Retail and technology

Relentless competitive pressure on retailers means that their two main, but seemingly contradictory, focuses now and in the future will be on cutting costs and improving customer value.

Chris Osborne, retail innovation team leader for IBM Global Solutions, says the sector has traditionally operated under tight margins, but it is being shaped by five major trends.

The first relates to consumers. Osborne says companies need to recognise that there is no such thing as an average customer with predictable behaviour.

Shoppers are now more sophisticated and have higher expectations.

Such trends have resulted in the sector starting to polarise into retailers that focus on low pricing and other organisations that are trying to differentiate themselves by providing premium products, services and overall customer service.

Osborne says there is a divergence in retailing. ‘And the businesses left in the middle will be a bit stuck and eventually have to make a decision one way or the other,’ he says.

The second big trend is the increasing difficulty that organisations face in getting their sales and marketing messages across to consumers, who are bombarded with information and offers every day. The onslaught means retailers have to work harder to develop customer relationships and brand loyalty.

The growing use of the web is also leading to additional change – the third key trend in retailing. Many consumers are now researching potential purchases online, and often use intermediary web sites that collate comparative pricing information about different commodity products and services to find a bargain, making price the only differentiator.

But the fact that they might wish to purchase goods online and pick them up in a bricks-and-mortar store is, says Anthoula Madden, vice president of consumer products at Capgemini Consulting, putting pressure on retailers’ logistics and supply chains.

Being able to forecast and answer demand across multiple channels is increasingly important, and the challenge is only set to grow further, she says. While online stores generate about 10 per cent of total sales, the figure is expected to grow to 25 per cent by 2010.

The fourth trend is linked to huge supermarket chains, such as Tesco and Wal-Mart/Asda, which are starting to branch out into areas beyond food and invest heavily to make their supply chain processes more efficient.

As efficiencies lead to increased profits, a percentage of the margins are passed on to customers as price cuts. Osborne says such decisions increase loyalty and generate additional revenues that can be ploughed back into the business.

‘It generates a virtuous circle, but also spawns a cycle of consolidation which sees the large retailers getting bigger and the smaller ones being picked off,’ he says.

The final trend again relates to cost-cutting and involves organisations outsourcing non-core functions as they concentrate on optimising their brands.

One example is drinks retailer Threshers, which has just signed a five-year IT outsourcing contract with Xansa. The deal is valued at about £8m and is expected to save the company more than £1m a year.

As a result of having to address trends such as outsourcing and online purchasing, Madden says the retail trade – which has traditionally been cautious in IT investment terms – is starting to increase budgets slightly, but only by about five per cent a year.

The sector is also trying to boost supply chain efficiencies by replacing bespoke enterprise resource planning (ERP) systems with packages from vendors such as SAP and Oracle. Retailers are also attempting to integrate front and back-end applications using middleware.

Madden says retailers have not traditionally invested in enterprise-wide ERP systems, instead integrating a range of function-specific systems.

‘Tesco and Sainsbury’s, for example, have a lot of bespoke systems because they have always believed they are a differentiator, although Sainsbury’s is in the process of replacing its applications,’ she says.