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TDWI Upside - Where Data Means Business

Are You Ready for Algorithmic Retail?

The algorithms are coming. According to Gartner, "algorithmic retail" will overtake and transform the retail market by the year 2020.

The algorithms are coming. Maybe not today, maybe not tomorrow, but probably in the next few years. According to market watcher Gartner, "algorithmic retail" will overtake and transform retailers as soon as the year 2020.

Gartner predicts the most immediate effect of this transformation will be that the top ten retailers will cut their merchandising staff by up to one-third. "Merchandisers" are the human analysts who make decisions about which products to sell, arrange product assortments, design planograms and store layouts, and own the buying and inventory.

According to Gartner, the transition to algorithmic retail will permit retailers to reduce costs and grow their revenues with much less human oversight, analysis, and planning.

Retail Data Ready for Revolution

Retail is ripe for algorithmic transformation because retailers are awash in data. Thanks to new data storage, data processing, and data analysis technologies, retailers can finally do something with this data. "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 Kelsie Marian, principal research analyst with Gartner, in a prepared release.

"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 organization."

The challenge retailers face is a familiar one, Marian said: "[R]etailers can't humanly scale to keep pace with growth of data, so a fundamentally different approach is necessary."

Enter "algorithmic retail." Gartner says algorithms will transform retail in four key ways.

1: Cost optimization: Algorithms will improve retail cost optimization, increasing top-line revenues and helping retailers slash the cost of goods sold, which accounts for up to 60 percent of retail operating costs.

2: Cutting overhead: Second, algorithms will help retailers cut into general and administrative overhead costs, which account for 15 to 18 percent of retail operating costs. This category includes domains such as finance, legal, HR, advertising, and IT, along with warehousing and distribution, Gartner says.

3: Labor optimization: Algorithms will permit retailers to optimize their labor costs, which account for between 13 to 16 percent of operations -- and are increasing steadily.

4: Store-level optimization: Retail stores are and will continue to be an important competitive differentiator for retailers, Gartner says. At the store level, algorithms will permit retailers to optimize pricing and inventory as well as help them enhance the in-store shopping experience for customers.

Retail CIOs have their marching orders: remake their organizations to best exploit the algorithmic revolution. According to Gartner's Marian, CIOs have an especially important role to play in "helping business leaders understand the benefits and limitations of algorithms, and how algorithms can support their business goals." With algorithmic innovation increasingly associated with the elimination of human skill, oversight, and jobs, they're going to have their work cut out for them.

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