Strategic conundrum, tactical puzzle
Retailers seem awash in money to spend on their IT strategies. However, this won`t make life easy for IT vendors who need to know retailers` business models, issues and widely varying technical competencies.
While many retailers may argue there is no such thing as a good year in their industry, the fact is South African retailers have never had it better. The economy has stabilised, and while possibly not showing the growth rate it should, is far more predictable than in the past.
Interest rates are also at historic lows and the rand exchange rate is less prone to wild swings, allowing for predictable pricing. Then there was the R15 billion in tax cuts that finance minister Trevor Manuel handed consumers, particularly those in the lower income brackets.
The proof of this is in the profitability of retailers. For instance, Pick 'n Pay`s trading profit for the 2005 financial year bounced 24.1% to R934 million, resulting in headline earnings per share surging 20.6% to 141.5c.
Higher-end retailer Wooltru saw its gross profit grow from R10.4 million in 2003 to R11.6 million for the six months ended 31 December 2004, allowing its headline earnings per share to rise to 1.7c from 1.2c previously.
These companies report similar profit and margin growths, and all feel their prospects are rosy. Another thing they have in common is that they do not openly talk about strategic IT investment plans.
These IT systems they have to invest in will encompass every part of their business model from supply chain management, to point of sales, from product development to content delivery of advertising, and from handling basic cash transactions to delivering sophisticated financial products.
Technologies they have to grapple with include radio frequency identification (RFID), database management systems, business intelligence systems, voice over Internet Protocol (VOIP), systems to close the last 100m gap, marketing and product development tools.
"There is not going to be one killer technology application for retail. Rather, it will be the killer business model that we are all trying to find," says one retail executive, who wishes to remain anonymous.
UCS Solutions CEO Richard Newton says retail, by its very nature, is in a constant state of flux. "There has been massive consolidation within the retail industry. Edgars Consolidated bought CNA and Topics, and Massmart has absorbed Ellerines and Reliant. But there is still massive expansion, with new stores being opened all the time, at home and abroad."
Newton says the general trend is for large multiple operations managed from one single entity.
IT is still a differentiator around the world for retailers.Jeff Woods, analyst, Gartner
Coupled to that is a massive variability in staff skills. "Executive management is very good, even by international standards. Middle management is generally good. Unfortunately, those on the shop floor need more training, but being the retail industry, staff turnover is high."
These factors influence retailers` IT strategies - some seem highly sophisticated, while others seem to be in the dark ages. One franchise operation still uses old AS400 computers to compile its financial systems.
"Management says it works and if it works - don`t fix it," says the IT manager, who also styles himself as "chief coal-shoveller".
However, Pick 'n Pay recently made a change by ditching its in-house Advanced Retail Management System in favour of a SAP solution that will be implemented by UCS Solutions.
Pick 'n Pay CEO Sean Summers justifies the move to SAP by saying that back-office systems are no longer a differentiator between retail chains, and his group would rather focus its energies on developing customer-facing initiatives.
The selection of SAP also reflects a change in Pick 'n Pay`s business model in moving from a decentralised supply chain process to one that provides "end-to-end supply chain processes and controls".
Gartner supply chain management analyst Jeff Woods says he was surprised by Summers` comments.
"IT is still a differentiator around the world for retailers. Systems such as SAP and Oracle come from the manufacturing environment whose needs are very different from retailers. That, and the fact that IT is still a big differentiator for retailers, is why many retailers around the world still develop their own supply chain management software."
Woods says the international retail model has moved from cost-cutting type plans to using IT as a business enabler. "It has become very tactical in how they develop and deploy IT strategies."
He says using these systems to plan transportation routes, for instance, can shave percentage points off costs that end up saving or costing a retailer a massive amount in the long run. "The whole point is to work the costs out of the supply chain," Woods says.
The cost of adoption
"If there is one cost that retailers understand, it is that of renting property. And everything must be explained to them in those terms," says Nebula CEO Danie Nel.
Top of mind should be speeding up till queues.Barry Baetu, MD, Harmonic Group
Expenditure in the retail sector is calculated per square metre. Therefore, it is essential for companies to drive down unit costs to ensure a notable reduction in the overall costs.
Nel, whose company consults on telecommunications issues to retailers, says: "More importantly, to ensure enhanced operations and reduced costs, retailers need to predict their expenses. If cost, as a variable, becomes too big and uncontrollable, companies have difficulty in managing their expenses successfully and this ultimately leads to unproductive business operations."
According to Nel, the upgrade of telecommunications within the retail sector is being driven by strategic decisions, rather than pure IT ones. A business imperative for this market is the ability to accurately transfer information from various national branches, as well as ensure the optimisation of inventory allocation between stores.
"Retailers are driving the efficient use of WAN technology via digital networks. This trend is likely to continue in the next six months, with the standardisation of MPLS networks," he says.
Nel says VOIP and IP telephony are still in their infancy and are not likely to be adopted by companies in the retail sector at this early stage.
"Although VOIP already exists in private networks where it routes calls over the retailer`s WAN, it is not likely to be implemented in the public and corporate spaces yet," he says.
Nel also says technology solutions such as IP telephony are too expensive to implement.
"However, with the deregulation of the local telecommunications industry, the retail industry is likely to witness the rapid adoption of this technology, as it will ensure increased functionality at store level, as well as enhanced customer service," he says.
Looking for the RFID case
As the rest of the world edges closer to using RFID solutions to manage their supply chain processes, South African retailers do not seem to be in a hurry to implement it.
RFID has been lauded as a technology that can make lives a lot easier for retailers. A tiny antenna could be stuck onto a pallet, or even individual goods, with data describing the nature of the item and where it is located automatically read from it. Revolutionary? Possibly. New? Not at all.
"RFID as a technology is mature. However, it is a technology that is still making a business case for itself," says Gartner`s Woods. However, he does believe it will take off within the next five years and retailers had better start looking at business plans now.
Three international retail chains have been major drivers in promoting RFID technology: US retailer Wal-Mart, French chain Carrfour, and Germany`s Metro group. Their demands for suppliers to use RFID centre mainly on pallets of goods, rather than individual items, as that may take much longer to implement.
In SA, however, it is in the hands of the Independent Communications Authority of SA (ICASA), the communications regulator.
Bob Cork, MD of BCA Barcode Alliance, a company that has been supplying barcode solutions for about 20 years and is now looking at doing the same with RFID systems, says: "South African retailers are well aware of the benefits of RFID. However, we need ICASA to tell us which frequencies we can use. Until then it is very difficult to even test the equipment."
RFID frequencies range from about 869.52MHz for the longer distance applications to 1 357MHz for closer usage.
Max Stone, regional sales manager for Symbol Technologies Africa, says the wait for ICASA is a stumbling block for South African retailers waiting to adopt global standards.
He says the big challenge for RFID is to make it manageable. "RFID is not a rip-and-replace solution. It must work seamlessly with other technologies, such as barcode data capture, wireless networks and portable data terminals. The key is to view RFID as one part of a broader solution set," he says.
Stone says that while RFID brings the promise of improved supply chain management, bridging the gap will require architectural solutions that address the need to capture, move and manage a wide variety of data.
But will RFID replace barcodes? "No way. There is just too much invested in barcodes," says Cork. "Rather, they will be complementary technologies. RFID is not really suited for a number of products, such as toothpaste tubes."
Queuing for solutions
Barry Baetu, MD of mobile computing and barcode company Harmonic Group, says: "Top of mind should be speeding up till queues, and while many retailers have addressed this, anything more than one customer ahead of you is still too long. Queue busting needs to be introduced."
He says this can be accomplished by placing technology in the hands of shop assistants or sales people. For example, sales people equipped with a mobile computer can be permanently online to the company`s database with instant access to stock inventories.
Baetu`s favourite, the ultimate in making customers work for their purchases, is to equip shoppers with scanners and allow them to track products, prices, total up the amount in the trolley and match the contents of the trolley to the shopping list.
Marketing automation is another area that is receiving more attention from the retailers. The whole function of product placing, packaging and the messages that will attract consumers is a complex and multifunctional task that involves not only the retailer, but the manufacturer, advertising agencies and marketing specialists who are involved in the product design and development lifecycle.
"South African retailers are probably not where they should be in terms of automating their marketing functions, but they are catching on quickly," says Denham Trollip, director of software engineering firm JamWharehouse.
"Marketing is the last big opportunity for business process improvements," he says.
Credit is king
South African consumers seem hardly able to hold onto their money in the rush to buy goods and services. During the December 2004 Christmas season, retail shoppers forked out about R30 billion. But what are they using to pay?
No other country has such a great use of cards to complete retail transactions.Stephen Leonard, MD, PIC Solutions
According to Stephen Leonard, MD of credit management solutions company PIC Solutions, 60% of consumer transactions in this country are done using in-house cards, between 20% and 30% are done using bank credit cards and 10% of transactions use cash.
"This country is absolutely unique in this. No other country has such a great use of cards to complete retail transactions," he says.
This use of cards for payment has blurred the traditional lines between retailers and banks. Leonard says retailers have almost become financial institutions and have put in place sophisticated IT solutions that would normally be found only in banks in other countries.
There have been a number of reasons for this:
* The high crime rate has made the carrying of cash a risky proposition.
* Retailers developed the "six-month no interest charged" method of credit - a product specific to this country.
* Commercial banks have seen the opportunity and have aggressively targeted the market with credit card payments that are interest-free for up to 90 days.
"Logically, these products mean that South African consumers do not have to carry cash on them in large quantities to make their shopping purchases," Leonard says.
He says the overall investment on credit systems by the clothing and furniture retailers has increased year on year for the past five years. "Credit has moved from the back office to the forefront of the profit equation."
Recently, retail credit grantors have focused on:
* Implementing automated scoring and applications processing systems.
* Improving collections and champion/challenger risk management strategies across the entire credit lifecycle.
* Systems and processes in their credit and risk functions.
"Decisions have become more automated and analytically driven, which is key to handling increased volumes and achieving optimal profitability," Leonard says.
The fly in the ointment could be the proposed National Credit Bill being processed by Parliament. While the Bill is aimed at cleaning up the delinquent micro-loan industry, it could affect the large retailers.
"We have a very sophisticated credit industry and it works well. Although the Bill has good intentions, it could mean additional costs for the retailers and thereby the consumer," Leonard says.