What does 2017 hold in store for IT spend, who owns the budget and how will it be spent? Fran Riseley, Deputy Managing Director, Martec International, asked CIOs of the leading 150 UK retailers.
THE BIG news is that IT budgets are on the increase for the first time since 2011 and now stand at 1% of sales. This is up from 0.9% in 2014-15. Of course, IT spend varies by sector. This year the results were home shopping 3.4%, department stores 1.7%, large format speciality 1.4%, small format speciality 1.3%, mass merchandisers 1%, and food and drug 0.8%.
In real terms the spend is higher than this as a number of departments outside IT are now spending on systems. Some 42% of retailers recognise that other departments invest in IT projects that do not come under the auspices of the IT department and this is up significantly from 33% last year. The key departments that do this are ecommerce and marketing (22% of all retailers have ecommerce departments that invest in non-IT controlled projects and 17% for marketing). We expect this trend to continue as it becomes easier to source cloud-based applications. The main motivation for increased systems investment is that existing retail IT is unable to cope with a digital world and retailers that don’t replace them with systems that facilitate one view of customers and single stock will ultimately fail. Work arounds and manual systems to make up for deficiencies dent profitability and reduce customer service so are not viable in the long term.
Replacement plans are high for 2017 – most noticeably store systems – 29% of retailers plan to replace them. Plus 21% of retailers plan to replace their merchandise management systems. Both of these tie in with the focus on facilitating the digital store – either at the front end or by making sure the back office stock management systems can cope with omnichannel retailing. This is rather encouraging and shows signs of recovery in the market, though of course not every retailer will actually get round to investing to the timescales they originally planned.
For the past four years the top investment priority was ecommerce or multichannel systems and in 2016-17 ecommerce is again the top priority. Traditionally, store systems consumed the largest part of the IT budget, often as much as 80%, because of the multiplier effect of a large number of stores. Store systems again come in at second place. With the rapid acceleration in online and mobile sales, it makes sense that the gap in investment intentions should widen. There is more return to be gained from implementing consumer-focused mobile solutions than routine upgrades to EPOS systems. Third in the list of investment priorities is ERP which has a much higher prominence than previous years. Integrated ERP systems, rather than separate systems, will be preferred in 2017 because of the easier integration across sales channels. Our research demonstrates that significant IT investment is being planned.
The IT in Retail report also reveals that online sales among retailers that also operate stores currently stands at 8.1% of sales, down from 8.6% last year. This is really only to be expected as the market matures. These retailers predict that the level will top out at 20-29%. And it is all getting a lot more complicated to operate and the average retailer now sells from an average of 4.6 different sales channels – including online, stores, franchises, wholesale and digital TV. But systems are not very often integrated across all sales channels, making it difficult to manage them profitably. We have anecdotal evidence that when a physical store is closed online sales for the catchment area of the shop can drop by 2-3% and there have been US examples where this has dropped by 20%. The different channels therefore are vital for promoting the retailer’s brand across the business.
M-commerce is obviously attracting a lot of attention. Retailers with stores now experience 4.1% of their total sales from mobile devices, about half of their online sales. Some 81% of retailers have a website that is optimised for smartphones and tablets at present, up from 60% last year and this is likely to become virtually 100% by the end of 2017.
Cloud solutions are now mainstream
Cloud solutions used to be favoured by start-ups and smaller companies but now they are mainstream with 80% of the leading 150 UK retailers running at least one cloud-based application. This is up from 51% last year. Previously it was non-risk applications like HR that were favoured. Now there are retailers running their ERP systems in the cloud. The single most important retail application run on the cloud is ecommerce used by 21% of retailers, up from 15% last year. Often this investment in cloud-based systems is being made outside of IT, often by the ecommerce department. In fact, the evidence is that control of the complete IT landscape is slipping out of control of the CIO as cloud-based applications become more common and easy to invest in, without involving IT.
Cloud-based systems make it much easier to achieve real time or near real time visibility of inventory across the business along with a complete view of the customer and the product range. In addition, cloud-based solutions can offer pricing models that avoid heavy Capex investments enabling retailers to pay a good share of the costs as they receive the benefits.
WHAT’S NOT CHANGING VERY QUICKLY?
Though the retail business is a fast moving one, retailers are not the quickest to change and spend on IT. Retailers now replace their systems every 9.8 years, down slightly from 10.1 years in 2014-15, so they are still really sweating their assets. Though, as you might expect ecommerce systems have a much shorter life expectancy that averages at 5.6 years – down from 7.5 last year – explained by the rapid pace of change in the ecommerce world.
In spite of the proliferation of specialist software a high proportion of retailers still rely on in-house developed systems; 26% of the merchandise management systems used by the leading 150 UK retailers are home grown and 21% of logistics systems. These levels are dropping slowly each year as retailers replace old systems with ERP or packaged systems, but there are still a number of CIOs out there protecting their empire of in-house developers.
The vendor market will continue to concentrate with more mergers and acquisitions. Though there are plenty of new start-ups and small vendors who continue to innovate and grow to compensate. So for retailers looking to select new systems to support a joined up digital business it is as difficult as it has always been. Checks into potential vendors’ financial viability and credibility among clients are a vital part of the selection process.