By  on November 16, 2005

Scott Friend, the co-founder and former president of ProfitLogic, which was acquired by Oracle this year, likes to tell a funny story about what retailing was like before the age of massive chains and mergers.

In his first job at IBM, one of his customers was Carson Pirie Scott in Chicago. He regularly visited the executive in charge of store operations, who had pictures on his wall of all the store managers. At this time, the retailer had 20 or 25 stores in the Midwest, Friend said.

"After a few months of working with this guy, I noticed the pictures kept moving around. I thought I was crazy, but they seemed like they kept moving. So I asked him one day, ‘What's going on with the pictures?' And he said. ‘I have a store manager meeting every month, and I move the pictures around based on performance. And if someone's on the bottom row for too many months in a row, I get rid of them.'"

That method doesn't work anymore because retailers are now so big, said Friend, who is vice president of marketing and science for Oracle's Retek Global Business Unit. But by marrying the science of data analysis with the traditional art of going with your gut, retailers in today's world can preserve intimacy without sacrificing efficiency, he said.

As inspiration, Friend cited "Moneyball," the book by business writer Michael Lewis that details how the Oakland A's became one of the most successful teams in Major League Baseball by using analytics.

ProfitLogic's price optimization service analyzes store data to figure out optimum markdowns and when to take them. "If we can tap into [the data], the results can be phenomenal," he said. ProfitLogic today has 35 customers worldwide.

Retailing is complex, with hundreds of thousands of stockkeeping units and decisions, yet the typical buyer has a liberal arts degree, is motivated by fashion and trends and often has no tools beyond a spreadsheet, Friend continued.

"We're hiring her and we're saying here's a huge stack of data and a spreadsheet, and go and invest 20 million bucks. Now I don't think any of us would give our money to an investment manager if that's how they were running their operation. Yet retail is — after the brand is set and the merchandise is bought — fundamentally an investment game. It's about how many do I buy, which stores do I put it in, and how do I price it? And those as it turns out are big math problems," he said.When J.C. Penney adopted ProfitLogic's service, it improved its gross margin by 5 points, increased turns by 10 percent and increased top line and comp-store growth for four consecutive years, Friend said.

ProfitLogic also helped American Eagle assort its stores based on demand instead of geographical profile. After the retailer analyzed store data, it realized demand in its California stores followed a pattern similar to its Midwest stores. The common denominator seemed to be a college-age customer.

"Those kinds of small decisions can make all the difference in the world between a profitable and an unprofitable store," said Friend.

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