Trends 2006: Retail It

March 1, 2006

Trends 2006: Retail IT

E X E C U T I V E S UMMA RY

The retail IT spending outlook is positive: Retailers have finally figured out how to compete with

Wal-Mart and are now organizing themselves to deliver differentiation. Many retailers have tackled

aging POS platforms, with most initiating a POS upgrade or replacement in 2004 and/or 2005. So

where will 2006 take us? Two places: Experience-based differentiation -- whether an explicit strategy

or a reactive move to be more customer service-oriented -- will drive technology activity beyond the

store; and service-oriented architecture will break down application boundaries, putting infrastructure

questions -- and investments -- back on the road map. Is the retail IT renaissance finally here? It might

be just around the corner -- but only if sales stay up, IT finally learns how to talk to the business, and

the business finally learns that architecture investments pay off in the end.

TA B L E O F CO N T E N TS

Retailers Tackle Experience-Based

Differentiation And Architecture

Experience-Based Differentiation's Ripple

Effect

The Platform Wars: Round One

WHAT IT MEANS

The Retail IT Renaissance Is Almost Here

N OT E S & R E S O U R C E S

This document is based on interviews with

a number of retailers and technology vendors

and data gathered at several industry conferences

during 2005.

Related Research Documents

"Smarter Stores: Are We There Yet?"

October 4, 2005 Trends

"The State Of Manufacturer And Retailer

Collaboration"

November 21, 2005, Market Overview

"Consumer-Focused Innovation"

March 16, 2005, Forrester Big Idea

RETAILERS TACKLE EXPERIENCE-BASED DIFFERENTIATION AND ARCHITECTURE

The sun is beginning to shine on retail again. After a difficult first half of the decade, the second half

is looking much better. What's happening with retail IT? Retailers:

* Plan to increase IT spending in 2006. The IT spending outlook is positive, with the majority of

retailers we surveyed predicting higher IT budgets in 2006, and few looking at smaller budgets

(see Figure 1). What's driving this increased investment? A couple of years of positive sales and

economic growth, plus a focus on delivering differentiation in the consumer experience -- and

finally learning the lesson about how to compete with Wal-Mart.

* Will spend on innovative technologies to differentiate. Besides organizational overhauls,

retailers seeking to deliver experience-based differentiation find they need to upgrade aging

technology alongside investments in innovative ones to tailor consumer experiences. This

doesn't mean POS, as the majority of retailers tackled their aging POS platforms by at least

initiating their upgrade or replacement in 2004 and 2005.1 Rather, retailers seek differentiation

by tackling price and revenue optimization, merchandise optimization, demand forecasting, and

product information management -- right alongside upgrading more established technologies

like warehouse management, inventory management, and order management and fulfillment

(see Figure 2).

So where will 2006 take us? To two places on the technology front: the experience-based

differentiation landscape -- now more familiar thanks to consumer centricity -- and new frontiers

in technology architecture.

Experience-Based Differentiation's Ripple Effect

Experience-based differentiation -- whether an explicit strategy or a reactive move to be more

customer service-oriented -- will drive a lot of technology activity in 2006.2 While the store remains

the crux of the shopping experience, experience-based differentiation is sending waves of IT

implications rippling back through the enterprise (see Figure 3). A sampling of retailer activity and

investment:

* Collecting consumer data. All kinds of consumer data are up for grabs, and all of it is

becoming increasingly important. This includes identifying the consumer and tying all online

and offline transactional information together with behavioral information -- how they surf

the site, how they shop the store -- demographics, psychographics, and even preferences like

favorite color, birthday, and favorite coffee flavor.

How will retailers get this information? In 2006, retailers will add more vehicles to capture

consumer data, whether through handheld-equipped employees or kiosks that capture

consumer requests or preferences. And they'll follow that data all the way to the back end via

master