On a mild Thursday in early June this year John Fletcher, the commanding officer of Australia's second-largest retail giant, Coles Group, was incensed - he'd just read a damning article in The Australian Financial Review about the state of his company's technology systems. "Coles still has no automated stock ordering and stock replenishment systems and is doing most things manually, leading to frequent instances of stores being out of stocks," the article said.
The newspaper's Chanticleer columnist, Alan Jury, went on to write that the already tough job of Coles' chief information officer, Peter Mahler, had been further complicated by "internecine" internal power struggles between his unit and
Fletcher did not waste any time at all firing back.
"Your claims of information technology bungles and cost overruns are without basis," he wrote in a letter to the editor published the next day, noting some technology projects had been delayed to bring other initiatives forward.
"To paint this business decision as an 'IT bungle' is an unfair and inaccurate slur on a team of hard-working IT professionals who have successfully delivered one of the biggest technology transformations ever seen," Fletcher wrote.
In the cut and thrust of the daily public arena, such an exchange is not uncommon. However, the fact that Fletcher felt it necessary to personally respond to the criticism goes some way towards demonstrating just how important technology is to Australia's retail sector.
Such exchanges had focused on industries such as financial services or telecommunications, where technology enables companies' most basic products and services. Now that dependence on technology has moved into retail.
Australia's largest retailers are following international counterparts such as Wal-Mart in making internal IT systems top priority, especially as they relate to supporting supply chains. The sector has moved on from seeing IT as a basic business enabler and is now focused on using technology as a tool to drive competitiveness.
Woolworths leads the way
Gartner principal research analyst Derry Finkeldey says his firm typically characterises Australian retailers as technology followers.
"While interested in knowing what international retailers are doing and best practices, they tend to be risk-averse and will invest in proven technologies when it comes to the adoption of solutions," she says.
It's only in the past eight years that the sector has started to take technology seriously, following pioneering reforms of retail leaders such as US-based Wal-Mart and Britain's Tesco, which have been investing in the area for at least the past 15 years.
Within Australia, there is a secondary hierarchy at play: Woolworths out front, followed by the rest.
If there's one thing most of Australia's retail CIOs agree on, it is that Woolworths has stolen a march on the rest in terms of technology use and is fortifying its position as leader of the pack. The company says it saved $9.3 billion through its Project Refresh initiative, which began in 1999 and had a substantial technology component.
Back in 1999, Woolworths' IT operation was not well regarded in the company. But all that changed with the appointment of Roger Corbett as chief executive.
Corbett introduced radical changes, focusing on growing business steadily, but also using technology and other measures to take billions in expenses out of the retailer's bottom line.
Financial analysts still cite the program as one of the main factors behind Woolworths' success over the past decade. One indicator of the results is that the company's share price has risen from about $5 in 1999 to above $30 today - a more than 500 per cent return in just eight years.
Woolworths' current CEO, Michael Luscombe, recently heaped praise on several systems that have been key to the development: inventory and stock management solutions StockSmart and AutoStockR (internally developed after the company's previous supply chain vendor i2 Technologies hit the wall in 2003).
The development of these systems is a landmark in the Australian retail sector, and most other retailers are looking to emulate Woolworths' success by consolidating their inventory and stock management into more sophisticated technology.
Gartner's Finkeldey says retailers will continue to focus on improving internal processes for productivity and cost efficiency, including from their supply chains, which typically reach into Asia. Retailers are also looking to benefit from recent IT investments made to improve supplier lead times and reduce "out of stocks".
"Most retailers in Australia still have 10 to 20-year-old point-of-sale solutions but baulk at the total cost of ownership of replacement," Finkeldey says. She notes that retailers want to deal with local suppliers, of which there are few. "At some stage, they will have to bite the bullet," Finkeldey says.
Woolworths is now focusing on implementing a common point-of-sale system across its retail properties, as well as extending AutoStockR. This, too, is a move others will follow.
Former Woolworths chief logistics and information officer Stephen Bradley has been in charge of much of the work, but with one of Australia's largest and most successful technology transformations under his belt, he has left Woolworths in the hands of interim CIO Daniel Beecham.
In some respects, Woolworths doesn't have to do much talking about the success of Refresh - others will happily do so.
"Woolworths are the standout. They've done an amazing service for IT in retail," Harvey Norman CIO Kaine Escott says. He adds that the company's example gives him ammunition to convince some within his business about the value of IT in retail.
Myer IT director Timothy Clark agrees: "Woolworths has done an amazing job with optimising their supply chain."
Harvey Norman and Myer are two examples of smaller companies that are trying to bring their systems up to speed with the pace that Woolworths' Beecham and his team have set.
Coles has been supplying some IT services to Myer since the latter was separated out in a buy-out by corporate raiders Texas Pacific Group and Newbridge Capital and the original Myer family's company in March last year. However, Myer has signed a five-year outsourcing deal with IBM to wean itself off its former parent.
In addition, Myer's $99 million merchandising system went live in June and the company has made the transition to its own payroll and SAP-based financial systems, in addition to re-engineering its supply chain. Myer's next step is to detach itself from Coles' IT operation early next year and roll out a new point-of-sale system across its stores nationwide.
Clark says Myer isn't a technological leader in the retail field but that recent investments will push the group along. He says senior management recognises the importance of IT.
At Harvey Norman, Kaine Escott joined the company in late 2005 as its first CIO. The position was never going to be an easy one; company co-founder and chairman Gerry Harvey is known to be sceptical about the value of technology.
But Escott and his team are doing much to change internal attitudes. They have an ambitious plan to rework Harvey Norman's operations across the nation. Unlike larger retailers, Harvey Norman is structured as a franchise, which means much of Escott's job is to provide tools that the company's savvy franchisees can take up if they want to.
"Franchisees have a lot of choice," he says. But some things remain centralised. For example, Harvey Norman mandates which point-of-sale system will be used. It is consolidating data across operations to provide better intelligence to its franchisees.
Traditionally, Harvey Norman has seen logistics as a problem for its many suppliers to handle. But Escott says this is changing and the company now recognises the potential to take costs out of the supply chain.
One key move by Escott's team is the implementation of the ITIL (IT infrastructure library) service management framework across the business.
Other players, such as David Jones and 7-Eleven are engaged in similar initiatives but declined to go into detail for this article.
Then there is Coles Group. Australia's No. 2 retailer is a basket case of conflicting interests, due to its pending $19 billion takeover by Wesfarmers, itself a significant retailer through its Bunnings chain.
Despite ongoing criticism of Coles for not being at the same advanced stage as Woolworths, the group has achieved much in the five years since its major technology change program kicked off in 2002.
"When we began this transformation, the business was dealing with a maze of disparate systems, which were mostly a legacy of the way the company had grown over time through mergers and acquisitions," CIO Mahler says.
He says that in the past Coles developed most of its systems in-house, which resulted in little flexibility for modernising applications and not much agility to accommodate changing business needs. However, the IT group now has a philosophy of buying software off the shelf and modifying it to suit their needs, and is working more intimately with the business.
"The days of [IT] getting isolated requests for programming and then tossing the code back over the fence for the business to deal with are long gone," Mahler says.
Coles' five-year plan from 2002 involved more than 145 major projects. The initiative included not only supply chain developments and applications specific to its brands (such as Coles and Kmart) but also back-end and enterprise resource planning systems, and infrastructure upgrades affecting the group's communications. Coles is also modernising its data centre.
"There has been a large investment over five years and most projects have landed on time and under budget," Mahler says.
He admits that five years ago Coles was in catch-up mode to its local rivals, but says today the company is ahead in some areas and quickly catching up in others.
Finkeldey says retailers are looking to improve their use of data about customers. And the Gartner analyst says that isn't just about customer relationship management software, which is not finding much traction among retailers.
Mahler agrees that customer information systems will be very important.
"Gaining a picture of who the customers are and how they behave is critical, and not as easy as you might think," he says.
"We are getting into cluster analysis, trend analysis, being able to forecast changing customer demands, and not just by season, but by week and day of week. There is a lot we can learn from other industries such as airlines, hotels and casinos."
Myer's Clark believes there is no major retailer in Australia that is matching international leaders such as Tesco or US supermarket chain Kroger when it comes to the use of information technology, particularly in customising offers based on an individual's buying patterns or trying to increase average transaction value.
Finkeldey says retailers will slowly introduce wireless technologies that will allow personal digital assistants to be used for stock counts and associated services, but most retailers are yet to develop mobile/wireless strategies, and those that have use them cautiously.
The much-hyped radio frequency identification tags being used tentatively in sectors such as defence are still a long way off, Finkeldey says, although companies such as Myer are flirting with them.
According to Clark, retailers will increasingly move into the online environment, which has so far been underdeveloped in Australia.
"Marks & Spencer [in Britain], from my understanding, had a very, very good online Christmas in 2006," he says. "They've had an online presence for probably three years that's now starting to gain acceptance. So I think that's another area that unquestionably is going to get some greater focus in the marketplace."
Harvey Norman's Escott sees self-service kiosks becoming an area of greater focus for retailers, particularly in areas such as photography and music services. The retailer is planning to conduct some pilots in the area before the Christmas season.
Australia's retail sector CIOs know they are facing the same challenges as their counterparts across the globe.
"The world is a small place and retailers talk and work with one another, especially ones that are not in the same geographic area," Coles' Mahler says.
He notes that just a few years ago it was common for Australia's retailers to visit international counterparts to learn. That still happens, but "today we have people coming to Australia to see our applications and technology in production", too.
Retail's high-tech armoury
* Woolworths kicked off a new phase in the use of technology within Australia's retail sector in 1999 with its Project Refresh initiative.
* Others such as Coles have followed, and have achieved success within their own technology change programs.
* Australia has, in the past, been behind the rest of the Western world in the sector but is rapidly catching up.
* The consolidation of inventory and stock management and merchandising systems within the sector is a priority, in addition to the replacement of ageing point-of-sale systems and continued optimisation of supply chains.
* In the future, the sector will probably focus on systems that will allow it to get more information about its customers. Companies will also flirt with wireless IT, web retailing, self-service kiosks and more.
The hygiene factor
Myer IT director Timothy Clark says CIOs need to get the basics right in their organisations before they can expect to play a part in wider strategic issues. "You've got to earn your stripes at the hygiene level first of all, in an organisation," he says.
"Most organisations, first and foremost, want to make sure the lights are on, that issues are managed seamlessly and reliably. And once you get the core hygiene issues right, then you start to move into playing a greater strategic role across the business."
Once CIOs have done that, Clark says, they have built some credibility and have bought a ticket to play the more strategic role of helping create differentiation.
Coles CIO Peter Mahler says the relationship between the retailer's IT department and business is much more complicated than in the past.
"In Coles, technology requirements are defined by the business and IT working together, based on the business's strategic objectives," he says.
"On major technology changes, [those of us on the IT team are] in a unique position to use our inherent process and analysis skills to guide the business in their thinking about managing change."
At Coles, IT workers are represented in management at all levels. The process isn't always easy but Mahler says his staff has done a good job.
"I think the IT team we have here at Coles has been exceptional for its ability to be real business partners and to be flexible as they help deliver the strategy."
© Fairfax Business Media
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