2011 worst year for retail IT investment since records began

First signs e-commerce sales have started to dip and overdue system upgrade requirements cannot be postponed forever

The sales slump gripping the UK retail industry has led to a squeeze on technology investment, with forecast expenditure on new IT systems for 2011-2012 dropping to one per cent of retailers' total sales revenue on average, the lowest since research firm Martec International first started compiling records nine years ago.

This year's survey, which interviewed CIOs and IT directors from 150 UK food and non-food retailers representing 71 per cent of total UK retail market by sales revenue, makes even more grim reading than usual.

"It is bad news, worse when you discount inflation, but there is a huge spectrum of some retailers growing, some going out of business and those in between," said Martec International managing director Brian Hume.

Ongoing downward budget pressure means that some of the technology initiatives being used to increase retail sales, including customer relationship management (CRM) expansion and social networking integration, are being conceived and funded by marketing, rather than IT, departments.

"Roles are blending: if you look at what our marketing team has done with Facebook pages, for example, they did not come to the IT department for that, they went off and did it themselves," said Kevin O'Brien, IT director at electrical giant Comet.

"No one person is responsible for IT now, everybody has to work together."

The Comet Group spends around £29m a year on IT systems, figures dwarfed by retailers such as Tesco (£250m), Sainsbury's (£220m), Asda, Boots and the John Lewis Group (all £100m), B&Q (£70m), Littlewoods (£65m) and 02 (£50m), according to Martec's findings.

Fashion chain Jane Norman, the latest in a long line of retail bankruptcies in the past few years, spent around £2.3m a year on its IT provision.

Indications that previous growth in online sales is bottoming out will also alarm retailers. Overall, online sales were static at 6.3 per cent year on year, while two companies surveyed by Martec - Maplin's and Lakeland - predicted for the first time that the percentage of their non-store sales would fall in 2012.

"This is the first time ever that e-commerce sales as a percentage for retail sales are going down," said Hume.

"These were companies that were doing a high percentage of online sales in the first place, 25-40 per cent, and the question that this raises in the long term is are we at the point where e-commerce has topped out?"

Hume predicts another year of relative austerity for retail IT spending, but says that companies cannot ignore the pressing need for system upgrades for long - there will come a tipping point where investment has to be made.

Increased use of mobile commerce and kiosks were the only bright spots for retailers, while Martec's survey also reveals that spending priorities for UK retailers involve merchandising management and planning, logistics, e-commerce, marketing/CRM, store systems, data warehouse/business intelligence, financials and space management applications in particular.

"Replacing merchandise management systems is such a difficult, complex thing for retailers to do that it is a bit like open heart surgery for them, and they will avoid it as much as possible," said Hume.

"But they have been stretching the life of those systems for so long - 10 or 15 years in some cases - that they have reached a point where they cannot live with that patchwork quilt any longer."

Comet started using IBM WebSphere 7.0 to develop multiple shopping channels, including an Argos-like, web-based, click-and-collect service as well as mobile applications, at the end of 2010.

The company is also trialling free in-store Wi-Fi access for customers in a bid to bring more shoppers into its premises and to use their subscription information for CRM purposes.

"It is always an IT director's role to make sure the company is spending money in the right places and make the board aware of any risks to the business," said O'Brien.

"Part of that is to look at the contracts we have and say, 'Do we need these right now?' and can we get more bangs for our buck."

Comet has previously tried to get better value for money out of IT provision by offshoring application development and support, and is also considering a move to a transaction-based cloud computing model

"Most systems require a big capital investment up front but they stop the business moving forward as you implement them and while people get trained up, and things never go 100 per cent according to plan," said O'Brien.

"Cloud is an interesting, transaction-based cost model - whether it costs more or less does not really matter and the hardware and software licence costs move up and down with fluctuations in trading periods."

Richard Dodd is chief operating operator (COO) at BT Expedite, which sponsored the Martec International Survey and which is looking to establish itself as a one-stop shop for retailers looking to buy in managed IT services, including in-store Wi-Fi and hosted applications, from external suppliers.

Dodd knows he is selling to a tough market, but points out that the retailers going under are being acquired mostly by their competitors, meaning opportunities to sell into larger companies looking to upgrade or consolidate IT systems will present themselves.