U.S. retailersâ€™ creativity will take the promise of GIS (geographic information system) technology to new levels.
Route mapping is the hallmark application for GIS technology in retail, but it's one that leaves folks like geoVue's Rudy Nadilo scratching their heads. Nadilo, CEO at the GIS solutions provider, says retailers that haven't taken the power of GIS technology beyond route mapping and store locators are "missing the side of the barn."
Essentially, GIS technology enables the useful application of a body of data as it relates to geography. For instance, the government uses GIS data in relation to demographic information to build census reports and understand the socioeconomics of the country by region. City, state, and national governments have long used GIS solutions to aid in municipal planning and to measure the impact of infrastructure projects on the geography, the environment, and the population. More recently, GIS solution providers have teamed with players in the BI (business intelligence) space to explore the technology's potential impact in the business sector, and retail has become a primary focus for many of them. Early-adopting retailers are finding that GIS technology, especially when integrated with demographic information, can have a profoundly positive effect on several retail disciplines including real estate site selection, merchandising, and promotions. Let's examine why the retail vertical has become a hotly competitive — and lucrative — arena for GIS solution providers.
1. Brick And Mortar Route Mapping
Responding to the consumer demand for a seamless multichannel experience, many retailers got their first exposure to GIS tools when they added map routing functionality to their Web sites. This now de facto use of the technology gave Web-browsing consumers an easy way to find the nearest retail store, an important tool considering the prevalent "research online, buy in store" phenomenon that marked early Internet retailing. And while the Web is the fastest-growing retail channel, the consumer expectation of an integrated retail experience that facilitates transactions in any channel will continue to drive the adoption of map routing and store location applications by multichannel retailers.
To Nadilo's point, though, GIS technology solution providers are equipped with data and modeling tools that take the power of the technology far beyond ZIP codes and highways.
2. Retail Site Selection
Nadilo is shocked at how little analytics are used by retailers during the site selection process. "There is so much data out there to help, but so little usage," he says. "Location optimization is a key element of capital planning. GIS solutions can help retailers prioritize their location selection by market and maximize the locations they can put into each market or territory." To that end, solution providers like geoVue are able to give retailers a combination of geographic and demographic trade area data to use as a basis for site selection decisions. Traditionally, site selection decisions have been made based on less-than-formal market analysis, with a heavy dependence on real estate and brokerage companies and those companies' knowledge of site availability. The same is true of analysis of a market's ability to support several franchises. "I've talked with the heads of franchising for many major retailers, and many of them are making these decisions based on anecdotal evidence," says Nadilo.
The alternative is the use of predictive analytical models that companies like geoVue and France's Asterop (which is making an Accenture-backed push into the U.S. market, recently opening an office in Phoenix) can create. "Predictive models can analyze the demographics of a region a retailer is moving into and determine exactly how many stores it can open there," Nadilo says. Of course, a thorough understanding of the retailer's target demographic is key to this function, but most retailers are able to pinpoint their target consumer using historical sales and consumer data. "Modeling a market's potential can help ensure that a retailer's worst-performing store will still create a return on its invested capital," Nadilo says. Asterop CEO Christophe Girardier agrees. "All retailers know how costly a site selection mistake can be. Two stores of the same concept can perform drastically differently," he says. "What retailers haven't been able to put their fingers on is why. We can analyze those situations now, and we can find out how to avoid the mistakes."
One concern is the perception that this application of GIS technology will supercede the need for brokers. Nonsense, says Simon Thompson, the commercial industry manager at ESRI. ESRI provides one of the world's standard GIS platforms, powering the solutions provided by geoVue and others. "I'd guess that 80% of our conversations about the power of GIS technology for retail site selection take place with the brokerage community," he says. "We're empowering them with the tool." While Nadilo's work is often directly with the retailer, he agrees that GIS solutions aren't a fitting replacement of brokers. He does, however, expect the retail community to become more active in the site selection process as it discovers the power of analytics. "Retailers shouldn't be choosing blindly from the available locations a broker finds in a given market. Rather, they should be presenting their brokers with the analytical data that supports the selection of a certain location and saying 'find me something here.'"
Using GIS solutions to analyze and improve site selection decisions is fast. Web-based applications of the technology can provide detailed data on the potential of a specific address in a matter of minutes, replacing the traditional weeks-long research process that yielded significantly less concrete market analysis. The tools also are useful for analyzing the performance of existing locations.
ESRI's Thompson says GIS providers are challenged with the task of overcoming the perception that GIS solutions are all about drive time and end cap navigation. "The next sophisticated step for GIS concerns geomarketing, understanding a very deep-level analysis about individuals within specific geographies," Thompson says. "This is being driven by the integration of solutions like ours with BI and business analytics providers." For its part, ESRI has forged business relationships with the likes of ABI, Business Objects, IBM, Microstrategy, and SAS. "The major focus for most of those relationships is in the retail space, developing solutions for merchandising, inventory optimization, etc.," says Thompson. The end result is an ability to classify the U.S. population into more than 60 different groups based on demographics and lifestyle preferences. This data, applied to geospatial analysis of the retail site, allows retailers to predict or analyze market opportunity in terms not just of the consumer base, but of the transportation infrastructure, accessibility, and even brand desirability. "We can therefore help retailers align themselves with the target audience that appeals to them in terms of merchandising, store location, promotions, and so on."
Asterop provides GIS solutions to French supermarket giant Intermarche, a 1,600-store enterprise that credits analytical modeling for improving the performance of nearly half of its stores. "Intermarche improved its sales performance by simulating the merchandising strategies of individual stores based on the demographics of each store's market," says Asterop's Girardier. "Then it optimized each store's merchandising strategy by focusing on the most successful merchandise models, thereby improving the sales performance."
The power of knowing a region's demographic attributes allows retailers to target promotions. Thompson points to retail cherry picking as an example. Cherry-picking consumers are those who shop several retailers of the same stripe to take advantage of sales and promotions. Analysis of cherry pickers in a 2005 Journal of Marketing article authored by Edward J. Fox and Stephen J. Hoch revealed that households with senior citizens are much more likely to cherry pick. Armed with demographic information like this, retailers can make wise decisions as to which items to promote and the appropriate media in which to promote them.
geoVue's Nadilo sees the trade area as the heart and soul of retail operations. "Why not use the trade area to base not only your site selection and merchandising decisions, but your direct marketing decisions as well? We have many customers who are not looking to expand sites, but want to get more efficient about analyzing and running their existing stores," he says. "We help them determine which ones to move, close, remodel, invest in, etc. Stratification of their existing markets helps retailers improve operations."
ESRI's Thompson goes so far as to say that for grocers in particular, competitive factors can create opportunity if promotions are handled right. He challenges the knee-jerk reaction that some retailers have when a Wal-Mart opens down the road. "If you're a grocer, you have a good opportunity to gain market share from a Wal-Mart Supercenter's presence. Wal-Mart isn't an option for consumers seeking gourmet food or specialty produce or for consumers who need to pick up a few staples." The key, of course, is promotion of that merchandise to the appropriate consumers.
Girardier's international presence gives him an interesting perspective. He says that while European retailers are further along on the GIS adoption curve, U.S. retailers are more creative regarding retail marketing. "But there's a general lack of analytical tools to fuel the execution of this creativity in the United States," he says. "Considering the revolution in the U.S. retail market in terms of competitive pressure and consumer behavior, retailers here must enhance their market execution strategies using tools like GIS." Girardier accepts the challenge his industry faces in getting this message across to U.S. retailers. "There's nothing more complex than making something easy," he says. But as long as GIS solution providers are trying, retailers shouldn't let the basic GIS tools they've come to know limit the technology's potential. Think creatively about how you could use geospatial and demographic data, and let the potential benefits drive the application.