Technology is fundamental to enabling retail businesses to survive in a competitive and changing landscape.
Retail businesses face huge challenges in keeping pace with changing consumer habits and expectations, as well as meeting their sales performance and profitability targets.
Furthermore, the market can be fairly unpredictable. For instance, although overall retail sales increased by 3.3% year-on-year in July, some sectors, such as food and department stores, experienced a decline.
Therefore, to remain competitive in this difficult market place, retailers, whether internet, store-based or a combination of the two, must focus on maximising their own sales and profitability figures. And much of this can be achieved through technology.
Often referred to as digital transformation, many retailers are using technology to streamline back-end processes and improve customer experiences. From innovative marketing campaigns, to ERP systems, and chatbots and apps to improve customer interactions and experiences — technology is the enabler.
Expense versus asset
Indeed, research shows that 66% of retailers believe digital transformation is crucial to their business. But it needs to be funded. Traditionally, retailers, especially large corporate organisations, would have purchased their technology and ‘sweated’ their assets on the balance sheet over a period time.
Although this provided accounting flexibility, many retailers today don’t have the cash flow to fund large scale technology projects upfront. This is why many retailers have opted for lease contracts to fund their technology requirements.
This approach not only eases the burden of an upfront investment, but it also allows them to implement the required technology while smoothing payments to protect their capex budgets.
Navigating new IFRS rules
However, January this year saw the introduction of IFRS 16 which removes the distinction between finance and operating leases. All leases now need to be recorded on the balance sheet as liabilities at the present value of the future lease payments, as well as an asset over the lease term. In addition, any expenses concerned with the total cost of ownership of the technology, such as maintenance and disposal, also need to be accounted for.
This potentially has a number of significant effects on a retail business such as:
- Retailers with a large lease portfolio may find that it becomes more complex to manage, especially around total cost of ownership;
- The greater the number of leases, the greater the assets, but the debt burden also increases for the retailer;
- Accounting and financial ratios will be affected, which could decrease the retailer’s ability to raise finance;
- Any existing banking covenants may be affected and would need to be checked.
But, working with a technology partner that fully understands the IFRS 16 regulations, as well as the business’s technology and leasing requirements, can simplify the process.
Benefits of a subscription and as-a-service models
Companies that use subscription and as-a-service models should be the technology partners of choice. Leases with a shorter than 12-months and where there isn’t the option to purchase the technology at the end of the lease term, are exempt from IFRS 16. However, not all partners are adept at managing the disposal of assets at the end of the term and incorporating this appropriately within lease payments, unlike those that adopt an as-a-service model.
It’s therefore essential that retailers choose a partner that can manage this process and take care of all associated maintenance costs. This mitigates the need for extra accounting, as well as ensuring that the technology life cycle is managed effectively and in a sustainable fashion.
In addition, leases with a value of less than $5000 are free from IFRS 16 regulation. A subscription and as-a-service partner can use this to manage retailers technology requirements in the most prudent way possible for the business.
Accessing technology now
Staying ahead of the competition and remaining agile often requires retailers to make technology decisions quickly. With an as-a-service solution, there is no waiting game in terms of budget or capex; the technology can be added to any existing subscription and deployed within the organisation almost instantly.
And the beauty of this model is that technology can be deployed and upgraded as it is needed. The partner can store and then deploy the asset as needed in order for staff to be as productive as possible, and to ensure that the customer experience isn’t impacted. In addition, payments only start once the technology has been deployed.
The retail market isn’t going to get less competitive and IFRS 16 is here to stay. However, additional financial regulation shouldn’t be a barrier to staying competitive. Finding a trusted technology partner who understands the business and as-a-service models, certainly won’t let this stand in the way of any technology transformation goals.
Chris Labrey is MD of Econocom UK and Ireland
Author image courtesy of Chris Labrey/Econocom