by the US Census
Bureau in April 2003.
on the other hand, the sector has made demands on both the software vendors'
and their prospective customers' capabilities, since retail organizations and
their suppliers alike are constantly facing intensifying competition; fluctuating
demand whether or not due to seasonality; picky and fickle customers; evolving
retail channels; and increasing globalization. Sales are pressured, margins
are compressed, and almost all participating companies have to try to achieve
improved results with fewer people. As a result, retail organizations seek enterprise
applications and other information technology (IT) solutions to better
manage their increasingly complex businesses that have to cut across different
enterprise business disciplines instead of focusing only on a particular one,
in a stovepipe manner (e.g., procurement, marketing, finance, customer service,
etc.). Thereby this improves their operating efficiencies and financial performance,
and strengthens their relationships with customers and suppliers.
companies in the retail market do have specific IT requirements to support and
optimize their operations. To that end, general enterprise resource planning
(ERP) solution providers have traditionally been unable to fully meet the demands
of these organizations, but recently, some major ERP players have been developing
in-house, buying, or partnering with vendors that have retail point solutions
to increase their appeal to retailers. Although retail and wholesale customers
have typically invested a low proportion of their total revenues in IT, retail
industry leaders have begun to demonstrate the ability to achieve market advantage
through the effective use of specialized enterprise applications. Thus a requirement
for all retailers to increase their investment in IT and adopt best practices
has grown. As mentioned earlier, many of these companies have not yet replaced
their customized legacy systems with packaged software solutions. As a result,
there is substantial opportunity in the retail market and additionally, many
of the companies in the market do not utilize sophisticated optimization solutions.
is Part One of a two-part note.
Two will present retailer progress.
packaged goods (CPG) manufacturing customers employ solutions from retail
software providers to optimize their ability to sell to consumers through the
retail channel. While most of these companies have historically invested heavily
in manufacturing systems from other providers, such as manufacturing-oriented
ERP vendors, the technology support for their sales operations is generally
limited. Consequently, retail software aspirants are developing a new solutions
market with these companies, focused on optimizing the sales of consumer products
to end-consumers through collaborative solutions. These solutions allow the
CPG manufacturer and the retailer to improve inventory assortment and availability
at the point of sale (POS).
investments in store execution technology will remain a top priority in the
foreseeable future, all with the idea to actually deliver on the promise of
"right product, right price, right place, and right time". In addition to POS
technology upgrades and replacements, increasing the use of mobile technology
and improving the use of store-centric forecasting, planning, and replenishment
(CFPR) systems are often cited as next acquisition steps by prospective retailer
users. For more information on some innovative store execution ideas, such as
to equip store associates with wireless technology that offers a more assisted
and informed customer interaction through, e.g., on-the-spot comparisons as
well as cross-sell and up-sell information, see The
Store of the Future.
many retailers have also claimed benefits from deploying some pricing and markdown
optimization applications. At the core of this is rules-based pricing management,
enhanced by price and markdown optimization engines (algorithms) with near,
real time links to the central product database, historical prices, and promotional
data along with multiple-levels of store space clustering and zone analytics.
In the case of CPG retailers, it includes the need to include supplier trade
funds and deal management functionality. They also emphasize an easy integration
capability so that this fully analyzed and optimized pricing data can be deployed
quickly. For more information on some of these approaches, see Profit
Optimization—Can We Possibly Argue with the Objective?
retailers that have already made significant investments in data warehouse and
analytic applications, now logically tend to accelerate the use of their historical
data to implement better demand-driven forecasting and replenishment programs,
and dynamic space planning and utilization at both, the store and distribution
center (DC) level. Reducing out-of-stock situations, and improving inventory
turns and product assortment are some of the drivers and benefits of these initiatives,
as is the ability to continually and automatically refine forecasts and the
resulting replenishment plans through the ongoing review of historical data.
this market sector might also be an object lesson in how important and, at the
same time, how painstaking the process of delivering vertically focused applications
can be. Those who can deliver solutions that satisfy the exacting, stringent
requirements of some vertical markets are in the driving seat to capture that
market segment. However, the market will also conversely punish those that take
the feat too lightheartedly. This is especially true in the small to medium
business (SMB) market segment, where there is much less leeway for time
and money consuming implementations that also require massive software patchwork.
consumers might have increased discretionary spending in the sector, there are
ever more retail segments vying for these purse strings. All retailers face
intense pressure to discount prices, increase inventory turns, and meticulously
controlling labor costs, while maintaining foil-thin margins. Typically, everyone
is in a sort of a "zero sum" game, given the lack of significant, organic market
growth, which forces one's growth largely at its competitor's expense. However,
despite the above common themes in terms of challenges for all the retail segments,
grocers, for example, have the additional challenge of ensuring store assortments
with close attention to the products' freshness, its quality, and to localization
factors. This is all to address the increasing sticker-sensitivity amongst shoppers.
Further, due to many perishable items, composition and decomposition, and unit
of measurement (UOM) changes, grocers have additional functional requests
for the applications that would help them track on-sales velocity, spoilage,
and the profitability of all items.
the other hand, the fashion and apparel industry also has abundant challenges.
Enterprises are challenged to remain competitive in this fast-moving, volatile
environment by gaining control over inventories and costs, enhancing efficiencies
and slim margins. Some of the more specific business, marketing, and operational
challenges include complex, multinational supply chains; global sourcing issues;
direct shipments; multisite operations; volatile sales patterns; inaccurate
forecasting of varying fashion trends; seasonal demand fluctuation; ever increasing
and changing customer requirements; proliferation of design variations and product
characteristics; savvy demand enticement capabilities; rapid style turnovers;
shifting periods of make-to-stock (MTS) and make-to-order
(MTO); an immense number of stock keeping units (SKU); and the complex
scheduling and logistics of cutting, sewing, subcontracting and outsourcing,
and transportation, and so on.
these enterprises have traditionally been reluctant to make IT investments.
While many have implemented pieces of technology to fulfill a specific need,
such as computer-aided design (CAD) systems and cutting optimization
systems, or automated numerical control (NC) machinery for repetitive
operations, their decisions are usually based on a business rationale of rapid
payback through operational cost savings.
other words, most IT investments have been directed towards automation, not
information, and consequently, many midsize and even larger fashion retail companies
still operate with no integrated forecasting, planning, purchasing or scheduling
systems. They may have a basic accounting software package, or a warehouse
management system (WMS) to provide advance-shipping notices (ASN)
to customers, mainly because their influential customers—the large retailers
demand it. Some may even have invested in electronic data interchange
(EDI), again to satisfy a "big brother" customer's requirement. Furthermore,
of those companies that have implemented some enterprise applications, many
of their systems are proprietary or in-house legacy systems that have evolved
over the years, and now face obsolescence.
is Part One of a two-part note.
Two will discuss the progress that is being made in addressing the retail market.