Retail's new information trend

As technology evolves, retailers look for ways to make sense of the data.

by Len Lewis

A retailing revolution took place one summer day in 1974. At a Marsh's supermarket in Troy, Ohio, a clerk passed a 10-pack of Wrigley's chewing gum over a UPC bar code scanner manufactured by NCR, ushering in an era of more efficient inventory management for retailers and speedier checkouts for customers.

This event marked the most radical change in the shopping paradigm in decades, but despite the advantages it offered, retailers didn't seem particularly eager to follow up on it with major investments in newer and even more far-reaching technologies—that is, until recently.

Shunted to the background during the last recession, retail technology has re-emerged as an essential element in day-to-day decision-making and is viewed by many executives as a panacea for what ails the industry—from the supply chain all the way to the checkout counter.

In an ultra-competitive environment where profit margins are being squeezed more than ever, retailers are increasingly depending on state-of-the-art tools—hardware, software and middleware—to reduce costs, increase efficiency and build relationships with customers.

Not surprisingly, this realization has led to rising retail IT budgets that, despite some trepidation over the direction of the economy, will probably continue to increase over the next several years.

How much is enough?
But are retailers spending enough on IT to keep up on the technological power curve? Boston-based AMR Research recently reported that retail IT budgets are expected to increase 5.8% in 2005 on a 6.8% gain in capital expenditure, while a survey of 27 retail CIOs by AMR and the National Retail Federation indicated IT spending increased more than 9% in 2004. The retail industry hasn't seen this level of IT spending since the introduction of—you guessed it—bar code scanners.

Recent figures compiled by the Food Marketing Institute, Washington, D.C.-based retail trade association, indicate that the average retailer is spending 1% to 2% of sales on IT systems; some observers say the rapid growth of new technologies might require nearly double that amount.

According to Jeff Roster, senior retail analyst with Gartner Research in Stamford, Conn., the crucial point isn't how much you spend—it's what you achieve through the spending. As he points out, "you can embrace a fair amount of technology as long as you're driving down your overall operating budget."

The savings start here
One area where retailers can realize potentially huge savings in their operating budgets is in the supply chain, particularly in data accuracy and data synchronization. For the past five years, a panoply of major players in the retail and manufacturing sectors have been making significant investments in what many consider to be critical component in the process: the Global Data Synchronization Network (GDSN).

The GDSN consists of interoperable data pools linked to a master database. Suppliers upload their product or company data to source data pools, which then send "core" information to the master database. Meanwhile, customers search through recipient data pools to find the product or company information they require. The database then synchronizes the source and recipient data pools, allowing the automatic and continuous exchange of information between suppliers and customers.

The GDSN is only as good as the data that feeds into it. That's where enterprise data warehousing and other data management technology comes into play. Having a centralized repository of information reduces redundancy and ensures accuracy. Synchronization is simply the next step in the process.

According to a 2002 report by management consultancy A.T. Kearney, eliminating inaccurate supply chain information through data synchronization could save the consumer packaged goods and retail industries between $25 billion and $50 billion per year. Data synchronization is also viewed as the silver bullet that would reduce out-of-stocks by 10% and cut the amount of time needed for new product introductions by 80%.

Operational efficiency is fundamental to every retailer. But these days, retailers can't differentiate themselves on operational efficiencies alone. "It doesn't mean you shouldn't pay attention to it. It's simply no longer a differentiator, but a minimum level of acceptance," says Roster.

But retailers can differentiate themselves on customer-service technology. "Retailers need every bit of insight they can drive, and that's what we're seeing in the push for new merchandising systems, global data synchronization and radio frequency identification (RFID)—the ability to get at information faster in order to provide better service to customers and to make better business decisions," Roster explains.

Rolling out smart carts
With so much competition, retailers are taking a more strategic view of new and emerging technologies. One example is Shopping Buddy, a wireless, Internet-capable shopping cart device being tested by Stop & Shop supermarkets in Massachusetts. The system enables customers to send an electronic shopping list to the store and then pull it up on the Shopping Buddy's touch screen when they arrive. By activating it with a customer loyalty card, users can see the location of items on the list, receive coupons on the fly and get suggestions for related items. They also can customize their shopping experience around dietary requirements.

Perhaps the most important part of this RFID-driven technology is the ability to scan items as they are placed in the cart, keeping a running total of what's being spent and eliminating the need to wait in line at the checkout. This is not some far-off future event, either; Stop & Shop and its sister chain plan to implement the technology by the end of this year.

Cart-mounted computers could be a common sight in all retail venues over the next several years, as the technology becomes more compact and less expensive, according to some analysts.

"Grocery shopping will never be the same once shoppers begin using the features of the new Shopping Buddy," said Marc Smith, president and CEO of Stop & Shop. "Our initial pilot tests of these systems have been very positive. This will allow us to better serve our customers by saving them time and giving them personalized service."

Improved customer service is important, but the underlying benefit of all this data collection and analysis is a greater level of awareness of customer trends and product movement, which in turn leads to improved inventory management, increased revenues and bigger profit margins.

Self-checkouts gain ground
Another piece of promising data collection and analysis technology is self-checkout. Adopted by a broad cross-section of the supermarket industry as well as such retailers as Home Depot, Wal-Mart, Walgreen, Staples, Office Depot and Lowe's, self-service is expected to catch on in the industry the way it did with ATMs and pay-at-the-pump gasoline stations.

Germany's Metro is deeply involved in this technology, having installed a RFID-enabled self-checkout system and dynamic shelf tags at its "future store" in Rheinberg, Germany. It is also committed to rolling out 50 of NCR's FastLane self-checkout stations at its Real and Extra stores to supplement conventional checkout lanes.

Analysts believe self-checkout accounts for 15% to 40% of daily transactions at supermarkets in the United States and up to 30% of daily dollar volume. Overall, self-checkout and other self-service systems, such as kiosks, generate an estimated $128 billion in retail sales in the U.S., a figure expected to grow exponentially over the next several years, according to a recent study by IHL Consulting Group.

Return on investment is difficult to calculate—particularly with the cost of the system plus installation tipping $100,000 per checkstand. But proponents believe that, long-term, the return will come from more than just customer satisfaction; they predict a reduction or redirection in the workforce—the second biggest expense for any store after the cost of goods.

The value of analysis
In-store technology that interfaces with consumers may be the sexier discussion. But most analysts agree that with RFID and data synchronization, supply chain logistics may be the more practical and widespread application. As such, the question is how to handle the information without becoming overrun with data.

"You can't just slap RFID tags on cartons and throw readers on doors and expect everything to be good. You have to transform your business processes to take advantage of RFID in the supply chain, and that's where we're at the earliest stages of experimentation," says Roster.

The tradeoff is getting the information versus the cost of obtaining it. It's understandably difficult to project returns on technologies that have yet to reveal their full impact on the industry. The key is for retailers and manufacturers to develop a partnership in order to fund and test these new developments.

Wall Street, which once penalized companies for tech investments, is starting to pay attention to technology adoption profiles and give credit to retailers for doing the right thing. At the same time, it is beginning to penalize retailers for showing a lack of interest in adopting technology that will impact long-term growth, according to Roster.

This is a fundamental but significant change in the way return on investment is viewed, even during times of economic uncertainty. As such, a rigid ROI analysis on every piece of technology may no longer be the norm. "We're at the extreme end of needing to calculate the ROI of everything. This was primarily the product of tough economic times. Retail can't spend time worrying about driving ROI on every technological innovation," Roster notes.

Instead, the industry needs to look at the whole equation: the technology that gathers the data as well as the technology that transforms it into actionable information. "The challenge in a RFID world is that you no longer need an excessive amount of labor to get the information, but you need the systems to process it and leverage the data that's being collected," he explains.

Real-time understanding
The general attitude, according to Roster and other analysts, is that the last thing companies need is more data. What they need are data analytics and systems that allow analysis to take place in real time. "And if we're swimming in data today, multiply that several times over in a RFID world. We can't have an army of analysts. We need analytics that can process the data and push out the insights," he says. T

Len Lewis is editorial director of Lewis Communications, Inc. and former editor of Progressive Grocer. He has covered the retail industry for many years.