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Moving the Needle

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If there’s such a thing as perfect timing, retail CIOs just may be the beneficiaries. After nearly three years of cost cutting and containment, retailers are planning to increase IT budgets by 3 to 4 percent in 2011 — putting overall tech spending at roughly $2 billion, according to some estimates.

Consumers’ rapid-fire adoption of smartphones and all things mobile has left the retail industry in catch-up mode, and this appears to be the year they’ll seek to make up some ground. Mobile is driving IT spending, followed closely by multi-channel investments intended to move businesses ever-closer to the shopper and next-generation optimization tools aimed at adding value by leveraging tools already in place.

Most CIOs describe their budget outlook for 2011 as “upbeat,” a welcome change from the “wary” and “cautious” categorizations that have prevailed for nearly three years. It’s no longer a question of whether they can come up with capital to invest; it’s more about figuring out where to invest.

“Mobile is an unstoppable trend — it’s transformational,” says Jeff Roster, research vice president for Gartner, who expects a 3 percent rate of growth in IT spending this year despite an inability to fully reconcile such increases with a number of less-than-ideal economic indicators. “The magic here is the consumer,” he says. “They’re so far in front of the industry in their approach to mobility that retail companies have to invest capital in their e-commerce infrastructure to close the gap.”

Deborah Weinswig, who heads the retailing/broadlines, food, drug and home improvement team at Citi Investment Research and Analysis, is calling for a 3.1 percent year-over-year increase in retail IT spending, noting that several large companies have managed to generate significant cash flow from operations, thereby providing more capital to devote to technology.

“During the downturn, we believe retailers turned to technology as a way to mitigate sales declines, protect gross margins and control expenses to drive profitability in a difficult environment,” she says. “In 2011, we expect retailers to utilize technology to drive sales, improve buying and allocation decisions, enhance margins with next-generation optimization tools and leverage stronger toplines with workforce management.”

A 3 to 4 percent increase in IT spend pales in comparison with other industries, however, and it’s important to note that roughly 80 to 85 percent of a retailer’s IT budget is dedicated to the multi-year rollouts, licensing fees and maintenance of a hodgepodge of systems and applications required to merely “keep the lights on”: What remains is applied to innovative solutions, and given the flurry of tech innovation coursing through the industry, most experts say that’s not nearly enough. Moreover, retail IT budgets typically consist of 1.2 to 1.5 percent of overall revenue: While many companies managed to eke out year-over-year gains in 2010, increases were concentrated in the low single digits, suggesting that while the budgets may have increased slightly, no one will be spending with wild abandon.

Mad for mobile

Mobile-related spending falls into three distinct buckets, according to Greg Buzek, founder and president of IHL Consulting Group: enabling store associates, consumers and management, and “the biggest share of the investment is being spent on getting mobile devices into the hands of store associates,” he says. Buzek calls the debut of the iPad “a Guttenberg moment” for the retail industry.

“The $500 price point for a device that levels the playing field and provides a better customer experience is what has generated all the interest in tablets,” he says. “Having mobile devices in the store also unleashes the store manager, and there’s a direct correlation between the time a manager spends on the selling floor and the success of a retailer.”

Buzek believes many retail CEOs would love nothing more than to emulate the Apple Store experience, but are stymied by the “generations of systems in the store.” He also notes that retailers’ efforts to enable consumer-carried devices running on a variety of operating systems present additional hurdles. “Retailers are trying to create applications in HTML 5 or WAP that will allow them to move from device to device, but it won’t happen overnight.”

David Dorf, director of technology strategy for Oracle Retail, sees interest building around mobile POS because it is “a cost-effective and easy way to add lanes and increase customer service without taking up a lot of additional real estate. It gets sales associates in the aisles interacting with customers and it delivers a clear ROI.”

Dorf hints that alternate payment schemes may gain a foothold in the coming year, particularly if speculation about Apple adding near field communication (NFC) chips to the next version of the iPhone proves true. “Any competition that can drive down fees will be good for everyone,” he says.

Managing a multitude of channels
While retailers are placing big bets on mobile, many expect a chunk of the capital earmarked for innovation to be spent on e-commerce infrastructure, specifically the tools that enable a seamless experience for the shopper regardless of where and how she interacts with a brand. Progress has been made on the mission to manage inventory across once-siloed businesses, but for most there remains a lot of runway ahead. CIOs know that there’s no more wiggle room to get it right, particularly with mobile commerce and Facebook commerce breathing down their necks.

“What’s top of mind for CIOs is the movement to a single brand that has multiple touchpoints,” says Jon Stine, director of the retail and consumer products practice at Cisco IBSG. “There needs to be flexible fulfillment that allows shoppers to buy something in one channel, pick it up at another and return however it’s most convenient, without any hiccups along the way.”

It’s one thing, he says, “to put up a Facebook page or to create an iPhone app, but when it comes to establishing what some call an ‘Omni brand’ — one consistent and relevant experience for the consumer across multiple touchpoints — that’s a different challenge entirely. This is not something that happens overnight.”

Gartner research finds that 41 percent of retailers describe their e-commerce infrastructure as being “severely limited,” Roster says. “Upgrades need to happen — and fast,” and those investments will ultimately drive down costs. Many stores have “servers that are six years old,” he says. “Today’s technology is 100 times more efficient from every angle. Investing here will make the business more scalable and more nimble. We’re not talking about three channels of business anymore — we’re talking about six or seven. Organizations just can’t survive without overhauling this infrastructure.”

Stine and Roster emphasize that the retailers with the greatest exposure are the ones with younger customer bases, but neither is willing to give merchants catering to more mature segments an extended hall pass. “Retailers are going to have to bifurcate their technology spend based on who’s at the peak of their bell curve,” Stine says. “If you’re Hot Topic, you know which way you have to go. If you’re Chico’s, you may be able to go another way for now.”

Bob McFarland, senior vice president and general manager of SAP America’s U.S. retail organization, takes it a step further. He believes that the best predictor of which retailers will be thriving in 2015 is the level of attention they are currently paying to improving customer loyalty through multi-channel integration and promotions and, ultimately, fulfillment.

“The majority of retailers currently rate a ‘2’ or ‘3’ on a 1 to 10 scale in this critical competency area,” he says. “Adding a layer of business intelligence across the enterprise is the linchpin for taking multi-channel beyond merely seamless integration with the customer to really driving loyalty and increasing spending. Most retailers have a long way to go.”

Merchants able to blend mobility with an effective multi-channel integration strategy “have a tremendous opportunity to bring personalization back to retail,” says David Gruehn, U.S. retail industry solutions director for Microsoft Corp. Retailers are now “catering to customers who have built connected lives using technology as a conduit, and the challenge for retailers is to do the same.”

Optimize everything
Optimization tools represent one area being soundly backed across retail. Companies that deployed price optimization years back, and then layered on markdown, promotion and, in several instances, size optimization, have reaped swift margin benefits — and they’re hungry for more.

Next-generation optimization tools “allow retailers to make decisions in near real time” and “more easily and quickly run optimization scenarios by SKU down to the store level,” Weinswig says. “These tools will help retailers better manage their gross margins in an environment where margins are likely to be pressured by rising product costs.”

“‘Optimization on steroids’ and improved customer insights are two key retail technology areas that drive sales and margin potential. And, importantly, they provide a rapid return on investment,” explains Diana McHenry, global retail product marketing for SAS. “We’re finding that retailers like Macy’s and Chico’s are leveraging these technologies to get closer to their customers and to understand shoppers’ needs at a very detailed level.

“Today, customers know more than ever about retailers. They know their merchandise, competitors and prices,” says McHenry. “By using these next-generation optimization tools along with business analytics, retailers can understand their customers’ web behavior, their sentiment in social media, what their market baskets look like and how to create a one-to-one relationship and tailored promotions.”

Infrastructure revamp
Upbeat as many are about the prospects of a modest increase in IT spending, industry experts insist that retailers will not be able to move the needle very far until they can boost the portion of capital spent on innovation. In fact, given the blistering pace of innovation, retailers would be better served if they were able to invest half or more of their IT budgets on innovative technologies.

Gruehn insists the way to make this happen is to move more computing to the cloud, which offers “a great way to leverage technology to empower employees. They can provide associates with a way to connect to a portal, access the Internet and access e-mail. It allows them to move forward on the concept of the empowered employee quickly and with less expense.”

Additionally, Gruehn insists there needs to be “more buying and leasing and less building and maintaining” if retailers are going to harness the innovation they need to differentiate their businesses. “It’s possible to take commodity tools — and even some things that are more mission critical, like portals and Microsoft Office in the store, and run them in the cloud,” he says. “It’s about realigning costs so that we can pursue business innovation more aggressively and spend less time and money worrying about keeping the lights on.”

The biggest challenge for retailers as they look across the spectrum of innovative technologies that dangle before them is determining the ones that will deliver the swift ROI so many are seeking. Is it the Tag, which Gruehn says can instantly turn a cell phone into a “sell” phone? Is it precision marketing, which McFarland insists will allow retailers to be more relevant to consumers? Is it implementing workforce management to better leverage labor and allow managers to spend more time with customers? Is it figuring out how to extract salient data and consumer sentiments from social networks?

“When I think about the amount of change this industry has undergone in the last five years and then look at what lies ahead, it’s both exciting and daunting,” Roster says. “The days are numbered for retailers who continue to do things because they’ve ‘always done it that way.’ That’s just not going to fly anymore.”