Pressure can make people, and retailers, do strange things.
Take for example Walmart in the US. This immensely successful retail giant was feeling some heat from competitors in the online side of the retail market last year. Obviously, retail is a sector of the economy that Walmart is accustomed to dominating, so the business couldn’t sit idle and let revenue slide.
In response, the retailer threw a jaw-dropping $US10.5 billion at its IT challenges. And no, that’s not a typo — billion, not million; $US10,500,000,000. According to research by the International Data Corporation, this exceeds the 2015 spend on IT by any other company worldwide.
It is interesting to note that the exaggerated IT spend directly conflicts with Walmart’s core philosophy of being frugal, an approach that has served the business so well until now. The removal of $10 billion from its balance sheet will impact Walmart’s bottom line for years to come – at an interest rate of just 2% this equates to the evaporation of $200 million net profit annually.
Walmart seems to have taken a huge gulp of the type of Kool-Aid that maintains quantity always trumps quality. And even if the retailer based its IT spend on that other flawed theory — that a retail business needs to spend 1% of turnover on IT — its actual spend more than doubles this standard (Walmart raked in $US482 billion last year).
There is simply not enough hardware or software on the planet that Walmart could gainfully utilise to justify the $US10.5 billion. In my experience, knowing first-hand what other retailers have spent to get solid results, it seems that Walmart may have been taken for a ride. It would be interesting to see who is on the Walmart gravy train?
However, despite its blatant over-reaction, the retail behemoth’s concerns are understandable. Americans, rather than driving to a huge bricks-and-mortar store, are going online to shop more than ever before.
And it is a trend that looks set to continue. Walmart’s online competitor Amazon recorded a sales increase last year of almost 30%. And although its share of the market for 2015 was still half the size of Walmart’s, analysts continue to tip that Amazon’s market share is headed upwards, whereas Walmart’s looks set to languish.
The lesson: Traditional retailers need to morph into omni-channel businesses if they want to defend their market share. But, to avoid massive overspending, and other pitfalls, this transition must be handled with strategic care. However, few retailers heed such advice and examples of reckless IT spending abound.
The Australian retail landscape is struggling with similar challenges, and many retailers have fallen into the same trap as Walmart, believing that the more they spend on IT, the more relevant they will be in the future.
Most notably, in announcing plans to turnaround Myer’s fortunes to investors late last year, CEO Richard Umbers detailed a $600 million five-year strategy, with a large part of Myer’s plans — a cool $200 million of it — directed to the retailer’s omni-channel capabilities.
The challenge, as Umber pointed out to the hopeful audience, was the 116-year-old store’s until-then ongoing reliance on an approach to retail described as “traditional”.
According to Umbers himself, omni-channel customers are worth more than twice as much as those who just shop in a physical store, and seven times as much as someone who shops online only. But, does Myer really need to spend $200 million to turn its traditional customers into online shoppers?
Retailers will be well aware that the obvious outcome of overspending is the resulting long-term squeeze on profits. Sure, sometimes you have to spend money to make money, but reactionary spending on IT is just throwing good money after bad.
If a retailer uses a retail-specific, integrated technology platform that provides a single source of truth for all data and can run the business end-to-end, there is no need to spend a fortune to make a fortune.
This means that if Myer had the right retail platform to begin with, they could have just turned on its omni-channel processes and focus on counting the money. Many other retailers suffer from the same predicament – for years they have continuously added more and more isolated systems, and now they are surprised to find that some of their crucial plumbing is not connected.
Note that retailers don’t have the monopoly when it comes to crazy spending on IT. The $2 billion Myki fiasco in Victoria and $2 billion payroll system installed by the Queensland government (to pay mere 80,000 public servants) are glowing examples of people losing rational judgement and falling for the ‘sunk cost’ fallacy.
Australian retailers operate in an increasingly competitive and unforgiving environment. Wasteful spending can no longer be covered up with high profits. Therefore, IT must be treated as a smart investment that has minimal impact on the bottom line.
My message for retailers: Don’t fall for the hype. A well-architectured system, with a single version of all the corporate data, can be a solid base to deliver everything you need at a fraction of monumental spend that keeps making the headlines.