Pumping Up RetailPumping Up Retail

Freelance writer Lisa Trusiani usually spends about $500 on holiday gifts such as L.L. Bean maple syrup for her 20 clients. This year, she's sending them greeting cards. And instead of store-bought presents, some relatives will receive original panels from comic books, such as Marvel's Beavis And Butt-Head, drawn by her husband, freelance artist Rick Parker. As it is for many Americans, money is tighter this year for the Maplewood, N.J., couple.

The aftermath of the Sept. 11 terrorist attacks added to the couple's concerns, since Trusiani lost her job as a freelance copywriter for American Express Co., a position she'd held for 10 years. "We have good intentions instead of a budget this holiday season," she says.

Of course, for retailers, the road to bankruptcy is paved with such good intentions. Already bracing for tepid sales because of the slumping economy, retailers' uncertainty increased dramatically because of doubts about how consumer confidence will change in the wake of last month's terrorist attacks. To steer through the storm, retailers are relying more than ever on IT systems to help them keep a grip on inventory, distribution, and markdown decisions. Some also are pushing ahead with IT tools to improve shoppers' in-store experiences, such as kiosks and wireless devices, while others see those as experiments best postponed in these lean times. "I don't think anyone has a real clear picture right now," says Gordon Eiland, VP of planning, analysis, and new business development for Borders Group Inc. in Ann Arbor, Mich.

All of this intensifies the pre-holiday pressure retailers are under to predict how much to buy and where to stock it so they don't end up with excess inventory after the season. In recent years, retailers have had more of a profit cushion to deal with the leftovers they had to sell at discounts after the holidays, says Tom Friedman, founder and president of MoonWatch Media Inc., which publishes monthly newsletters and sponsors conferences for the retail industry.

During the prosperity of the past few years, before shopping became a patri-otic duty, retailers grew sloppy when it came to managing the inventory on their shelves. If merchandise didn't move, they could simply discount it once the holidays were over. "This year, if you've got the wrong goods, you're dead, and if you've got the wrong amount of goods, you're dead," Friedman says. "The only solution is mark-downs after Christmas, and [retailers] can't afford that this year."

Count department store chain Saks Inc. among those that had become a bit complacent about inventory control in recent years. "As an industry, we typically bought more in order to sell more. When markets are constricting, you can't do that," says Bill Franks, executive VP and CIO. "To sell more, you've got to have the right merchandise and right inventory levels available." Rather than trying to analyze each store to determine exactly what merchandise it needed, Saks had been crowding the stores with an abundance of merchandise so it would have anything customers wanted. "We were beginning to choke our stores," Franks says.

To help minimize the need for markdowns this holiday season, Saks decided to refine its merchandising and planning systems-aggressively rolling them out over the past six months as the dismal retail outlook became clear. The tough environment makes the systems an easier sell to Saks' product buyers, who have often resisted new technologies for selecting merchandise. "Now they're clamoring for tools to help them," Franks says. "Because the market is so tight, and they know they have to take inventory levels down, they want every bit of information, every tool, they can get."

For example, Saks' Buyers WorkMate tool designs a size grid for each store, determines which store gets how many pieces of merchandise, and breaks stores into tiers by size. That helps buyers calculate how to allocate merchandise. Other tools help buyers analyze inventory and sales data to forecast purchases. They also guide them on when to mark down merchandise and by how much. "The idea is to buy smarter, be more effective with the inventory you do purchase," Franks says. "People have a plan.Their financial reward is tied to how they did."

Retailers need to not only predict what will sell, but also where it will sell. Lowe's Companies Inc., a Wilkesboro, N.C., home-improvement retailer, will use its NCR Corp. Teradata warehouse this holiday season to analyze whether its Trim-a-Tree home and tree decorations are on the right shelves. Trim-a-Tree products hit the store shelves in the fall and are removed right after Christmas, so minimizing leftovers is crucial. "If they're still on the shelf on Dec. 25, we're going to lose money," says Steve Stone, VP of IT strategy.

The data warehouse tracks sales of Trim-a-Tree products. If sales are more robust in some stores or regions, Lowe's product managers can quickly spot the trend and shift merchandise. By using the system to track sales, managers also can better decide how close to Christmas to begin marking down prices on this merchandise. "At what point in time do we start doing markdowns? Doing it one week earlier or one week later can make a huge difference in profitability," Stone says.

Retailers demand sales data that's as close to real time as possible. Men's Wearhouse Inc., which saw sales drop 19.2% last month from August, relies in part on an investment in a frame relay network, which connects cash registers in its 400 stores with its Houston headquarters, to act as a buffer against a season of uncertainty. The $14 million system was completed this month after more than two years of in-house development. It not only enables greater analysis of sales data, but reduces credit-card transaction time from 20 seconds to a few seconds. "Now, I can look at every transaction, at every register, keystroke by keystroke," VP and CIO Jeff Marshall says. "Having that kind of information in real time makes us more agile."

Marshall and other executives can follow sales at a particular store on a given day and move inventory more effectively because they have a clearer idea of what's selling.

Allocation of certain items has caused problems for Men's Wearhouse in the past. The store carries unusual sizes, 56 on the large end and 22 on the small end, but doesn't order a lot of them for each store. "We didn't do a good job at the ends of the bell-shaped curve," Marshall says. So when his staff wrote its allocation and merchandising system, it used algorithms to help decide how to stock low-quantity items that needed to be split among its stores.

Borders uses its IT systems to forecast demand and respond to the unpredictable. The bookseller controls inventory with a management system developed in-house more than 10 years ago. Using historical sales data tracked regionally and seasonally, it forecasts demand and plans inventory by store and by item. But the same system lets it regularly monitor sales and modify the plan to account for market changes, such as the recent spike in demand for books about the Middle East, terrorism, Islamic history, the World Trade Center, and germ warfare.

No matter what IT tools retailers have, the tough decisions come down to people: A buyer must look at the data and decide how to adjust the assortment and allocation of products. Tom Cole, chairman and CEO of logistics and operations for Federated Department Stores Inc., which owns Bloomingdale's, Macy's, five regional department-store chains, and cataloger Fingerhut Cos., puts his faith in the hundreds of regional Federated merchants and planners. They fine-tune recommendations made by the company's proprietary planning, buying, and allocation systems, which analyze sales and historical purchasing data. "I don't see it as an IT issue. I see it as a merchandising, marketing, and allocation issue," he says.

Cole isn't writing off IT's benefit-Federated plans to use its application staff to upgrade its merchandising systems during the next three years. Revising the allocation system to give merchants more flexible tools takes time and isn't the sort of thing a company does in response to an uncertain holiday season, Cole says. "Your merchandising system is sort of your pulmonary system. You can't take it down for cleaning."

What about the customers' end? Retailers are divided on whether now's the time to give shoppers high-tech-and expensive-gizmos in hopes of increasing sales by improving the shopping experience. Office Depot Inc. is experimenting at 11 stores with letting shoppers design their own offices using CAD software. "Technology is being implemented that's obvious to the customer and provides a clear bottom-line advantage in the store," says Cathy Hotka, VP of IT for the National Retail Federation.

Other retailers aren't so sure about in-store technology for customers. Kiosks, for example, are getting mixed reviews.

Borders has been adding in-store kiosks since last year, offering its Title Sleuth system that searches for any book and determines whether it's in that store. Virgin Entertainment Group this month began installing 20 IBM NetVista kiosks at its Times Square megastore, letting shoppers download music and movie clips from the Web, scan bar codes from CDs, DVDs, and video games, and then pay for items at the kiosk. The machines, developed by Virgin with touch-screen technology from IBM and software from Microsoft, will also be tested in Boston, Dallas, and Los Angeles stores.

Others think kiosks aren't worth the price. Fed up with the cost, Gap Inc. is pulling kiosks out of its stores. In-store Web links are best reserved for store employees checking inventory, because a rugged device impervious to spills and the occasional pounding fist runs $6,000, while a simple PC and Web connection that only sales associates use is about $1,000, says Randy Covill, a senior analyst at AMR Research.

Cole at Federated is also cautious. The company opened a 240,000-square-foot Lazarus store earlier this month in Columbus, Ohio, as a place to experiment with new technologies. Some technology, such as wireless devices that display products on a bridal registry, have been well-received. Others, such as Web-based kiosks, might be more of a distraction to shoppers. "Sometimes, technology gurus give customers more credit than perhaps they deserve in how to use these things," he says. "I watch people using the Internet terminal, usually husbands with their wives. The wives go off shopping, and the husbands check sports scores or something."

Shopping-mall developers have mostly bombed in their efforts to convince retailers to embrace customer-facing technology. Simon Property Group Inc., the nation's largest mall developer, set up a company two years ago called Clixnmortar.com to test high-tech shopping tools. Central to its effort was a test of handheld scanners from Symbol Technologies Inc. that teen-agers could carry throughout its Atlanta malls, compiling wish lists at different retailers that they could E-mail to friends and family. A program for adults used similar technology, including kiosk checkout, at an FAO Schwarz store. But Simon found it wasn't making money and closed its Clixnmortar group last week, writing it off as a $16 million loss.

Yet an Indianapolis shoe store chain, Finish Line Inc., is picking up one piece of the Simon project. In partnership with Found Inc., a software company that developed wireless technology with Simon to tap into retailers' inventory systems, Finish Line is taking its pilot inventory program and expanding it to 54 stores for the holidays. Using handheld devices or store cash registers, employees can access a central server that integrates inventory and point-of-sale data and updates it every 10 minutes. Pulling from that information, the sales associates can let customers know if a product they want is available, at which store, and arrange for it to be held or shipped to the customer. About 90% of the time, customers have items shipped free, and 85% of the time, the items come from stores rather than the distribution warehouse. The system gives stores the "opportunity to outperform their physical inventory," says Roger Underwood, senior VP of IS at Finish Line.

Despite the tough retail environment, online retailing appears bound to keep growing. Amazon.com Inc. continues to sign partnerships in which it handles the back-office Web management and fulfillment for big-name retailers such as Target and Circuit City. Amazon is also pursuing its goal of a personalized shopping experience, launching a store in late September for returning customers, called Your Store, which lets shoppers track what they've viewed and bought in the past and lets Amazon pitch related products.

Jeff Handler, senior VP of marketing and advertising for Sports Authority Inc. in Fort Lauderdale, Fla., is using IT to blur the boundaries between in-store, Web, and direct marketing. During the last holiday season, Sports Authority tested marketing software called Allink Agent, from Harte-Hanks Inc., that analyzes point-of-sale and Web transactions each night and matches individual shoppers to a mailing list. The retailer then sends customers E-mail or direct-mail letters-or even calls them-with a sale offer based on each person's shopping history and most recent purchase.

Consumers redeemed more than 10% of the coupons, three times the industry average, Handler says. With those kinds of numbers, he's ready to put the software into full-scale use this season. And like every other retailer, he's hoping it can help this year's numbers come at least somewhere close to last year's. -with Eric Chabrow and Rick Whiting

Illustration by Roger Chouinard