Between them SAP and Oracle have spent in excess of $1.3bn in the past year buying specialist retail IT companies – but is that what the customers want? And does it worry the competition?
A year ago, the two were hitting the retail IT headlines in their very public battle over who would buy Retek, a specialist US IT vendor with a highly regarded product and a customer base of blue chip retailers.
SAP had started with $8 a share but Oracle ultimately claimed the prize at $11.25 – a total of $670m – not a bad result for shareholders when the share price before the SAP bid had been $6 and Retek’s turnover was $174m. So what did Oracle hope to gain? The answer lies as much in the retail sector itself as in SAP’s and Oracle’s ambitions.
Enterprise resource planning started life as a manufacturing concept – one which many retailers still consider irrelevant to them.
Top retailers tend to believe they know best when it comes to running their businesses and most took to IT early.
They have developed bespoke applications that most believe provide them with solutions uniquely tailored to their particular business. As a result ERP penetration in the sector is particularly low.
Analysts agree that ERP spending in retailing is low but growing. AMR Research suggests it will reach $9.3bn by 2009. “Retail is furthest behind in ERP,” says Scott Langdoc, vice-president at AMR responsible for the retail industry. “Both SAP and Oracle want to be the primary choice.”
He adds: “A concern is that in their frenzy to acquire more companies, both will become preoccupied with integration rather than innovation.
“In the past, retailers have proved resistant to buying commercial packages. As a result they’re sitting on a lot of bespoke applications. The better ones realise they can blend these with commercial projects to gain competitive advantage.”
Peter Kabuth, head of SAP’s international business unit for retail and wholesale, is dismissive of the integration issue: “Because of our NetWeaver development platform, it will not be a big job to integrate them.”
He says: “There is no overlap with our existing solutions and integration is progressing on a stepwise basis. We will have the end-to-end solution this year.”
While Retek’s suite would certainly have duplicated some SAP offerings, Mr Kabuth believes the Triversity and KhiMetrics acquisitions have successfully filled gaps. The emphasis is now on in-house development work.
A growing number of partners are providing specialist products to meet the more eclectic retail needs.
Mr Kabuth says: “About 80 to 85 per cent of retail processes do not deliver competitive advantage. I don’t agree that standard software will not support special processes.
“Solutions can be flexible and by working with many partners we can meet these various needs. SAP used only to deliver its full suite, but now we will offer stand-alone projects with quick and flexible integration.”
SAP, with 3,000 retail customers worldwide, launched its first retail applications in 1997 and has been targeting the sector with varying degrees of success since.
By contrast, prior to the Retek acquisition, Oracle had no specific retail applications of its own: “Oracle has a corporate strategy of going after vertical industry applications,” says Duncan Angove, ex-Retek and now general manager for Oracle’s global retail business unit.
He adds: “Many retailers choose point solutions or build their own applications, but that is high-risk and difficult to maintain, so it was an obvious target market for Oracle.”
Retek never had a back office system, so had tended to work closely with Oracle on joint projects, explains Mr Angove, and many of these joint customers had also opted for Profitlogic or 360Commerce applications as well.
“Essentially, Oracle has bought the IT footprint that many of its key customers had already chosen,” he says.
He too makes light of the integration issues, this time citing “Fusion”, Oracle’s middleware, and points to a burgeoning order book. “Demand has already outstripped what the individual companies would have done in the same period,” he says.
“We are seeing uptake on a global scale from com-panies such as Circuit City, Galeries Lafayette and Carrefour and we feel we have a very complete solution. Customers like to see Oracle do it all, including the integration piece.”
Current integration work is described as “opportunist”, with “holistic” integration between the assortment of acquired applications expected to be completed in 2007.
Others are not convinced. JDA, a leading retail IT company, began acquiring niche vendors seven years ago. “Integration takes a long time,” says chief executive Hamish Brewer, “and we certainly had to sacrifice innovation: connecting things together is a distraction.”
He continues: “Oracle and SAP appear to have quite different strategies. SAP is buying niche applications that add key capabilities to its core system, while Oracle seems to be buying the market, trying to build a suite.
“However, retailers don’t like to be dependent on one supplier. We now have 1,300 retail customers worldwide and we did 100 deals last quarter, so we’re busy.”
Chris Moore, chief executive of Torex Retail, which has also been highly acquisitive in the past year, was equally bullish when reporting record sales in January.
“If retailers wanted an end-to-end solution, they probably wouldn’t come to us,” he says. “But the ones we see don’t want to be sucked into buying the whole package from SAP or Oracle.
“Retailers like to be boss – and they like to deal with companies smaller than they are, so they feel in control. We’re also benefiting, as Triversity and 360Commerce have been taken out of the independent vendor market and are no longer competitors.”
Retail customers, too, are concerned at the vendor consolidation. “The feedback I get from retailers is a level of concern at the narrowing of vendor choice,” says Dilip Popat, managing director of Microsoft’s EMEA retail industry unit – itself an SAP partner and now active in retail applications thanks to a series of acquisitions.
“The consolidation is encouraging us to continue with the partnership model – JDA is also a global alliance for us. These partnerships are not just at a marketing level but involve deeper integration to develop a rich ecosystem.”
Some retailers may choose to buy into the partnership/ecosystem model, others may opt for Oracle’s one-stop-shop. However, as other vendors are finding, retailers can be a recalcitrant bunch: just as in their dealings with product suppliers, they like to have the upper hand.
The band of independent smaller vendors may be dwindling, but they’ll probably have no shortage of customers in coming months.