The Retail Morph

 
 
By Evan Schuman  |  Posted 2005-01-27
 
 
 
In many ways, CIOs are in the prediction business.

They must make one-, two- and sometimes even five-year plans for technology buying, when even a two-month prediction in many sectors—especially retail—is barely more accurate a predictor than a dice toss.

And, yet, predict they must, so out come the projections, the theories, the hypotheses and the assumptions. In that narrow context, CIOs are like columnists. We must predict the future, with not a money-back-if-were-not-right guarantee in sight.

Its in that light that Ive been trying to figure out what the next big shakeup will be for the retail technology space. What could send some unknown tiny startup to multi-billion-dollar dominance and send Wal-Mart to has-been territory?

The PC world knocked Digital Equipment from its perch in the 1990s. The Web almost did in Microsoft, which quickly churned out Internet Explorer after far too many months of ignoring the obvious signs. The compartmentalization of the mainframe almost did in IBM and it took a helm change for Big Blue to retain its dominance. And General Motors execs still shudder when they remember how Americans fell in love with small cars when they came out of Japan.

At the National Retail Federation show this month, I asked many executives and CIOs what they thought would be the next change-everything move in retail.

To read more about product trends discussed at the NRF show, click here.

The best answer came from Esther Lutz, who is the senior industry executive for retail at SAP America. Lutz made a powerful and self-serving argument that the morphing of retail and consumer goods companies would likely be the next big thing.

Cynical Note: I no longer take points away from an argument when its self-serving, having concluded that every industry argument to an editor is invariably self-serving. (This differs, by the way, from when my wife argues with me, a situation that I now consider a punishment for some unspoken transgression of mine that she cant yet prove but that I undoubtedly have committed.)

Lutz pointed out that retailers are shifting more and more of their merchandise to their own private-label items, cutting their consumer goods partners out of those dollars and boosting their margins. Indeed, unlike the typical private label of years ago, these retailers arent merely outsourcing the products creation to some no-name manufacturer. No, they are now seriously toying with doing their own manufacturing.

Nowhere are those design and supply-chain headaches exemplified better than in the struggle to get RFID to work consistently. To read more, click here.

At the same time, manufacturers—in numbers that are also larger than ever—are trying to sell and distribute their products themselves. And this is not merely a reference to e-commerce. No, were talking about CG players like Nike and The Limited setting up their own storefronts.

This is certainly not a new trend, but the number and diversity of the efforts on both sides of the aisle is indeed startling.

Is this the start of a CG war against retailers, who have made their margins on CG backs too long? Or is this a retailer war against CG players, who question if the CG players are delivering anything the retailer couldnt make themselves, with a lot more margin?

Either way, Lutz argues, both sides are discovering that the grass is a heck of lot greener when its on the other side of the supply chain-linked fence. And SAP is only too happy to sell more products to both sides, as retailers buy manufacturing apps and manufacturers start shelling out for retail apps.

There are other reasons for both sides to be exploring their opposite number. On the CG side, many manufacturers have been expanding their product lines in an attempt to attract more—and more diverse—customers. This product line expansion raises the prospect of having certain products no longer in synch with a retailer partners base.

Wal-Mart, for example, has been offering many higher-end items from some of their traditional suppliers. That has caused some uncomfortable moments when customers who would typically never shop in a Wal-Mart are hesitantly going there for particular products.

"What you get is the disconnect of the Mercedes parked outside the Wal-Mart," said Marshall Gordon, a Lutz colleague at SAP who is the companys industry principal for consumer products.

Some retailers are trying to remain pure-play retailers. To see how Circuit City is trying to change the rules of that game, click here.

Gordon cites another good example: QVC. "Its no longer necessarily the mother thats home in rural Wisconsin that is purchasing their products," he said. "The channels that people use today do not necessarily align with conventional wisdom."

Fair enough. And when Gordon argues that the number of companies that will remain pure-play retailers—or, for that matter, pure-play CG manufacturers—is likely to plummet, Im inclined to agree again.

But where does this all lead? Is Procter & Gamble going to start buying malls and using each storefront to sell one of its products? Unlikely, but it does raise questions about what this industry will look like come 2009.

But if this trend forces both retailers and CG players to treat each other a little more respectfully (read: fearfully), that wouldnt be entirely a bad thing.

Retail Center Editor Evan Schuman has tracked high-tech issues since 1987, has been opinionated long before that and doesnt plan to stop any time soon. He can be reached at Evan_Schuman@ziffdavis.com.

To read earlier retail technology opinion columns from Evan Schuman, please click here.

Check out eWEEK.coms for the latest news, views and analysis on technologys impact on retail.

Rocket Fuel