Gartner Says Retailers Must Use Algorithms for Competitive Advantage

In the new digital economy, retailers can best gain competitive advantage through the application of algorithms that reduce costs and grow top-line revenue, according to Gartner, Inc.

Kelsie Marian, principal research analyst at Gartner, said examples of algorithmic retail in action are emerging and yielding results for aggressive retailers.

"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," said Ms. Marian.

"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."

Gartner describes algorithmic retailing as the application of big data through advanced analytics across an increasingly complex and detailed retail structure, to deliver an efficient and flexible, yet unified, customer experience. Algorithms connect big data to results.

Gartner predicts that merchant leaders will be algorithms by 2020, prompting the top 10 retailers to cut up to one-third of headquarters merchandising staff.

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

1) Cost of goods sold

Cost of goods sold is the largest cost of retail operations at 55-60 percent. 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 top-line revenue.

2) General and administrative

General and administrative is an overhead at 15-18 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 optimization.

3) Labor

Labor represents 13-16 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 optimization and customer service.

4) 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," said Ms. Marian.

Gartner advises retail sector CIOs to:

1) Identify and classify all data sources, and identify data gaps that must be filled.

2) Prepare for an explosion of Internet of Things (IoT) data generated by products, customers and stores.

3) Review examples of how other retailers are successfully using algorithms.

4) Develop a framework for identifying current and future opportunities to improve performance through automation by algorithms.

5) 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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