Retailers still holding back
South African retailers are loathe to spend money, particularly relating to IT, even when said investments may save them.
IT penetration in the local retail sector veers from the sublime to the ridiculous. High-end retailers have sophisticated systems, while some mom-and-pop shops consider calculators to be hi-tech.
For a sector with incredibly tight margins and enormous logistical challenges, IT has a lot to offer the retail industry, but IT costs money and retailers, it seems, do not like to spend any capital.
"Retail is an historically margin-conscious sector; and retailers are tight in terms of what they spend on infrastructure. What they have done historically is to try to sweat assets for as long as they can," says Neels van Tonder, CEO of UCS Software Manufacturing, which supplies software to the retail industry.
"Some retailers have significant investments in IT, particularly high-end retailers, for example, Foschini, which has 1 400 stores with the requisite networking, terminals and business applications. In retail, we used to talk about a five- to seven-year refresh cycle; that has now gone up to 12 years. The trend is to eke out as much as they can of investments going forward," he adds.
Retail is an historically margin-conscious sector.Neels van Tonder, CEO, UCS Software Manufacturing Careful
The reason that retailers hang onto said systems for so long, costs aside, is primarily because of sustainability issues.
Says Van Tonder: "It's like the banks; it's been suggested that if their systems are down consecutively for three days, they will go out of business. It's the same for retailers. If they cannot transact, they don't have a business. The IT investments that have been made are strategic, especially on the transaction platforms side. If the system is robust and stable, retailers will try to eke out as much of it as possible."
While it could be said that technology can and does contribute to reducing costs, IT is still a cost-centre in the majority of local organisations. A retailer that goes ahead with a project, which may run over time and budget, and will likely cause at least some unexpected down time, is taking a big risk, particularly given the looming recession.
Where progress has been made, on the other hand, is in the drive towards introducing standards.
"This is a complete turnaround from previous years where vendors focused on competitive differentiation. We went through an era where standards were actively undermined," notes Van Tonder.
Vendors are now focusing on collaboration, as is the retail industry itself. Initiatives like the Efficient Consumer Response (ECR) Forum and the product data catalogue (PDC) were initiated to help smooth retail supply chains and reduce costs.
The PDC, for example, aims to be one catalogue where each product (and variants thereof) has one code, which all retailers can use when placing orders. This will mean that people ordering 12 boxes of 600g Baker's Marie Biscuits packs will get that, and not twenty 300g packs because the person on the phone has misunderstood the order. Sending back goods, issuing credit notes and re-ordering is time-consuming and expensive. Eliminating these problems would be of great benefit.
That said, the aforementioned initiatives are not going ahead at great pace.
"We have the Consumer Goods Council and the ECR Forum, which are supposed to help all the different industry players work well together, but they don't work because retailers are reluctant to share information," says Colleen Rose, IT director of Smollan Group, which provides availability, visibility and intelligence for a vast spectrum of brands in the FMCG space.
"Everyone's talking about RFID and how it's going to come in and save everyone, but it will be the same situation - the retailers will have the information and won't be willing to share it."
The first thing [big retailers] do is cut their IT budget.Marc Layne, service delivery manager, Faritec Reduction
Retail supply chains, by and large, work something like this: a packet of pasta is manufactured by company X, which gets delivered to the store by company Y. Food marketing company Z is there to ensure the pasta gets from the delivery truck and onto the shelf, that it is priced right, and that the manufacturer knows when stock is out, or flag rogue retailers who are, for example, not letting trucks deliver goods.
Retail point-of-sale (POS) systems hold information on all sales volumes. In some cases, they also use business-to-business ordering systems or automated replenishment systems that place orders with the manufacturers directly. These systems don't always work exceptionally well and many retailers (rural or smaller shops specifically) don't have them. Companies like Smollan engage with retailers on behalf of the manufacturers and report back to them about stock, pricing and so on.
Meanwhile, manufacturers' lives would be made easier if they knew what stock was selling, at what rate and at which shops. This is where the retail POS information becomes valuable. It is available for purchase (at a high cost) from some retailers and it is this information that Rose refers to when she says retailers are reluctant to share.
Things like ECR and PDC refer to the ordering part, which, as mentioned, is sometimes done by automated systems, but often manually, resulting in errors, returns and credit notes. The discrepancy in product numbers is matched by store numbering systems - each manufacturer uses a different identification number for each store. A store coding system, to standardise this, has been started, but Rose says it isn't really getting anywhere.
Retail is awfully complex once one gets into the supply chain logistics. Why is my load of fresh milk sitting in the sun for three hours, waiting to be unpacked from the truck? Do I even know that my truck is there? What can I do about it? And, of course, there are also the actual complications of predicting consumer demand.
This is where IT can, and already has, helped. Unfortunately, as Faritec service delivery manager Marc Layne notes: "Even the big retailers, when looking at a recession or bleak period, the first thing they do is cut their IT budget. With the coming-into-effect of the National Credit Act in June, some of our retailers halted projects, projects that were meant to differentiate them in the market, like getting the supply chain right or servicing customers.
"We find they tend to cut the IT budget first and the things that could potentially make the biggest difference to the business are put on hold."
Both Layne and Sybase SA business development manager Kirsten Graham note that when dealing with retailers, IT companies tend to speak to IT departments.
"We find that IT tries to sell concepts to the business; not the other way around, so they don't get a perfect fit in terms of what they are trying to achieve. If we compare IT budgets as a percentage of turnover or profit compared to other big corporates, we still find retail IT budgets are less than that of a bank or insurance company, for instance.
"The other problem is that a lot of IT professionals still don't understand retail. I worked for Foschini for five years and was amazed at the IT people who called on us and tried to sell us things that wouldn't make a difference in the business. I think a lot of retailers have lost faith in IT's ability to help solve business problems. The problem is two-fold: they are not getting the right advice, and they are loathe to spend money. We're not going to improve IT in retail unless we improve IT people's understanding of retail."
That, of course, refers to retailers that actually have IT systems. As Smollan's Rose points out: "The bottom end of the market is very important to manufacturers right now. All the retailers are moving into the townships and competing with the mom-and-pop shops. Every little bit we [and the manufacturers] can do to help them is appreciated, and it helps to get the manufacturer's product into the store."
One would think that getting product in-store would be simple enough, but the store manager may be having a bad day or the product may not be in the system (if there is one). In the case of the mom-and-pop stores, getting into the shop may depend on whatever cash the owner has on hand and what he thinks is likely to sell.
Fashion retailers, with similar supply chains and challenges as their FMCG retailer counterparts, have a different technology focus altogether.
Says Sybase's Graham: "FMCG tends to be conservative and consumer-aligned, while fashion is volatile, competitive, fast-paced and trendy. Fashion retailers are very interested in enterprise mobility, mobile POS and in-store touch-screen kiosks to improve the customer experience, [while attempting] to attract different clientele. These retailers are also looking at things like pushing mobile advertising content to consumers' cellphones."
FMCG retailers, says UCS's Van Tonder, are looking at leveraging existing, established technologies in new ways.
"For example, video analytics is well established on the asset protection side. Retailers are now leveraging it for operations and marketing. From an operations point of view, it allows for analysis of foot-count in each store. Retailers can analyse the video footage, understand where huge queues form and take action. On the marketing side, it has obvious use for shopper analysis - how many visit, what they buy, how long they stay," he says.
Van Tonder explains that a key focal point for retailers today is data analysis and reporting in order to be more strategic and relevant to marketing campaigns, as well as understanding buying trends.
"A spin-off from that initiative is that having access to data and pulling reports has exposed the low level of data integrity within systems. Retailers are being forced to address data quality issues; if they don't have the correct process in place at the point of capture (POS), they could be capturing data in the wrong format, which makes that data irrelevant.
"Many of the suppliers purchase data reports from retailers [that shows] movement of their products versus competitors. There is huge emphasis on data storage, corporate reporting, sharing of data, data analysis and so on," he adds.
Sybase's Graham also mentions RFID, which hasn't as yet been implemented widely, mainly due to the costs, but her reference is not in the usual context. She mentions at least two retailers that are seriously investigating using passive RFID tags (which respond if you hunt for them, but don't transmit constantly) to keep track of "green lugs" (fruit and vegetable baskets) and trolleys.
"Lugs are lost between suppliers and retailers, and it results in losses of around R16 million every year," she says. "Aside from the cost in replacing lugs, each time they are washed (in huge, industrial machines), the bar codes are destroyed and need to be replaced. RFID tags can be embedded in the plastic, so it won't be damaged in the washing process and will allow retailers to track and locate them when needed."
An average large retail shopping centre store loses approximately 700 trolleys a year, Graham adds. "Using RFID tags and leveraging a single platform for lugs and trolleys makes these systems a lot more cost-effective."
IT in retail finds itself in pretty much the same space that IT fits in every sector post-Y2K: out of favour and not viewed as strategic. Faritec's Layne validates this by saying IT should do better to understand retail, which is a legitimate comment, particularly in line with the latest trend towards merging business and IT, and breaking down silos once and for all.
IT can and should be making a massive difference to retailers' businesses, but it has to prove itself and continue proving itself in order to reach those lofty heights.