JDA Portfolio: For the Retail Industry -- Part Five: Analysis of Market Impact

Market Impact

JDA Software Group Inc. (NASDAQ: JDAS), a prominent global provider of integrated software and professional services for the retail demand chain and over 4,600 customers, plans to build upon the collective JDA Portfolio to enable its customers to achieve a new level of operational excellence. The vendor plans to establish this capability as a defining and differentiating characteristic of its next generation PortfolioEnabled solutions over the upcoming months and years. JDA Portfolio 2004.1 software and service offerings are detailed in Parts Two through Four of this note.

However, JDA has to deal with some morphing trends within the retail market segment, since the termination of the merger agreement with QRS has more ramifications for JDA than merely a bruised ego (see Not All Acquisitions Happen: JDA and QRS). Namely, JDA and QRS were reportedly well down the road with a combined product development blueprint, including new functionality around global data synchronization (GDS) and product information management (PIM), which have lately been key areas of interest as companies increasingly look outside their four walls and firewalls to conduct electronic business with their trading partners (customers and suppliers). This is particularly essential for retailers and suppliers that must syndicate or receive product and commercial data from multiple data sources, both inside and outside of their firewalls, and JDA is now indisputably left in the lurch by QRS' abandonment.

As noted earlier, the ill-fated merger of JDA and QRS might have well emphasized some interesting dynamics within the retail market segment. On one hand, the market is much less penetrated by enterprise applications than most other economic sectors, in part since 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 possibly ongoing, economic malaise, in part as 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.

However, on the other hand, the sector has been demanding 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.

Although retail and wholesale customers have typically invested a low proportion of their total revenues in IT, as the leaders in this industry begin to demonstrate an ability to achieve market advantage through the effective use of specialized enterprise applications, the requirement for all retailers to increase their investment in IT and adopt best practices thus has grown. As mentioned earlier, many of these companies have not yet replaced their customized legacy systems with packaged software solutions, and as a result, there is substantial opportunity in the retail market. In addition, many of the companies in the market do not utilize sophisticated optimization solutions. For a detailed discussion of what software vendors face when addressing the retail market see Retail Market Dynamics for Software Vendors.

This is Part Five of a six-part note.

Part One presented the event summary.

Parts Two through Four detailed the components of JDA Portfolio 2004.1.

Part Six will look at the ERP vendor and retail market and make user recommendations.

It will be published January 3.

Retailers Look for a Competitive Advantage

As consumer markets become more competitive, retailers realize they must do more than simply achieve increased efficiencies in their own organizations. In other words, a retailer's competitive advantage is now being defined by the efficiencies of their entire supply chain. In addition to enabling trading partners to collaborate in planning, forecasting, replenishment, and space planning decisions, some vendors are also developing additional functionality that should enable retailers and their suppliers to make collaborative decisions for marketing, assortment, and promotion activities.

But, as the retail industry supply chain process includes hundreds of collaborative steps among thousands of retailers, vendors, suppliers, brand manufacturers, and other intermediaries to create, manufacture, and move products from source to store, the industry is characterized by multiple product sourcing options, a wide array of products and multichannel shopping venues that include retail stores, outlet malls, mail-order catalogues, and Internet sites. Given the competition for retail customers and wholesale orders is intense, the industry participants must be able to meet consumer demand quickly, accurately and at the most competitive price. To that end, even back in the mid-1980s, a cooperative industry effort to improve the electronic processing of data led to the creation of certain data format standards, including the adoption of electronic data interchange (EDI), uniform product code (UPC) and, in Europe and other international markets, the European article number (EAN) standards. More recently, the global trade item number (GTIN) has been established.

The GTIN, UPC, and EAN data formats allow for the consistent identification of merchandise throughout the supply chain process, from product design to the point of sale. The use of GTIN, UPC, and EAN data promises to greatly increase the efficiency with which retailers and manufacturers can mark, track, and exchange detailed product information. As a result of these standards and technologies, many retailers, vendors, suppliers, and brand manufacturers have been able to reduce the cost of financial operations, mismatches between purchase orders and invoices, inaccurate product shipments, and stock-outs.

The still current manual, paper-based item authorization procedures at some sites continue to create unnecessary shipment lag times and also impede the future growth. This is particularly true when, on average, a grocery retailer may be required to collect and enter of hundreds pieces of data in order to introduce one new product from one supplier into the network of thousands of trading partners. Consequently, the term product information management, or PIM, has appeared more frequently lately in the discussion of GDS and syndication because of a number of market initiatives that act as catalysts for change. For example, many large retailers, spearheaded by Wal-Mart, have mandated their suppliers to synchronize product data via European article number/UCCnet registry and data synchronization services. Other catalysts would include the Sunrise 2005 initiative that seeks to standardize on a format for global product identification via a new fourteen-digit code, and the RFID initiatives in place to bring about the rapid adoption of new radio frequency tags on all products, so that they may be tracked through manufacturing and retail environments more easily.

Thus, some software vendors targeting the retail sector, such as QRS, IBM, SAP or General Exchange Services (GXS) (see GXS Acquires HAHT Commerce for More Synchronized Retail B2B Data and SAP Bolsters NetWeaver's MDM Capabilities) remain focused on enabling retail industry participants to connect with each other and transact business through the use of these automated communications and product identification standards. There are a number of other best-of-breed PIM players on the market, including FullTilt Solutions, Blue Martini, Cardonet, SAQQARA, Sterling Commerce, Comergent Technologies, CommercialWare, Flow Systems, Stibo, Liaison Technologies, and Velosel. Each has a number of customers using its solutions, but the PIM market is just now heating up and the "lion share" of the market is still up for grabs.

Nevertheless, hand-in-hand with the trend to conduct business transactions electronically via the Internet, is an effort to clean up those transactions and reduce the occurrence of errors. Often enough, the trouble with product attributes is that they do not match from one database to the next in the value chain. For every product under its brand umbrella, there are several product attributes, including definitions, specifications (product weights, measurements, calorie counts, etc.), images, marketing messages, and prices. As a result, something as bland as a can of food comes with arrays of data relating to pricing, description, promotion, and so on. To make things worse, companies may have hundreds or thousands of products and multiple individuals may maintain each bit of product information, so the task of organizing and maintaining all this information is critical to the company, since bad data costs companies billions of dollars in incorrect purchase orders, subsequent returns and the manual effort required to fix them (see $40 Billion Is Being Wasted by Companies without Product Information Management Strategies--How Is Yours Coming Along?).

Accordingly, data synchronization applications automate the process by which suppliers, manufacturers, and retailers share information relevant to issues like inventory status and product specifications. This technology might also be an important underpinning for emerging plans around the RFID technology, which is also high on these retailer giants' agenda. But, as mentioned earlier on, data synchronization would be a relatively simple task if the data was normalized, complete, and error-free. Unfortunately, this is rarely the case, given product information is not created by a single department within the company and is usually not overseen by any single group. It is this lack of process within a manufacturer's business and around managing product information that facilitates errors. Yet, related systems such as logistics, invoice reconciliation and POS also need the same product information. Hence the retail sector, particularly food and grocery industry, would greatly benefit from some on-line industry coordination when it comes to managing catalogs and B2B trading communities.

CPG Priorities

Like most software solutions, PIM has evolved along a path on which the most pressing needs are met first. For CPG companies, the highest-priority need is GDS, and when faced with mandates from their largest retail partners to synchronize product information via EAN/UCCnet, thus many CPG companies have quickly implemented solutions to upload information to the registry. However, they have also soon afterwards discovered that they did not have all the requested information, or a process for keeping the registry information up-to-date. Therefore, a long-term PIM strategy requires integration with other systems, workflow, an information repository, and the ability to synchronize and syndicate information to a variety of destinations in multiple formats. For more information, see The Role of PIM and PLM in the Product Information Supply Chain: Where Is Your Link?. For that reason, the QRS acquisition by JDA would have eventually brought together two providers of complementary e-commerce products that would help retailers, manufacturers and suppliers manage and sell their products to other companies and customers on-line. Namely, as also seen with recent Click Commerce's acquisitions of Allegis and bTrade (see Click Commerce Acquires Allegis), in addition to the above mentioned merger of GXS and HAHT Commerce, and the partnership of The Kodiak Group and Cleo Communications, it is apparent that strictly retail-focused JDA offerings would have had a broader value proposition when bundled with the QRS technology that helps companies record the correct product data and push it throughout the channel in order to avoid such things as overstocking or under-stocking of often incorrect items. In other words, JDA would have gained PIM software, which aggregates and organizes item-related data from multiple application sources; and data synchronization/syndication tools, which let manufacturers and suppliers synchronize items with retail partners through the entitled registers like the UCCnet foundation service.

Therefore, JDA would have stood a chance of marshalling broader and deeper retail supply chain functionality than most of its rivals through QRS's hosted catalog, GDS, sourcing, and collaborative B2B integration services. Also, in addition to increasing its size by over 50 percent and becoming the leading pure-player in the retail sector (nearly doubling the size of the most direct peer competitor Retek), there would have been an ample cross-selling opportunity for both JDA to sell its retail-specific applications to nearly 10,000 QRS customers and, conversely, to offer QRS' collaborative products to its vast number of customers worldwide that might likely need a more collaborative relationship with their trading partners.

Accordingly, the QRS acquisition would have handily expanded JDA's internally focused retail demand chain optimization applications to include supplier-centric collaborative planning. Unfortunately for JDA, the QRS' last minute "no show" leaves gaping holes in JDA Portfolio, which are possibly much more visible now after the market has been made aware of the ill-fated merger's prospects. JDA now remains on its own to define a revised PIM/GDS strategy, either by pursuing a standalone homegrown offering or to seek another partnership or acquisition solution to fill voids in the portfolio. However, either of these initiatives will be conducted under a somewhat difficult climate owing to recently subdued JDA financial performance and its stock value (which, in fact, has greatly been blamed for the unsuccessful QRS acquisition).

A mitigating factor could be the recent mid-September announcement by JDA that its Portfolio Data Synchronization product (recently renamed from the above mentioned VistaRetail) has been certified for UCCnet services by the global standards organization, the Uniform Code Council, Inc (UCC). To obtain this, JDA reportedly participated in rigorous certification testing in an independent environment to demonstrate that its Web-based data synchronization application can enable trading partners to relatively efficiently and cost-effectively utilize UCCnet services, and thereby ensure that accurate product information is readily accessible at all points of trade. Moreover, JDA customers that license any 2004 version of the Portfolio Data Synchronization application will benefit from a 25 percent reduction in UCCnet registration fees along with a certified integration strategy aimed at maximizing supply chain cost-savings.

Moreover, despite a relatively flat revenue performance over the past three years, the major elements of JDA growth strategy involve the following factors:

1. its continued offer of support and enhancements to its existing products and add complementary functionality to the JDA Portfolio through acquisitions;
   
   
2. although 70% of its software license sales in 2003 were from the existing customer base, there may still exist a growth opportunity because two thirds of its retail customer base, and nearly all of its CPG manufacturers and wholesale customers, still only own one JDA product; and
   
   
3. the collaborative solutions market is still emerging, and JDA believes that this market could grow to become a substantial portion of its business.

Yet, the vendor faces increasing competition from many directions, given the fragmentation of the retail sector, which has so far been too complex for any vendor to master the true intricacies of all retail segments. Thus, within the Retail Enterprise Systems arena, in addition to Retek, the competition could come from the likes of AC Nielsen Corporation, Aldata Solutions, Alphameric (formerly Compass Software Group), Connect3 Systems, Island Pacific (formerly SVI Holdings), SAS Institute (after recently acquiring Marketmax), Micro Strategies, Evant (formerly Nonstop Solutions), Lawson Software, NSB Retail Systems, SAP, Oracle, and so on. The competition for In-Store Systems is even more fragmented, and primarily coming from small POS-focused companies such as CRS Business Computers, Kronos Incorporated, Retail Technologies, MICRO Systems (formerly Datavantage), Radiant Systems, Workbrain, 360 Commerce, Tomax Technologies and Triversity, in addition the above-mentioned broader solution set providers such as NSB Retail Systems, Retek and SAP.

Further, JDA's current Collaborative Solutions compete primarily with products from SAS, Evant, AC Nielsen Corporation, i2 Technologies, Manugistics, Information Resources, and Synchra Systems. But, as the vendor continues to develop or acquire e-commerce products and expand its business in the area, it will likely face potential competition from B2B e-commerce application providers, including Ariba, Commercialware, Microsoft Business Solutions (see Microsoft Business Network [MBN]—Coming of Age? ), and Ecometry Corporation. These are in addition to unavoidable Retek, SAP, and others. This increasing competition within a market that is far from being buoyant might, in part, be the reason for JDA's recently cut quarterly performance expectations.

In the market for consulting services, JDA has pursued a strategy of forming informal working relationships with leading retail systems integrators such as IBM Global Services, Capgemini, Kurt Salmon Associates, and Lakewest Consulting. These integrators, as well as independent consulting firms such as Accenture, AIG Netplex, CFT Consulting, SPL, and ID Applications, also represent competition to JDA consulting services group. The functional gap of optimizing promotion events such as markdowns and setting everyday merchandize prices based on predicted consumer demand seemingly remains even within the combined product portfolio, and lacks the capabilities of the specialists like ProfitLogic, i2, Spotlight Solutions, DemandTec, and KhiMetric.

In addition to the above-mentioned direct and indirect competitors in data synchronization and retail demand chain spaces, the company's possibly biggest challenge remains a still ongoing lack of awareness about the need for these applications. While many people have realized the power of e-commerce on the consumer side, there is still plenty of education to be conducted by all the B2B e-commerce vendors as to prove how much leverage their applications can bring to corporations. Also, many retailers prefer to trust seasoned employees rather than software "black boxes", and retailers are typically slow to adopt new technology until they see proven results from their peers and market leaders. On the other hand, some leading retailers like Wal-Mart tend to not invest in packaged applications tailored to their needs, since it could take away their competitive edge.

There are also many risks of JDA's commitment to the Microsoft .NET Platform, some of the more prominent being

1. prospective customers possibility refraining from purchasing the current versions of products which need to be re-written, instead waiting for the mature .NET Platform versions;
   
   
2. adequate scalability of the .Net Platform for the largest customers;
   
   
3. the ability of JDA development staff to learn how to efficiently and effectively develop products using the .NET Platform, which is still a novelty to many of them; and
   
   
4. JDA's ability to transition its installed base onto the .Net Platform when it is available.

Additionally, JDA licenses and integrates technology from many third-party providers in certain of its software products. For example, it licenses the Uniface client/server application development technology from Compuware for use in PMM, certain applications from Silvon Software for use in IDEAS, IBM's Net.commerce merchant server software for use in Portfolio Customer Ordering, and the Syncsort application for use in the AKB component of Portfolio Planning. Should JDA be unable to continue to license any of this third party software, or if the third party licensors do not adequately maintain or update their products, it could face delays in the releases of its software until equivalent technology can be identified, licensed or developed, and integrated into its software products.

This concludes Part Five of a six-part note.

Part One presented the event summary.

Parts Two through Four detailed the components of JDA Portfolio 2004.1.

Part Six will look at ERP vendor and the retail market and make user recommendations.

It will be published January 3.