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Capital Investments

BY Jim Hogan

Ever since the financial crisis, consumer confidence has labored to regain strength, and spending has been correspondingly subpar. So it’s not surprising that retailers have been extremely reluctant to make big capital outlays. But now there are signs that consumers are loosening their purse strings and, as they do, momentum is building among retailers to renew capital spending on certain projects. For some, today’s low rates make this an ideal time to secure financing; however, some struggling retailers may need creative financing solutions to access the capital they need.

According to the latest results from the GE Capital U.S. Mid-Market CFO Survey, a bi-annual survey of 500 middle-market CFOs, 39% of retail CFOs surveyed expect to increase capital expenditures in the next 12 months. This is more than any other industry in the survey and almost double the number from the beginning of the year. The survey of finance chiefs also found that retail is the most likely to see increased financing needs in the next 12 months. That bodes well for the overall economy considering that middle market retail finance respondents have, on average, revenues of $150 million and 1,235 employees.

Without question, challenges persist for many retailers. In fact, middle-market retail CFOs in the GE Capital survey were the least positive of all industries about both the global economy and their own industry. A hefty 33% expect profits to decline over the next 12 months, an increase of 17 points from the previous survey. Another area of stress for some retailers is the availability of credit: 12% are having trouble lining up credit. That’s not a huge number, but it’s up substantially from 8% earlier in the year.

Given this muddled picture, why are investment expectations spiking so significantly — from 20% to 39% in a six-month period? It’s always difficult to pin down universal causes in an industry as diverse as retail, but there are some themes that seem to be, at least anecdotally, driving investment spending. For instance, after years of deferred capital outlays, many retailers can simply no longer delay certain projects — such as refreshing stores that have grown worn and out of date. Further delays risk turning off customers in a fierce competitive environment.

IT Integrations: Another big driver of capital spending is linked to online sales. Information technology (IT) integration projects that tie together websites, physical stores, warehouses and distribution have become business critical for many retailers. Today’s consumers expect robust websites where they can research items, check availability and easily place an order. These sites must be integrated on the back end across the enterprise to create maximum flexibility for the consumer and efficiency for the business. If a consumer orders an item online and chooses an in-store pick-up, the company needs sophisticated point-of-sale technology that integrates warehouse distribution with stores.

Smaller Stores: The trend toward online sales is also impacting spending on new stores. With so much purchasing occurring online, some retailers with large-store formats are beginning to experiment with smaller spaces with less inventory; this strategy leverages a trend among consumers to use store visits as part of their research before making their actual purchases online. For retailers, these smaller, leaner stores are a way to quickly and efficiently expand their geographic footprint, while relying on centralized data warehouses to fulfill online purchases.

More companies are also investing in energy-efficiency improvements. Some of these projects are driven by legislation, but more often companies are undertaking them voluntarily as a strategy to lower costs in the medium term. For instance, many lighting upgrades now have a payback in just 18 months, which makes them attractive to corporate leadership.

Financing Solutions: All these projects cost money — sometimes substantial amounts. Many retailers have ample access to credit, but some are not as fortunate. As noted, the survey found that an increasing number of retail CFOs are having trouble lining up financing.

Lenders are aware of these challenges, and some are stepping up with solutions. One creative arrangement that’s proving popular is to finance the estimated liquidation value of new equipment instead of financing an entire purchase. So if a company is buying $10 million worth of service vehicles with a liquidation value of $7 million, it might secure $6 million against that liquidation value; that’s far from 100% financing, but it does offer valuable liquidity.

Given the results of the latest survey of mid-market CFOs — as well as various recent consumer surveys — the retail industry appears to be turning the corner. After years of holding the line on spending, there’s an overwhelming need to invest in an array of capital projects. Some CFOs may delay investments into early 2013 to see how the new Congress resolves the fiscal cliff, with its toxic mix of tax increases and spending cuts. After that, retail investment spending may really begin to gain momentum.

Jim Hogan is senior managing director at GE Capital, Corporate Retail Finance, a leading provider of senior secured loans to retailers in North America, supporting working capital, growth, acquisitions and turnarounds (gecapital.com/americas).

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Focus on: Loss Prevention

BY CSA STAFF

Total losses attributed to retail shrinkage hit $34.5 billion last year, “positioning retail crime as the largest form of property crime,” according to Dr. Richard Hollinger, professor of criminology, law and society, University of Florida, Gainesville, Fla. And it shows no signs of easing anytime soon. Indeed, the rate of shrink remains on a five-year climb, according to the Loss Prevention Research Council (LPRC), Gainesville, Fla.

But retail shrink is now challenging retailers in new ways. Traditionally, chains have focused their shrink reduction efforts on such internal and external loss factors as shoplifting, employee theft and, particularly in recent years, organized retail crime. Today, however, operational factors — including returns, gift cards, maintenance of raw materials and perishables — and merchandise movement across the supply chain are also viewed as contributing to shrink levels. And as retailers integrate more in-store digital touchpoints to support their customer engagement strategies, they are creating even more opportunities for loss (see related story).

Industry experts say the key to combating all these varied loss factors is to tightly integrate the loss prevention team into IT planning — especially as chains begin implementing more customer-facing digital solutions.

“LP needs to be at the table at the planning stages of any IT project,” said Joe LaRocca, VP loss prevention, National Retail Federation. “LP can look at these proposed technology solutions, and share thoughts on potential ways criminals will try to crack systems or intrude into software.”

Some retailers are already integrating the expertise of loss prevention teams into information technology planning. Gap Inc. is one company that is bullish on the value of aligning the two groups. By merging the expertise of the chain’s IT and LP teams, “Gap is improving returns management, exception reporting and source tagging order management processes,” according to Orlaith Murphy, senior director, loss prevention, Gap, San Francisco.

Apparel retailer bebe stores takes this strategy one step further. The company is leveraging its LP team’s operational expertise, a move that will create a cross-functional team that focuses on loss prevention, field marketing, inventory management and revenue as a whole.

“We need to work smarter, not harder, so we started tapping our team’s different skill sets,” explained Brent Hamlin, senior director of loss prevention, bebe stores. “In our case, one executive was taking financial courses; another was proficient in SQL coding. By discovering those specific tasks, you improve operations,” including loss prevention strategies and decisions.

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Making the Customer Connection

BY CSA STAFF

Getting closer to the customer has always been important to retailers, but never more so than it is today. Chain Store Age spoke with SAP’s Lori Mitchell-Keller about the transformational shifts that are shaking up the retail model.

All the buzz today is about how retailers need to get closer to the customer, but what exactly does it mean?

It means understanding customers for who they are, what they want to buy, what they already did, how they want to interact with the retailer, which channel they prefer, and what motivates them to spend their money with you.

It’s really about experience management. The experience that a customer has should be the same whether its in-store, on the website or via a mobile device. They should feel comfortable with the brand and with their ability to find what they need, access assistance when needed and make a purchase easily. Underneath all this are the tools that harness the customer knowledge and drive the experience, including big data and social network analysis tools.

What is it about the current environment that makes getting closer to the customer so important?

Every so often we see a significant shift that really shakes up the retail model. We all remember the days where retailers and advertisements told consumers what we wanted. Now, as consumers, we have the power to demand what we want from retailers. We’ve just started to work our way through another significant shift prompted by the increase in transparency of pricing and offers. Customers not only demand specific items; they now demand those items at certain price points, via specific channels, delivered via the method they want. To stay in the game, retailers must use the customer knowledge to match these demands. If they can’t, the consumer will simply move on to another retailer that can.

What is the biggest challenges retailers face in becoming more connected to the consumer?

Understanding the shopper and providing products in the right place, at the right time and at the right price. By utilizing big data tools and feedback from consumers, retailers can more easily meet expectations.

How can technology help retailers in this regard?

The right technology tools can help retailers pare down and analyze customer data, get more granular and then define proactive campaigns to maximize customer interactions across all channels — a true multichannel approach based on real data. This strategy — combining the power of predictive analytics with the ability to personalize the shopping experience for individuals — is the key to getting closer to the customer, driving purchases and increasing revenues.

What type of solutions/tools does SAP Retail offer for helping retailers connect better with customers?

SAP Precision Retailing is a new cloud-based enterprise solution, powered by SAP HANA, that helps retailers influence consumer shopping behavior at the point of decision by delivering one-to-one personalized offers in real-time across channels, such as mobile devices. Using customer data and geo-location, retailers can share customized offers with consumers at the exact point when the consumer is primed for purchase. Also, mobile tools, such as the SAP Retail Store Ops Associate app, can empower sales associates to close more sales. It provides real-time insight to product information and inventory, in order to answer nearly any question a customer might have.

What role do things like personalized promotions, m-commerce and social analytics play in this?

Social analytics help retailers define consumer trends in order to maintain an optimal inventory. Personalized promotions then help inform the consumer about offers and availability based on their individual demands. Finally, m-commerce enables customers to pay, buy, bank and remit money from mobile devices, offering the ability to buy how and when it suits the customer.

How does SAP see all this evolving?

We envision retail without boundaries, where technology continues to evolve as consumer demands change. As consumers rely more on technology tools, especially social and mobile ones, the information available to retailers will grow, and interactions will become more personalized.

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