The shop in the high street has lost its allure for consumers. Chris Field explains how retailers must now adapt, while James Rogers looks at the online market.
Over the forthcoming months, Computer Weekly will be taking a broad look at UK.com, focusing on how a wide range of industries are embracing the digital age. The next year will see sector-specific features on publishing, travel and tourism, construction, financial services, utilities, manufacturing, health, local government and the petrochemicals industry. To start us off, this first article concentrates on the retail sector, an industry that has been transformed by the dotcom revolution
Faced with consolidation, globalisation, price deflation, new channel costs, competition from non-store retailers and a shift in power to the consumer, the slow-moving and comfortable world of retailing is being rocked on its axis.
Something has happened to retailing in the past five years. Once filed under services and consigned to the inside pages by newspapers and magazines alike, retailing is now sexy. Sexy at least for the consumer, who is now being courted by retailers on the high street, over the Internet and telephone, through the post and via digital television. In fact, it has never been a better time to be a consumer, faced with a wealth of choice, goods from all over the world can be delivered to your door within 24 hours and all at permanently low prices.
The consumer is taking full advantage of the situation. Demanding, fickle and clued-up, he is also starting to test home shopping via phone, fax, television and the Internet, convincing some commentators that shopping by store is under threat. However, it is not the store that is under threat so much as the whole way that retailers do business. No one channel necessarily threatens the existence of another, forcing retailers to develop capabilities across each and every one.
The British no longer talk about the weather, they talk retailers, prices, styles and Web addresses, making sure they are always one jump ahead of the hapless retailer who is struggling to make a profit while at the same time sinking millions into developing a multi-channel infrastructure.
Just look at the top 25 UK retailers' share prices - virtually every one is down from a year ago except deep discounters Matalan and N Brown, and food king, Tesco. The mighty Marks & Spencer, once almost immune to high street recessions, has seen its share price hit a 10-year low and the future of other traditional players, such as Arcadia and Bhs, must be seen as doubtful. These are all retailers which seem to have missed the customer revolution and may simply be too large or too inflexibly structured to do anything about it quickly enough.
There is some good news. The failure of more and more dotcom start-ups may have left a gap for traditional high street retailers to fill. While the dotcoms were faster-moving, unburdened by legacy systems and more customer-focused than high street retailers, they were also constrained by a lack of retail experience, inadequate fulfilment systems and non-existent brand names.
However, the challenges to retailers that have all these components in place are enormous and retailing is clearly going through a period of great uncertainty. Predicting the success stories of the future has become a lottery.
A perfect example is healthcare retailer Boots which filed its interim results on 2 November. Like-for-like sales have risen a modest 1.4% but pre-tax profits have fallen 8% as Boots is attacked on price by the supermarkets. The chemist's share price is down to 536.5p from a year ago high of 795p, as shareholders worry not just about the results, but the growing investment costs of revamping stores, investing in new technology and channels plus developing new high margin formats such as dentistry and chiropody. While this strategy is costing Boots its share price in the short term, the long term view seems clear.
Responding to these market dynamics adds cost, complexity and uncertainty to the retail organisation, placing a great deal of pressure on the IT director and his technology suppliers.
According to Austin Bendall, retail consultant at Strategy Partners, former PriceWaterhouseCoopers partner and member of the ActiveStore committee, retailers are responding to these dynamics but the evidence is patchy and the reaction often confused or half-hearted.
"Retailers are working in a number of areas but chiefly, they must work to make their supply chains more responsive to the consumer," he says. "And they need to do this quickly because business opportunities appear only to evaporate within months or even weeks."
This year the main focus has been on developing new channels to market, integrating them with existing systems to handle fulfilment and creating electronic links with suppliers and other third parties in the supply chain. "It's about access to information any time, any place and through any device," says Bendall.
Supermarket chain Asda, bought by US giant Wal-Mart last year, is already pointing the way ahead with the forthcoming launch of Asda.com. The site, in time, will enable a customer to initiate an order via the PC, update it via their mobile phone and track it or pay via digital television, or any permutation of channels.
Bendall agrees that this channel integration will be key to satisfying the consumer. "Connectivity and standards mean that for the first time retailers have both richness and reach," he says.
His words are echoed by the ActiveStore initiative, backed primarily by Microsoft, which is aiming to create a definition for store-based transactions. Bendall explains, "The goal is to build retail applications around the actual transaction, independent of platform, hardware and application. OPOS has already separated application and hardware; now ActiveStore is taking the final leap to make all IT solutions fit the needs of the business, rather than the other way around."
He warns that, although the technology building blocks can be developed relatively easily, the bigger issue is integration. "Retailers talk blithely about customer relationship management, but they know relatively little about their customers compared to consumer packaged goods manufacturers. Data, systems and channels must be integrated to create a single interface to the consumer and to ensure efficient order processing, packing, distribution and customer service."
Great hopes are being pinned on XML as the standard for interfacing systems and ActiveStore has already announced three retail business interfaces that define interfaces between critical systems.
The challenge for retailers is knowing where to start in implementing solutions. Bendall says, "Retailers need to have a clear idea of where they want to be and this will mean a major restructure in how they work. They should be dividing their business by customers, devices, content, goals and technologies and making someone responsible for each area."
Meanwhile, retailers are already a month into the Christmas sales season on which some rely for more than 50% of their annual sales. They may not have time to worry about big IT projects. In 1999, as Y2K loomed, some IT suppliers were putting on 25% growth. In 2000, the order books for many have slumped. The technology shopping list is growing, but some retailers are clearly not buying.
Virgin’s kiosk roll-out
Virgin, which owns music chain Our Price, had planned to sell the business but realised that it would have no direct consumer presence on the high street. It therefore chose to revamp its stores into VShop outlets. Prompted by positive sales of Virgin mobile phones, the company decided instead to use the stores as a platform for other Virgin products and services.
Seeking to provide services such as insurance, travel, railway tickets, new car sales and financial services, as well as reduce dependence on music sales, the retailer adopted a kiosk-based solution. Virgin Our Price worked with kiosk developer, EPoint to install in-store kiosks that permitted Web-based access to a broad range of goods.
EPoint developed the kiosk to make the in-store experience quick, simple and attractive, particularly to teenage customers who generally pay by cash. This included the ability to place an order at the kiosk, print a receipt and pay at the till.
The kiosks also have remote diagnostics which enables the system to redirect customers who experience difficulties with site navigation capabilities, features designed to eliminate problems of unreliability that have plagued retail kiosks in the past.
With its Internet offerings now being promoted in stores via kiosks, Virgin Our Price has been able to generate higher store traffic and attract attention to a broader range of products and services. The kiosk exists as a platform for the addition of new content and the forging of partnerships with third parties to defray investment costs.
According to Virgin, the company plans to maintain its current rapid roll-out to ensure that it achieves maximal functionality for the 2000 holiday period. In addition, the retailer intends to implement kiosks in all stores by mid-2001.
By keeping track of e-commerce developments over time, Virgin was quickly able to implement a fully-developed kiosk solution embracing all of its main retail offerings while providing the ease of use of a home multimedia PC.
Retailers should ensure strong project management and sponsorship by the IT department to control the input of a variety of suppliers to encourage co-operation and teamwork to achieve rapid roll-out.
In the rush to build Web sites, it should be remembered that not every retailer's business is instantly suited to non-store sales.
In the UK, Kookai, the fashion retailer, has a cautious attitude to the Internet. IT manager Peter Mila explains, "Our business does not immediately lend itself to online shopping, most of our customers still want to see, touch and feel the clothes before they buy."
However, the company does see value in promoting its brand, introducing new ranges so that people can see them before they come to the store and in fulfiling a small but growing number of online orders, mostly for branded goods.
Kookai worked with its French counterpart, which had already started to design a Web site. Initially, the planned UK site was for information only but the company decided to offer a limited range of goods, strongly branded with the Kookai logo. Mila adds, "The Web site also allows us to provide access to customers in areas where we have few or no stores."
The move to trading online required significant changes in back-end systems and processes. While the volume of orders remain low, Kookai will not commit resources to building a system which may be leading edge but will also be so expensive that margins will be destroyed. Orders are therefore currently handled offline and then matched to stock availability through the Mercatus merchandising system from NSB. The Web site is treated by Mercatus as another shop which can be kept stocked by either the distribution centre or other stores if necessary.
However, the company has bold plans. Mila explains, "We like NSB's vision for the Internet and may adopt the integrated approach as it becomes part of the package. We would like to process orders online so that we can confirm availability there and then and process the credit card payments automatically, thus providing a seamless interface to our customers."
A company intranet is currently under development. This will enable stores to check stock via Mercatus, not just in the distribution centre, but in other stores. Customers will then be better served by being offered more choice of either going to the nearest store, ordering in store by mail or ordering online.
With consolidation among the main Epos systems suppliers and the cutting down to size of the traditional systems integrators ICL and Siemens Nixdorf (now Wincor Nixdorf), few companies retain a vision of the ideal software and hardware ecosystem. The likes of SAP, Retek and JDA effectively control the centre where the core merchandising and financial systems lie, but even they have had limited success in describing the infrastructure that will support multichannel retailing.
NSB, which has bought USI and RTC and plans to make another big acquisition early in 2001, is hoping to carry the baton once held by IBM. Mike Carrell, NSB's technology development director, says the typical ecosystem comprises: merchandising with merchandising planning, labour scheduling, customer order processing with order tracking, data warehouse with decision support, an extranet so that suppliers can collaborate on replenishment, promotions and forecasting, an intranet linking users in head office, marketing, the call centre, warehouse and stores, Epos and connected devices including kiosks and personal digital devices.
The most comprehensive map of technology in retailing has been created by Moonwatch Media in the US, an online publisher that also runs the Retail Systems show in Chicago in June. See www.moon watchmedia.com.
The mass defections by senior retail IT people mean that most retailers are looking for new IT directors, either to replace those that have left or to replace those that have outgrown their usefulness. And there are plenty who live in the old world of mainframes, procedures and certainty.
Recruitment consultancy Michael Page Technology is among the companies looking. According to operating director Simon Crockett, "What retailers need is an e-strategy director and he will most likely come from the consultancies, the software houses or maybe even marketing. The pool is bigger but no one is meeting demand. There are many technologists and indeed marketeers around but people who can cross over are rare. It may be cheaper in the short-term for retailers to get two people to cover the job while we wait for all-rounders to emerge. Meanwhile, they can always use consultants to formulate and oversee strategy."
At IT manager level, the skills retailers are seeking that are in short supply are mainly Java, XML, Active Server Pages and Html.
Part of the reason for short supply is retailers do not pay top-dollar for their IT professionals. "Retailers have to think more like dotcoms, and introduce share options, flexible hours, home working and modern dress codes," says Crockett.
Skills needed in retail
Software skills most in demand in the retail/distribution/commercial sector.
- Windows NT
- Internet general
- Visual Basic
(Source: SSP, October 2000)
IT spend in retail
IT expenditure per employee in the retail sector (from latest Kew Report)
- 1998: £954
- 2000: £1,262
- 1999: £1,115
- 2001: £1,376
- 2002: £1,474
Top five concerns
According to Crimsonwing's Mike Winch, the top five concerns for retail IT managers are:
- How to identify new opportunities that add value to the business
- How to make them work with the existing infrastructure, rather than try to reinvent everything
- How to be more flexible and fleet of foot in responding to the needs of the business
- How to make the transition to the new world in ways that are practical and which will motivate users
- How to select partners to work with to achieve this.
Future developments in retail
In the last year, the IT directors of some of the UK's largest retailers have quit to go and work for dotcoms or technology companies.
Ian O'Reilly at Tesco, Ushir Bhatt at e-Kingfisher, David Rosalski at Somerfield and Mike Winch at Safeway have all made the move and are already resurfacing with solutions for retailers that break new ground.
Mike Winch was IT director at Safeway for 17 years and is now chairman of IT services company Crimsonwing. He explains, "I can focus on the creative use of technology without worrying about the every day concerns that retailers have. We can provide retailers with opportunities that might otherwise pass them by."
Winch feels that the new breed of smaller supplier is ideally placed to handle the big changes going on in retailing. "The traditional players are not as fast-moving or responsive, proved by the fact that many of them have tried to emulate what we are doing, not entirely successfully. And the in-house IT department comes with too much baggage. We come from the old world but are working with structures and technology that make us fleet of foot."
He also feels that the days of the traditional, permanently-resourced IT department are numbered. "With the rise of application service providers, outsourcing has finally come of age and retailers have a compelling reason not to develop and maintain everything in-house, even if they could; the rise of multi-channel retailing means that no retailer can really expect to be able to manage the operational requirements created by PCs, wireless application protocol phones, digital television and personal scanners, let alone stores and telephones."
Crimsonwing has emerged as e-commerce package provider Intershop's key integrator in the UK. Winch explains, "Anyone can build a Web shop, but the route to profit can only be found if the front end is integrated with back-end processes including order processing, picking, packing, logistics, tracking and marketing."
And this is exactly the role that Crimsonwing has played at Ideal Hardware, which needed a way to build a business-to-business network that would stave off competition from dotcoms.
Ideal Hardware's customers are now able to, in real-time, search from Ideal's catalogue, compare and check availability and send orders, which automatically feed into Ideal's enterprise resource planning system. The new system is designed to free resources and cut down on administration, allowing Ideal's sales staff to concentrate on selling and negotiating on the higher margin products. Call-back features are integrated into the online service, so customers can choose to order by telephone, Web or fax.
Winch also bought the rights to the Easiorder personal shopping personal device he developed with IBM at Safeway and is now licensing the device to the market through Crimsonwing.
- January - Arcadia outsources direct management and support of its 5,000 point-of-sale terminals in 2,000 stores and 600 concessions throughout the UK and Ireland to IBM
- February - the Sealand shipping company uses the Internet and ASN Enabler from Manhattan Associates to enable US retailers to bypass wholesalers and distributors and deal direct with manufacturers in Asia
- April - Sears Roebuck and Carrefour form the first global B2B online exchange serving the retail industry, GlobalNet Xchange, enabling members to buy, sell, trade or auction goods and services over the Internet using standard Web browsers
- June - Virgin introduces a kiosk into VShop enabling customers to order online and pay at the till
- October - Boots signs deal with Granada to give it publicity through digital TV in return for complementary programming
- November - Kingfisher acquires failing dotcom Streets Online for a bargain £15.7m
- December - Asda launches Asda.com, the next generation home grocery shopping site that will enable customers to place orders via any device.