Boom times might be back in technology, at least when it comes to retailing.
U.S. retailers this year are expected to step up their information technology spending, with some predictions of double-digit jumps. In an increasingly competitive environment, technology is seen as a still-underdeveloped frontier for merchants to boost sales and grab market share.
The last big wave of retail tech updates occurred in the late Nineties when IT budgets were boosted to replace or reconfigure computer systems to handle the dreaded Y2K Millennium date change.
While no one is forecasting similar across-the-board technology overhauls in 2004, there’s increased investment in the wings against 2003 as retailers see their IT departments as the key to being more efficient — and distinguishing themselves — in this Wal-Mart era of low prices.
“Retailers realize technology is extremely important to compete on service and cost,” said Dick Maider, a former chief information officer with department store Boscov’s and now executive director of the Association of Retail Technology Standards, a division of the National Retail Federation.
And the buzzword in retail technology investment this year is “transparency,” or creating a “glass pipeline.” That means using computer software and hardware, or Internet-based services, to buy and track merchandise, better understand consumer buying patterns and more efficiently forecast, produce and price the next hottest fashion trends.
“These decisions are happening now but with a lot of human intervention,” said Jerry Black, managing director for global practice development with Kurt Salmon and Associates.
While Black said people will always need to design garments — usually with the help of computers — “decisions about how much to produce, where to produce it and how to replenish it are becoming much more scientific” thanks to emerging technology, such as the nascent field of intracompany data integration in which “a Levi’s or a P&G can get into Wal-Mart’s database and see what’s selling.”
Merchants also appear to be shaking off leaner economic times that have slowed high tech spending after the Y2K flurry. At the same time, the technology sector is emerging from a shakeout in the aftermath of the 2000 dot-com bust. New technology has been spawned and, crucially for cost-conscious apparel and fashion businesses, high tech prices are lower — since the early 1990s, prices have dropped nearly 25 percent a year, while the processing power of microchips has doubled every 18 months, according to a rule of thumb called Moore’s Law, named after Intel’s founder, Gordon Moore.
“Unfamiliarity with technology is also gone,” said Josh Walker, research director with Cambridge, Mass.-based Forrester Research Inc., which surveyed general merchandise stores, including department stores, food retailers and apparel and accessories stores, and found that 2004 technology budgets will increase 10 percent. In addition, Walker said retailers are more savvy about technology investment, knowing “which projects can get done and how rapidly.”
A recent survey by Boston-based AMR Research found the largest growth in retail information technology investment this year will be by specialty stores, which will spend 5.3 percent more than 2003 levels. That represents IT investment of 2.9 percent of sales, or about a percentage point higher than the industry usually spends on technology, according to the NRF. Department stores and mass merchants are slated to increase IT spending this year by 2.7 percent, which represents 3.6 percent of sales, according to AMR.
For all retailers, including supermarkets, convenience stores and drugstores, IT budgets this year are expected to increase 3.9 percent. Of note, AMR said the trend this year is expected to continue, with retailers, compared with other service industries, allocating a higher percentage of their IT budgets to capital expenditures, or 44 percent versus 36 percent.
Among all retailers, the largest slice of technology investments in 2004 is expected to be targeted at making sure consumers find merchandise they want, down to the size and color, according to the same AMR survey of 61 IT executives at stores with at least 1,000 full-time employees. Of those surveyed, 26 percent of specialty chains and 20 percent of mass retailers and department stores forecast spending this year on what’s called customer order management.
“It’s well known that customers have little tolerance for out-of-stocks and slow checkouts,” the AMR survey noted. “Given what little loyalty most shoppers have today, one bad experience sends customers and their wallets to a store across the street.”
In addition, 20 percent of mass retailers and department stores and 17 percent of specialty stores said it will be “strategically important” this year to have technology designed to enhance customer loyalty and otherwise improve customer relationships.
To help strengthen consumer-merchant ties, Dave Hogan, cio with the NRF, estimates 15 to 20 percent of department, mass and specialty store retailers this year will replace POS computer hardware or software, which has a general life span of seven to nine years. “Every good retailer will use this technology as a weapon to give a competitive advantage,” said Hogan, a former cio with Lane Bryant, a division of The Limited.
Hogan said the technology budgets in general for retailers range from 1.5 percent to 2 percent of sales, but this estimate can change, depending on whether nuts-and-bolts technology like telephones are included and whether major overhauls of POS systems are needed.
“A lot of technology investment hasn’t been made with the slow economy,” said NRF’s Maider. “A lot of the technology budgets over the past couple of years have been flat.”
Adds KSA’s Black: “Historically, apparel companies and retailers haven’t spent nearly the amount on technology advancement as manufacturing, banking, insurance or other sectors.”
The competitive field of retail technology investment was given a jolt last year when Wal-Mart announced it will require its top 100 suppliers by January 2005 to use the emerging commercial technology of radio frequency identification tags on all merchandise pallets and cases. Tests between the retailer and vendors are under way. (For more on RFID, see page 15.)
RFID goes beyond the 30-year-old bar codes currently used, which rely on people to scan computer codes, usually at distribution centers or checkouts, to keep track of what’s been sold or stocked. With RFID, computer chips smaller than a pinhead and packed with information are read remotely when in contact with radio waves generated by computer readers stationed along the supply chain.
“It will make sure we all have the right merchandise at the right time,” a Wal-Mart spokeswoman said, declining to say how much the retailer is spending on any technology. “Benefits include better tracking and moving of inventory, faster receiving and shipping, improved quality inspection, fewer out-of-stock items resulting in improved shopper satisfaction, greater predictability in product demand and better value for the shopper as efficiencies occur.”
The cost to create an RFID network varies according to the industry using the technology, how much merchandise is being tagged and the size of the company. RFID infrastructure investment for a $10 billion retailer is estimated by analysts at $500 million, and that excludes the amount being invested by manufacturers to tag products, which still costs a relative hefty 40 cents each. However, analysts estimate RFID can eventually save up to 1 percent of revenues, which can be a sizable amount, but could take several years to be realized.
RFID already is being used sparingly in the marketplace, like on merchandise at Prada’s New York Epicenter store that enables sales staff to quickly pinpoint the location of products. Benetton last spring nixed RFID tagging plans for its Sisley line when privacy groups in Europe threatened a boycott, but the company said at the time it hopes to eventually use the technology. English retailer Marks & Spencer has gradually deployed RFID for two years to keep track of its busy take-home, prepared-food business.
The technology, sometimes called see-it-all or Auto-ID, is shaping up to “accelerate the split in the retail sector between the ‘haves’ and ‘have-nots,’” wrote technology consultant Jonathan Byrnes in the Sept. 1 Harvard Business Journal. Essentially, Byrnes envisions smaller vendors without RFID either facing less service from large RFID-capable suppliers or even being charged higher prices to do business with them.
Of course, RFID isn’t the only means for retailers to realize savings through technology.
Bluefly.com, the five-year-old discount designer Web site, credits a jump in sales, in part, to switching its e-commerce software to Blue Martini from a Windows-based application. Bluefly’s sales climbed more than 30 percent in the third quarter of 2003 to $8.2 million.
“From an e-commerce perspective, the [Blue Martini] technology is far more developed, far more bug free,” said Bluefly chief executive officer Ken Seiff, who said his company’s software switch was “a seven-figure investment.”
“It’s much easier to evaluate software today than when we started,” Seiff added. “And it’s less expensive.” Other Blue Martini customers now include Carrefour of France, Kohl’s and Bloomingdale’s.
Retailers also are dabbling in so-called price optimization software. The software uses algorithms to determine the best time to discount merchandise and by how much. The mathematical formulas are tailor-made for retail clients.
One such software program is produced by Boston-based ProfitLogic, and last year, Gap, Bloomingdale’s, Ann Taylor and Charming Shoppes were among the retailers that bought the company’s pricing program. J.C. Penney signed on in 2001.
“The beauty of this is the data we use is all the retailers’ own historical sales data,” said Jakki Glivicky, ProfitLogic’s director of marketing. She’d only describe the software’s cost as in the “single-digit millions, depending on the size of the retailer,” and the return on investment is typically within one season.
In November, a Smith Barney analyst report on Bloomingdale’s said the software gives the retailer “a new way to look at the business” and should help improve the chain’s gross margins over the Christmas holidays, as well as “have positive implications for the potential roll out…to the rest of Federated’s divisions.”
Similar kudos for improving fashion retailers’ bottom lines were recently given to 7thOnline.com by UBS Investment Research. 7thOnline is an Internet-based fashion merchandise-planning service and virtual showroom started five years ago as a pilot between Liz Claiborne and Saks Fifth Avenue.
Jones Apparel Group has since joined Liz in subscribing to 7thOnline’s Collaborate and eShowroom services, which allow retailers to speed and enhance fashion buying decisions. Twenty-five retailers now routinely use the Web site to peruse, tweak and select their Liz and Jones merchandise, eliminating much of the need for face-to-face meetings and fax exchanges. More than $1.2 billion in annual transactions are now conducted via 7thOnline, according to the UBS report.
“Jones and Liz Claiborne are leading the pack in terms of technology innovation,” UBS declared in a December report entitled “Apparel: Technology is Key to Higher Profits.”
Using 7thOnline “will continue to lead to better inventory management and more full-price selling,” UBS said, noting how department stores, which have moved to more centralized operations and expanded the number of fashion seasons beyond four, need help quickly tailoring merchandise to the tastes of particular markets.
Joseph Mazzarella, 7thOnline’s director of sales and marketing, said a subscription to the Web site costs vendors “in the hundreds of thousands of dollars” and has increased its users’ sales by as much as 5 percent. For 2004, Mazzarella said the privately held company plans to recruit more vendors, develop more services and hopefully see retailers start requiring suppliers to use 7thOnline. “There’s a lot of momentum right now generated by the fact that Liz and Jones are doing this,” Mazzarella said.
But where apparel vendors and retailers spend their technology budgets — and the importance of technology to stay in the game — is an evolving issue, just like the technology industry itself.
To that end, Jay McIntosh, partner in Ernst & Young’s Retail and Consumer Products Industry Services group, said retailers and apparel vendors are expected to continue the trend started in the late 1990s to bring cio’s under the wing of chief financial officers.
“Many companies felt like they weren’t getting the bang for their buck in their technology investment and there was a need for more rigorous analysis of IT spending,” he said.
KSA’s Black said, “The best chief information officers in the industry aren’t technocrats, but they know enough about technology” to weigh business considerations.
Another technology personnel trend Black sees continuing this year is the move among retailers toward dividing the duties of apparel buyers between “the artistic people” with an eye for fashion and “the quantitative people” adept at technology to place and track orders, as well as forecast trends.
Predicting how all the technology personnel changes and investment will precisely translate to increases in sales and market share is difficult. Economists widely credit technology as contributing to the surge in U.S. workplace productivity since 1995, which has grown at an annual rate of about 3 percent, or double that, seen between 1973 and 1995. (In the past two years, output per hour has increased more than 5 percent per year.)
However, measuring technology’s exact influence remains elusive.
“Economists will continue to debate the relative importance of various factors underlying productivity growth,” noted Federal Reserve vice chairman Roger W. Ferguson Jr., in a Jan. 4 speech before the American Economic Association. “But our experience in the United States clearly suggests that periods of relatively rapid…productivity growth are characterized by innovations in technology that are accompanied by changes in organizational structure and in business financing arrangements and by investment in human capital.”