To further expand its capabilities in enterprise retail software, SAP is buying privately-held Khimetrics, an early pioneer of retail price and promotion optimization and market leader in consumer demand intelligence—both key components of Retail Lifecycle Price Management (RLPM) technology.
Deal terms were not disclosed, though the transaction is scheduled to close in January 2006. This acquisition follows closely behind SAP's first major acquisition into retail store systems with its purchase of Triversity last September. It also further validates the lucrative opportunity the company sees in the Retail industry as it competes head to head with Oracle in an industry vertical battle royale that began last spring when Oracle acquired Retek.
The Bottom Line: Lifecycle price and promotion capabilities underpinned by a powerful demand intelligence engine is the driving force behind SAP's aggressive move for Khimetrics, though complex integration challenges and broadening competitive threats will still loom large.
Retail as a key industry
AMR Research's soon-to-be-released "Retail Industry Market Analysis, 2004-2009" shows a Retail Application market that we expect to grow from $6.0 billion in 2004 to $6.6 billion in 2005, of which $2.2 billion will be driven by application license revenue.
By 2009 the total market is projected to grow incrementally by nearly $3.0 billion to to $9.3 billion, driven primarily by retailers seeking long-needed replacements to legacy applications and more flexible, scalable, demand-driven retailing software options. This momentum is what drove the executive management teams of both SAP and Oracle to declare retail as a key industry, pulling out all the financial stops to ensure they are building or buying the necessary functionality to meet this growing opportunity.
While Oracle essentially established from scratch its core retail applications offerings in 2005 from its acquisitions of both Retek and ProfitLogic, SAP has been more focused on finding incremental capabilities that will enhance its existing SAP for Retail footprint, versions of which are currently installed in well over 400 retailers globally. The Khimetrics acquisition will blend demand analytics and predictive insight with the art of retail price and promotion planning and execution.
Here are the key points from the deal:• SAP has found in Khimetrics a key leader in the RLPM and retail demand intelligence vendor landscape.
Along with its archrival DemandTec, Khimetrics helped to introduce price and promotion optimization to Fast-Moving Consumer Goods (FMCG) retailers, which as a group have long struggled with injecting better analytics into a very top-down process of category management and merchandise planning. The Khimetrics customer base today contains both FMCG and non-FMCG retailers, including Tier 1 retailers like Albertsons, PETsMART, ShopKo, and Lowe's Home Improvement. The acquisition blends Khimetrics's price and promotion optimization capabilities with SAP's strong transactional support for both item and price management functions. However, blending these functions into a workflow that merchants will use to drive operational and financial benefits is very complex and time-consuming, which could affect the post-acquisition integration roadmap.
While their capabilities in FMCG and hard lines were well established, one potential weak spot in the Khimetrics product strategy is a lack of apparel-oriented forecasting, a capability SAP will surely need as Oracle works to integrate the softlines-savvy ProfitLogic demand engine into its portfolio. Whether SAP works to invest in building out the Khimetrics engine with softlines support or looks for other demand modeling technology to acquire is unclear, but having demand intelligence technology that can forecast all potential retail merchandise categories (think hypermart formats) is rapidly becoming a mandatory assessment criterion for leading retailers.• Merchant-centric application design will prove to be this deal's hidden asset. One of the comments often heard from Khimetrics references has been how strong its user interface and workflow has proven to be, not only in helping traditional merchants adopt to using complex demand analytics but also how the application helps advanced thinking in how price and promotion planning processes should work when using new tools like what-if forecast modeling. Other valuable resources behind the technology itself includes the company's strong client services organization and its solution deployment methodology. Khimetrics's thought leadership and domain expertise in retail application usability should be leveraged by SAP to improve other industry offerings like merchandise, inventory, and workforce planning. • SAP gains additional demand-driven capabilities targeted at other industries. While Retail has been its focus since its inception, Khimetrics has parlayed its demand modeling and analytic technology into solutions for the Financial Services and Consumer Products industries—both SAP target verticals. This technology will help SAP to combat various competitors in those industries that seek to expose historical weaknesses in SAP analytics. • NetWeaver is critical to SAP's Buy, Build, AND Partner strategy in Retail. As SAP looks to integrate Khimetrics, Triversity and other potential acquisitions into its existing retail platform, NetWeaver will play an increasingly important role as SAP leverages its own service oriented architecture (SOA) model to blend old and new capabilities. A key example is when multiple demand intelligence engines are connected, where price and promotion optimization functions supported by Khimetrics will need to be tied to existing Forecasting & Replenishment application capabilities, driven by another forecasting engine from Swiss company SAF. Using NetWeaver and SOA doesn't absolve SAP from ensuring that retail users are abstracted from any inherent technical complexities that this integration architecture creates. Retailers will select SAP/Khimetrics for its industry capabilities and merchant usability, not its middleware approach.
Recommendations for Khimetrics customers and prospectsThe key will be the speed and clarity by which SAP outlines its product development and integration roadmap that includes Khimetrics technology. As with Triversity, we expect to see the Khimetrics product portfolio continue as a standalone offering into 2006, with added investment from SAP in terms of product development, sales, and marketing. As Khimetrics technology blends into SAP for Retail directly, details on SAP's license, support, and maintenance programs (and cost) will become most important. Since many current Khimetrics customers operate in a hosted environment, understanding how SAP will offer hosted or behind-the-firewall solutions will be crucial.
Recommendations for SAP customers and prospectsExisting SAP for Retail customers can only benefit from the focus that SAP has placed on providing better demand analytics as well as advanced applications like price and promotion optimization. Prospects that have been concerned about the gap in demand intelligence capabilities between Oracle and SAP should find this deal helps to offer more parity—though the real market success will be seen from the software vendor that actually delivers an integrated solution that blends embedded analytics with strong merchandise, inventory, and price management capabilities.
All materials copyright © 2004 of the AMR Research Inc.
AMR Research, Inc. is a source of analysis and advice for executives responsible for delivering performance enhancement and cost savings aided by technology. AMR Research aggregates best practices from leading global companies and provides tailored, actionable advice and research reports to every client. More information is available at www.amrresearch.com.