CRM and SCM Will Help Some Retailers Survive the Holidays

Once upon a time, big department stores were the preferred destination of holiday shoppers. Those cathedrals of commerce lured millions of moms and dads, grandmas and grandpas, and girls and boys through their revolving doors with magical, theatrical Christmas displays. Every Yuletide (beginning in November), they decked their halls with boughs of faux holly and set Christmas trees bedecked with lights and tinsel at the end of every aisle. Gift-wrap departments bustled with elves tying satin bows.

Children—dressed in puffy parkas with mittens dangling from their sleeves, their cheeks crimson from the cold and their eyes shining with excitement—lined up to sit on Santa’s lap. Shoppers marveled at the spectacle as they crowded the stores in search of stocking stuffers and the finest gifts to secret under their trees. n But that was then.

Though department stores continue to spruce up for the holidays, they can no longer rely on theatrics to bring in the shoppers. Now they rely on holiday sales—pre-, not post—and that’s not good for their bottom lines because sales eat into profit margins. Even Santa has abandoned the big store. He’s moved his operations from the heart of the store to the center of the mall, and that’s where consumers are increasingly spending their holiday bonuses. They no longer crowd department stores in search of that something extra special for that extra-special someone. Instead, they head to Brooks Brothers for their husbands, Chico’s for their wives, Abercrombie & Fitch for their teenage sons and daughters. And when they leave the mall, they head across the highway to Wal-Mart to pick up toys for their tots.

Or they go online.

Last year, consumers spent $23.2 billion online during the Christmas season, according to Goldman Sachs, Harris Interactive and NielsenNetRatings, which was a 25 percent increase over the previous Yuletide season. Holiday sales across different brick-and-mortar stores rose just 2.3 percent from 2003 to 2004, compared with 4 percent from 2002 to 2003, according to the International Council of Shopping Centers (ICSC), a trade group that tracks and reports retail sales.

This holiday season isn’t looking much better for retailers, but it’s looking especially grim for the big department stores. Record-high gas prices have cut into consumer spending. A survey of 7,000 Americans conducted by Big Research, a provider of consumer market intelligence, showed more than 70 percent of Americans shifting their spending from luxuries to necessities because of staggering fuel costs. The National Retail Federation predicted holiday sales at discount, department, grocery and specialty stores would rise 5 percent this year, to $435 billion from $414.7 billion the previous year. The 5 percent bump is lower than last year’s 6.7 percent jump over 2003 and the slowest growth in holiday sales since 2002. (For more data on department store declines, see “Taking Inventory,” this page.)

In other words, “Ho, ho, ho” is rarely heard in the big department stores these days. More often, Santa and his helpers are saying, “Ho, no.”

What the Big Stores Are Up Against

his move of consumers away from department stores in favor of specialty stores isn’t new. Department stores have been struggling with lackluster growth for years due to several intractable problems:

© They all look the same. Nothing distinguishes one store from another, so customers don’t have a compelling reason to pick one over another.

© They’re difficult to shop in because, to save money, they’ve cut back on staff. Consequently, there are fewer employees to organize merchandise on their endless racks and shelves and fewer salespeople to help customers find their size, color, style or brand.

© The merchandise is bland. Trying to stock something for everyone has produced collections that frequently have nothing for anyone.

© With their constant barrage of sales, department stores have trained customers to shop on price, which further limits profitability. “Department stores live and die off the weekly sale, so merchandise is driven by price point, not by quality or style

or what the customer really wants,” says George Whalin, president of Retail Management Consultants. (For more on the once happy, now dolorous history of department stores and how they got into this fix, see “Big Stores, Big Problems,” Page 66.)

Paula Rosenblum, a former CIO at iParty and Domain Home Fashions and director of retail research at Aberdeen Group, says IT can help the big department stores address all or most of these challenges in a number of ways. “By using technology to do iterative product design and to communicate more quickly and effectively with suppliers, they can reseize the fashion imperative,” she says.

Two of the large department store chains—Nordstrom and J.C. Penney—have in fact turned around their operations (which had suffered during the late 1990s), thanks to sound management and smart investments in IT. Today, both are bucking the downward trend and outperforming their competitors.

How I.T. Can Help

ast year Nordstrom created what is essentially a customer database (with vendor Blue Martini Software) that sales associates access through cash registers to identify which customers to contact with information about new merchandise, trunk shows and sales. For years, Nordstrom’s best salespeople had used written notes to keep track of customers, their sizes, favorite colors, brand preferences and so on. The computerized system makes it easier for all sales associates to capture and share this information.

Also, in 2002, Nordstrom began implementing an inventory management system from Retek (now owned by Oracle Retail) and a replenishment system (also from Retek) during the first quarter of 2005. The inventory management system helps merchants do their preseason and in-season planning and forecasting by essentially guiding them through those processes and giving them access to historical sales data. The replenishment system helps the company turn inventory faster for basics such as underwear and T-shirts. Since Nordstrom began using its inventory management and replenishment systems, the $7.1 billion company has increased its inventory turns every year (and by 10 percent in 2004) while its selling, general and administrative (SG&A) costs have declined every year since 2000. Nordstrom’s SG&A costs were 28.3 percent of sales in 2004 compared with 31.5 percent of sales at Federated Department Stores, which operates Macy’s and Bloomingdale’s. Average inventory per square foot has declined steadily at Nordstrom’s 153 stores since 2002.

J.C. Penney has also improved its supply chain. The $18.4 billion company established a factory-store system in 2003 that creates a direct link with many of its suppliers for its private label merchandise. This link allows J.C. Penney to order merchandise as needed as opposed to at regular, preestablished intervals, thereby preventing out-of-stocks. And by improving communication between Penney and its suppliers, the factory-store system has also helped the retailer reduce the time it takes to get an idea for a product into a store from as long as two years to just 45 days. Additionally, the company reports that it has saved approximately $30 million in average monthly inventory investment. In 2004, Penney also rolled out new planning, allocation and replenishment systems that help merchants forecast demand, determine the right mix of merchandise and more effectively restock shelves each season in each store. Penney spent a total of $70 million on IT in 2004. This year, the company estimates it will invest $170 million.

While IT can’t solve all the problems affecting the big stores, innovative CIOs can play a crucial role in improving their operations.

“If you’re a big retailer and you don’t learn the technology tools that are available to help you run more efficiently and wring out costs, you’ve got to be out of your mind,” says Whalin. But, he adds, the technology that retailers implement has to be “something that really, truly helps the customer and is something that customers want.” In retail, more than in most industries, the customer truly is king.

Nordstrom Brings High-Touch to High-Tech

Nordstrom wasn’t a first-mover when it came to technology. Throughout the 1990s the company’s information systems lagged behind many retailers, according to Robert Spector, author of The Nordstrom Way, who’s written about the company since 1982 when he was a stringer for Women’s Wear Daily. Nordstrom’s CFO Michael Koppel remarked in a presentation at a Credit Suisse First Boston conference in June 2002, “Our people at one time were our information system.” Spector says the company had been reluctant to consider IT for many years for fear that technology would come between the store and its customers, and because it needed to find technology that would support and be accepted by its highly independent, commissioned sales staff.

Finally, during a 2000 sales slump, the company began buying IT, including financial software from Oracle, a warehouse management system from Manhattan Associates, inventory management software from Retek and business intelligence tools from Business Objects. Over the past four years, the company has reportedly spent $350 million on IT and has found that technology has improved, not degraded, the customer service in which it takes such pride.

A prime example of a technology Nordstrom has deployed that complements its high-touch approach to retailing is its personal book software, which is essentially a CRM tool built on top of a customer database. Prior to installing the personal book software, sales associates kept track of their customers’ contact information in notebooks they called personal books, the idea being that the better the salesman knew the customer, the better he could serve the customer and the more money the customer would spend with Nordstrom. When new merchandise came in, salespeople called the customers in their personal books. In 2002, Nordstrom and Blue Martini developed an application that mimicked the content and purpose of the notebooks and provided additional benefits to the company and to associates. For instance, by virtue of the point-and-click interface, the centralized, searchable customer database, and the business logic behind the software that analyzed customer behavior and purchasing patterns, the application made it easier for sales associates to manage and access the information (which they can enter manually) and to determine which customers would be most receptive to a call about, say, a Donna Karan trunk show, according to Brian Dean, vice president of marketing and strategy for Ecometry/Blue Martini, explaining in general how the CRM software works in department stores. When their shift begins, salespeople log on to the application, which then brings up a welcome screen with a list of people to call about various events, says Dean, adding that the list is automatically generated by the business logic underlying the system.

During the company’s second-quarter 2005 earnings conference call, Executive VP Peter Nordstrom announced that use of the personal book software, which was rolled out to all stores in 2004, was in fact resulting in increased sales. Total sales for the first quarter of 2005 increased 7.7 percent to $1.7 billion, compared with $1.5 billion in sales during the first quarter of 2004. Total sales for the second quarter of 2005 increased 7.8 percent, to $2.1 billion, compared with the same period in 2004. CFO Koppel said during a presentation at an A.G. Edwards conference in February of this year that approximately a third of all sales are a result of interactions between sales associates and customers facilitated by the personal book software. And in The Nordstrom Way, Spector writes that Nordstrom’s best salespeople (those who gross $1 million a year) owe 68 percent of the business they generate to the customers in their personal books.

Behind the Scenes: Inventory Management

Nordstrom has invested in two other systems that an analyst with Goldman Sachs characterized during Nordstrom’s second-quarter 2005 earnings conference call as “a tremendous home run”: an inventory management system and a replenishment application.

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