October 9, 2007
Retail IT Budgets Slow
By Tom Ryan
According to the annual IT budget survey from AMR Research and the NRF’s CIO Council, retail spending on IT is expected to rise a modest two percent in 2007. That’s less than the seven percent planned increase retailers reported in a 2006 survey.
In the study, AMR said one reason for the decline is that retailers are now realizing operational efficiencies from capital investments over the last several years in areas like telecommunications, store networking, store hardware (such as POS systems) and packaged enterprise software, resulting in a four percent decline in IT operational expenses between 2006 and 2007. The reduction in operational spending is offset by a planned seven percent increase in IT labor budgets. Depreciation expenses are growing two percent due to substantial increases in capital expenditures in recent years.
Source: AMR Research; in millions
“Retailers are currently taking a short break to digest the aggressive technology investments that they made in packaged applications over the past few years,” said Rob Garf, vp and general manager of retail strategies at AMR Research. “But even while retailers implement this influx of technology, great operational gains are being achieved from the utilization of new broadband networks, in-store hardware, and third-party software.”
The
study also found several areas where retailers are planning investments. Highlights
include:
- Forty-five percent of retailers plan to invest in merchandise management
systems (including item, price and inventory management) in 2007. AMR believes
aging merchandise management systems at the heart of the enterprise are forcing
many retailers to replace this foundation as part of their architecture strategy.
Retailers are also finally embracing ERP as packaged application suites become
viable options; - Half of the retailers surveyed plan investments in retail planning
systems to more effectively capture demand signals and respond with more
accurate financial, assortment, allocation and pricing strategies. AMR said
new functions like store clustering by attributes, pack optimization, lifecycle
pricing and size profiling allow retailers to plan at more granular levels
than ever before; - Forty-five
percent of retailers plan to add to, improve or replace their customer relationship
management (CRM) applications in order to provide consistent and positive
cross-channel customer interactions; - Sixty percent of survey participants plan to add to or
improve or replace their B2C e-commerce platforms. AMR said retailers recognize
that the cross-channel shopper spends nearly one-third more than her single-channel
counterpart and that more than half of in-store purchases are influenced
by online research; - Sixty-five percent of retailers intend to improve or replace
their current POS software. Outdated software, according to AMR, is plagued
by increased maintenance and support costs, excessive training costs, inefficient
marketing and merchandising execution and manual cross-channel operations; - Forty
percent of retailers surveyed plan to invest in new payment systems, which
AMR believes is linked to PCI data security regulations and the desire for
more efficiency; - Around supply chain systems, nearly half plan investments in
replenishment/inventory optimization and warehouse management. PLM investments
are also increasing as private label efforts expand.
The findings came from the CIOs of 23 retailers with average revenues of $4.4
billion.
Discussion Questions: Why do you think retailers are slowing investments
in IT spending? Are some core enterprise applications under-appreciated? Based
on your experience, where do you think most retailers should be focusing IT
investments?
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Collaboration with supplier networks is becoming more complex as well. EDI 852 data merely sent as “flat files” to suppliers of choice make the process of Category Management and consumer insight reporting only available to the manufacturers that have huge IT teams behind them. This endless cycle leaves out the regional niche product producers who have incredible abilities to tailor assortments by stores, but lack the POS system to fully extrapolate the proper trends. Retailer spending may be “down” in the near future, but the supplier community has a long way to go in order to “talk” to a number of antiquated systems from their top customers.
Retailers are very skeptical about the return on investment promised by technology. Too often, projected profit improvements either disappoint their sponsors or are very hard to prove unambiguously. Furthermore, a lot of technology improvements in the past few years aren’t paradigm shifting breakthroughs, they’re incremental improvements. The Golden Age of retail systems spending was the late 1990s, during the dual manias of Y2K and the internet. Until another great paradigm shift occurs, it’s unlikely that level of spending will return. Furthermore, software, hardware, and communications are getting cheaper, so the same dollar goes further. And Asian outsourcing also gets retailers more results per dollar.
You have to be very careful with this kind of data. A drop from 7% growth one year to 2% the next is very steep–IT spend growth for next year about equal with inflation, which is rare.
Most companies, including retailers, would of course like to reduce IT spend as a percent of sales, and I would not at all be surprised that the increase is slowing, as it is in many industries, but I think the reduction from last year is probably exaggerated just based on the survey methods/population, etc. and wouldn’t read too much into it.
I’m sure that many retailers are simply catching up with IT investments and, as Tom mentions, realize the efficiencies from systems that are currently operational.
However, I believe that many of the installations have been technology for technology’s sake and that many of them continue to be underutilized. I hate to bring it up again, but the entire issue of data mining at retail needs to be re-examined. All; the data is simply not being used to come up with actionable information.
Frankly, the slowdown in spending is good. Gives retailers the opportunity to breathe and see what they’ve got and start utilizing it.
I also think it’s time to look at the role of the CIO. This is not, as someone said, the techie in charge of other techies. They are agents of change within any organization and their recommendations about equipment and potential applications must be taken more seriously by senior management.
RSR does a lot of survey based research and I tend to agree that the numbers in this sample size are “roughly directional” rather than statistically significant. Numbers tend to stabilize in aggregate at around 40 respondents, but still have an sampling error of at least 5%.
Having said that, I believe Rob is correct–and retailers are assimilating the purchases they made over the past few years, working to gain the ROI they expected.
There are also some analysts who believe the seemingly endless spate of mergers and acquisitions has slowed the buying market while retailers wait for the spree to settle down.
We see increased use of existing business intelligence engines across new parts of the business as a key area of focus. And, as new buying channels continue to emerge, retailers will once again react and make spot investments (budget or no budget).
Although overall spending may be less, it seems like the decrease in hardware and network infrastructure is being somewhat off set by an increase in spending on more strategic applications such as demand planning and updated CRM solutions. In IT, there are two sides of the “house.” There is the infrastructure designed to “run” your business and the infrastructure designed to “manage” your business. The two are distinctly different. One system is designed for order entry, billing, shipping and other areas that make the company operational. Once those systems are running sufficiently, companies want to leverage the information gathered in those systems to help them understand their business better, make more informed business decisions and get more efficiencies out of their people, programs and systems. There is often a shift of concentration between the two areas. It appears that the retail industry is making that shift toward more strategic applications.
Part of what drives the slowdown in IT spending (or other infrastructure investment from one year to the next) is the need to keep overall expense management in line with revenue expectations. 2007 is not turning out to be a banner sales year for most retailers (with a particularly uncertain holiday quarter around the corner) and an election year such as 2008 tends to be equally dicey until the end of the year. Whether an individual company is being short-sighted by failing to make needed tech investments to its business is another question.
I’m with Dan. The sample is 23 retailers averaging $4.4 billion. If only a few of the players changed this year, you’ve got all new numbers. I think this is useful and roughly directional, but it’ll vary by channel and by retailer. Every retailer has to have their own priorities in mind. I’m one of the dinosaurs who thinks that the e-channel is often overblown, especially in terms of relative ROI, but I see by the instant poll that I’m in the minority.
What is interesting is that we saw the same trend with probably the most technically advanced retailer, Amazon. When they reported earnings back in April we asked “Has Amazon reached their free cash flow period?” Their spending on IT infrastructure had dropped significantly and their earnings had turned upward. Could the reduction in IT spending be a harsh realization by retail management that it is not the force of the club but the precision of the swing which makes the difference? At what point is the automation simply “good enough” and the results become a “people factor” that depend on the skill of the user? Could it be that there are great systems and great employees, but it is difficult to find them both together?
As an IT veteran, my vote of “Not Sure” was definite.
Actually I wanted to vote “other” but there was no choice.
Web 2.0 is causing a revolution in communications. Push is out; honest customer to customer (to retailer?) is in. But this isn’t an expensive new killer app.
Customer management seems the wrong word; customer partnership, more appropriate. From the retailer’s point of view, that’s what’s next.
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Collaboration with supplier networks is becoming more complex as well. EDI 852 data merely sent as “flat files” to suppliers of choice make the process of Category Management and consumer insight reporting only available to the manufacturers that have huge IT teams behind them. This endless cycle leaves out the regional niche product producers who have incredible abilities to tailor assortments by stores, but lack the POS system to fully extrapolate the proper trends. Retailer spending may be “down” in the near future, but the supplier community has a long way to go in order to “talk” to a number of antiquated systems from their top customers.
Retailers are very skeptical about the return on investment promised by technology. Too often, projected profit improvements either disappoint their sponsors or are very hard to prove unambiguously. Furthermore, a lot of technology improvements in the past few years aren’t paradigm shifting breakthroughs, they’re incremental improvements. The Golden Age of retail systems spending was the late 1990s, during the dual manias of Y2K and the internet. Until another great paradigm shift occurs, it’s unlikely that level of spending will return. Furthermore, software, hardware, and communications are getting cheaper, so the same dollar goes further. And Asian outsourcing also gets retailers more results per dollar.
You have to be very careful with this kind of data. A drop from 7% growth one year to 2% the next is very steep–IT spend growth for next year about equal with inflation, which is rare.
Most companies, including retailers, would of course like to reduce IT spend as a percent of sales, and I would not at all be surprised that the increase is slowing, as it is in many industries, but I think the reduction from last year is probably exaggerated just based on the survey methods/population, etc. and wouldn’t read too much into it.
I’m sure that many retailers are simply catching up with IT investments and, as Tom mentions, realize the efficiencies from systems that are currently operational.
However, I believe that many of the installations have been technology for technology’s sake and that many of them continue to be underutilized. I hate to bring it up again, but the entire issue of data mining at retail needs to be re-examined. All; the data is simply not being used to come up with actionable information.
Frankly, the slowdown in spending is good. Gives retailers the opportunity to breathe and see what they’ve got and start utilizing it.
I also think it’s time to look at the role of the CIO. This is not, as someone said, the techie in charge of other techies. They are agents of change within any organization and their recommendations about equipment and potential applications must be taken more seriously by senior management.
RSR does a lot of survey based research and I tend to agree that the numbers in this sample size are “roughly directional” rather than statistically significant. Numbers tend to stabilize in aggregate at around 40 respondents, but still have an sampling error of at least 5%.
Having said that, I believe Rob is correct–and retailers are assimilating the purchases they made over the past few years, working to gain the ROI they expected.
There are also some analysts who believe the seemingly endless spate of mergers and acquisitions has slowed the buying market while retailers wait for the spree to settle down.
We see increased use of existing business intelligence engines across new parts of the business as a key area of focus. And, as new buying channels continue to emerge, retailers will once again react and make spot investments (budget or no budget).
Although overall spending may be less, it seems like the decrease in hardware and network infrastructure is being somewhat off set by an increase in spending on more strategic applications such as demand planning and updated CRM solutions. In IT, there are two sides of the “house.” There is the infrastructure designed to “run” your business and the infrastructure designed to “manage” your business. The two are distinctly different. One system is designed for order entry, billing, shipping and other areas that make the company operational. Once those systems are running sufficiently, companies want to leverage the information gathered in those systems to help them understand their business better, make more informed business decisions and get more efficiencies out of their people, programs and systems. There is often a shift of concentration between the two areas. It appears that the retail industry is making that shift toward more strategic applications.
Part of what drives the slowdown in IT spending (or other infrastructure investment from one year to the next) is the need to keep overall expense management in line with revenue expectations. 2007 is not turning out to be a banner sales year for most retailers (with a particularly uncertain holiday quarter around the corner) and an election year such as 2008 tends to be equally dicey until the end of the year. Whether an individual company is being short-sighted by failing to make needed tech investments to its business is another question.
I’m with Dan. The sample is 23 retailers averaging $4.4 billion. If only a few of the players changed this year, you’ve got all new numbers. I think this is useful and roughly directional, but it’ll vary by channel and by retailer. Every retailer has to have their own priorities in mind. I’m one of the dinosaurs who thinks that the e-channel is often overblown, especially in terms of relative ROI, but I see by the instant poll that I’m in the minority.
What is interesting is that we saw the same trend with probably the most technically advanced retailer, Amazon. When they reported earnings back in April we asked “Has Amazon reached their free cash flow period?” Their spending on IT infrastructure had dropped significantly and their earnings had turned upward. Could the reduction in IT spending be a harsh realization by retail management that it is not the force of the club but the precision of the swing which makes the difference? At what point is the automation simply “good enough” and the results become a “people factor” that depend on the skill of the user? Could it be that there are great systems and great employees, but it is difficult to find them both together?
As an IT veteran, my vote of “Not Sure” was definite.
Actually I wanted to vote “other” but there was no choice.
Web 2.0 is causing a revolution in communications. Push is out; honest customer to customer (to retailer?) is in. But this isn’t an expensive new killer app.
Customer management seems the wrong word; customer partnership, more appropriate. From the retailer’s point of view, that’s what’s next.