Petsmart CEO: SAP project 'far more' difficult than expected

An installation of SAP AG's retail software completed last year by Petsmart Inc. created problems that were "far more than we anticipated" and that continue to affect the pet-supply retailer's business performance, according to Petsmart's top executive.

Phoenix-based Petsmart this week warned that the financial results for its fiscal third quarter ended Oct. 29 will be below expectations due partly to lingering problems related to the SAP Retail installation (see story). In a follow-up interview, Phil Francis, Petsmart's chairman, president and CEO, said implementation delays and other difficulties stemming from the project "hurt us substantially."

Francis wouldn't comment directly on whether there were problems with the SAP applications themselves. But he said the most difficult part of the project involved what he described as getting SAP Retail to "play with other children" -- meaning the process of integrating the SAP software with other systems that Petsmart uses.

"I'd say we had problems with the connectivity to other software for about a year or so," Francis said. "We were in pretty rough shape [on application integration]." As a result, he added, Petsmart limped through 12 to 15 months of delays in implementing the SAP Retail applications before finally turning them on last year.

After the system went live, Petsmart experienced higher-than-expected "shrink levels" that affected its product inventories -- a reference to losses due to shoplifting and damaged items. In this week's announcement, the company said "residual effects" resulting from the implementation problems on the SAP project continued to contribute to above-normal shrink levels in the third quarter.

Francis said Petsmart, which expects to record a total of $2.2 billion in revenue during its current fiscal year, was significantly larger than the other U.S. retailers that were already using the SAP Retail software. At the time the decision was made to install SAP Retail, he noted, Petsmart faced the need to replace aging systems that weren't Y2K-compatible.

The company had the choice of buying older retail applications or going with newer and more modern software such as SAP Retail, Francis said. He wouldn't say whether, in hindsight, he would still make the latter choice if Petsmart had to do it again. But the company said in this week's announcement that the SAP system "is now providing sound data."

Petsmart was the second SAP Retail user to disclose in a matter of days that its earnings are being affected by issues surrounding an implementation of the software. Last Friday, fabric retailer Jo-Ann Stores Inc. said out-of-stock problems related to its use of SAP Retail played a role in reducing the company's third-quarter earnings below the original expectations (see story).

Like Petsmart, though, Jo-Ann Stores said it's working its way through the start-up problems with the applications. The out-of-stock problems being experienced by the Hudson, Ohio-based company's retail stores have now been isolated to its crafts business and will hopefully be fully resolved "as quickly as possible," Jo-Ann said.

A spokesman at SAP America Inc. in Newtown Square, Pa., said neither Jo-Ann nor Petsmart has criticized the SAP Retail software itself. Instead, he said, both companies have praised its value to their business operations. And the fact that numerous large retailers have chosen SAP Retail to run their businesses is proof that the applications work, he added.

Jim Shepherd, an analyst at AMR Research Inc. in Boston, said vendors of enterprise resource planning (ERP) software such as SAP Retail aren't always blameless when users run into problems. But delays in integrating ERP software with other applications should be expected as a matter of course in big projects, he said.

According to Shepherd, installations of ERP systems are inherently complex and multifaceted projects that also usually involve major changes to the internal business processes of users.

"Most companies have not undertaken projects of this magnitude [previously]," Shepherd said. "They rarely have the skills required, and they always underestimate the time and effort required to do it." Software installation hiccups can also be convenient excuses for poor business execution by companies, he added.

Petsmart this week also announced that it plans to buy a controlling interest in its unprofitable e-commerce affiliate, which until now has been operated under a joint venture set up last year with a small online pet-supply company. Francis said that deal was a reflection of where he thinks brick-and-mortar companies have to go to be successful online.

"I think the marketplace has come down squarely on the side of multichannel participation," Francis said, referring to a mix of retail, catalog and online product sales. "Now is the time to improve integration [between those sales channels] in the practical sense," he added.

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