Retail Market Dynamics for Software Vendors Part One: Software Requirements for Retail

Introduction

There 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.

However, 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.

Therefore, 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.

This is Part One of a two-part note.

Part Two will present retailer progress.

Current Solutions

Consumer 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).

Thus, 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.

Recently 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?

Some 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.

Hence, 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.

Challenges Plus

While 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.

On 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.

Yet, 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.

In 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.

This is Part One of a two-part note.

Part Two will discuss the progress that is being made in addressing the retail market.