Beating the SMB Dilemma

By  George Goodall — July 27, 2006

Advanced technology for SMB retailers is coming. Although no industry consensus exists that defines small-to-midsize (SMB) retailers, RIScaps the revenue figure for these merchants at $750 million, a frequently cited upper limit. What makes this market important is that its IT investment rate is the fastest growing in retail and these merchants are quickly moving from laggard to leading edge.

Technology is a crucial component of SMB retail success and SMB retailers must decipher a bumper crop of new technology buzzwords, such as: contactless payment, RFID, hosted point-of-sale, and wireless network topologies. As vendors position their marketing terms, decision makers in small retail organizations must sift through the offerings in order to plan for effective IT expenditures.

Making sense out of new and existing technology offerings can be overwhelming, particularly for SMB retailers. The most successful SMB companies will focus on both strategic metrics and operational flexibility and approach the goals in different ways. For example, Stauffers of Kissel Hill a chain of supermarkets and garden centers in Pennsylvania used Microsoft technology to achieve inventory reduction, margin lift, and reduced overhead costs. Part of its success stems from the use of a consultant with extensive knowledge of both garden centers and Microsoft technology.

Roman a gift and decorations retailer takes a very different approach. For Roman, the ability to rapidly adapt to changing business conditions is very important. It uses Oracle Application Express to quickly develop and roll out reports and applications to end-users within the organization. Roman can develop the functionality it requires without incurring onerous overhead expenses for development.

The experiences of both Stauffers and Roman demonstrate three important tenets for SMB retail success: focus on core operational metrics; use proven technology and leverage the domain experience of providers; and maintain the operational flexibility required by business operations.

Technology Trends

While technology has changed, the underlying drivers of retail have not. Retail is still about minimizing operating expenses and improving margin. The tension between technology and these business fundamentals is being fought in the SMB market. As SMB retailers look at their IT budgets for 2007 and 2008, they must realize that the channel for technology provision is far more important than the technology itself. The business drivers will force these providers to find new delivery mechanisms for their SMB retail clients.

Trends in retail technology reflect the trends in other industries. Through 2004 and 2005 organizations of all stripes invested in both infrastructure and applications. Unfortunately, many of these movements fall outside the domain of SMB experience, including network optimization, improvements to network infrastructure, RFID, and data collection.

Network improvement and optimization is still a big-ticket item. Increased incidence of viruses and network attacks led organizations to review their security policies and infrastructure. They also have improved capacity due to drastically increased volume of network data and the addition of bandwidth-intensive business applications such as VoIP. The increased data volume of CRM and RFID initiatives also has taxed infrastructure in another way: storage. Organizations increasingly look to tiered storage infrastructures and investments in networked storage technologies.

In addition to upgrades, organizations are facing a fundamental change to network infrastructure. Wireless technology increased in popularity as a means to support both network access and industry-specific applications. Wireless tools used for inventory control also have increased in popularity. Another technology with a lot of mindshare if not market share is RFID. It promises to improve supply chain operations. Despite the hype, it remains unclear how SMB retailers can harness this technology in a cost-effective manner.

While RFID promises to alleviate supply issues, organizations increasingly turn to CRM tools to track customers and understand their behavior. The combination of CRM and strategic initiatives such as contactless payment and loyalty cards was intended to put together the best customers with the most profitable products for a kind of margin nirvana. This approach is common with larger enterprises but still remains outside the reach of SMBs.

Increased attention on data collection has led to another issue. The cascade of data is producing information overload and many organizations are looking for a panacea in Business Intelligence (BI) software. Unfortunately, these initiatives in addition to being costly have notoriously variable Return-on-Investment (ROI). This variability is likely due to an organizations commitment to, and use of, specific Key Performance Indicators (KPIs) at a strategic level.

All of these technologies have been implemented by organizations throughout the retail supply chain and by larger retailers. Few of them, however, have had any uptake among SMB vendors. The excessive cost is a factor for this limited uptake. A more likely contributor, however, is the relatively weak manner in which these technologies address the real consideration of SMB retailers: margin and operating costs.

The Pincers of Margin

The smallest retailers are in a precarious technological position. They are most sensitive to margin erosion yet have insufficient resources to implement technological solutions. For example, it is unlikely that a small retailer can support a CRM implementation. It typically lacks the upfront capital to purchase a CRM system and the hardware required to support it.

SMB investments in CRM are hindered by two factors: the ongoing financial and human resource costs of maintaining enterprise software, and the difficulty in feeding data to the CRM beast. Large retailers use customer data gleaned from contactless payment and loyalty card programs. Unfortunately, this approach is not viable for SMBs.

SMBs also lack the scale required to pressure suppliers. Many retailers are hostage to the prices set by their supply chain partners. Take, for example, the plight of mom-and-pop convenience stores. These types of retailers are not in a position to mandate terms with suppliers such as Costco or Wal-Marts Sams Club. Even though the smaller retailer is far closer to the end-customer than any other player in the supply chain, it has no power to negotiate terms.

In short, SMB retailers are stuck between the pincers of margin. They lack the means to leverage CRM and BI technology for topside improvement, but they also lack the clout to negotiate favorable terms with suppliers. This scenario paints a bleak future. But there is a silver lining: technology, but not from the channels that most retailers expect. New technological channels will emerge and they will offer solutions that satisfy SMB retailers needs.

White Knights for SMBs

The average mom-and-pop convenience store purchases most of its goods from regional wholesalers and suppliers with whom they have no negotiating power. The wholesalers, however, have a very strong interest in the buying habits of the customers of the convenience store. While neither mom nor pop may have much interest in their own point-of-sale data, the wholesalers certainly do. They want a clear picture of market demand and consumption patterns in order to gain their own margin advantage and to protect inventory positions from the dreaded bullwhip effect. From this brief scenario it seems that the organizations that stand to benefit the most from SMB technology adoption arent the SMBs but rather their supply-chain partners. From this perspective, those partners should begin to offer advanced technology to the SMBs. Key supply partners should provide hosted services in addition to products that SMBs put on their shelves.

These white knights will offer a specific set of technologies. Hosted point-of-sale is the most obvious offering. They also will partner with local broadband providers to facilitate the process of setting up broadband connections in disparate retail locations.

Hosted point-of-sale will address one of the key concerns for SMB retailers: reducing operating costs. However, the white knights also will have to provide a wide variety of tools to address margin. Hosted CRM will be popular with retailers of boutique items. Retailers of very price-sensitive items require different technology and a set of products that are completely unavailable to the SMB retailer.

Where CRM fails, merchandising is crucial. Hosted services for product mix optimization, product placement and slotting, and pricing optimization will emerge as succor for CRM-bereft retailers.

In this scenario, the retailers gain an advantage: they are able to use advanced technologies in a cost-effective manner. They exchange subscription fees and information for tools that are currently well beyond their reach. The advantage of hosted services is that SMB retailers gain technology that will allow them to focus on their core competencies without the infrastructure investment.

The Knights Steeds

Hosted software is hardly a supplier bailiwick. Just like SMB retailers, they are focused on those crucial issues of margin improvement and controlling operating costs. While the white knights will offer services to SMB retailers, the underlying technology will be hosted by the incumbents: IBM, Oracle and HP.

Instead of pushing their products directly to SMB retailers, these vendors will expand their suite of hosted offerings. In addition to industry-specific functionality such as point-of-sale, CRM and price optimization, these service providers will supply the underlying infrastructure that supports the technology. Nagging issues like network security and maintaining an adequate storage infrastructure will fall within their purview.

These major providers will partner with the supplier firms. The wholesalers will provide the marketing channel and the service providers will supply the technology. The providers get access to the elusive and marketing-dollar-intensive SMB market and the wholesalers get access to valuable demand-signal information. The retailer, meanwhile, gets access to advanced technology that was previously beyond its means.

The providers wont be beholden to just the wholesalers. They will offer their products to a wide range of different consultants and independent software vendors. These smaller parties will use the same hosted services and also will offer a greater level of customized service to retail clients. Mid-sized retailers looking for advanced technology will be able to get the same level of support and service.

The Bottom Line for SMBs

SMB retailers should be prepared to wait for at least two years for advanced technologies to thoroughly meet their needs. But as managers begin to assess their technology options for the future, they should see beyond just identifying retail technology and look to the delivery channels for that technology. Most importantly, they must align their technology decision with strategic organizational goals and KPIs to avoid the pincers of margin.

POST A COMMENT

comments powered by Disqus

RATE THIS CONTENT (5 Being the Best)

12345
Current rating: 0 (0 ratings)

MOST READ STORIES

topics

Must See


FEATURED REPORT

Mobile Risk: Security Is Not a Game

IDC predicts 2 billion mobile devices will be shipped by 2017, while Gartner expects a 26 billion Internet of Things installed base (excluding smartphones and tablets) by 2020. With more devices, more machines, more connectivity comes more risk.