Price pressures and need to supercharge the store impact technology trends for 2006 and beyond
It is a well known fact that retailers spend the least amount on IT as a percentage of revenue than nearly every other major industry. While the insurance and healthcare industries routinely spend between six percent and eight percent of annual revenue on IT, retailers spend only between one percent to two percent. Traditionally, grocers have the tightest of all retail budgets within the retailing industry at an approximate average of 1.3 percent of revenue.
While this might seem like a low figure, it's a logical outcome for an industry segment where the average retailer in North America makes less than one penny profit on every dollar sold. While IT expenditures at the store level typically average 65 percent of the IT budget at the typical grocer, evidence from the recent RIS News/IHL Consulting Group Store Systems Study suggests that in 2006 grocers are not only spending more on IT, but focusing it heavier at the store level. The average respondent indicated a 6.5 percent increase in the company's IT budget aimed at the store in 2006.
Follow the IT Money
The technologies that grocers are purchasing depends heavily on where they are in the technology curve, but two areas of heavy concentration are new POS systems and self-checkout lanes, purchases that require heavy capital spending and significant planning. POS systems are seeing the biggest levels of interest, and the focus of capital spending reported among respondents is roughly three times the number of new purchase decisions in the next 12 months, as we have seen in previous studies. There are several factors cited for the high replacement rate. These include a desire to increase speed and usability, replace old equipment that is too costly to maintain, and improve communication needs with staff through a more flexible POS design.
In these POS upgrades we are also seeing interest in a changing of the way these retailers purchase their systems. Traditionally, grocers have looked for a single source solution of hardware, software and most peripherals. That is changing rapidly with new entrants that have lowered POS base-unit costs, a pieces-and-parts negotiation style for components, and the rise of more robust and secure software applications based on open standards. In fact, while typically 80 percent of grocers purchased their POS hardware and software from the same vendors in the last purchase cycle, the most recent data suggests that 70 percent of grocers are seriously considering buying their hardware and software from different vendors for their next decisions.
Big Changes Ahead
One of the most significant changes is the interest in Microsoft operating systems at the POS terminal. In the recent study, 77 percent of responding grocers are seriously considering a Windows-based operating system with 54 percent considering either Windows XP Embedded or WEPOS (Windows Embedded for Point of Service). This is much higher than previous years.
Linux is also seeing a big jump in interest with 31 percent of the sample also considering the operating system. IBM's 4690 continues to be a solid choice for many in the industry with 23 percent of our sample saying they are seriously considering this for the next POS purchase decision.
A second major change in the POS system is the upgrade to LCD touch-type technology. Sixty-two percent of our respondents were seriously considering touch LCD technologies for their next display. This serves three functions for the retailers. First, it lowers energy costs over CRT technology. That's a big deal when you might have 20,000 terminals throughout the chain. A second function the technology serves is improved ease of use and a drop in the learning curve for new employees, which is the result of limiting available functions at a particular point in the transaction on the screen rather than enabling all keys on a keyboard at all times. The final function is that many retailers may choose to go without another keyboard, thus lowering the cost and another point of maintenance failure on the machine.
Self-Checkout Continues Inroads
Outside of the traditional POS system, self-checkout is the other key focus for many grocers in 2006. As you can see in the table, the rate in which grocers are planning to make decisions is accelerating over 2005. Forty percent of our sample said they were planning a new self-checkout decision in 2006 versus 31 percent in 2005. Because of the planning required and the amount of capital spending that needs to be allotted for these systems, they are one of the most likely of IT decisions to go forward once the funding is set aside.
Self-checkout technology is certainly now considered to be a mainstream store system. Results from IHL Consulting Group's 2005 Self-Checkout Study show that 94 percent of PC users have used self-checkout in the last 12 months. Retailers that have effectively deployed the technology are now seeing as high as 40 percent of their total transactions and 20 percent of their revenue transactions going through self-checkout systems in stores where they are deployed.
Increased IT spending is not just at the front of the store. The grocers in our study said categorically that they are planning major upgrades to the portable inventory terminals that they use throughout the store. A full 50 percent of our sample said they were planning to make a new portable inventory terminal purchase decision in the next 12 months. Many of the current systems are aging and as continued changes to the inventory system, new bar code standards, and some initial experiments with RFID technologies, grocers are looking to upgrade their systems to take advantage of robust software enhancements put in place in years past.
Workforce management is another technology getting significant budget interest in the near future. Although not particularly heavy this year (only six percent in the next 12 months), a total of 44 percent of the survey said they will make a new workforce management decision by June of 2007. With labor costs being the most significant variable expense for grocers, optimizing labor expenses is critical for these retailers that compete with Wal-Mart every day.
Wal-Mart, yes Wal-Mart. We began this story comparing retail IT spend as a percentage of revenue to other industries such as healthcare and insurance. Those industries don't have a Wal-Mart. While many in our industry have debated whether Wal-Mart is good for our industry, as a consumer, don't you wish there was some of that Wal-Mart-generated downward price pressure in healthcare and insurance?
Greg Buzek is president of IHL Consulting Group, which specializes in business consulting and market analysis for retailers and IT companies that focus on retailing. More detail about the data and analysis found in this story can be found at www.ihlservices.com or by writing to Greg at [email protected]