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Gartner Says Retailers Must Use Algorithms for Competitive Advantage

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In the new digital economy, retailers can best gain competitive advantage through the application of algorithms that reduce costs and gro

Analysts Discuss How Retailers Can Grow Revenue and Save Costs With Algorithmic Retail at Gartner Symposium/ITxpo 2016 on the Gold Coast, Australia, October 24-27

In the new digital economy, retailers can best gain competitive advantage through the application of algorithms that reduce costs and grow top-line revenue, according to Gartner, Inc.

Speaking at Gartner Symposium/ITxpo in Australia today, Kelsie Marian, principal research analyst at Gartner, said examples of algorithmic retail in action are emerging and yielding results for aggressive retailers.

“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 Ms. Marian.

“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 organisation. But retailers can’t humanly scale to keep pace with growth of data, so a fundamentally different approach is necessary.”

Gartner describes algorithmic retailing as the application of big data through advanced analytics across an increasingly complex and detailed retail structure, to deliver an efficient and flexible, yet unified, customer experience. Algorithms connect big data to results.

Gartner predicts that merchant leaders will be algorithms by 2020, prompting the top 10 retailers to cut up to one-third of headquarters merchandising staff.

According to Gartner, there are four main functions where algorithms can have a big impact in retail.

1)     Cost of goods sold

Cost of goods sold is the largest cost of retail operations at 55-60 percent. Since it is driven by the selection, assortment, pricing, promotion and inventory levels of items listed for sale, it has the largest possible benefit from the application of algorithms. Algorithms can both reduce the cost basis and increase top-line revenue.

2)     General and administrative

General and administrative is an overhead at 15-18 percent of the cost of retail operations. It typically covers headquarters activities such as finance, legal, HR, advertising and IT, as well as warehousing and distribution. Algorithms used here will significantly improve cost optimization.

3)     Labor

Labor represents 13-16 percent of the cost of retail operations, but is rising sharply, and directly impacts the quality of the customer’s experience. Algorithms can support both cost optimization and customer service.

4)     Stores

w top-line revenue, according to Gartner, Inc.

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