Retek benefits from some retail therapy

While the broad, enterprise applications vendors such as SAP, Oracle, JD Edwards and PeopleSoft report shrinking revenues, a handful of companies competing with them in specific vertical markets are going in the opposite direction. No more so than Retek.

The developer of applications software for the retail industry recently reported its best ever quarter with a string of sales to bluechip organisations pushing revenues up by a hefty 39% and taking the company into healthy profitability.

But why, as technology spending continues to slow, is a company focused on a single vertical weathering the storm so well? And does its success show that IT decision-makers are increasingly favouring applications that fit the needs of their vertical sector more closely than generic business application suites?

One explanation for Retek's strong performance relates to the dynamics of the retail sector. Even though retail companies have traditionally been technology laggards, the sector is now one of the few relatively buoyant areas of technology investment. According to analyst group AMR, retailers continue


Company name: Retek

HQ: Minneapolis, Minnesota

Main activity: Retail software for merchandising

Last full year revenues: $179 million

Last full year net income:
-$14.3 million

Key issue: Retek's tightly integrated merchandising system is winning it fans in the high end of the retail market, allowing it to win deals over the broad business applications vendors SAP, PeopleSoft, and Oracle. But with large retail customers taking longer to assure themselves of a return on investment, Retek's reliance on large contracts may trigger unexpected revenue fluctuation.



to dedicate 2% of their total revenue to IT, the same amount allocated last year, while other industries – although spending a greater proportion overall – saw a drop from 4% to 3% on average. Moreover, in 2003, AMR expects to see IT budgets at retail organisations increase by 5%.

Judging by Retek's impressive revenue growth, those budgets are being focused on applications that have been tailored to the sector's requirements. Sudhir Patel, IT director of UK department store Selfridges, believes this retail specialism was an influential factor in his company's investment in Retek: "Traditional ERP [enterprise resource management software] caters for many sectors without being a specialist in any," he argues.

Tom Fischer, sales director for Northern Europe at Retek sees this as a wider trend. "What we've seen in North America is starting to happen [in Europe]," he says. "The big North American retailers said the [ERP] systems they had installed were not giving them flexibility, particularly the merchandise retailing applications, when they wanted to diversify into different merchandise."

Retek's new customer roster supports this view. While one of its rivals in retail software, JDA Software, has been focusing on smaller contracts, Retek has been aiming itself at deals worth $5 million or more, and has landed clothes retailer Gap, grocery chain Kroger and UK supermarket chain Sainsbury's in its latest quarter. "A classic mid-market and high-end market split is playing out [in the retail sector]," says Greg Girard, analyst at AMR Research.

This focus on the high-end of the retail sector has its downside. Although Retek has managed to pull in revenues of $60.8 million in its second quarter it is relatively reliant on large deals. As much as $30 million of expected revenue did not materialise in the second quarter because of just six deals where customers wanted more assurance of a return on their investment.

"About 50% of new [customers] now require pilots, running three to six weeks, before licensing products," explains Raymond Nieuwenhuizen of AMR. "But it's not a sign of a weakening software market in retail. Retailers are rightly demanding proof of concept in these economically uncertain times. The risk of crippled business processes is too great for anything else." Fischer agrees. "People are doing much more due diligence now, and that's producing very significant delays."

This level of due diligence may work in Retek's favour, however, according to AMR. In companies where Retek is a proven commodity, it says, users will want to extend their investment in the product. Since its penetration rate within its customer base is still relatively low, the company will continue to focus its sales efforts on getting customers to buy more modules of its software.

It will still face competition from the broader ERP suppliers, particularly as they beef up their expertise in vertical sectors. But as retailers make more considered decisions about their investments in enterprise applications, Retek's vertical market expertise will prove compelling, believes AMR analyst Janet Suleski. "Retek's integrated, best-of-breed message rings bells by addressing the need for quick-hit, manageable projects," she says. If this is the case, Retek should survive intact – at least as long as the retail economy holds up.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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