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The Internet of Things in the Retail Industry

posted Jun 3, 2015, 4:37 PM by Christopher Furton   [ updated Dec 13, 2015, 10:34 AM ]
Written by: Christopher Furton

The Internet of Things in the Retail Industry

Overview

The Internet of Things (IoT) is described as a paradigm where everything of value will communicate in a networked form with one another. This involves development of sensor network technologies that ultimately form a new standard in which information and communication is embedded within our environments. Objects, such as refrigerators and coffee cups, interact with other objects within a designated geographical range, all with the intention of improving the lifestyles of people (Yan, Zhang, Yang, & Ning, 2008, p. Ch. 13 Para. 1).

To accomplish this, three criteria are important: sensors and actuators, connectivity, and people and processes. First, sensors and actuators create a “digital nervous system” through the use of Global Positioning System (GPS) data, cameras, microphones, temperature sensors, pressure sensors, and many more. Next, connectivity moves that data across networks such as Personal Area Networks (PAN), Local Area Networks (LAN), or Wide Area Networks (WAN) using a variety of different protocols and architectures including cellular 3G/4G LTE, WiFi, Bluetooth, Near Field Communication (NFC), and many others. This connected data is combined into bi-directional systems where people and processes can utilize it to make better decisions, both human and automated (Harbor Research & Postscapes, 2015).

From a consumer products perspective, the Internet of Things offers potential for new product lines to turn everyday homes into “smart homes” by developing supporting architectural equipment as well as end-point devices like smart lightbulbs (Entertainment Closeup, 2015, p. 1). Over the past several years, smart consumer products have hit retail product portfolios putting home automation and the Internet of Things “safely poised on the brink of entry into the mainstream market” (Koyfman, 2014, p. 30).

Consumer products already on the market can adaptively adjust a home’s thermostat based off usage patterns and occupancy, continuously capture health information like calorie expenditure and temperature 24 hours a day, and remotely turn off appliances using a cell phone by terminating outlet power. However, this is just the beginning as Internet of Things devices are spreading throughout industries effecting home consumers, transport mobility, health care, building infrastructures, and industry practices (Harbor Research & Postscapes, 2015).

As the Internet of Things edges close to the mainstream in the consumer products market, it also has substantial potential value in backend operations. Technologies like Radio-Frequency Identification (RFID) allow objects to use radio waves to transfer information to readers without direct line of sight, potentially driving supply chain efficiency (Bardaki, Kourouthanassis, & Pramatari, 2012, p. 233). Through innovation, companies can leverage IoT technologies to outperform competitors and gain competitive advantage.

Industry Applicability


The Internet of Things technologies will likely affect all industries with transformational affect throughout retail, manufacturing, finance and insurance, and information services. According to Readdy (2014), retail has the second largest potential for gain from IoT technologies at US$1.6 trillion behind manufacturing at US$3.9 trillion. Information services and finance and insurance are tied for third and fourth with US$1.3 trillion of potential gain (p. 3). In total, estimates are upwards of US$14.4 trillion throughout all industries. These gains are anticipated through improvements in customer experience for US $3.7 trillion, innovation for US $3.0 trillion, supply chain and logistics for US$2.7 trillion, employee productivity for US$2.5 trillion, and asset utilization for US$2.5 trillion (Readdy, 2014, p. 3).

With retail poised to benefit upwards of US$1.6 trillion, early adoption offers potential to achieve competitive advantage. Particularly, retail companies can benefit from stock-out prevention, i.e. prevent empty shelves, because of connected and intelligent supply chains. Furthermore, the IoT opens the door for innovative use of technologies for predicting customer behavior and trends by performing big data analytics on data collected from video surveillance cameras, social media, Internet browsing, and mobile devices. Although the manufacturing industry is predicted to gain the most from IoT, retailers have the potential to build strong business cases for enhanced revenue, increased efficiencies, and improved asset management (Readdy, 2014, p. 2).

Strategy Implications for Retailers


The Internet of Thing will affect strategy through six key areas: energy, security, smarter analytics, new revenue streams, productivity, and travel. The first strategic area, energy, is similar to the concepts discussed in the Overview regarding consumer products. Through the use of connected devices that regulate lighting and temperature, retail stores as well as distribution centers and backend offices will reduce energy expenditure (Anderle, 2015). This “greening” of facilities utilizes Information Technology strategy in the form of the IoT to intelligently reduce energy expenditure without compromising productivity or business functionality.

The second strategic area, security, will primarily affect retail organization’s Loss Prevention (LP) or Asset Protection (AP) divisions. Because these LP/AP divisions are responsible for physically securing property with locking mechanisms, closed-circuit television (CCTV), and employee and customer safety, the IoT will have significant impact. These functions exist at store level, distribution level, and corporate level alike. Smart locks will keep track of who is in the buildings at any particular time, smart doorbells will inform employees of who is trying to gain access, and smart surveillance systems will potentially save substantial man-hours reviewing video footage for specific events (Target Corporation, n.d.) (Harbor Research & Postscapes, 2015).

The third strategic area, smarter analytics, is one of the most important areas that offers significant benefits to retailers through IoT. Essentially, more smart devices means more data collection for analytics that, with the right people and processes, can improve strategy and customer experience (Anderle, 2015). Historically, e-commerce sites have been able to leverage analytics to figure out where items should be positioned on web sites to catch the eyes of shoppers and suggest follow-up purchases. With the IoT, retail stores will be able to track customer movement throughout the store, analyze pauses in movement and collect data points for analysis. RetailNext, a comprehensive in-store analytics company, already offers a service that provides 10,000 data points per store visitor. This video-based service collects 57 petabytes per year from 300 million shoppers at 50 retail chains (Groenfeldt, 2012).

In addition to smarter tracking of customers through stores for marketing purposes, the IoT analytics enables multi-channel functionality in brick and mortar stores. Through cross channel integration of back-end systems of product information, inventory, promotions, Customer Relationship Management (CRM) along with smarter physical shopping aisles, retail companies can achieve in-aisle consumer interaction through the use of mobile devices (Wonnagy, 2011). For example, based off Internet browsing, a retailer learns a consumer is interested in purchasing a new coffee brewer. The CRM system keeps track of this data and provides it to the physical store when the customer’s cell phone passes a sensor in the entry doors. Based off product information, inventory, and promotions, a push notification is sent to the consumer’s device with an advertisement and directions to the appropriate aisle number.

The fourth strategic area, new revenue streams, moves the IoT beyond cost reduction into a profit center driving sales and profitability. First, retailers can profit from added product lines directly related to IoT technology consumer products. According to forecasts, the sale of connected devices and related services could result in US$2.5 trillion in revenues by 2020. Forecasts also predict the number of smart devices to exceed 50 billion and machine-to-machine connection, the fundamental backbone of the IoT, to grow to 18 million, up from two billion in 2011. This growth, combined with the declining sensor cost, increase in computing and processing power, low-cost data storage, and widespread high-bandwidth connectivity, positions the retail companies to exploit substantial revenue growth by adding IoT consumer product lines to existing portfolios (Readdy, 2014, pp. 3-4).

The fifth strategic area, productivity, offers the benefit of increased efficiency to reduce costs. Currently, two thirds of organizations that have IoT solutions report having achieved 28 per cent cost reduction in daily operations (Inside Retail, 2015). Specifically, retailers can benefit through better supply chain management, inventory, logistics, and fleet management. Currently, bar code and RFID technologies let retailers monitor inventory levels, but IoT technologies will increase the data coming in to these monitoring systems. This provides better insight to products moving through the supply chain leading to improved efficiencies and leaner inventories (Sankaran, 2014, p. 1).

According to research by The Economist Intelligence Unit (2015), companies see improving productivity as the key immediate benefit to IoT despite long-term expectations for revenue growth (p. 5). Productivity benefits include improved overall employee production, optimized utilization of assets, reduced operational expenses, improved Internet oversight and control, and enhanced worker safety (The Economist Intelligence Unit, 2015, pp. 8-9).

The sixth strategic area, travel, affects retail logistical fleets as well as corporate travel via commercial airlines. Updating retail logistical fleets with smart technologies can increase safety and potentially avoid costly accidents. IoT technology may allow trucks to interact with other vehicles on the roadways through predictive algorithms and models providing best escape avenues for drivers in emergency situations or to identify potentially dangerous drivers. Current technologies include self-braking vehicles but it is anticipated that the IoT will develop with vehicle-to-infrastructure (V2I) and vehicle-to-vehicle (V2V) systems. For example, Ford’s safe car technology converts intersections into “smart intersections” that can predict when a driver is going to run a red light and transmit warning to surrounding vehicles (Bertolucci, 2013, p. 1).

In addition to upgrading retail fleets, IoT has strategic benefits for retail companies through increased efficiency in commercial airline travel. Despite the growth of virtual collaboration, travel is a necessary evil of business that will not go away. Fortunately, the IoT has potential to improve the airline industry through better flight planning and operational changes that will have secondary effects on retail executive travel (Readdy, 2014, pp. 2,4).

Potential Threats and Challenges


Although the Internet of Things can be exploited to improve revenue streams, reduce costs, and enable innovation leading to competitive advantage, there are four challenges that must be considered. First, lack of standards and industry-wide agreement on protocols may introduce interoperability problems down the road. Second, cybersecurity concerns over network-enabled sensors and devices must be considered to prevent misuse or abuse.

Next, existing infrastructure must be able to support the increased bandwidth resource utilization caused by IoT devices. Lastly, retail culture in respect to employees and customers must support the increased data gathering and potential privacy concerns arising from Big Data initiatives including IoT.

First, with so many stakeholders in the IoT, achieving widespread use of standards will take some time. Likely protocol wars will emerge especially as legacy IoT device companies try to protect their proprietary systems. Open system proponents will likely push for industry standards to encourage better systems integration (Kocher, 2014, p. 1). Having universal standards would also reduce risk regarding security concerns.

Second, security concerns must be considered. The increase in devices leads to more decentralized entry points for malware. Devices will likely be placed in physically accessible areas which could be subject to tampering and exploitation. The increase in software, middleware, programmer interfaces, and machine-to-machine communications results in additional complexity and security requirements. These can be addressed with internal policies, but likely commercial products that leverage a policy-driven approach and provisioning will become available (Kocher, 2014, p. 1).

Weak information and telecommunication infrastructure is another concern when considering IoT initiatives. According to a report from the Economist Intelligence Unit (2015), 44% of companies surveyed identified poor information and telecommunication infrastructure as the one of the most significant obstacles to developing the IoT (p. 9). As the number of devices increases, there may also be a shift in the use patterns of network bandwidth demand. Estimates show an increase in global peak traffic (per hour) from 2,823Gb in 2012 to 16,215Gb in 2020 (Zhuang, Cappos, Rappaport, & McGeer, 2013, Table 3). The increased processing power to perform analytics, storage space to maintain databases, and communication pathways supporting wireless solutions, cloud, and mobile computing must be in place to support an IoT initiative (Zhuang, Cappos, Rappaport, & McGeer, 2013, pp. 10-11).

Lastly, privacy concerns must be considered and cultural changes made that support the collection and analysis of significant amounts of consumer information. Retail customers may object to being tracked throughout the retail brick and mortar stores despite similar current practices in e-commerce. Trust must be developed between consumer and retailer so that information can be gathered without fear of abuse or compromise (Kocher, 2014, p. 1).

Exploiting Opportunity – The Path Forward


Despite the challenges presented by the Internet of Things, retail companies are uniquely positioned to develop business strategies that leverage this cutting-edge technology. Making the move towards an IoT ecosystem requires careful consideration of the fit within business, organizational, and information systems strategy. As described in Pearlson & Sanders (2013), the company will need ensure the organizational strategy is in alignment with the business and information systems strategies creating the Information Systems Strategy Triangle (pp. 23-24).

First, business strategy needs to be assessed to determine which specific areas an IoT technology can help achieve desired results. For example, as a retailer, there are several strategic functions where IoT can be beneficial -- namely, supply chain management, marketing (analytics), multi-channel sales, and improved in-store checkout process. Despite the temptation to integrate IoT into all these functions simultaneously, a “rip and replace” mentality is not advised. Because retailers will not be able to create use cases from scratch, they will need to integrate the new technologies with current systems, data, and infrastructure investments. This is best done by ensuring alignment of IoT with existing company strategies. Furthermore, the company needs to avoid treating IoT as a technology experiment by building a technical solution in search of a problem. The IoT needs to meet business objectives and be directly linked to business strategy (Kocher, 2014, p. 2).

One method of doing this would be to develop a phased deployment of IoT technologies focusing first on small scale opportunities that enable quick wins without jeopardizing existing processes. For example, developing a marketing/analytics strategy where IoT sensors placed strategically in pilot stores increase customer touch-points to improve available analytic information on customer behavior. The same IoT architecture could be further expanded over time to include multi-channel sales. The next big step would be phasing out barcodes replacing with RFID leading to better supply chain management options with an end-state goal of eliminating slow moving checkout lines where cashiers scan barcodes (Bardaki, Kourouthanassis, & Pramatari, 2012).

This is a big feat that requires modifications to Information System strategy so that alignment is achieved with business strategy. The IoT ecosystem will need to encompass existing data structures and create many new ones. For retail organizations, that means linking loyalty card programs with Internet browsing activity and linking brick and mortar customer touch-points into these data warehouse repositories. Also, employing a “Green IS” into the phased IoT implementation can help reduce costly energy consumption.

Lastly, to achieve alignment under the Information Systems Strategy Triangle model (Pearlson & Saunders, 2013, pp. 23-24), the retail company will need to consider evaluating organizational hierarchy and assessing manpower requirements to achieve such a large scale innovation initiative such as IoT. People and processes are critical for an IoT initiative which places great emphasis on the need for organizational strategy alignment. An increase in qualified Information Technology professionals, as well as experienced marketing analysts and logisticians, will be required to properly fulfill the IS strategy with the end goal of successful business strategy and competitive advantage.

Conclusion

The Internet of Things will have a profound impact on businesses and consumers in the near future. Most industries will develop innovative ways to leverage the power of the IoT through the use of sensors and actuators, extensive connectivity, and intelligent people and processes. In particular, companies within the retail industry are positioned to gain significant benefits for early adoption impacting several strategic areas: energy, security, smarter analytics, new revenue streams, productivity, and travel. More specifically, creative use of IoT can enable retailers to increase revenue through additional product lines, decrease costs through lean processes and green initiatives, and enable technical innovation through next-generation supply chains and cashier-less RFID checkouts.

Despite these opportunities, the IoT does have several challenges that must be considered. Lack of industry standards, weak cybersecurity posture, inefficient or nonexistent infrastructure, and privacy concerns must all be addressed when planning an IoT initiative. Regardless, the rewards are greater than the risks so the IoT opportunity should still be explored. Through business, organizational, and information systems strategy, a phased implementation allowing opportunity to adjust to consumer demands and build trust, expand existing infrastructures, and ensure security measures are sufficient will position the retail company favorably to profit in the short and long-term.

References

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About the Author

Christopher Furton author bio picture
Christopher Furton

is an Information Technology Professional with over 12 years in the industry.  He attended The University of Michigan earning a B.S. in Computer Science and recently completed a M.S. in Information Management from Syracuse University.  His career includes managing small to medium size IT infrastructures, service desks, and IT operations.  Over the years, Christopher has specialized in Cyber Security while working within the Department of the Defense and the United States Marine Corps. His research topics include vulnerability management, cyber security governance, privacy, and cyber risk management.  He holds active IT Certifications including the CISSP, CEH, ITIL Foundations, Security+CE and Network+CE.  He can be found on , , and .  

Additional information available on Christopher Furton's website at
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