5 Big Retailers With Big Technology Plans

Yes, some retailers are going out of business. When you see once-popular brands like Aeropostale, American Apparel, Wet Seal and Sports Authority filing for bankruptcy, it can scare investors out of the market.

Yes, others are shutting down a large number of stores. Macy’s (100 stores), Wal-Mart (154), Walgreen’s (200), J C Penny (73 done, 7 more this year), Office Depot (300 over the next three years) and most recently, Sears Holdings (64) likely top this list.

But isn’t it true that the teen-focused Aeropostale group may have simply misread their customers’ needs? And isn’t it also true that a reduction in stores by the others may be with the view to divert investments elsewhere, where the benefits may perhaps be greater? Or does it mean that it’s all doom and gloom for retail stocks? Let’s find out.

The Retail Sector Is In Transformation Mode

When Amazon (NASDAQ:AMZN) started selling books online, not many would have thought it could create the kind of disruption that it has. Yes, there are other online retailers like eBay, Etsy, Groupon, Blue Nile, etc. But none have really taken the concept to the level that Amazon has, through its technology, its automation, its fulfillment standards, free shipping, Prime loyalty program, devices, you name it. In fact, Amazon has set a certain standard of service that customers, especially millenials, have come to expect. Since they have grown up with technology, they feel comfortable with it. The youngest consumers are important for every seller because this is the demographic that represents the future. And this is the problem, in a nutshell.

Customer Acquisition Has New Dimension

The habit of consuming information online continues to extend to products, practices and prices. When customers don’t spend time researching these things, they increasingly listen to music, watch video, play games and spend time in social networks from their smartphones or other connected devices. Their habits, likes and dislikes are therefore known to big technology players like Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL), Twitter and Apple (NASDAQ:AAPL) as well as a host of other smaller players. Facebook in particular is important because it has broader appeal across different age groups, and so offers access to them.

Naturally, technology companies don’t share this valuable asset but instead welcome retailers to leverage the knowledge to advertise with them. This is not an ideal situation for retailers since they are losing access to customer data and direct interaction with them, which in turn is affecting things like customization and the ability to compete. But in order to make the most of an unfavorable situation and speed up the process from advertising to sales, they are increasingly using direct-response formats.

Retailers are also trying to strike the right balance between online and offline channels when seeking customer data. While more data makes it easier to serve people, not everyone has the resources and expertise to leverage the data. For instance, recent Forrester Research data reportedly says that retailers use just a third of the data they currently have with only 29% admitting they are good at translating the result of data and analytics into measurable business outcomes. There is also the danger that too much interaction with customers may feel intrusive. Further, not all customers (especially younger ones) like dealing with people, so they may not be looking for the personal touch. This also makes data collection difficult.

Given the number of options available both online and offline, customers generally have too much choice. So the older model of stocking up on inadequate quantities of a broader selection to target more shoppers may not be that effective today. Selling fewer items that are always in stock is likely to satisfy them more, according to a MasterCard study for 2015.

Inventory Management Has Never Been More Important

At some point or other, we’ve all had this urge: seeing something pretty that we want to pick up immediately. Earlier it used to be in a shop window and these days, it’s generally online. So for a retailer advertising online, it’s very important to be in stock. When a customer clicks through on an ad, the purchase intention is generally high, but many will move away if it means waiting for the right size or cut. This is especially true in case of commodity-type products or food. The purchase intention will also be depleted if they have to wait too long for fulfillment or are required to pay for shipment. So retailers need to be able to track and transport inventory quickly using efficient logistics and at minimum cost. With minimal scope for personal interaction, customer loyalty boils down to availability and ease of completing the transaction.

Employee Productivity Increases Are A Must

Many retailers are seriously looking at their corporate structures to eliminate unnecessary management layers and speed up operations. Efficient and helpful sales staff that can take on adjacent duties when required and operating in a more flattish structure is the need of the hour. This is because footfall to stores continues to decrease (RetailNext Performance Pulse says that store traffic declined 6.6% in August, following persistent declines in the preceding five months). Therefore, revenue per employee has to be pushed up in other ways, which may be achieved by expanding roles. One example would be by equipping store sales staff with connected devices so they can check online inventory when required and place an order for the customer. Moreover, better-trained and more capable sales staff will also be able to increase conversions in stores, which will help retailers make the most of the traffic declining though it is.

In-Store Experience Remains Important

There are many aspects to the shopping experience that can be worked on and this is one aspect that retailers are spending time and resources on. Apart from adding merchandise and increasing selection, retailers are using technology to track customers and push promotions to them at suitable times, reduce waiting time at the billing counter, enable more variety and security in payment options while also letting them experience the personal element. On the other hand, routine functions such as locating and fetching products or tracking shelf space for replenishing are increasingly being automated. The adoption of beacons has been much slower than initially expected across retailers but IoT is bringing technology to them in other ways.

Consistency In Online And Offline Experience Is A Challenge

Most large and medium size retailers and big brands have built websites and mobile apps in addition to their retail outlets and those that haven’t are expected to follow soon. In fact, market researchers and industry experts expect 2016 to be a momentous year for omnichannel buildout. While an online presence increases exposure to many more customers, it also calls for a consistent experience across a retailer’s online and offline properties. On the other hand, even large online retailers need offline presence as is clear from Amazon’s plans to open some physical retail stores this year and a 100 pop up stores next year. For retailers, this consistency of experience is a very big challenge because it requires investment in technology at every level, from supply chain management to procurement to stocking, store layout, sales and customer relations, and may in fact require a re-design of the entire process. This won’t get done in a hurry and will require significant investment over the next few years.

Security/Privacy Is A Growing Problem

As retailers do more business online, they will increasingly be subject to many rules and regulations that normally apply to online operators. Most of these regulations relate to the all-important customer data collected, whether in-store or online.

Developments over the past few years have greatly increased awareness of the way customer data is being collected and used leading to concerns about individual privacy. Data breaches at leading retailers have also raised concerns about security and identity theft.

This year saw the EU parliament pass the General Data Protection Regulation (GDPR), which should go into effect by 2018. The law is designed to hand over more control to the person the data relates to and provide a uniform playfield across the region. Data portability across processing systems and an individual’s right to erasure are other things covered. A fine of 20 million euros, or 4% of total global revenue have been approved for non-compliance with some sections, so retailers need to sit up and take notice.

The regulatory requirements vary by state in the U.S. and all over the world, so cross-border retailers have a good amount of work to do here. Needless to say, this will require significant investment in technology.

U.S. Retailers To See International Competition

Some successful international retailers are getting ready to hit the U.S. market. The Irish low-price high-quality apparel and home goods retailer Primark is reportedly looking to open 10 U.S. locations this year. Germany’s Aldi and Lidl are targeting 2K stores each by 2018.

So given that backdrop, it’s become increasingly important for domestic retailers to take their current introspection a step further by getting as lean and efficient as possible and leveraging technology whenever possible.

Following are five companies that are already working to get there:

Wal-Mart Stores (NYSE:WMT)

Wal-Mart isn’t new to ecommerce; the company has been building its capabilities over the past 4-5 years through over a dozen acquisitions and internal innovation. This year alone, it bought a 5% share in China’s JD.com in a deal that will help it reach Chinese customers. More recently, it spent $3.3 billion to acquire Jet.com, a company better known for providing the lowest rate available, that too in a market where Amazon operates. Jet’s attraction was its pricing mechanism that helped customers create smart baskets, with optimal order size, delivery speed and distance to minimize cost. This is technology Wal-Mart will be incorporating in its own business. The company has also started collaborating with technology players. Grocery is a focus area for the company and it now has an alliance with Uber to home deliver groceries in some markets.

On the other hand, it still has a huge footprint of 4.6K stores strategically located to address 90% of the U.S. population. This is amazing reach that only an online retailer can probably hope for. Since the company has been investing in technology for quite some time, many bits are already in place.

Wal-Mart in one of the first companies to offer the order-online-pickup-at-store facility. It also has the technology to detect when a customer has come for pickup so packaging is started even before she enters the store. This reduces delivery time to about 3.5 minutes, lower than the company’s promised five minutes.

Inventory management continues to improve. In the words of CEO Doug McMillan, "A dynamic connected supply-chain with improved forecasting leveraging predictive analytics can serve customers and reduce cost by merging truckload, pallet, case and each movement. Accurate inventory placement is a really good way to make money."

Its global technology platform Pangaea comprises smart pricing algorithms that help it manage pricing on large amounts of inventory. This in turn makes it easier to compete with online players. If a competitor has a lower price on any product, Savings Catcher in the Wal-Mart app fetches the customer a gift card for the difference.

But the company also has plans of shedding its low-cost image. This is in line with MasterCard data that shows customers looking for a balance between value and price. The desire to strike a balance is in fact what gets them to research products more. So companies need to understand that higher prices aren’t such a bad thing but need to be supported with relevant information.

The company also has the data now to show that omnichannel shoppers spend an average $2.5K a year compared to $1.4K for in-store-only buyers, so its ecommerce strategies seem to be working. Moreover, it is one of the few retailers seeing its store traffic move up rather than sideways or down.

To compete with Amazon better, Wal-Mart also has the regular 2-day shopping program and its own payment system called Wal-Mart Pay.

And this isn’t all because in January this year, the company open-sourced OneOps, an open source cloud and application lifecycle management platform allowing developers to use off-the-shelf technologies from Microsoft (NASDAQ:MSFT) Azure, Rackspace, AWS and CenturyLink (NYSE:CTL) Cloud, as well as any OpenStack cloud in public and private cloud environments to speed up app-building and maintenance. The company has used the technology in house to move applications among multiple clouds and speed up the deployment of product enhancements across locations.

WAL-MART STORES Price

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Written By: Zacks Investment Research