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Sell Smart, Sell More
Old-line merchandisers change IT strategies to not only survive, but to prosper

By Katherine Bull
Issue date: Sept. 18, 1995

ver the last few years, large U.S. retailers have had to shift the course of their information technology strategies. The success of large-volume retailers such as Wal-Mart, Home Depot, and Toys 'R' Us, has dragged old-guard merchandisers such as Sears, Roebuck and Co. into the modern age of IT. It hasn't been easy, but Sears has risen to the occasion and reacted quickly, a move that retail analysts say may have helped save the company. Sears was one of those retailers that could have gone the way of the dinosaur unless it drastically changed its ways. Analysts say that if there were ever a perfect IT turnaround story in corporate America, the honor would have to go to Sears.

What Sears has done over the last two years is not much different than what many retailers have also done: migrate from a mainframe-based architecture to client-server computing. But Sears is different, says Steven Johnson, managing partner at Andersen Consulting in Chicago, because the company had fallen very far behind other retailers in moving to a client-server architecture. In fact, its leading position in the industry was seriously in question.

In an attempt to gain some ground, Sears hired Joe Smialowski as chief information officer two years ago to reconstruct the company's computing architecture. At that time, Sears had just begun to feel the financial impact of moves by retailers such as Wal-Mart and Kmart, which bought merchandise in high volume and sold it at low prices.

One of the biggest problems, says Smialowski, was that Sears' inventory levels were far too high for products that weren't in demand. Times had changed, but Sears' inventory had not. "We had merchandise sitting on shelves in storerooms," Smialowski says. "That model translated to lots of lost dollars and was bleeding the company's revenue."

The situation was "crazy," says Richard Buchanan, a consultant in Peterborough, N.H. "Sears tried to keep a lot of inventory on hand, and they didn't know what kind of a mix of merchandise each store should have," he says. "They were notorious for sending tons of snowshoes to Florida."

Sears' IT executives decided to move away from mainframes to client-server networks of PCs and workstations. Most retailers already started to migrate to client-server, so Sears had to work quickly and choose the right technology.

In addition, Sears' managers determined that stores needed to have detailed sales information in order to properly gauge what merchandise to keep in stock and how often products needed to be replenished.

After ensuring that the tactical problems--such as inventory management--were under control, Smialowski says Sears turned its attention to solving that problem. The goal was to move away from being an organization that looked at the retail world in a mass-market way. "No matter which store you went into, they all looked exactly the same," Smialowski says. "We had to change the processes to meet the needs of a particular demographic area."

Terabytes Of Data
Last year, Sears installed an AT&T 3600 MPP multiprocessing server running a Teradata database at its headquarters in Chicago. Massively parallel processing (MPP) technology allows many microprocessors to work on a single problem. Each Sears store has a Pentium-based computer running IBM's OS/2 that's linked to the MPP machine and database. Under this setup, managers and buyers can analyze data faster and adjust merchandise levels more appropriately, thus making the stores more efficient.

Sears has put more than a terabyte of information at the disposal of its business analysts at each store, enabling them to analyze everything from the best way to schedule Sears' 300,000-person labor force to how fast white cotton sweatshirts are moving at a particular store.

The payback for Sears has been phenomenal. "Because of our new architecture, we have reduced inventory levels by 60% and we now have very specific information on the buying habits and needs of more than 80 million households," says Smialowski. "Our revenue numbers are back on track and we're competing better with the volume retailers."

Store-Level Strategies
Putting information in the hands of store managers ha s been a key to success at other retailers as well. Toys 'R' Us has installed an IBM SP2 running an Oracle database at its headquarters in Paramus, N.J., to gather and disseminate data to its stores nationwide. Store managers access data from the system via Windows-based PCs.

"We needed to get more information at the store level," explains Dennis Healey, CIO at Toys 'R' Us. This philosophy of distributing information isn't new to company executives. They realized the importance of store-level data more than five years ago, Healey says.

A recent technology effort for Toys 'R' Us is its use of Pentium multimedia kiosks, which are being tested in a handful of stores. "Our primary concern is how to make it easier for people to shop in our stores," Healey says. "We're still not sure what the payback is by using kiosks, but we don't want to rule them out as a technology that can give us an edge." If the multimedia kiosks prove to be useful, Healey says Toys 'R' Us plans to put one in each of its stores.

The IT efforts at Sears and Toys 'R' Us reflect the retail industry in general, which has come to regard IT as crucial to financial success. In a recent survey of 323 retail industry IT professionals by Consulting and Systems Integration in Waltham, Mass., 62% of the respondents said their companies plan to boost IT spending this year. The average increase, according to the report, is 22%.

"Most of this investment is expected to be applied to store-level and merchandise-management technologies that help them increase operation efficiency and improve customer service," the survey reported.

One emerging technology option for retail organizations is the use of the Internet to market and sell products, although analysts disagree on the role of the Internet in retail. The Consulting and Systems Integration survey, for example, found that there is virtually no interest among retailers in online shopping right now. However, Andersen's Johnson believes that by the year 2000, 20% of retail merchandise sales will be made via the Internet.

Johnson says retailers need to prepare now on how best to exploit the capabilities of the Internet and other online resources. "Retail is a very competitive business, and the bar keeps going up," he says. "Internet technology is far away from delivering the fundamentals, but growth on the Internet is outstanding, and this form of distribution is bound to have an impact on large retailers."

Consultant Buchanan believes that in four to five years, the Internet infrastructure will become secure and stable enough for large retailers' business. Johnson and Buchanan may be right. Consider that five years ago, many industry pundits thought no one would buy or sell PCs through a mail-order catalog. That "conventional wisdom" didn't stop Gateway Computer Co. from making a fortune selling PCs over the telephone.

Large retailers have mixed feelings when it comes to the prospect of selling merchandise over the Internet. Sears' Smialowski regards the Net as a form of distribution to watch but not something to jump on in the short term because the payoff is not yet clear.

A First Step
Toys 'R' Us is taking a cautious approach, starting with a home page on the Internet's World Wide Web. "Our home page is specifically tailored to marketing products rather than selling them, but I can see us eventually selling toys over the Net in the next couple of years," says Healey.

Selling merchandise on the Internet will require retailers to think about their business in a different way. "Most people focus on the 'over the Internet' part, but the emphasis, and creativity, needs to be focused on the 'do-business' part," says Buchanan. "That's far more difficult to accomplish.

The next few years promise to be challenging for retailers. Getting their IT architectures in order and streamlining the ways they deliver merchandise to consumers is a high priority. Retailers surprised by the ways in which Wal-Mart and Kmart shifted the retail paradigm vow they won't be caught in th at situation again. You can bet the store they'll be using innovative IT as an insurance policy.

(To view the Retail chart in PDF format click here)

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