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    Technology adoption by small retailers

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    Small retailers are facing stiff competition from the big players in organised retail. According to 2008 ICRIER survey, half of small retailers experienced declining sales in 2006 and 2007; and 60 per cent of these retailers attributed it to encroachment by organised retail.

    Large retailers – supermarkets, discount chains, specialty retailers, category killers – have clear advantages over small merchants in the form of bargaining power with suppliers, supply chain and distribution economies of scale, and brand strength. But an equally important source of competitive advantage is their innovative use of technology. With deep pockets and fat lines of credit, they have invested heavily in their back-end and POS infrastructure over the past years. As a result, they offer a differentiated value proposition to the customer – from card acceptance, to loyalty and gift voucher programs, to targeted price promotions. On the back end, automated ERP and accounting systems drive down operating costs, speed up supply chains and improve merchandising assortment. And it all ties together via real-time data networks that give management real-time visibility and control.

    Small retailers struggle to keep up with this arsenal of technology. Based on the same survey, only 10 per cent of small merchants have computerszed billing systems. Even fewer accept cards or manage inventories electronically. This begs the question: what is stopping small merchants from leveraging the same tools and enablers as their larger competitors?

    Not only do small merchants lack the expertise to achieve compliance, they can’t afford ongoing upgrades.

    Conventional wisdom suggests that small merchants simply cannot afford the investment: hardware, software licenses, data center hosting, network connectivity and dedicated IT resources. But this argument holds true only so long as the upfront investment must be borne by the merchant.

    Enter the Managed Service Providers (MSPs) to level the
    playing field. Managed Services give even the smallest merchant access to state-of-the-art technology. Most best-in-class ERP and POS applications – from card acceptance, to electronic billing systems, to value-added services like loyalty programs, gift and prepaid cards, and supply chain management software – are available on a hosted model.

    In this hosted model, merchants access a suite of applications either directly through their web browser or via a thin client application on their PC or POS. All that is needed is a reliable Internet connection – widely available in the market, and very affordable. MSPs generally charge a low upfront cost; merchants pay for services on a pay-as-you-go model.

    In fact, small merchants using a managed services model enjoy a distinctive edge over their larger counterparts. Upgrades and enhancements are provided automatically from the central host to enrolled PC or POS terminals. And since switching costs are low, MSPs are compelled to continually innovate to retain their customer base. Large retailers, on the other hand, are typically locked into their existing technology investments and dependent on in-house IT resources for innovation.

    MSPs can also provide unparalleled security. This is particularly critical for payment and loyalty applications that store sensitive customer data. For example, credit card transactions are governed by the Data Security Standards of the Payment Card Industry (PCI DSS). Compliance is a moving target, as Visa and MasterCard apply ever-more stringent standards.

    Not only do small merchants lack the expertise to achieve compliance, they can’t afford ongoing upgrades. As a consequence, they risk exposure to monetary penalties and reputational damages in the event of a data breach.

    MSPs enable merchants to outsource data protection. Transactions are encrypted on the merchant’s POS, transmitted via a secured Internet connection and stored at a fire-walled data center. This provides end-to-end data security for sensitive customer data. Plus, the merchant gets the benefit of real-time reporting from his centrally stored transaction data.

    Finally, small merchants can harness the connectivity of Internet-based Managed Services to overcome their scale disadvantage. Merchants are already forming coalitions to leverage purchasing power, optimize supply chains and exchange learnings. E-enabling these initiatives through a shared real-time ERP applications can neutralize the scale disparity between organized and unorganized retailers, improving margins and operating efficiency.

    Managed Services are a cost-effective, flexible and secure channel for small merchants to tap into cutting-edge technology. It enables the roughly 12 million small merchants to grow their business, deepen their relationship with customers and suppliers, and improve their business processes.

    If history is any guide, the application of disruptive technologies in established markets breaks down existing cost structures and leads to the evolution of far more efficient and effective ways of servicing customers. The impact of the BPO revolution on how business is conducted in corporate America serves as an example. We can conjecture that the wide-scale application of technology by entrepreneurial small merchants could have a similar effect – giving them the edge they need to take on organized retail.

    Mohan Natarajan is AVP of Business Development at Pine Labs. Views expr