Newly private, retailers re-up tech investment

NATIONWIDE RT REPORT —It used to be that when retailers, particularly food retailers, wanted to boost business, the sure-fire solution was a quick store remodel or other cosmetic improvement to let people know that things had changed. But these days, with the high incidence of retail assets landing in the hands of private equity firms—most of which are flush with cash and not afraid to spend it—the investment du jour is cutting-edge technology.

“I think if you look at many of the recent private equity transactions, whether it’s Toys ‘R’ Us, Michaels or Burlington [Cost Factory], in all those cases systems improvements were high up on the agenda,” said Scott Friend, a venture partner with Bain Capital Ventures.

The reason most retailers need an upgrade in technology when they go private varies. Sometimes they have financial problems prior to a buyout that prevent them from investing in new software or system upgrades. Other times, they’re too focused on technology that saves them money in one area of their business but not others.

“You see a lot of retailers that invest in the supply side of the business to save money on the back end,” said Friend. “But a lot of them don’t focus on technology that can produce better profits by making their stores operate more efficiently.”

That’s why many private equity firms find themselves upgrading to new systems that improve the in-store experience. David Boyce, senior vp of product strategy for Oracle Retail Group, said one in-demand product is price optimization software that tracks inventory and helps retailers merchandise their store more effectively. Retailers like The Children’s Place and Jones Apparel have used these programs to determine what customers are buying in each store so that they can allocate and price merchandise according to demand.

“An application we see these companies using a lot is inventory and price optimization programs,” said Boyce. “It helps retailers track what’s selling in each store and what isn’t and that helps them phase out products at the right time.”

Boyce said better technology isn’t a cure-all for any retailer but said knowing when to cut prices on a specific product or give others prominent placement goes a long way to taking the guesswork out of merchandising. “Retailing is a mix or art and science and pricing software is what makes the science more effective,” he said.

But rolling out new software throughout a large chain takes a significant investment in time and money and many chains that go private have problems that make those kind upgrades difficult. “A lot of the time, a retailer is too busy just trying to remain solvent to worry about system upgrades,” said Boyce.

Or it’s sometimes a case of a retail division not getting enough attention from its parent company. When Target sold Mervyns to a group of investors headed by Cerberus Capital Management in 2004, the newly private clothing chain received a much-needed makeover that included store remodels and the overhaul of its in-store technology system.

In an interview in 2006 with Retailing Today, Mervyns executive vice chairman Vanessa Castagna said investing money in-store technology was key to improving the chain and talked about a “monumental information technology platform” being rolled out in stores.

“We will be transferring information to our suppliers in a more efficient way and it will facilitate assortment planning to help us stay in stock,” said Castagna. “Also, the customer will get through lines faster because our POS registers will be changing and we can get her in and out quickly. And we’ll have better data that we can use to better serve our customers, be it for in-stocks or for new seasonal products.”

There are also recent examples of new management taking over a chain and investing millions of dollars in new technology to improve it. As the majority owner of the Pathmark supermarket chain in 2005, Ron Burkle poured close to $150 million into improving the chain in a revamp that included installing TVs at cash registers.

Longs Drug Stores was saddled with declining sales when a new management team came on board in 2003 and launched a five-point turnaround plan that included a $50 million investment to overhaul its supply chain and in-store software systems. Since then, Longs has rebounded and attributes its turnaround in large part to its upgrades in technology.