According to technology research firm Gartner Inc, retailers can gain a competitive advantage through the application of algorithms that reduce costs and improve top-line revenue.
Gartner says the main functions where algorithms can have a big impact in retail are.
- Cost of goods sold – the largest cost of retail operations at 55-60 per cent. Since this 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.
- General and administrative – an overhead at 15-18 per cent of the cost of retail operations. Algorithms used here will significantly improve cost optimisation.
- Labor – representing 13-16 per cent of the cost of retail operations, but rising sharply. Algorithms can support both cost optimisation and customer service.
- Stores – will remain a major cost of retail operations and an integral part of the retail landscape. Algorithms can help with pricing, inventory and improving the in-store customer experience.
“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,” Gartner principal research analyst Kelsie Marian said.
“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.”