Retalix Strives for Leadership in Retail Food Segment

Introduction

Every vendor aspires to be a segment pack leader, the one that all competitors watch. Retalix, a supply chain software provider for the retail food industry is no exception. Through internal development and corporate acquisitions is expanding its functional scope. This combined with its corporate and product strategies, and company performance, may very well make Retalix realize its potential as a segment leader in the food retail, food service, fuel, and convenience store sector.

Vendor Positioning

Retalix took full advantage of its first International Customer Conference, called Roadmap to the Future, to convey its corporate message and product and platform strategy to a combined audience of its existing customers and partners as well as those from OMI, IDS, and TCI, companies it acquired since early 2000. (See Part One for more detail.). Timing was critical, as the company had already embarked on a growth strategy of acquisition to complement and fill out its product portfolio and expand its installed base. Prevailing at the conference was the corporate theme of providing solutions from "warehouse to checkout", by synchronizing data and applications among stores, warehouses, distribution entities, and headquarters.

Part Two of the Retalix Strives for Leadership in Retail Food Segment note.

One of the messages from the conference was that the Retalix vision has not changed. Its strategy and tactics to continue to move forward were elaborated in more detail via its announcement of the Retalix InSync product portfolio and architecture. This technology development undertaking will keep Retalix very busy through 2006, and will solidify its technology platform to service the food sector in the future. Retalix' new tag line "Synchronized Retail from Warehouse to Checkout" aptly frames its target market segment.

Retalix is taking a three-pronged approach to its road map strategy that includes

• Continuing product(s) integration by using master data management (MDM) techniques and its home grown data synchronization engine (DSE),
  
  
• continuing product(s) enhancement through new product releases, reporting, business information (BI), and key performance indicator (KPI); and
  
  
• construction of the future architecture platform, Retalix InSync.

Retalix expects this process to be an evolution, not revolution of its existing product portfolio, which will be more acceptable to its diverse installed base. Past investments need to be protected, and the Retalix pitch to the conference was that it is small enough to be responsive, yet big enough to be responsible.

Retalix' integration work started shortly after its acquisition of OMI. Now, the vendor's approach and scope has dramatically expanded with the added resources of 120 developers working worldwide on the Retalix InSync platform. The Retalix InSync platform development strategy encompasses service oriented architecture (SOA). It is intended to be a state-of-the-art, Web-based portfolio of synchronized applications for retailers, distributors, and operators in grocery and food service industries. Two early-adopter clients have already been identified with initial testing involving purchasing, order management, invoicing, and data analyzer that will be completed by the end of 2005.

So how do these developments bode for Retalix as a potential leader in this defined segment?

Major Elements and Characteristics Required of a Pack Leader

Vertical differentiation

Retalix has demonstrated its industry domain expertise through its management commitment to the food retail and distribution sectors. Its acquisition of software companies that were also bearing down on the same or similar targets, has brought Retalix a considerable amount of application inventory and human intellectual capital. This has heightened its ability to provide specific functionality required by the segment, that along with Retalix InSync, will solidify Retalix' scalability for the high transaction volume requirements of food service retail. As a result, the vendor's solutions now span the cycle from store checkout to the supplier.

Table 1: List of Solutions Store

Significant development work on Retalix InSync that will enable new prospects to use this suite of solutions in an integrated fashion, is yet to be done, but once complete, this expanded functionality will be considerable in meeting the needs of the sector.

Taking a broad-brush view, there are key differentiators that Retalix' applications have over the competition, which includes IBM, NCR, and Nixdorf in grocery; Radiant Systems and Verifone in c-Store; JDA, Oracle/Retek, and SAP in headquarters operations; and Manhattan Associates and SSA Global/EXE in warehousing. In addition to deep domain knowledge, open architecture, hardware neutrality, there is one particularly notable differentiator—an integrated service oriented architecture (SOA) platform solution, which will be available when Retalix InSync is completed.

Market segmentation (tier and territory)

The Retalix client and prospect profile covers supermarkets with revenues in the multi-billion dollar range (e.g. Albertson's, Publix, Ralph's, Kroger) to mid-sized convenience store chains that fall in the $500 million to $1 billion (USD) range. It also offers a low-end solution founded on an application service provider (ASP) model for small stores, below $500 million (USD). StoreNext is a separate entity tailored to address the underserved tier three and tier four grocery market. Smaller chains and "mom and pop"-type, family run stores cannot support or afford enterprise-wide retail applications. Furthermore, suppliers have little visibility into this low-end market. StoreNext offers this market connected services and Web-based applications based on monthly subscription fees. StoreNext is a 50/50 joint venture with Fujitsu Transaction Solutions, Inc. that offers technology to independent grocers and regional chains. This aspect of the vendor's business has grown significantly, now representing an estimated 20 percent of Retalix' annual revenue.

Clearly, Retalix' multi-tier business model has been effective in attracting clients and prospects from a broad revenue range. Geographically, Retalix software is running in 50 countries and 34,000 store locations, serving over 300,000 checkout lanes. It has a growing presence in Europe, Australia, South Africa, as well as an affiliate and clients in China, India, and Japan. In fact, 36 percent of revenues for 2005 are estimated to come from outside the United States.

Expanded functional footprint

Retalix' acquisition of IDS brings an enterprise software suite with elements of customer relationship management (CRM) for wholesale grocery, convenience store, and food service distribution industries. Through TCI, Retalix can offer pricing, merchandising, and inventory control solutions to the grocery industry. Clients like Bashas', Food City, and Fresh Brands have also been added to Retalix' own customer base as a result of these acquisitions. In conjunction with the new functionality provided by these acquisitions, Retalix has also introduced some new modules:

• Retalix DemandAnalytix (DAX), a browser-based demand analytics tool with demand algorithms, management by exception capabilities, and KPIs
  
  
• Retalix InSync Analyzer, which transforms data into actionable response, and monitors KPIs,via dashboards and scorecards

Horizontal Influences

In addition to vertical differentiation, a vendor must also address horizontal influences in order to establish itself as a pack leader.

Integration and platform technology

Retalix is approaching integration and platform technology through its Retalix InSync platform development strategy. The goals and characteristics of the SOA development project are to deliver

• Transparent Web services
• Java (J2EE) development standards
• Database independence (DB2, MS-SQL, Oracle)
• Interoperability (Unix, Linux, Windows, iSeries, MainFrame, etc.)
• Application server independence (IBM WebShere, JBOSS, etc.)
• Thin client user interface
• Scalable and high availability for 24x7 operations
• Workflow and process management

These are weigthy goals for an SOA platform evolution, and follow a similar path of IBM, SAP, Oracle, Epicor, Infor, and numerous other software vendors that offer supply chain solutions and espouse SOA. In order for Retalix' platform strategy to succeed, its approach must also enspouse flexibility toward a "demand intelligence" platform as analytics, supply chain visibility, and supply chain event management become more pressing requirements to meet the needs of today's adaptive supply chains.

Market value proposition

Pack leaders must also have a market value proposition. According to an IBM market technology study (September, 2003), 80% of food retailers are still using proprietary systems. Clearly, an open systems software technology solution provides for a large market opportunity, given that today only 20% of food retailer POS systems are open systems built on proprietary systems. Currently, the Retalix share of existing open systems in food and retail is estimated at 45%, and as legacy proprietary POS systems transition to an open standards platform, there is considerable growth opportunity for Retalix, given that US retail software spending has increased by 38%.

Balanced mix of revenues

The Retalix revenue mix is rather interesting relative to many other software vendors in the supply chain market. As the company has grown, the percentage of revenues from license sales has grown, and in 2005, Retalix estimates that 56% of its revenues will come from licenses. Tier two grocers are the largest client component, but the number of tier one clients Retalix has is also healthy. The lower tiers represent near 20% of Retalix' revenues. This is a good mix, with no heavy dependence on any one tier or on services, which is usually the less profitable source of revenue.

Solid and consistent financial performance

The Retalix financial performance is just short of astounding, with a compounded annual growth rate (CAGR) of 39% over the past five years. This perfromance, during the 9/11 slump, the dot-com bubble burst, and general software malaise of the market, is truly incredible. Retalix' 2004 revenues were $124 million (USD) and its revenue goal of an estimated $185 million (USD) for 2005 implies a revenue grown rate of 67% in 2005. Retalix has also shown a consistent track record of profitability since 2001, and has been listed on the NASDAQ in 1998. Retalix also had nearly $112 million (USD) in cash and marketable securities at the end of 2004.

Ability to execute in the field

Another indicator of field execution is the level of willingness by customers to serve as references or to speak openly about their implementation experience in a positive light. As seen by customer testimonials gathered by a third party, Retalix has also demonstrated its ability to perform well in the field. A 2004 research survey of retail technology users, revealed that Retalix had the highest number of "Excellent" ratings for product performance, and was the only POS vendor to achieve an overall rating of "Excellent". The vendor was also cited as taking deals from the major competitors in the POS market, IBM, Wincor-Nixdorf, and NCR.

Conclusion

The Retalix commitment to the retail food sector, in particular grocery, convenience store, fuel, and food service retailers and wholesale distribution worldwide, is commendable. The vendor truly understands how too use its abilities to meet the needs of a segment. Retalix can find comfort in its segment's growth potential. Its approach is refreshing, shows strong leadership, and an absence of greed that is characterized by fast, but potentially unhealthy growth, through rapid expansion into sectors that are not within a company's domain.

Having said this, Retalix also faces challenges and has a significant challenge with development, testing, and roll-out for its Retalix InSync platform, and as of yet, no roll-out plan or potential transition costs for Retalix InSync has been announced. One must also keep in mind that the devil is often found in the details, so attention to detail before, during, and after the general release and roll-out of Retalix InSync to existing customers will be the ultimate factor that will establish if the vendor can be the sole pack leader in this sector.