Worldwide Retail Industry 2012 Top 10 Predictions

IDC Retail Insights: Retail IT Infrastructure Strategies

TOP 10 PREDICTIONS Robert Parker Leslie Hand C h r i s t i n e B a r d we l l #GRI232576 Ivano Ortis Greg Girard

www.idc -ri.com

PREDICTIONS 1. Consumers, Not Products or Channels, Will Create the Basis for Growth Strategies 2. The Omnichannel Consumer Will Direct a New Retail IT Model for the Industry Omnichannel Orchestration and Optimization 3. Retailers Will Race to Innovate and Will Operate More Efficiently as a Result 4. Retailers Will Synchronize the Supply Chain with the Clock Speed of Their Customers 5. Retailers Will Create Great Brand Experiences by Enabling Engaged Employee Experiences 6. Planning Paradigms Will Begin to Evolve to Support Genuine Customer Brand Engagement Strategies 7. Continuous Assortment Planning Orchestrated for Space Will Become the Planning Hub 8. The Store Will Evolve Welcome to the Omnichannel Store 9. Customer Experience Improvements to Boost Online Conversion Will Go Beyond the Web Store 10. eCommerce Delivery Models Will Fragment

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January 2012, IDC Retail Insights #GRI232576 IDC Retail Insights: Retail IT Infrastructure Strategies: Top 10 Predictions

TABLE OF CONTENTS
P In This Study S i t u a t i o n O ve r vi ew 1 1

The Hourglass Economy .......................................................................................................................... 1 Customer-Centric Retailing....................................................................................................................... 2 IT Spending .............................................................................................................................................. 4 Future Outlook 6

1. Consumers, Not Products or Channels, Will Create the Basis for Growth Strategies........................... 6 2. The Omnichannel Consumer Will Direct a New Retail IT Model for the Industry Omnichannel Orchestration and Optimization .......................................................................................... 6 3. Retailers Will Race to Innovate and Will Operate More Efficiently as a Result..................................... 8 4. Retailers Will Synchronize the Supply Chain with the Clock Speed of Their Customers ...................... 9 5. Retailers Will Create Great Brand Experiences by Enabling Engaged Employee Experiences ........... 11 6. Planning Paradigms Will Begin to Evolve to Support Genuine Customer Brand Engagement Strategies ............................................................................................................................ 11 7. Continuous Assortment Planning Orchestrated for Space Will Become the Planning Hub .................. 14 8. The Store Will Evolve Welcome to the Omnichannel Store ............................................................. 16 9. Customer Experience Improvements to Boost Online Conversion Will Go Beyond the Web Store...... 18 10. eCommerce Delivery Models Will Fragment....................................................................................... 19 Essential Guidance 20

Invest in the "Four Forces" of Productivity ................................................................................................ 21 Create a Vision and Investment Road Map for an O3 Platform ................................................................ 23 Don't Forget the Importance of Being Genuine......................................................................................... 23 Learn More 24

Related Research ..................................................................................................................................... 24

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LIST OF TABLES
P 1 2 3 4 Worldwide Retail Industry External IT Spending by Select Segment, 2011 and 2012 ................. 4 Worldwide Retail Industry External IT Spending by Technology, 2011 and 2012 ........................ 5 Worldwide Retail Industry External IT Spending by Region, 2011 and 2012 ............................... 5 Assortment Planning Constraints ................................................................................................. 15

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LIST OF FIGURES
P 1 2 3 The O3 Platform........................................................................................................................... 7 The Evolution of Merchandise Strategies..................................................................................... 13 Retail Initiatives from the Four Forces of Productivity .................................................................. 23

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IN THIS STUDY IDC Retail Insights spoke with technology vendors, strategic consultants, and a wide variety of retail stakeholders (both IT and lineof-business) about what 2012 will hold for companies in their industry. These views together with those of IDC Retail Insights analysts form the basis of our top 10 predictions for 2012. SITUATION OVERVIEW The exercise of putting together our predictions for 2012 is always productive for our research team. To look forward, we must first look back and, in reviewing our past year's predictions, we are proud that we have been able to chronicle the larger trends in the industry. Prerecession, we introduced the concept of "precision retailing," where reliable visibility to demand data and advanced algorithms could win the day. The recession didn't necessarily impede the progress of precision retailing, but it certainly diverted and reshaped the objectives around a more informed and motivated customer. As Stephen Quinn, the head of marketing at the world's largest retailer, Walmart, said in a recent Fortune Magazine interview: What we've learned through this whole recession is just how incredibly resourceful and smart our customers are. Part of this "resourcefulness" was moving shopping online and the use of mobile devices as in store price research tools. Three years ago, we introduced the term omnichannel retailing to describe not just independent channels store, catalog, Web, mobile but the fact that these channels had to operate simultaneously for the modern consumer and carry a consistent brand message. The past two years of predictions picked up on the omnichannel momentum and discussed the transformation of traditional retailers, specifically how they think about and measure growth. Instead of new store openings and same store sales metrics, retailers began to look at same-shopper sales and, borrowing from their online-only competition, unique visitors. This continues to be apparent in the numbers from mature economies Web sales are up double digits and mobile, triple digits. And even the foundation channels of stores and catalogs are enjoying growth, albeit in single-digit terms.

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The Hourglass Economy

Economists have begun to popularize the term hourglass economy to describe the economic circumstances at the end of 2011. The premise is that the economy, particularly in the United States and the United Kingdom, is bifurcated, with the middle getting squeezed. There is certainly data to support this, but instead of looking purely at income levels, it is less contentious to look at education levels. The percentage of the U.S. adult population with at least a bachelor's degree reached an all-time high of nearly 30% (2010 census). While unemployment was well over 8% for most of the year, unemployment among the "graduate class" was half that number and real wages were growing while the number of people in the other 70% slipping below the poverty level was increasing, effectively hollowing out the middle and creating the hourglass economy. IDC Retail Insights also believes that to only look at the U.S. economy as an hourglass is wrong similar cases, perhaps not as dramatic, can be made for the whole of Western Europe and Japan. In emerging economies, there are dramatic differences in spending power between the educated minority and the rest of the population, which is why we see most of the retail investment going into the urban centers. Even India, which reversed course on letting multinational retailers in, may have done so not because of pressure from indigenous retailers, but from the fear of what might happen if the transfer of money from professional to street vendor was somehow co-opted by large retail organizations. Most importantly to retailers, the graduate class makes up between half and two-thirds of consumer spending. The amounts quoted vary, but even at the more conservative one half, it is significant, given that it comes from 30% of the population. The winners during the recession were the off price chains that knew how to make money on bargain hunters. IDC Retail Insights believes that as consumer confidence returns and prospects look brighter in 2012, retailers will have to decide which resourceful and smart consumer they want to serve the graduate class seeking to meet specific needs or the value shopper who wants the best deal. We saw evidence of this in the 2011 holiday numbers. Overall growth was between 4% and 5% over 2010 (which itself was a fairly strong rebound over 2009). However, there were other reports that the early openings with "door buster" discounts ate into margins in a significant way. Meanwhile, online sales experienced double-digit growth and carried much better margins. At least for this holiday season, the physical store had become the retail backwater.

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Customer-Centric Retailing

Regardless of the demographic target, selling to the resourceful and smart consumer will take retailing beyond "you will buy what we decide to stock" to "we will stock what you decide to buy." This puts a new type of customer centricity to the retail calculus, and this has corroborated in our conversations with retail line-of-business executives conducted as part of our participation in a series of Next Generation Retail summits held around the world. Some retailers are still stuck in an old customer context as is evidenced by the following quote from Home Depot CEO Frank Blake (emphasis is ours): We will continue to invest in our core initiatives to provide customers with exceptional customer service and great product values. I would like to thank our associates for their hard work and dedication. While the intent is certainly admirable, the language is product/service rather than customer centric. Home Depot's main competitor, Lowe's, is trying to more actively engage the consumer through its My Lowe's initiative. It will be interesting to see which is more successful. Another retailer using much more active language is Kohl's, which has done very well with its omnichannel approaches, as is illustrated by the following quote from Kohl's CEO Kevin Mansell (emphasis is ours): Typically, when we see improvements in our trends, they're a result of actions that we have taken to motivate consumers. So more newness in our assortments, I think, gives us some confidence that we are getting more visits and we will continue to get more visits. An even more expansive active engagement of customers comes from Foot Locker's CEO Kenneth Hicks (emphasis is ours): We're also able to deliver consistent stories to our customers, and we support the messages effectively with the right products and displays, as well as the right people in our stores and in our call centers. These enthusiastic associates are better able to provide technical guidance and hook up ideas to our customers, leading to improved conversion rates across almost all divisions. In addition, these efforts have led to both higher footwear unit sales and average selling prices across the company as a whole.

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So the theme for this year is that 2012 is a pivotal year as retailers choose which half of the hourglass to focus on. Either way, they will have to actively and genuinely engage smart, resourceful shoppers across all channels. Same-shopper profitable growth will depend on it.
IT Spending

Of course, these initiatives to realize more customer-centric business models will be underpinned and enabled by technology. And retail spending forecasts for 2012 demonstrate this activity. Overall growth worldwide is 4.4%, led by the industry's largest segments (see Table 1).

TABLE 1
Worldwide Retail Industry External IT Spending by Select Segment, 2011 and 2012 ($M)
20112012 Growth (%) 4.6 4.7 3.9 4.6 5.6 4.5 4.4

2011 General merchandise Food stores Home furnishing Building materials Drug stores Apparel and accessories Total retail 20,457 17,700 6,698 5,581 5,531 5,181 81,369

2012 21,397 18,533 6,960 5,837 5,843 5,415 84,954

Comments A good 2011 for the largest retail segment Grocery continues to grow ahead of the industry Growth still slower than industry overall DIY slowly coming back Aggressive plans for 2012 Nice recovery, innovation-rich segment

Note: The six largest segments are listed.

Source: IDC Retail Insights, 2011

Table 2 shows growth by technology category. Software spending is growing well above the overall industry average. Investments in new analytic, commerce, and operational execution applications drive this trend. Hardware growth will be a healthy 4.1%, largely driven by continued investment in emerging regions. Services are rapidly losing share of budget as expectations for more turnkey implementations are raised and outsourcing services become more competitive.

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TABLE 2
Worldwide Retail Industry External IT Spending by Technology, 2011 and 2012 ($M)
2011 Hardware Software Services
Source: IDC Retail Insights, 2011

2012 30,413 25,260 29,281

20112012 Growth (%) 4.1 5.8 3.5

29,203 23,885 28,281

Table 3 rounds out our view for spending in 2012 by showing growth by region. The overall Asia/Pacific growth number is impeded by Japan, and the rest of the region is closer to the "rest of the world" (ROW) category (which includes Latin America and Eastern Europe), which has growth of more than 7%. The United States shows healthy growth on a base that represents nearly 40% of the total industry spend.

TABLE 3
Worldwide Retail Industry External IT Spending by Region, 2011 and 2012 ($M)
2011 United States Western Europe Asia/Pacific ROW
Source: IDC Retail Insights, 2011

2012 32,781 25,357 14,772 12,044

20112012 Growth (%) 3.9 3.6 4.8 7.2

31,557 24,487 14,094 11,231

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FUTURE OUTLOOK
1. Consumers, Not Products or Channels, Will Create the Basis for Growth Strategies

As we discussed in our opening comments, the movement toward becoming more customer centric is driving new industry business models. This premise remains connected to same-shopper sales as a growth strategy rather than same-store sales. That shopper, whether existing loyal, existing casual, or new, will be at the center of the business model, and retail brands will be built around the promises made. Channel and product strategies will flow from that brand promise and customer orientation. Product strategies will have to match the brand promise and customer need. Retailers will become even more advanced in their analytic tools to create more relevant assortments and timely allocations. Further, product fulfillment will be a key device in generating loyalty, whether the execution is in sourcing product, shipping orders, or completing store tasks. This customer-centric, omnichannel shift is making it quite clear that organizational structures that isolate channels (e.g., a Web only division) are failing or will fail eventually. Retailers wishing to be customer centric must start with their organizations that too often have a channel or product bent. And the impact will be felt up the value chain. Wholesale distribution companies are already being asked to align with the priorities of their customers' customers. More items to more locations at smaller increments will be the new standard, and business models that enable that profitably will be central to distributors' strategies.
2. The Omnichannel Consumer Will Direct a New Retail IT Model for the Industry Omnichannel Orchestration and Optimization

The IT Spending section in this document shows IT spending will continue its momentum in 2012. A good portion of the growth will be in technology, especially software, to support the customer-centric initiative. Our conversations with retailers over the past several months have revealed that this effort will be more than simply modernizing the application and commerce portfolio; rather, it will be a complete replatforming what IDC Retail Insights calls the omnichannel orchestration and optimization (O3) platform (see Figure 1).

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As Figure 1 shows, the objective of the technology investment aligns with customer-centric strategies as it puts the customer experience optimization at the center, whether that is individual shopping episodes or the long-term experience with the brand.

FIGURE 1
The O3 Platform

Source: IDC Retail Insights, 2011

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Working from the outside in, the platform is enabled by foundational technologies that are maturing rapidly big data, cloud, social, and mobility. The platform itself is a central repository for standard information/content management as well as operational processes. The real value from the platform will be harvested from the intelligence layer, which will leverage the standard processes (and associated information) across functional domains to align with the customer need and deliver on the brand promise. Those functional domains product management, supply chain, merchandising, and customer experience will come together under initiatives related to omnichannel excellence: Omnichannel fulfillment. The customer-centric strategy is meaningless if the retailer can't execute. Omnichannel merchandising. The old assortment science no longer applies. Omnichannel marketing. Retailers must attract shoppers to their brand in the consumer's context, not to their store with promotions bait. Omnichannel commerce. As ecommerce gains more share (of both dollars and influence), mobile and social commerce is hitting a fast track. Unified commerce is the key. The balance of our predictions will explore these four initiatives further to see how retailers will approach the business challenges and deploy technology to take advantage of the opportunities.
3. Retailers Will Race to Innovate and Will Operate More Efficiently as a Result

Retail brands are certainly transforming to be responsive to consumers wherever they are and however they shop, and at the same time retailers are expanding assortments through marketplaces, and yet localizing assortments in store. While there is much activity in operations, merchandising, and marketing to create winning customer experiences and brands customers love to shop, the pace of innovation in the supply chain is remarkable. Retailers are no longer waiting to be the accidental beneficiaries of adapted manufacturing supply chain processes and applications but are now the de facto innovators in the supply chain. Retailers, driven by real challenges including the complexity and risk of competing in global markets from a business growth and product development perspective, must think and act like the brands that they aspire to draw customers toward. Further, they must be innovators in product and service to have any quantifiable brand advantage.

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Advantage comes from beating the competition to market with highly sought-after products, an accomplishment made possible by having finely tuned consumer listening capabilities and efficient processes to act on insights gained, better and faster than the competition. Technologies must foster responsiveness and agility, leveraging data assets much more consistently throughout the enterprise and applying what we know about consumer needs, supply, and competitive pressures in much closer to real time, to keep pace with the current cadence of business and shifting consumer demands. Mobile, social, and cloud-based technologies are enabling all brand constituents customers, associates, and suppliers to engage with digital assets and products in unparalleled ways, enabling higher levels of productivity and more successful products higher quality, higher margin, and better performing. Retailers will increasingly turn their attention to the whole consumer-driven supply chain, implementing integrated end-to-end mobile, social, and cloud-enabled processes inside and outside of the organization. Indeed, leveraging technology to capture inspiration at the moment it occurs and facilitating the use of this data in the development of new products may raise new legal issues regarding whether products are truly "inspired by" or knockoffs. Likewise, interacting with consumers to hone products designed to meet real needs will also raise issues regarding the reliability and applicability of voice of the customer data.
4. Retailers Will Synchronize the Supply Chain with the Clock Speed of Their Customers

Business is certainly fast paced; it's virtual and, as we described in the previous prediction, the customer's shopping needs are somewhat of a moving target, therefore our strategies need to be comprehensive and highly responsive. One of the challenges is the faster cadence of business necessary to respond to rapidly evolving consumer needs. This often results in clock-speed mismatches. The demand side of the supply chain is operating at ever faster rates than the supply side thus causing issues with inventory as we potentially don't have the right products in the right place at the right time. We increasingly run the risk of developing or procuring product through our normal seasonal processes that have little shelf life by the time they get to market. The accelerating pace of business necessitates rethinking our approach to the supply chain and the way that supporting IT capabilities are consumed. There are four essential pillars of modern supply chain operations: Digitally connect processes, data, and people from the point of product inspiration to the customer's purchase of that product

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 Enable visibility, not just to products in DCs and stores but also to the extended pipeline on trading partner shelves and in production Enable omnichannel customer-optimized planning, scheduling, and execution that improve sourcing, order orchestration, and fulfillment activities Perfect inventory management, replenishment, and fulfillment capabilities, achieving new levels of operational excellence and return on assets Some of the specific capabilities that will increasingly come into play in the digitally connected supply chain are a services-oriented layer that easily enables integration of potentially disparate applications; common data structures customer, vendor, product and inventory, orders, and work that are shared throughout the enterprise; social networking that facilitates communication between associates and customers about products, customer response, and service; mobile capabilities that improve access to information, portability of our work and significantly bolsters creativity, spontaneity, productivity, and communication; and cloud-based services that enable extended collaboration and logistics capabilities that add flexibility and agility to our businesses. Innovations that continue to gain traction in retail supply chains include: Collective intelligence, social networking, and analytics that connect retailers with customer intentions so that they are not crippled by driving product assortments and strategies by looking in the rearview mirror PLM applications that enable retailers to capture inspiration as well as manage product development calendars, sourcing, workflow, specifications, materials costs, and lead times Social networking that connects associates to work and support from peers, supervisors, and digital resources 3D visualization that supports everything from expediting product sampling processes to engaging customers in store and collaborating on shelf assortments and placement Voice and mobile capabilities that permeate supply chain operations and product development, supporting right- and leftbrain activities capturing inspiration and improving productivity RFID being alive and well in retail, with a majority of the activity in apparel Cloud-based sourcing, logistics, order orchestration, and compliance capabilities that enable agile responsive operations

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5. Retailers Will Create Great Brand Experiences by Enabling Engaged Employee Experiences

Of course the last mile of the omnichannel shopping experience is the interaction that occurs between the customer and an associate in store, on the Web, or at a call center. One of the concerns we hear from retailers is that shoppers are often better informed than employees, particularly regarding assortment, inventory availability, and specials. This situation is untenable moving forward, and retailers must provide the appropriate tools to make their associates useful to shoppers. Retailers are racing to not only engage their customers but equally engage those on the front lines. To do this effectively, retailers must take advantage of technology. This includes social capabilities, but mostly in the social business (sharing, collaborating with other associates) context. Mobility of course must also advance rapidly from the single-purpose inventory control devices now widely deployed to more multipurpose (inventory, clienteling, etc.) approaches on consumer-ready devices. There should also be consideration of cloud-based applications that can help the associate, perhaps selectively by geography or product category. The applications unify and modernize existing capabilities but also extend a plethora of new capabilities to the workforce that supports higher levels of productivity and engagement. Engaging employees will also be key to executing on the speed and innovation demands discussed in the previous two predictions. Task management applications should be tied to shifting assortment strategies so that the associate responsiveness (speed) can match the market dynamics. As to innovation, the example of the Best Buy collective intelligence effort comes to mind. Best Buy blue shirts (store associates) are able to give feedback on products and suggest configurations that may be more suitable for the local trends (and sometimes catch a broader trend earlier). This highly successful effort is a great example of the impact of the engaged employee and will be part of the justification for new investment in 2012.
6. Planning Paradigms Will Begin to Evolve to Support Genuine Customer Brand Engagement Strategies

The waning retail planning paradigm, conceived almost 30 years ago, retains its product-centric roots. Conventional product centricity is infused in: Systems, for example, planning cubes dimensioned by time, merchandise class, and location (a concept now expanded to "channels" to include ecommerce)
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 Key metrics by which planners plan, track, and forecast their business (e.g., units sold, on hand, or on order as well as turns, dollars in sales, inventory, receipts, open to buy, initial markup, average unit retail, and return allowances) Space management in financial productivity, turns, allocation across products, categories, and other aggregations as well as in collaborating with internal business partners (merchants/buyers, marketing, store operations, distribution, sourcing, etc.) Grading stores and assigning (i.e., assorting and allocating) merchandise to them and across channels Life-cycle price, promotion, and markdown strategies and tactics Tasks comprising the retail planner's role and responsibilities, for example, attending to current season affairs via weekly (or daily) meetings to review last week's key metrics trends, daily or weekly course correction decisions, weekly (or monthly) reforecast of key metrics to season's end, competitive analysis, and supplier reviews Simultaneous planner tasks to plan future seasons' performance with the same product-centric tools, metrics, and collaboration Now, as more customer-oriented analytics become available, planners are bringing them to bear on the many aspects of planning enumerated above, such as complementing store grading on department size and unit volume with clustering store departments based on local market demographics, competitive intensity, and so forth; dropping/adding products from assortments with an eye on the most valuable customer or shopping mission baskets; and demand transfers from one product to the next based on customer purchasing patterns. Concurrently marketing to the greatest extent as well as buyers (or merchants), albeit with slow adoption of collective intelligence tools, and store operations to a lesser extent also brings customer-oriented analytics to bear in their domains. While the trend toward using more customer-centric analytics is a positive development, in the waning planning paradigm, customer insight is still only brought to bear on product-centric decisions in a handmaiden role, without the customer (or segments), the customer experience, or the customer's engagement with the brand being the focal point of key planning, tracking, and forecasting metrics or of the planner's decisions these metrics inform. As critiqued above, the waning product-centric planning paradigm of today does not provide all that planning needs to create the basis for growth strategies in customer-centric retailer (outlined in prediction number 1).

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There is an extended set of planning considerations, enumerated in the ellipses of Figure 2, that must be addressed if retailers want to genuinely engage customers around their brand. The O3 platform discussed previously provides the foundation for this new merchandise intelligence to be integrated at all phases of this customer engagement attract, inform, sell, and serve.

FIGURE 2
The Evolution of Merchandise Strategies

Source: IDC Retail Insights, 2011

In a complementary fashion: Merchandise financial planning needs to extend to customer financial planning with growth metrics such as same-shopper sales, shopping mission sales, current and lifetime customer margin or profit, and investment (analogous to price investment to increase unit sales), enabled by processes and systems to plan, effect, and track these outcomes. Assortment planning needs to extend to customer experience planning, with the goal of enhancing "the show," which lies at the heart of a successful customer engagement, to include, for example, connected, interactive, and transactional digital signage and selling floor events in the stores channel as well as online shopping and lifestyle living apps and operating metrics such as

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investment in and returns on spatial, technology, and talent resources applied to customer experiences. Product-centric regular, promotion, and markdown pricing needs to extend to omnichannel offer management as the localization and placement of product are extended to the contextualization of individual customer offers with "messages of influence" dynamically delivered to individual customers based on their current circumstances such as in-process shopping mission and presented offers accepted or rejected; recent activities such as an abandoned ecommerce shopping cart; and historical behaviors such as propensity measurements of shopping and buying behaviors in every channel, not just ecommerce. The emerging supersets of merchandise planning focal points require systems, processes, and organizations that more tightly integrate merchandising and marketing on a common platform of an extended set of customer insights, beyond the narrow financial metrics of annual spend, annual transaction, and simple demographics of age, income, and geography relied on today, to include such metrics as: Preferred channels and product categories Breadth of categories shopped Participation in loyalty programs and branded credit facilities Return and exchange behaviors Promotional and campaign response patterns Shopping mission patterns Product attribute propensities Brand propensities Declared lifestyles eCommerce shopping, searching, and buying behaviors
7. Continuous Assortment Planning Orchestrated for Space Will Become the Planning Hub

Prediction number 6 addresses the need to extend the frontier of merchandise planning paradigms beyond the product-centric roots. In a complementary fashion, prediction number 7 addresses the need to reposition product-centric planning on a new foundation built on and around assortment planning.

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As practiced today, the efficacy of assortment planning (i.e., "assortment planning" as the term is used in general merchandise and apparel or "category management" as practiced in food and consumer packaged goods retail) has long been constrained on a number of fronts. The ongoing developments shown in Table 4 are redressing these concerns to varying degrees.

TABLE 4
Assortment Planning Constraints
Long-Standing Constraints The lack of good product and the growing importance of customer-oriented analytics for store clustering, customer segmentation, weatherdriven shopping patterns, and style size profiles in apparel and footwear Limited scalability, speed, and flexibility of system with poor visualization tools Ameliorative Developments Descriptive and predictive analytics and flexible, scalable business intelligence (BI) tools for strategic, tactical, and operational decision making some now emerging with real-time capabilities and new sources and types of data (e.g., weather event markers and metrics, trade area location intelligence, and price zoning) Advanced software design and data management techniques (e.g., column-oriented databases, in-memory data storage and analysis, inexpensive analytical appliances built from commodity hardware and software, and elastic on-demand cloud capacity remedy system scale, speed, and flexibility constraints) Multimedia user interfaces and 3D augmented reality combined with digital asset, attribute, and content management and governance bringing merchandise visualization within reach Reliance on spreadsheet workarounds in the absence of enterprise systems Flexible, responsive enterprise systems that integrate with desktop applications (in particular Excel, Access, and PowerPoint) and with central data management, eliminating much of the need for desktop workarounds System-level improvements in analytics, business intelligence, scalability, and flexibility that support the maturation of assortment planning into a continuous process; accelerating rates of change related to customers, competition, products, channels, and so forth that put a premium on continuous assortment planning driving process change management toward a continuous planning paradigm Space-aware assortment planning tools currently in the market, with more coming; price life-cycle management being woven into forecasts and allocation decisions; improved visibility of WIP and delivery status of orders Digital asset, attribute, and content management and governance practices evolving to take advantage of emerging system capabilities

Process and system designs that relegate assortment planning to being a static preseason activity, not a dynamic continuous process through season's end

Disconnects with interdependent processes such as product and price life-cycle management and space and fixture management

Inadequate governance and life-cycle management of product attributes and digital content Limited ability to execute operational tasks required to present assortment as planned

Task management complementing workforce management, reliable depictions of store-specific as-built shelves and fixtures, case pack optimization, and vendor and supply chain compliance to store delivery orders reducing execution errors

Source: IDC Retail Insights, 2011

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Taken as a whole and individually, the forces described above will put continuous space-aware assortment at the hub of successful retail growth strategies. They will advance the progression of planning toward our concept of LASAR-like planning localized assortments orchestrated for space, allocation, and replenishment. Key dimensions of this new basis of competition will include such capabilities as: Spoke configuration of planning processes around a space-aware assortment planning hub, including merchandise financial planning; localization driven by store clustering and customer segmentation; vendor, brand, and product development management; global sourcing; allocation and replenishment; and life-cycle price management Intelligent in-season corrective action decisions in response to current or foreseen supply disruptions, sales/sell-through variance to plan, and other contingencies Unifying assortment planning organizations, processes, and systems across all channels stores, online, catalog Decision making informed by descriptive and predictive analytics, and optimization science too when appropriate, at the SKU-store (channel) level and summarized up, not at, the category or class level and disaggregated down Flexible merchandise hierarchy management to align assortment decisions with customer experience objectives (as described in prediction number 6) Acceleration toward the incorporation of macro- and microspatial constraints into assortment plans in view of assortment breadth and depth decisions, with consideration given to, and explicit trade-offs made between, visual presentations and the science of space optimization Recognition that adroit governance and management of product attributes through time, under governance of planners, merchants, product development, brand vendors, marketing, and operations, are critical to insight, customer segmentation, and store/channel clustering to tuning assortments for maximum value
8. The Store Will Evolve Welcome to the Omnichannel Store

The store will evolve to be an integrated part of the omnichannel strategy. In regard to the empowered-associate customer experience (discussed in prediction number 5), think of the omnichannel store as
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the single brand place where you can bring online capabilities (including social) inside the store and store value outside following the customer journey. This is what we call "online inside." This is a scenario that opens up a broad new set of marketing capabilities, where IT is a full innovator and enabler. Starting with POS, retailers have the opportunity to evolve traditional POS technologies into real-time architectures that can better serve: Current business objectives (e.g., scale up POS and store systems capacity to meet growing demand and to support new store openings with rapid time to market and low cost of ownership) Future business objectives, both in the short term (e.g., differentiate the customer experience by enabling immersive, personalized brand experiences) and in the longer run. In other words, POS will evolve from just processing store transactions, meeting fiscal/regulatory requirements, and updating inventory counts and other attributes in batch mode to centrally and remotely managed real-time commerce engines available for all of the selling channels. Key for retailers to differentiate will be the ability to bring online inside the store what we call "online inside" fostering consumers' appetite for socializing while shopping. For example, integration of social network services in the store will be an emerging trend that will drive store revenue, increase average basket size, and drive incremental store traffic or empower in-store associates with more accurate, timely, customer-centric information that may better guide the sales process and overall customer assistance. Mobile POS and mobile store tools will also be in greater demand, and the same POS decision made today for traditional checkout lanes should support future requirements for future deployment of different checkout "form factors" (self, mobile, etc.). Mobile POS can be a great queue-busting tool that reduces checkout time and delivers a perception of better customer service. While efficiently checking out customers, well-trained sales associates empowered with a mobile tool can also attain additional objectives in a timely manner (cross-sell, upsell accessories or related services, capture customer feedback and insights, perform inventory lookup for customer orders of out-of-stock products, etc.). The vision is that of a point of sales and interaction and socialization engine all combined, with a separate payment services layer abstracted from POS and sales channel in use, integrated with, and going forward embedded into, an omnichannel orchestration and optimization platform, leveraging cloud resources at the infrastructure, platform, and potentially also application level. The omnichannel orchestration and optimization platform will also embed all of the relevant store integration frameworks along with online, call center, and mobile technology integration, configuration, and management capabilities into a consistent shopping experience.
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As a result, we recommend retailers consider the following action: Implement points of socialization based upon an O3 platform. Make the same and unique POS engine available to all sales channels. Embed a mobile retail platform with shared management of mobile for both workforce and customer usage. Abstract payments with a payment services layer from POS. Leverage cloud resources at the infrastructure, platform, and potentially also application level. Integrate social network services in the store. Embed predictive retail intelligence in action "at customer" and not "at product," also fed by location and (social) collective intelligence. We envision the omnichannel orchestration and optimization platform will also embed all of the relevant store integration frameworks along with online, call center, and mobile technology integration, configuration, and management capabilities.
9. Customer Experience Improvements to Boost Online Conversion Will Go Beyond the Web Store

In 2011, many online retailers focused on improving the online customer experience with the use of add-on tools, such as ratings and reviews and recommendation systems, the effect being an uplift in conversion rates and basket sizes. This trend will continue in 2012; however, retailers will need to start looking at the touch points across the whole online customer journey rather than just when the consumer reaches the online store. These touch points are broad and varied and are certain to increase and diversify over time. Whereas search used to be a certain source of traffic to retail Web sites in the past, other customer journey starting points are beginning to come to the fore. Sure, Google is still a primary driver of traffic, but shoppers are also now initiating their purchasing journeys from many other destinations such as social networking sites, ratings and reviews sites, and daily deal or coupon sites such as Groupon and Living Social. Aggregator sites such as Polyvore are also popular ways of shopping as consumers can browse products from multiple online retailers in one place. The shopping experience has evolved in this way for a number of reasons, the primary reason being that consumers are more value focused. In these austere times for developed ecommerce markets, consumers are researching before purchasing and shopping around to find the best deal. Finding the best deal means finding the best value, but value does not necessarily mean cheap. Consumers want products that are suitable and will last. Purchasing on impulse is happening less frequently and, instead, discussing purchases with friends through social networks and reading ratings and reviews are becoming deciding factors when making a considered purchase.

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The "final mile" will also become a stronger point of differentiation as retailers compete to offer cheaper delivery, more accurate delivery times slots, and delivery in the shortest possible time. The final mile also extends to the store. Online pure-play retailers are rolling out lockers in malls and click and collect locations with noncompeting partner retailers, thereby increasing the competition in the physical store space but without the cost of owning high street stores. Multichannel retailers will look at innovative ways to compete with these new dynamics. Mobile will continue to spawn innovation, though in 2012, retailers will need to focus on getting the basics right. The period of doubt is over; mobile is here to stay. Retailers that have been tinkering around with mobile will now be forming clear strategies based on best practices involving sales, marketing, and customer service. Moreover, mobile has become so relevant to the retail business that when a digital decision is to be made, retailers will decide first how it can work on mobile, with any other channel becoming second priority. But just because retailers will be getting back to basics does not mean they will be holding back in terms of innovation. Augmented reality will become more widely adopted, and we will also start to see innovation around payments in online retail as mobile wallets start to find a place and Intel introduces NFC chips to laptops, with interesting consequences for online payments and retail loyalty schemes. Channels will continue to appear and evolve. The next big "thing to watch," if you can excuse the pun, is Internet television. IDC Retail Insights believes 2012 will be the first year we start to see real advances in this area. The important point among all of this channel activity is that the focus for retailers in 2012 is bringing all of these touch points together (search, social, shop, and serve) for a seamless omnichannel retail experience while at the same time leaving room for any newcomer consumer touch points in the future. The ecommerce platform should be at the heart of this consolidation.
10. eCommerce Delivery Models Will Fragment

Although retailers will be looking to deliver on the online innovation and consolidation discussed in the previous prediction, they are faced with the growing issues of lacking industry resource as well as the situation whereby ecommerce growth is outpacing investments in supporting technology. Technology and service providers have also clocked on to the problems and have broadened their technology delivery scope to meet the needs of retailers. For example, software that has historically been

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sold as a one-off license and delivered as an on-premise solution is now being offered as SaaS with a number of different payment options. This is a broader trend originating from the acceptability in retail of running SaaS-based third-party ecommerce add-ons, and one that is finding traction with the ecommerce market dynamics as described above. Another related problem is rearing its head as retailers look to international markets for continued growth. Although ecommerce will continue to outgrow physical retail in mature markets, sales growth is starting to plateau here too. To ensure continued growth, retailers will continue to expand into emerging markets by dipping their toes in ecommerce. However, ecommerce talent is even scarcer in developing online retail markets, so retailers are looking for ways to maximize their presence in these markets with the few resources available to them. This is where ecommerce outsourcing models are coming to the fore. Retailers are not only relying on outsourcers to manage their infrastructure, integration, and ecommerce platforms; providers are also expected to be able to supply the payment and fulfillment and logistics services in emerging markets, either directly or through partners. As such, there will be more movement toward full ecommerce outsource models from likely sources such as ecommerce platform providers, but also from traditionally logistics focused businesses moving into the technology space. With all players jostling for a piece of the services action, it is fair to say that retailers will become overwhelmed by the options available to them. Any provider that can pull all of these offerings into a single simplified approach will win out. For this reason, IDC Retail Insights believes that in the medium term, there will be a gradual consolidation of options. This will occur as providers learn what works best for their business and, more pertinently, as M&A activity creates integrated ecommerce stacks, and therefore single contracts. ESSENTIAL GUIDANCE The retail industry is in the midst of tremendous change, and with change comes opportunity. Technology is increasingly critical to business success, from better planning and execution behind the scenes to the technology that is exposed to the customer and creates differentiating experiences. To align technology investments with business priorities, IDC Retail Insights offers three core recommendations explained in the sections that follow.

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Invest in the "Four Forces" of Productivity

In the decade from 2000 to 2009, retailers improved their information technology, measured as spending as a percentage of revenue, by more than 25%. Investments in virtualization, low-cost offshore development, business intelligence (BI), and wired networking costs all contributed positively. It is important to distinguish productivity from cost cutting. Productivity is measured by output over input so investments should provide scale costs (input) while enabling a wide number of options for capturing business value (output). The productivity investments for this decade will revolve around what IDC refers to as the four forces mobility, social business, big data, and cloud. In fact, survey work completed in 2011 shows that investments by retail companies are already under way and that these investments will fundamentally change future cost models (again, the input side of productivity). Business value (the output part of IT productivity) can be less clearly articulated by IT organizations. Two things are clear. First, the line-ofbusiness executives (product sourcing, supply chain, merchandising, marketing, distribution, store operations, etc.) have an increasingly influential voice in what is being delivered. Second, the capabilities delivered will be at the intersection of the four forces, as shown in Figure 3. To understand Figure 3, think of the horizontal continuum as infrastructure. At one extreme are broadly applied resources (compute, storage, and networking) as delivered by the cloud, and at the other end are resources applied to a very specific domain, as we see with big data appliances or applications. The vertical continuum is application related, which stretches from those with an individual focus under the domain of mobility and those with an organizationwide focus under social business. Four essential capabilities are created at the intersection of these technology investments: eBusiness 2.0. At the intersection of cloud and social business is the opportunity to realize the promise of ebusiness. The hypeheavy discussions at the turn of the century were hampered by infrastructure cost models that were fixed and expensive as well as by the lack of a good mental model for interorganizational collaboration. Cloud (flexible infrastructure costs) and social (a collaboration model) provide the basis for revisiting ebusiness investments. Corporate application store. At the intersection of mobility and cloud is the emerging practice of building corporate app stores. The term consumerization has been overused, but the original intent applies here. Line-of-business employees are now used to

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having an application choice on their personal devices and will expect the same for corporate applications. Large IT organizations have been busy building service catalogs for their organizations, and IDC Retail Insights believes that quickly developed and free apps (and we used apps to distinguish them from applications) will be available in corporate app stores. The objective for the IT organization will be to encourage the consumption of back-end services through consumerlike apps. Automated processes. At the intersection of mobility and big data is the M2M movement. Here, corporate IT organizations in the retail industry will continue to look for ways to better instrument processes for data acquisition, monitoring, and even actuation. A wireless device in the hands of every employee and the costeffectiveness of wireless sensors constitute the mobility story. Being able to handle new volume, variety, and velocity of data is the big data part of the equation. Integrated business intelligence. At the intersection of big data and social business is a trend we have been following for several years and perhaps the most important capability that will be created for the intelligent economy. Integrated business intelligence is the evolution of past BI and data warehousing investments into decision environments that model behavior and allow the organization to engage the analyzed information to take better corrective and competitive actions. Retailers should have an investment plan not only for the four forces individually but also for the four enabling initiatives described above. If investment hasn't started, the company is already behind.

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FIGURE 3
Retail Initiatives from the Four Forces of Productivity

Source: IDC Retail Insights, 2011

Create a Vision and Investment Road Map for an O3 Platform

If the retail initiatives from the four forces of productivity (refer back to Figure 3) are intended to drive improvements in internal operations, the O3 platform (also built on the four forces; refer back to Figure 1) is what is exposed to the customer and enables the transformation to customer-centric retailing. Using our O3 platform as an architectural reference point, understand what your future omnichannel platform will look like. When evaluating the next logical step of gap analysis, be sure to take an honest assessment of the company's organizational, process, and technology capabilities. Transformation begins with getting the organization and process right before undertaking technology modernization.
Don't Forget the Importance of Being Genuine

Too often retailers embark on employing a new way to reach customers (social, mobile, etc.) but do so in a contrived way. The result is never good and often only serves to alienate those the effort was meant to reach. When devising technology to reflect the brand promise (assuming that promise is genuine of course), make sure that efforts to execute comply honestly to the mission.
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One way to assure this standard is met is to think about some new titles in the IT organization. Some interesting examples we have seen are: Social network anthropologist. An individual who observes the behavior of key consumer types and better informs efforts Scrummer. An individual who rapidly develops applications that encourage the consumption of back-end services that encourage interaction and build brand loyalty Sensortician. Like an electrician, but someone who wires processes with sensors for better data acquisition Data scientist. An individual who can see the unique patterns that lead to evidence-based differentiated experiences We realize that not all of these positions have a direct impact on your degree of genuineness. The important point is to rethink how you staff and augment those project managers, system operators, and application developers with personnel who know how to use the new tools. LEARN MORE
Related Research

Asia/Pacific Retail 2012 Top 10 Predictions (IDC Retail Insights #AP9140605T, December 2011) Business Strategy: How to Win and Keep More Customers by Excelling in Omnichannel-Driven Order Management and Fulfillment (IDC Retail Insights #GRI229602, August 2011) Perspective: Top 10 Recommendations for the Holiday Season (IDC Retail Insights #GRI229659, August 2011) Business Strategy: The RRM 2.0 Manifesto Omnichannel Price, Promotion, and Offer Optimization (IDC Retail Insights #GRI228477, June 2011)

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Synopsis

This IDC Retail Insights report presents the 2012 top 10 predictions for the retail industry. Bob Parker, VP of Research, said, "2012 begins with the continued momentum from ongoing improvement in consumer confidence. However, the recession has made a lasting impact on business models, and retailers will have to use technology as a key mechanism for adapting their business models and becoming more customer centric."

Copyright Notice

Copyright 2012 IDC Retail Insights. Reproduction without written permission is completely forbidden. External Publication of IDC Retail Insights Information and Data: Any IDC Retail Insights information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Retail Insights Vice President. A draft of the proposed document should accompany any such request. IDC Retail Insights reserves the right to deny approval of external usage for any reason.

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