Supply chain and omni-channel to drive retail profit

21 May 2014 | News | Source: just-style

Improved supply chain capabilities and omni-channel improvements will be a key driver of near-term profits for US retailers, with investment shifting from stores to IT.

Drawing on the insight of Brian Kilcourse, co-founder and MD of RSR, a supplier of technology solutions to retailers, analyst FBR Capital Markets believes profitability in the short term will be driven by supply chain and omni-channel improvements, rather than improved demand.

It also notes that while retailers have traditionally invested less than 2% of their revenues in IT systems - two-thirds of which is simply maintenance - there is now a shift of investment from stores to IT.

Meanwhile, cloud-based solutions could create omni-channel accessibility for small to medium retailers, such as Francesca's, Aeropostale and Express, thanks to lower initial investment and faster returns.

"Overall, we believe the call underpinned our thesis that omni capabilities are a 'must have' for long-term profitability and competitiveness," said FBR. "We reiterate Chico's as our top omni pick, and Carter's and The Children's Place as our top up-and-coming omni picks that are poised to benefit from investments over the next several years."

The analyst also notes that many retailers have eliminated, or are currently eliminating, significant costs from the selling side of the business, and may focus next on a significant restructuring of operations to focus on the supply chain and omni-channel. This is largely an area of under- investment by many apparel retailers, it adds.

Brand differentiation also dictates the importance of a digital/omni presence, with consistency across multiple touch points (stores, mobile, web) crucial for solidifying brand image and enhancing customer satisfaction.

"Historically, retailers have been focused on rolling out their store bases as quickly as possible and have underspent on technology.

"However, under a new paradigm of decreasing mall traffic and a somewhat saturated brick-and-mortar retail environment, we are witnessing an increasing focus on IT/systems investment. Given that supply chain/omni capabilities are likely to be the dominant drivers of profitability, we expect continued emphasis on omni capabilities over the next several years."

The emergence of cloud solutions instead of proprietary, in-house systems could also make omni capabilities more accessible for small- to mid-size retailers.

Cloud solutions typically require lower upfront and total costs and may provide a positive return in two years versus 3-5 years for traditional solutions.

"However, we believe the cloud could have drawbacks," FBR says. "With cloud services, there is likely a mark-up and required third-party data management. In addition, a large retailer may require more in-depth, customised solutions that are typically not economically feasible by smaller retailers."