Green shoots or moss?

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Economic forecasting has always been a bit of a dark art where the experts have pondered the runes at length and often come up with some wildly conflicting conclusions. Certainly the amount of data to be digested in this age of the 24/7 TV and on-line news overload gives these latter day soothsayers plenty to get their teeth into.

The deepest recession since the great depression of the 1930s was not well predicted, and its end is as equally hard to predict with any certainty. The green shoots of recovery seem to be in evidence and getting a little stronger every week, but recent months have been topsy-turvy, to say the least. House prices went up by 1.6% in July and mortgage lending increased, but the UK economy shrank by 0.7%. Germany was firmly out of recession, whilst Japanese exports declined and Japan announced record unemployment figures although employment trends always lag behind the curve in the life cycle of a recession.

With experts predicting either an end to the recession or warning that reports of a global recovery are premature, where does the retail industry in the UK stand? Lord Harris of Peckham, Chairman and Chief Executive of Carpetright, seen by many as a barometer of the retail industry, was bullish when announcing an increase of 7.5% in group sales in the period 3 May to 1 August for the leading specialist carpet and floor coverings retailer. The British Retail Consortium/KPMG Retail Sales Monitor for July is a little more circumspect citing a UK retail food and non food increase of 2.5% in the period May-July 2009.

Against what can only be described as a challenging and volatile backdrop, investment in IT has suffered in the same way that all capital expenditure in retail has. A recent survey of 100 top retailers carried out by retail consultants Martec International in association with BT Expedite, reports that IT budgets had been cut by approximately 20% so far this year. The report made note of the fact that new projects were being launched but many were based around squeezing value from assets retailers already own suchas stock and space productivity, or squeezing more productivity out of costs such as labour.

Brian Hume, Managing Director of Martec International (pictured) gave The Retail Technology Review a wide ranging insight into the current situation in the marketplace. Yes, there is still investment going on, but there has to be clear and measurable return on investment (ROI). It is also very variable, dependent on the sector. Food is holding up well and fashion is OK. Its the furniture and D-I-Y sectors that have taken a massive hit. Some of these organisations have had their budget cut by up to 50%.

There are exceptions of course. Multi-channel is de-rigueur at present. Failure to have the correct on-line/high street synergies will leave retail organisations behind as the upturn comes and the on-line savvy customers ever more conscious on the best deals on offer will look elsewhere. As the survey points out, all bar three of the 100 retail organisations polled have transaction processing sites and with some companies now doing between 15-25% of their business on-line the rest are starting to worry about losing market share if they dont catch up or at least get in the game. Evidence, if evidence were needed that if the ROI is there, then the money can be found according to Hume.

Return on investment is clearly the mantra for both the IT and finance departments. But how, realistically do you go about measuring that? Hume again, Well, first a project needs a good ROI to get funded or approved. Secondly, it forms the basis of executives tracking that they actually receive the expected benefits. Savingsare usually easy to measure and easy to ensure that they are achieved. Retailers as a breed are extremely good at expense control and things such aslabour savings delivered by any new technology mostly get realised. An interesting upside to the current financial climate is that if the project has a good ROI, the cost of money is a lot lower and the minimum return a project needs to achieve is also lower.

Where it gets harder is in margin improvements and sales increases. Potential margin improvements can often be identified, but afterwards no-one can prove whether they really got them. However, when building an ROI model, the logic of achieving a margin gain can be modelled. For example, in fashion a margin gain might be realised theoretically through increasing the degree of full price sell through, i.e. the percentage of goods that get sold before any price reduction is necessary. While you may not be able to prove that you got the margin gain, you can at least prove that your full price sell through increased in line with your predictions.

On the assumption that a project has the green light based on all of the above, what are the key elements that retailers should have at the top of their list of priorities when selecting new point of sale hardware and software?Brian Hume is clear, For the volume retailer, speed through the checkout is critical these days.The next aspect is loss prevention.In this economy, losses are rising and the volume retailers are more affected. In a low volume high transaction value environment, it is easier to notice issues. When it comes to the SME retailer, they may choose to have a PC on a cash drawer type of system rather than a purpose designed EPOS device because they don't need the same level of security.Very often the owner works in the business and keeps a closer eye on things.

In terms of putting one sector under the microscope, then mobility for the workforce is an area a little like multi-channel, which can demonstrate continued investment through having such clear potential benefits and hence has driven the development of more and more sophisticated and feature-rich mobile computers. Claims of deliverable ROI are still helping to drive growth among DCs, where everyone has enough scale but it is interesting to note that the Martec survey shows that there is less scope in stores because a high percentage of the stores not using mobile technology are small format fashion stores, which dont have the scale for the adoption of real time mobile data capture solutions. At store level, it is harder to quantify ROI and the latent growth just isnt really there at present.

So, where does that leave us? According to the Bank of England, growth will be fragile in 2010. This will be reflected in our business without a doubt and Brian Hume gives an equally cautious assessment of how the next year or two may develop. Personally, I'm not convinced that growth will resume in 2010.I suspect that the current economy is what normal looks like for the next two or three years. I believe that investment in 2010 will follow the pattern in 2009. In other words, it will be based on projects with a demonstrable ROI. I think retailers will continue to play it safe, hence big ERP projects won't be at all common and the focus will continue on projects like merchandise and assortment planning, forecasting and replenishment, labour scheduling and the like, where there are clear paybacks.

The clear take-away from this is that unless a project can demonstrate that it will provide return on investment and make the very best of the limited scope for business growth, then the investment is unlikely to return to our business at the levels seen prior to 2007 for some time to come. Those green shoots need to become firmly established, and not, as some wag said on radio 4 a couple of weeks ago, turn out to be, just moss.


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