Can Technology Help Retailers Survive 2009 and Thrive in 2010?

Things have become so depressing for some U.S. retailers that rather than filing for Chapter 11 Bankruptcy protection and trying to slog through the recession, they’re simply throwing in the towel.

Close all the stores. Lay off everyone. Liquidate everything.

MORE ON CIO.com

Starbucks’ Next-Generation CIO: Young, Fast and In Control

How Wal-Mart Lost Its Technology Edge

Borders’ Revamped E-Commerce Strategy Falls Flat During Holiday Season

That’s essentially what happened at Circuit City, Linens ‘n Things, Sharper Image and several others during the past several months. With the economy in rougher shape than the clearance rack at dollar store, many more retailers may seriously weigh the merits of this gloomy business strategy in the months to come.

“The reason we’re seeing liquidation rather than bankruptcy from so many retailers is because people are hopeless,” Dean Baker, codirector of the Center for Economic and Policy Research, recently told Newsweek. “We’re still looking at a very bad year in 2009 and probably most of 2010, so it’s very difficult to be optimistic about reorganizing and coming out of it stronger.”

To be fair, some sectors of the retail industry have been oversupplied. This is, after all, a nation that boasted of 2 million retailers before the recession started, which roughly translates to one retailer for every 150 people, according to research from Tony Gao, an assistant professor of marketing at Northeastern University.

So in this environment, a pertinent question arises: Can IT best practices and retail-specific technology applications help weather this storm?

Several retail analysts contacted for this article say, “Yes, IT can make a difference,” with many caveats—especially regarding cost. “I think IT can help, however, I would sincerely doubt that any retailers are going to be spending too much money in order to upgrade their systems to help,” says Patricia Edwards, a retail industry expert. “This is an extraordinary time for retailers. It’s not about margins, which is what IT has been able to help with in the past. This is about cash flow. This is about survival.”

Penny-Pinching Traditional for Retail IT

Retailers are well known for their thriftiness when it comes to technology spending, and for a long-held belief that off-the-shelf apps aren’t robust enough for their demanding environments. Both of these beliefs may be impediments to IT’s ability to accelerate business change right now.

Retailers spend just 2.9 percent of revenue on IT, according to our most recent State of the CIO survey data. Contrast that with the finance and banking category, which spends 7.7 percent of revenue on IT.

Across every industry, however, CEOs and business leaders have made it clear about what they want from IT now: Acquire and retain customers; manage customer relationships; and drive innovative new-market offerings, according to the combined State of the CIO and Forrester Research data (which surveyed 600 top business executives).

How well did IT actually support that mission during the past year? Forty-nine percent of business leaders judged IT’s performance as “fair” or “poor.” Another 5 percent said IT did not support acquiring or retaining customers at all.

This damning data couldn’t be more relevant to retailers’ IT shops, as business decision-makers (such as merchandise buyers, forecasters and supply chain managers) try to plan for the latter half of 2009 and 2010: How can retail applications assist decision-making in a recessionary climate when decades’ old trends seemingly don’t apply?

Edwards points out that the data sets and algorithms employed by markdown-optimization software—which aids retailers in determining when to cut prices and by how much—have to be modified to today’s environment. As an example of just how bad this environment is, Kevin Sterneckert, a retail research director at AMR Research, says that on the first day of the new season, one apparel retailer was “offering deep discounts already,” he says, “which we had never seen before.”

A peak into consumers’ mindset further illustrates the dilemma for retailers. According to research from Northeastern’s Gao, if retailers continue to offer huge discounts as a way to achieve short-term sales wins, the long-term effect will be that consumers will balk at full-price deals and buy merchandise solely from the “loss leader” categories (those promotional items that are deeply discounted to boost store traffic but reduce retailers’ margins).

Sales success during the next year or two will most likely be elusive for retailers “if they’re going on previous experiences,” Edwards adds. “This is not your father’s recession. This is your grandfather’s recession.”

Retail IT Focuses on Five Areas

Despite the economic uncertainty that remains in 2009, retailers are not stopping their technology investments, says AMR’s Sterneckert.

Sterneckert and his AMR colleagues met with more than 200 retailers at the recent National Retail Federation (NRF) trade show, and they found that retailers are focusing on projects with quick, measurable return. “Projects that are large in scope and cost, with benefits difficult to measure, are lagging,” Sterneckert notes. “These are typically the implementations of large, multimillion-dollar, ERP systems that require a number of years to implement or see any value.” (For more on companies’ dissatisfaction with ERP systems, see the Enterprise Software Unplugged blog.)

According to Sterneckert, retailers are spending their time and money mostly on five areas: merchandise assortment and space planning, allocation and optimization; regular price, promotion and markdown optimization; in-store systems such as point of sale (POS), kiosks and mobile technologies aimed at improving the customer experience; cross-channel merchandising that improves channel visibility and connectivity; and business intelligence (BI) that facilitates action.

“Why these?” notes Sterneckert. “Because they can directly affect the bottom line within 12 months.”

Brian Kilcourse, a managing partner at Retail Systems Research and former retail CIO, says IT departments have to break out of the “that’s the way things have always been done” mindset. IT needs to work hand in hand with business users to examine operational processes to discover efficiencies, he notes, for example, reducing the number of handoffs between steps in any business practice.

“This isn’t necessarily Six Sigma stuff—a lot of it is just common sense and using the current climate to challenge the status quo,” Kilcourse says. “For retailers, the objective is to hyper-optimize non-selling functions so that more of the company’s labor spend can be focused on selling and services.”

Like Sterneckert, Kilcourse points to the lack of “action” in retailers’ BI systems, as well as a huge disconnect: Transactional systems “talk” to BI systems, but BI systems don’t “talk” back. “To the extent that BI results can be turned into actionable information that can be interjected into a business process, gains can be realized,” Kilcourse says.

For example, instead of merely tracking a customer’s history and areas of interest based on past purchases, the BI system should make real-time suggestions to the person serving that customer at the point-of-service. (See Starbucks’ Next-Generation CIO: Young, Fast and In Control for an inside look at how Starbucks is using BI and analytics applications.)

“BI is all-too-often consumed by the wrong people—executives, corporate analysts,” he says. “Why not make actionable information available right at the point-of-service delivery?”

In the end, all retailers will now have to make difficult decisions—including IT—that weigh short-term gains (and survival) versus long-term investments regarding an unknown future. “Unfortunately, many retailers are under tremendous pressure from investors to deliver short-term sales and financial results,” notes Northeastern’s Gao, “and don’t have the luxury of longer decision-horizons.”