Are retailers spending enough on their IT?
As we all know, retailers traditionally have spent less on IT compared to other industries and enterprises of a similar size.
In the past, it was for good reason.
Other sectors like finance and healthcare rely heavily on technology for their core operations and risk management. Banks need top-notch IT for secure transactions, while healthcare relies on IT for patient records and life-saving equipment.
Retail, on the other hand, focused more on physical store operations and customer service, where IT played less of a central role. Retailers didn't face the same level of regulatory pressures as other industries with strict data security and privacy requirements, nor did it handle much sensitive customer data.
Retail is also a volume-driven and highly competitive sector with significant operational costs and price sensitivity, and slimmer margins compared to other sectors. This leaves less room for significant IT investments, especially when measured against competing demands from inventory, store rents and staffing.
And retailers were often slow to adopt new technologies because they didn’t yield high returns. Business changes were more gradual and often driven by consumer trends rather than technology.
So what has changed?
It was only with the advent of new technologies like mobile apps, ecommerce and digital marketing that IT become a game-changer in retail.
Retailers learned to be agile and invest in technology for competitive advantage during the pandemic and are starting to embrace that agility as new technologies like generative AI become mainstream.
Now retailers are focussed on finding the right systems and partners to rebuild their business from the bottom up. They’re building a customer-centric approach to retail using technology and experiences to enhance the brand, drive sales and grow loyalty.
The most forward-thinking and ambitious retailers know that they need to do it quickly. Nearly one in five retailers have posted negative economic profit since 2015. And while the retail sector has created value over that time, the gap between winners and losers is widening, with the top 10% of publicly traded retailers now accounting for 70% of the sector’s economic profit.
Retailers that are aggressive on growth - creating distinctive omnichannel customer experiences and expanding the breadth of their product offerings, while also resetting their cost base - are the companies that will create value, meet customer needs and head off competition.
And that means retailers are now as dependent on technology as other industries for their survival.
How much should retailers spend on IT?
The simple answer is it depends. There’s no one-size-fits-all solution and the right number depends on a retailer’s specific circumstances. It can vary greatly by retail category, company size and growth stage.
Our anecdotal experience suggests that most retailers spend only 1-3% of their revenue on IT, although one study found that retail and ecommerce IT spend was 10% share of company revenue in 2023 (up from 7% in 2022).
This is still low compared to other industries such as software, tech hosting and financial services, which dedicate 19%, 16% and 15% of revenues respectively.
These industries, of course, have different business models with significant investments in R&D. We’re not suggesting retailers need to invest at these levels, but they do need to scale their IT spend for opportunities that make their businesses stronger, smarter and ready for the future.
What are the problems retailers experience when they underspend?
There are 8 indicators that can mean it’s time to assess your level of IT spend:
1. Things just don’t work smoothly
Retailers who don't spend enough on their IT infrastructure may face hardware malfunctions, software crashes and other technical issues that disrupt business operations and negatively impact customer experience. Legacy systems can be less efficient, more vulnerable to security breaches and don’t integrate well with newer technologies.
2. Customers are frustrated
Today’s consumers expect a seamless shopping experience, whether online or in-store. Inadequate IT infrastructure can result in slow service, unavailability of products, discrepancies in pricing and a disjointed omnichannel experience, all of which lead to disappointment and frustration, a lack of trust and even a sense that your organisation is dysfunctional and incompetent.
3. Growing pains
Retailers with outdated or poor IT systems may find it difficult to scale their operations effectively. As the business grows, systems can become a barrier, hindering expansion and adaptation to new market demands.
4. Data, what data?
The inability to collect, analyse and act on data due to poor IT infrastructure can leave a retailer behind in understanding market trends, consumer behaviour and inventory needs. That means missing out on insights that could drive business growth and operational efficiency.
5. Security, what security?
Inadequate security measures and a lack of robust data privacy protocols are signs of underspending. Retailers need to invest in IT to protect customer data and comply with privacy laws. Failure to do so can lead to data breaches, legal issues and a loss of customer trust.
6. Compliance and regulatory challenges
Retailers are subject to various regulations, including those related to data protection and privacy. Insufficient IT investment can lead to non-compliance with these regulations, resulting in fines and damage to the company’s reputation.
7. Employees aren’t happy
Working with outdated systems can be frustrating for employees, leading to decreased morale, lower productivity and higher turnover rates.
8. Sales decline
With all these issues, sales and profitability can dip. Customers may choose competitors with better service and technology, and the retailer may incur additional costs due to inefficiencies and security breaches.
When is it time to increase your IT spend?
If your retail business is focused on any of the following goals, you’ll want to increase your IT spend as a percentage of revenue, at least in the short term:
Transforming into digital-first business: Retailers are implementing omnichannel strategies to make shopping a fast, easy and compelling omnichannel experience with personalised products, prices and promotions pre, during and post their purchases, plus fast and frictionless on-demand delivery options.
Meeting changing customer expectations: Changing consumer preferences and rising expectations for speed and convenience are creating new growth opportunities. The retailers that deliver a personalised and memorable CX are best positioned for long-term growth and loyalty.
Developing new business models: Retail leaders are improving and expanding their traditional products and services and launching in new, but related, market segments. Technology is blurring industry lines and allowing different operators – including retailers – to move into services such as media, healthcare, finances, travel and entertainment.
Improving operational efficiency: With increasing costs, pressure on consumer spending and the cost of doing business on the rise, there will be more consolidation and business failures. Retailers recognise that investing in technology now will lead to long-term cost savings, even if it means a higher short-term spend. It’s about making things run smoother and more efficiently, which cuts costs down the road.
Want help to find the right systems to build your unified commerce business model?
We can help you build a foundation for operational efficiency and continuous, innovative growth. Just contact me at kelly.brown@triquestra.com or get in touch.
For insights into how a unified commerce approach gives you the flexibility and agility you need to keep in step with consumers’ changing needs, download our ebook:
