Why tech roll outs can be seriously perilous for large retailers

While agile, tech-laden newcomers enter the retail market the established large players, with their sizeable store estates, face a significant issue when trying to compete because of the sheer cost involved in undertaking company-wide technology implementations.

The problem with large roll-outs is that although economies of scale come into play – thereby reducing costs – there is a point that is reached in this process when the law of diminishing returns comes into play. This then outweighs the benefits gained from any economies of scale.

Anton Mironenkov, director of big data at Russia-based X5 Retail, says: “Economies of scale can spread the costs but after [rolling out to] a certain number of stores it effectively makes no sense financially to go any further as you have to add in extra infrastructure and bring in more qualified people. And often some of the latter stores end up delivering lower returns.”

For software roll-outs the general rule is the more stores the better. Evan Goldberg, founder and EVP of Oracle NetSuite, agrees: “For software it’s infinite elasticity for rolling out. It [law of diminishing returns] is not an issue, unlike for hardware.”

When hardware is involved then there will inevitably be a point in the implementation when the law of diminishing returns kicks in. When this is reached depends very much on the dynamics of the individual projects. “For some projects you can roll-out to an infinite number of stores but for others it could be only to a small number,” says Mironenkov.

Processing requirements

For X5 Retail with 15,000 stores located across the vast expanse of Russia (encompassing 10 time zones) this is a critically important consideration when evaluating the potential roll-out of technology solutions.

An area of big interest for the group at present is video analytics and Mironenkov cites the fact that a single server can handle the processing requirements of 10 stores but when reaching a certain magnitude of outlets then there is a need to introduce additional infrastructure in order to manage the various servers and enable them to talk to each other.

“Reaching a certain scale brings in other levels of complexity [and cost] in order to run the network. And then there’s the support needed for this extra technology. When you have these big networks then it becomes a lot more complicated,” he explains.

Just-walk-out stores

For another project, X5 is currently running a pilot – these typically encompass as many as 1,000 stores – to assess the benefits of operating stores without people. It has built a 20 sq m prototype that is 100% automated. He says it is taking the company in the same direction as Amazon with its Go stores.

But unlike Amazon, which is investigating the potential of such stores through some serious levels of capital expenditure, X5 has had to take a more cost-conscious route. Management recognises that it runs the risk of the costs being prohibitive for it to roll it out across its entire sprawling estate and it does not want to be constrained by only being able to roll-out to certain stores. It therefore looks to stringently focus on minimising costs in order to offset the law of diminishing returns issue.

“Our solution is not as expensive as Amazon’s as we’ve simplified the process – in order for it to be cheaper and to give us a project payback,” says Mironenkov.

“With our solution you have to pay at a till rather than just walking out so it is not quite as seamless. This last step costs a lot of money so we chose the tech we wanted in order for a short time-to-market and one that is less expensive.”

The company has also been working on a self-checkout solution, which Vladimir Salakhutdinov, director of strategy at X5 Retail, says are clearly commonplace around Europe and economically viable at the scale that they have typically been rolled out, but for the scale requirements of X5 it needed to build its own solution.

“For us with our big chain we developed our own because it’s cheaper. It’s several times cheaper in fact so that we could scale it across our stores,” he explains.