Sailing into new waters

Software giant Oracle is pushing hard into the lucrative retail sector, with the capture of Retek last year being its first venture into uncharted territory

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By  Peter Branton Published  June 11, 2006

|~|oracleleadbody.jpg|~|Oracle owner Larry Ellison’s passion for sailing is only equalled by his passion for buying software companies; Oracle has bought 20 firms since January last year.|~|It must be tough being an Oracle executive trying to explain the company’s acquisition strategy right now. Within a month of the company holding a briefing for its retail arm, where senior managers briefed journalists on just how the various acquisitions it has made fit together, Oracle had made another one: supply chain software firm Demantra Software was bought this month for an undisclosed fee. Then again, the briefing in question was held in Valencia, Spain, and was followed by a day’s sailing, tracking the progress of the Oracle team yacht that is currently in the process of competing in the Louis Vuitton Cup, the qualifiers for the America’s Cup next year. So perhaps it isn’t that tough a life after all for Oracle executives. Why were Oracle managers entertaining journalists on a boat off the coast of Valencia? Well, that is a bit complicated, but here’s one explanation: the Oracle Retail event could be said to highlight two of Oracle boss Larry Ellison’s main pleasures: sailing and buying up software firms. Ellison’s passion for sailing is well documented. Oracle is again teaming up with BMW to support a team having a crack at the America’s Cup, having lost out in 2003 to the Swiss team Alinghi (as the title-holder, the landlocked Swiss team was able to select the venue for the next race and chose Valencia, hence the briefing event being held there — Oracle hoping to see a little of the glamour of the event rub off). Buying up software companies is an equally well-documented pleasure for Ellison — one that has proven even more expensive than luxury yacht racing. Demantra is Oracle’s 20th acquisition since it completed its US$10.3 billion purchase of PeopleSoft in January last year. Even for an industry where many firms find it easier to grow by gobbling up rivals than by developing applications and winning customers from scratch, this is a staggering amount, especially since these are by no means all small deals: Siebel Systems cost US$5.8billion and retail software firm Retek was bought for more than US$650 million in April last year. Oracle followed the Retek buy with the purchase of retail-pricing specialist ProfitLogic in July last year and mechandising software-maker 360Commerce in January this year. The product lines from these acquisitions — as well as some of the products from other buys, including the PeopleSoft/JD Edwards deal — have all now been grouped under the Oracle Retail umbrella, a separate business unit set up by Oracle last year. So, last month’s event in Valencia was designed to showcase how far Oracle has come in the retail sector, one year on from the Retek buy. “It is a year on from when we made our first acquisition in retail with Retek, so we’re just updating people on that,” Duncan Angove, senior vice president and general manager, Oracle Retail, explains. “In the three quarters that we’ve completed, we’ve had sixty customer go-lives, which is a real measure of success — not so much that we’ve had customer wins but that we’re actually getting the customers up and running with the software,” he claims. The Retek deal was seen as very much a statement of intent for Oracle, as it bought the retail supplier after a fierce bidding war with arch-rival SAP, which had initially bid US$496 million for the vendor. After buying Retek Oracle had approximately 1,000 customers in the retail space worldwide, according to reports, although this was understood to trail SAP: the German firm having around 2,400 clients in that sector. However, by the time that Oracle established its Retail unit, it was claiming closer to 2,000 customers in the retail space, including those customers who had its database, enterprise resource planning suites and more specialised retail applications. Its customer reference list is certainly impressive: in the Europe, Middle East and Africa (EMEA) region it can claim such blue-chip names as Tesco and Sainsbury’s in the UK, France’s Carrefour and Dubai Duty Free in the UAE. However, as Angove sees it, going after the retail sector is a logical move for Oracle for more reasons than just allowing it to win bragging rights over SAP. Oracle has an ambitious growth strategy and “we see being number one in a select number of industries as being essential” to that strategy, he says. “The type of characteristic that we look for in these industries is, first of all, that on the business side that they face enormous pressure and need to transform what they are doing,” Angove explains. “I think any one who covers retail can see all the pressures that are going on out there,” he adds. As well as looking at industries which have a strong business need, Oracle is also of course targeting those sectors where there is a strong IT need — and a good chance of success. “The retail market is very fragmented,” says Angove. “You have 12 to 15 software vendors chasing a single point application sale, as well as a lot of in-house developed applications being deployed by firms,” he adds. That means a lot of retail companies have complicated infrastructures, which could suit a strong company that can offer an all-in-one solution, as Oracle wants to do. “The goal is that we can go out and select those applications that the market has already indicated are best-of-breed and integrate them at Oracle on a common, simplified, technology stack,” Angove says. Retek had clearly established a position in the market before Oracle bought it, Angove claims — perhaps unsurprisingly, as he had been with Retek for eight years before it was acquired — having built up an impressive customer base of its own, with firms such as Sears, Roebuck, Gap, Radio Shack and Abercrombie & Fitch using its merchandising software. “When we [Oracle] went out and looked at what was available, then all the leading retailers had already selected Retek, across any geography and industry sector,” says Angove. Retek was certainly considered a market-leading technology company, with its merchandising software being used to help firms plan their ordering and distribution decisions, keeping track of inventory. However, with revenues in its last year of just US$174 million, it lacked the scale or the clout of an SAP — or an Oracle. “From a customer perspective, we are now able to do business with customers where we wouldn’t have been able to before, even if we did offer the best solution that could add the most value to them,” says Tarik Taman, vice president of Oracle Retail’s EMEA operations, a position he also held for Retek. “Specifically, they have the confidence in our longevity — Oracle is certainly going to be around for a long time — confidence in our delivery, and the understanding that Oracle has the technical prowess to make sure that the marriage of the technology and the business capability and the applications will be provided to them in the manner that they’re used to with Oracle,” he adds. Angove points out that Oracle Retail is also more than just Retek rebranded: he identifies both 360- Commerce and ProfitLogic as important parts of the mix. ProfitLogic specialised in pricing optimisation software, an area that is growing increasingly important in understanding customers’ all-too-often fickle buying habits. Instead of relying on a mix of industry knowledge and educated guesswork to decide what products to stock and at what prices, retailers are now using pricing optimisation software to build detailed models of customer demand. By measuring data from specific stores and point-of-sale devices the aim is to get a clearer understanding of what products are in demand and how much custo- mers are willing to pay for them. While big retailers already have ERP and customer relationship management (CRM) applications in place, the more specialised retail software can better follow retail trends, such as what items are most in fashion at any given time, essentially giving retailers a better and deeper understanding of the data — and their customers. While the concept is simple, for a major retailer, with tens of thousands of stores across the world, selling many different lines of goods, the execution is anything but. ProfitLogic’s CEO Scott Friend, claimed in an interview after his company was acquired by Oracle that it had spent more than 15 years to build the complex algorithms that underpin its software, which helps to explain the US$2million price tag it put on its products. That level of complexity also helps to explain why a company with Oracle’s resources finds it easier to buy, rather than build, retail software. ||**||Oracle’s clout|~|Oracle-2body.jpg|~|Tarik Taman was keen to emphasise Oracle’s success.|~|derstanding of the data — and their customers. While the concept is simple, for a major retailer, with tens of thousands of stores across the world, selling many different lines of goods, the execution is anything but. ProfitLogic’s CEO Scott Friend, claimed in an interview after his company was acquired by Oracle that it had spent more than 15 years to build the complex algorithms that underpin its software, which helps to explain the US$2million price tag it put on its products. That level of complexity also helps to explain why a company with Oracle’s resources finds it easier to buy, rather than build, retail software. But it is that clout that Oracle brings that is really key, Angove claims. “Oracle hasn’t gone in to [the retail sector] to be number two so it has put a significant amount of investment around it and the pace of hiring, the investments in R&D, everything it is on a scale that would be incomprehensible for three separate companies,” he says. By establishing Oracle Retail as a separate business unit within the company, Oracle is getting the “best of both worlds” as Angove describes it: the Retail unit has dedicated research and development, sales and services teams, allowing it to maintain the nimbleness and focus of a speciali-sed industry player, while still benefiting from the scale of Oracle in its back office functions. “In a way, it’s almost as if we went private,” he says. “The amazing thing is that as a stand-alone company you are either under-capitalised relative to what you know the global opportunity is or you are a public company sandwiched by earnings expectations and the investments you know you need to make to really grow the bottom line,” he adds. Regardless of how much backing you have, you can only do well if the sector you are operating in lends itself to that success. Analysts believe however that retail is one sector that is definitely set for growth. While some industry sectors overspent on the internet-boom, and have since cut back, retail has to date not been such a heavy user of IT: Oracle and SAP are not alone in seeing it as a potential growth market. Developing technologies such as radio frequency identification (RFID), which is growing in importance and usage in the sector, will make IT even more central to retailers’ business plans in the future. “Consumer demand continues to be unstable, they are fickle and demand is volatile, which basically puts pressure on retail organisations to enhance customer facing operations, looking to offer the best-in-class service and experience to their customers,” says Ivano Ortis, programme manager for analyst firm IDC’s European vertical markets team’s retail and transportation research. “We see technologies like customer lifecycle management becoming perceived as a “hot” area of focus, while generally there is a need for IT integration and new standards [in retail],” he claims. Prior to the Retek acquisition, IDC did not see Oracle as a major retail player, Ortis says, but with Retek and the other acquisitions taken into account, the firm should rank amongst the top three software suppliers for the sector this year. Since IDC sees the overall IT spend in the retail sector as being worth as much as US$24billion by 2009 that could be a position worth having. Ask Angove and Taman about Oracle’s market share and they are both bullish, claiming that the most important point is how much it is growing, rather than where it is right now. “If we go back and look at the growth rate of the three companies, year-on-year, the difference [in growth] is staggering,” says Angove, claiming that the Retail unit is achieving high double-digit growth in a market that is seeing 7% growth for its competitors. “We all underestimated the impact that the Oracle brand behind these assets would have, particularly on a global basis,” he says. While he says the three acquired firms were all somewhat North-American and European-centric “the global distribution of this business now is staggering, there are customers in the Middle East that we never saw before, the [acquired] companies never had the reach to do that.” As the man in charge of the Middle East market, Taman describes Oracle’s market share within the region “as a breath of fresh air” for the retail business. “People come to Oracle for retail with an expectation that they will get the value of the solution and the support behind it,” he says. “It is a breath of fresh air not only because Oracle has a large presence and a long track record but because retail in the Middle East is growing like hot cakes. Dubai is a particularly good example but even in Kuwait, which I have visited quite a bit, and Saudi Arabia, the amount of activity that we have and the amount of market share that we already have is quite high and we expect that success to continue to grow,” he adds. Taman estimates that the Middle East is worth as much as 20-25% of pan-European business, from both a revenue perspective and a “go-forward” basis. So, the opportunities are clearly there for Oracle in the retail sector — especially in the Middle East. Now, the firm has to convert that opportunity into success, and make its mark in a very tough, competitive sector. But, as Angove points out, Oracle — and boss Ellison — doesn’t like to come second: in racing or in the software business. ||**||

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