SAP conversion causing retail headaches for fabric chain

Jo-Ann Stores Inc., a $1.4 billion chain of fabric and craft stores, today reported its third-quarter financial results had a cross-stitch put in them by two technology-related issues: continuing start-up problems with a retail version of SAP AG's R/3 software that was turned on last spring and a loss stemming from the company's involvement in an e-commerce venture.

The Hudson, Ohio, company is still in the middle of a $30 million conversion to SAP's back-office applications for retailers, a system that went live in April (see story). But Jo-Ann said it is having trouble keeping enough products in stock while processing restocking orders through the SAP Retail software, contributing to lower-than-expected earnings in the third quarter.

"It's just been a very painful systems conversion," said Brian Carney, Jo-Ann's chief financial officer. "It's not necessarily the software's fault, and we're happy that our business will be running on SAP. But it hasn't been easy."

Carney confirmed that the conversion has taken longer than the company expected and said Jo-Ann still expects to experience out-of-stock glitches in its crafts business during the current fourth quarter. In its third-quarter financial report, the company said it hopes to resolve the problems "as quickly as possible," but offered no specific timetable.

Jo-Ann's business operations are a difficult proposition for any retail software to handle, Carney said, with 100,000 active product items needing to be tracked at more than 1,000 stores. "We're a very large implementation for SAP," he said. "There's a constant trade-off in performance between needing speedy run times and delivering the kind of detail it takes to place our orders."

Despite the out-of-stock problems, William Wohl, a spokesman at SAP America Inc. in Newtown Square, Pa., said the German vendor still intends to use Jo-Ann as a customer reference for SAP Retail. Such installations are a difficult science at best for users, he added.

"Since every customer is unique, once you get into these projects is when you start realizing [that] you need to change business processes," Wohl said. "Or you head off in directions that were unexpected."

And retail-industry users such as Jo-Ann pose an especially difficult challenge for enterprise resource planning (ERP) applications, according to Wohl. "We are one of the very few solutions that can tackle these kinds of problems and the scalability these retailers need," he said. "That's why you see our name connected with these complex jobs."

David Dobrin, an analyst at Surgency Inc. in Cambridge, Mass., said he's not surprised to hear that a retailer such as Jo-Ann is having problems with the installation of a back-office and supply chain system.

SAP Retail "has always been the ugly duckling" of the R/3 product line, Dobrin said. And the retail industry in general has proven to be a minefield for application vendors, he added. "What retailers need is very specialized and very difficult to build," Dobrin said.

Alan Rosskam, Jo-Ann's chairman and CEO, said in a statement that the company is "in generally good shape on overall inventory levels" and thinks it has "a compelling seasonal merchandise offering" for the fourth quarter. But, he added, executives at the retailer "are concerned about the overall economic environment and our ability to achieve our original sales target for the quarter."

Jo-Ann's SAP project hasn't been a simple matter from the start. The company originally hoped to start using the retail applications in the summer of 1999, but the rollout schedule had to be delayed because of throughput problems with the software and the onset of last year's holiday shopping season.

Les Duncan, Jo-Ann's CIO, said earlier this year that the retailer also had to customize SAP Retail, with help from developers at SAP, in order "to fill some big gaps" in the software's ability to keep track of seasonal products and to manage pricing and promotions.

That kind of complexity and schedule slippage is par for the course on major ERP projects, Dobrin said. "The only people who ever get those estimates [of implementation times] right are the extreme pessimists, and extreme pessimists rarely get any power in an organization," he noted.

Jo-Ann, which warned early last month that its third-quarter earnings would be below expectations, said the results also were hurt by a $1.1 million loss stemming from its minority stake in Inc., an El Segundo, Calif., company that sells arts and crafts supplies online. Last spring, Jo-Ann invested $6.5 million in return for 28.5% of as part of a deal leading to the launch of an e-commerce Web site that bears the Jo-Ann name.

Carney said losses from the e-commerce venture will actually be less than originally projected for this year as a whole, although he added that Jo-Ann executives don't expect to get any profits from the deal with IdeaForest until the Web site's third year of operation.

"But it's not strictly about profits," Carney said. "If someone buys online, that's great. But if they go out and get an idea online and then buy something in one of our stores, that's fine, too."

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