How aggressive retailers are using algorithms to beat the competition

Data is ubiquitous in the new retail environment, and retailers will survive only if quality data is embedded into every decision across the retail organisation, says Gartner analyst Kelsie Marian.

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Complex algorithms were once the domain of scientists and academics, but with the advent of digital technologies, the IoT and smart machines, retailers will be able to use algorithms to improve business results

Kelsie Marian, Gartner

In the new digital economy, retailers can best gain competitive advantage through algorithms that help reduce costs and grow topline revenue, reports Gartner.

"Retailers are some of the original data hoarders, using years of store-level sales data for demand planning since the mid-1980s, but what we see today is vastly different," observes Kelsie Marian, principal research analyst at Gartner.

"Data is ubiquitous in the new retail environment, and retailers will survive only if quality data is embedded into every decision, minute by minute, across the retail organisation. But retailers can't humanly scale to keep pace with growth of data, so a fundamentally different approach is necessary,” says Marian, who spoke at the Gartner Symposium/ITxpo in the Gold Coast.

Gartner says smart machines are an emerging "super class" of technologies that can perform a wide variety of work and add great value to business processes.

“Algorithmic retailing supports the evolution of unified retail through smart data discovery that paves the way toward analytically driving every decision and leveraging smart machines for productivity and detailed understanding,” says Marian. “Algorithms are required for the execution of opportunities coming from big data.”

Gartner says there are four main functions where algorithms can have a big impact in retail.

Cost of goods sold

Cost of goods sold is the largest cost of retail operations. Since it is driven by the selection, assortment, pricing, promotion and inventory levels of items listed for sale, it has the largest possible benefit from the application of algorithms. Algorithms can both reduce the cost basis and increase topline revenue.

General and administrative

General and administrative is an overhead at 15 to 18 percent of the cost of retail operations. It typically covers headquarters activities such as finance, legal, HR, advertising and IT, as well as warehousing and distribution. Algorithms used here will significantly improve cost optimisation.

Labour

Labor represents 13 to 16 percent of the cost of retail operations, but is rising sharply, and directly impacts the quality of the customer's experience. Algorithms can support both cost optimisation and customer service.

Stores

Stores will remain a major cost of retail operations and an integral part of the retail landscape. They provide a major source of competitive differentiation for multichannel retailers, with store services much of what employees provide to customers. Algorithms can help with pricing, inventory and improving the in-store customer experience.

"Retail CIOs and their teams play a pivotal role in helping business leaders understand the benefits and limitations of algorithms, and how algorithms can support their business goals," says Marian.

Gartner advises retail sector CIOs to:

Identify and classify all data sources, and identify data gaps that must be filled.
Prepare for an explosion of Internet of Things (IoT) data generated by products, customers and stores.
Review examples of how other retailers are successfully using algorithms.
Develop a framework for identifying current and future opportunities to improve performance through automation by algorithms.
Ensure that smart data discovery technology is bringing big data discovery to the business user at the time of decision. This is a critical step on the path to process automation.

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