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\u2014dressed in puffy parkas with mittens dangling from their sleeves, their cheeks crimson from the cold and their eyes shining with excitement\u2014lined up to sit on Santa\u2019s 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\u2014pre-, not post\u2014and that\u2019s not good for their bottom lines because sales eat into profit margins. Even Santa has abandoned the big store. He\u2019s moved his operations from the heart of the store to the center of the mall, and that\u2019s 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\u2019s 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\u2019t looking much better for retailers, but it\u2019s 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\u2019s 6.7 percent jump over 2003 and the slowest growth in holiday sales since 2002. (For more data on department store declines, see \u201cTaking Inventory,\u201d this page.)In other words, \u201cHo, ho, ho\u201d is rarely heard in the big department stores these days. More often, Santa and his helpers are saying, \u201cHo, no.\u201dWhat the Big Stores Are Up Againsthis move of consumers away from department stores in favor of specialty stores isn\u2019t new. Department stores have been struggling with lackluster growth for years due to several intractable problems: \u00a9 They all look the same. Nothing distinguishes one store from another, so customers don\u2019t have a compelling reason to pick one over another.\u00a9 They\u2019re difficult to shop in because, to save money, they\u2019ve 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. \u00a9 The merchandise is bland. Trying to stock something for everyone has produced collections that frequently have nothing for anyone. \u00a9 With their constant barrage of sales, department stores have trained customers to shop on price, which further limits profitability. \u201cDepartment 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,\u201d 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 \u201cBig Stores, Big Problems,\u201d 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. \u201cBy using technology to do iterative product design and to communicate more quickly and effectively with suppliers, they can reseize the fashion imperative,\u201d she says. Two of the large department store chains\u2014Nordstrom and J.C. Penney\u2014have 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 Helpast 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\u2019s 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\u2019s 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\u2019s and Bloomingdale\u2019s. Average inventory per square foot has declined steadily at Nordstrom\u2019s 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\u2019t solve all the problems affecting the big stores, innovative CIOs can play a crucial role in improving their operations. \u201cIf you\u2019re a big retailer and you don\u2019t learn the technology tools that are available to help you run more efficiently and wring out costs, you\u2019ve got to be out of your mind,\u201d says Whalin. But, he adds, the technology that retailers implement has to be \u201csomething that really, truly helps the customer and is something that customers want.\u201d In retail, more than in most industries, the customer truly is king. Nordstrom Brings High-Touch to High-Tech Nordstrom wasn\u2019t a first-mover when it came to technology. Throughout the 1990s the company\u2019s information systems lagged behind many retailers, according to Robert Spector, author of The Nordstrom Way, who\u2019s written about the company since 1982 when he was a stringer for Women\u2019s Wear Daily. Nordstrom\u2019s CFO Michael Koppel remarked in a presentation at a Credit Suisse First Boston conference in June 2002, \u201cOur people at one time were our information system.\u201d 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\u2019 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\u2019s 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\u2019s 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 ManagementNordstrom has invested in two other systems that an analyst with Goldman Sachs characterized during Nordstrom\u2019s second-quarter 2005 earnings conference call as \u201ca tremendous home run\u201d: an inventory management system and a replenishment application. Before Nordstrom installed the inventory management system, which it began rolling out in 2002 and completed in 2003, sales associates had to count inventory manually, according to Peter Nordstrom. \u201cThat was not the most accurate way [to manage inventory], and it certainly wasn\u2019t very quick,\u201d he said during the company\u2019s fourth-quarter 2003 earnings conference call. In addition, merchants could neither track inventory by location nor as it moved through the supply chain. Because they couldn\u2019t tell which stores needed inventory and which stores were overflowing with merchandise, they had to discount a lot more product than they should have. Oracle Retail\u2019s Retek inventory management system, like the one Nordstrom rolled out, helps merchants forecast consumer demand for merchandise based on historical sales data and fashion trends, and it helps merchants determine the best way to spread their inventory dollars across men\u2019s and women\u2019s merchandise and among various types of tops and bottoms, according to Julie Driscoll, who handles customer implementation for Oracle Retail, which purchased Retek earlier this year. The system guides merchants through the inventory planning process by establishing workflows for each step in the process. Price optimization is done by a forecasting platform, built by Price Logic (now also owned by Oracle Retail), to model consumer demand and decision support. It also contains analytical tools that crunch the numbers and determined how to spread inventory dollars for merchandise allocation across stores to maximize sales and profitability, says Driscoll. In the first quarter of this year, Nordstrom began rolling out a replenishment optimization application, also from Oracle Retail, designed to improve inventory productivity. The system tracks weekly sales data so that if a merchant sees that sales of, say, linen tunics in large sizes are sluggish in one store, he can then see which stores are selling those tunics the fastest and send stock from the warehouse there. The inventory management system and replenishment optimization application have worked wonders for Nordstrom. According to Koppel in the company\u2019s first-quarter 2004 earnings conference call, inventory levels declined steadily in 2003 and 2004, with total inventory down $15 million or 1.6 percent in the fourth quarter of 2003 from the same period the year before, and down again by 5.3 percent during the first quarter of 2004. In addition, inventory turns increased by 10 percent in 2004.Since implementing the replenishment optimization software, Peter Nordstrom reported during the company\u2019s second-quarter 2005 conference call, in-stock levels for replenishable merchandise (nonfashion items such as khaki pants, T-shirts, underwear and so on) improved almost 500 basis points, or by 5 percent, while inventory levels for those items decreased. And a basis point, says Aberdeen\u2019s Rosenblum, is nothing to sneeze at. It means Nordstrom has been able to lower the amount of inventory it carries without facing stock-outs, and that\u2019s the holy grail of all inventory management. Nailing inventory levels means fewer markdowns and greater profitability. Nordstrom\u2019s results from its inventory system and replenishment application are especially enviable because these systems are not easy to implement. They require that almost all its business processes change, from determining what categories of merchandise to show in a particular store to the amount of space that will be given to a particular category, says Sam Israelit, a partner with consultancy Bain & Co., which specializes in retail. In the company\u2019s second-quarter 2005 earnings conference call, Koppel alluded to a learning curve Nordstrom\u2019s merchants had to follow. Nordstrom executives didn\u2019t elaborate on the problems they had implementing the system or getting merchants to use it, but Israelit says salespeople are often reluctant to use these systems because they view these processes more as an art than a science. Furthermore, because many retailers\u2019 merchandising departments are staffed lean, merchants are reluctant to invest time in learning to use new technology. Finally, according to Israelit, merchants can find the technology threatening because it reveals which categories have inventory problems, which they used to be able to waive away through creative interpretation. Inventory management and replenishment systems enforce levels of accountability.Rosenblum says retailers can overcome resistance in a variety of ways, including getting buy-in from the CEO, publicizing the initiatives inside the organization, and conducting pilots with clear metrics to confirm ROI. Fashionable I.T. at J.C. Penney enney has also implemented new systems, including an inventory management system from I2 and a forecasting and replenishment system from Teradata in 2002, with great success. J.C. Penney Executive VP and Director of Planning and Allocation Jeffrey Allison told analysts and retail executives at an A.G. Edwards conference in February 2005 that J.C. Penney has reduced the time it takes to get a product from the design stage to the sales floor from as long as two years to just 45 days due to changes in the company\u2019s supply chain and product development processes. In 2003, J.C. Penney created its factory-store system, which enables the store to replenish such basics as towels, sheets, men\u2019s underwear and jeans on an as-needed, just-in-time basis \u201cwithout tying up our capital in excess inventory,\u201d according to Peter McGrath, J.C. Penney\u2019s executive VP of product development and sourcing, speaking to institutional investors during the company\u2019s analyst day earlier this year. Since J.C. Penney can now get those items directly from its suppliers, who can produce them in a matter of days, the company no longer has to store them in warehouses, said McGrath. \u201cThe direct-to-store program allows J.C. Penney to ship weekly from global suppliers within five to seven days of receipt of an order. This saves J.C. Penney approximately $30 million in average monthly inventory investment. Beyond reducing our warehouse inventory and improving our in-stock percents, we believe that cycle time and turnover should improve as well,\u201d added McGrath. Virtually all of the suppliers that manufacture J.C. Penney\u2019s private label merchandise are linked up to this system, according to Penney CEO Mike Ullman. By enhancing electronic communications with suppliers, J.C. Penney can get fashionable clothes into stores faster and more often, which gives customers a reason to shop there more often. And that, according to McGrath, creates the potential for increasing sales. In addition, because of J.C. Penney\u2019s connections with suppliers, it only took eight months from concept to launch for the company to begin selling a new line of what it calls women\u2019s dressy casual clothes. Because of its investments in IT, J.C. Penney can do what no other mid-price department store chain has been able to do, according to Aberdeen\u2019s Rosenblum, and that\u2019s source and sell the fashionable clothes today\u2019s consumers are clamoring for and previously could find only in speciality stores. Role Models for the Industryaljit Dail, a partner with McKinsey & Co.\u2019s IT practice, says the retail industry has been slow to adopt IT because in an industry where profit margins are so slim, retailers are often hard-pressed to justify the dollars required to implement the sophisticated point of service, supply chain, merchandising and inventory planning systems necessary to make them more efficient. But the success that\u2019s accompanied Nordstrom\u2019s and J.C. Penney\u2019s technology implementations doubtless will convince other retailers that IT isn\u2019t nearly as much of a gamble as trying to forecast trends and inventory a year to two years in advance. And if it doesn\u2019t, perhaps another lackluster holiday season will.