Coming Quarters May See Retail Revenues Improve For IT Firms As Large US Retailers Invest In Tech

After the slump the IT sector saw in retail in the first quarter, coming quarters might see the sector revenues improve. For, the US retailers are spending in tech to improve their online presence and prepare for the post-pandemic shopping experience, say experts.

Though analysts caution that the demand might not be what it was in the pre-COVID-19 levels, IT firms working with large US retailers will gain, they added.

US retailers are one of the large customers for IT companies. At the back of the pandemic, non-essential retail was one of the worst hit as shops were shut and demand came down. Large retailers like JCPenney, Neiman Marcus, and J Crew filed for bankruptcy. Others had to cut down their operations to keep afloat.

According to reports, retail sales in the US could fall more than 6 percent in 2020. Store closures in the US reached an all time high 2020 with 11,000 closed till date compared to 9300 in 2019, according to a HSBC report.

For IT firms, who support their brick and mortar functions like billing, warehouse management and enterprise functions, their revenues were impacted.

On quarter-on-quarter (q-o-q) basis revenues from retail and consumer packaged goods (CPG) declined by 9.9 percent for Infosys and 15.5 percent for TCS for the quarter ending June 2020. For both the companies, the segment accounts for about 15 percent of their revenues.

For HCL Tech, close to 10 percent of its revenues come from retail and CPG and it declined by 9.2 percent q-o-q for the June 2020 quarter. Wipro’s fell by 12.3 percent on q-o-q basis.

However, coming quarters might see these numbers improve, as retailers’ tech spending looks more or less sustainable.

Pareekh Jain, founder, Pareekh Consulting, a tech consultancy firm, said that unlike a couple of months back when the outlook was bleak for retail, things are looking better for a couple of reasons.

Economy has opened up and shops are open. However, large retailers have realised that they cannot go back to what they were doing earlier to get shoppers back.

“So they are investing in contactless shopping experience and omnichannel retail in the true sense to get people back into the shops and safe at the same time,” he added.

Case in point is the increasing tech investment the sector saw in the recent times. Large retailers like Walmart, Target, Home Depot and Lowe’s, which are also large retail clients for IT firms, saw their mean technology investment increase in customer experience, order management and supply chain, a HSBC report on the US retail said.

These firms have been significantly investing in technology over the last couple of years and this would now accelerate, the report added.

A Kotak Institutional Equities report pointed out that some retailers like Inditex have indicated their plan to increase their online sales to 25 percent by 2022 from 14 percent currently. The company is also investing $1 billion in capex for digital platform initiatives.

These investments are likely to be in the areas of improving in-store technology, increased use of robotics, and addition of more value-added services such as customer tech support.

The IT sector will obviously gain from all these.

“Yes, some of these investments might go to cloud players or Software-as-a-Service providers. But retailers would still need IT services companies to help integrate products and solutions,” Jain added.

IT firms will also gain from vendor consolidation in the sector, he added.

Of course, this does not mean that the retail sector is out of the woods. Retail shop closures would continue to increase and mid and small retailers might not have the bandwidth to invest in technology.

But, HSBC report said that for most IT firms exposure to small retailers are limited and these closures are not indicative of cut in IT spends. Yugal Joshi, Vice President, Everest Group, an IT consultancy firm, pointed out that the outsourcing will be able to offset cut in IT spend by retailers. "Net of it, the proportion of outsourcing pie will increase in the total IT services spend of a retail enterprise," he added.