Penny Sleuth’s View Of Retec Digital

Adrian J Cotterill, Editor-in-Chief

Tom Bulford, editor of The Penny Sleuth has had a much better experience with (RET.L) Retec Digital PLC than we ever had and his views are quite complimentary but then he did start at the top of the organisation with the founder John Cole and finance director Charles Mckay whereas we dealt with some half arsed techies who figured that they owned all and any relationships with Sainsburys (long story).

Retec of course recently acquired the much admired company Liquid Digital at a knock down, dirt-cheap price.

Dear Reader,

The other day I had to endure the agony of buying a pair of shoes for my son. As usual the store was overcrowded and untidy, and what few staff there were just stood about watching as we attempted to find the right style and the right size.

It drives me mad – but is, I suppose, the penalty we have to pay for being able to buy goods at low prices.

This ‘pile it high, sell it cheap’ formula has been a successful one for many a retailer, but it does have its limitations. Take wine for example. I don’t know much about wine, so when I am in the supermarket I just look for a wine that is the right colour, the right price, and – yes, I admit it! – has a nice label.

But the supermarket, and no doubt the producer of the wine, would like me to be a bit more sophisticated than this. They would like me to trade up, and spend more.

How can they achieve this? One way would be to train an army of experts, and have them linger in the wine department of each store. This is not going to happen.

Supermarkets do not train staff, because they have no expectation of keeping them. But what they can do is to copy the on-line wine retailers. They can make information available on a screen.

We are, after all, becoming more familiar with screens. We all use an ATM, we buy train tickets from the automatic machines, and at the airport we check ourselves in at the kiosk rather than stand in a long queue.

Choose the best wine

So retailers now have the idea that information on wine, for example, can be made available on a touch screen placed on a small stand in the wine department. There you can learn which full-bodied red would suit your barbecue, or which dry white would wash down a nice Dover sole.

But all the time, of course, the aim of the retailer is to steer you in the direction of a more expensive wine than you otherwise would have bought.

These touch screens will soon be introduced into the wine departments of certain supermarkets and they will have been supplied by Retec Digital, a small AIM-listed company valued at just over £4m.

Last week I met Retec’s founder John Cole and finance director Charles Mckay and they told me that, although they were seeing some hesitancy in the current climate, they had an excellent pipeline of new business and felt that Retec’s digital display units were finally making a breakthrough in an industry that has been much hyped.

For the last few years a number of small players in this industry have been spouting the same mantra. That more advertising bucks will be devoted to the ‘in-store environment’ because this is where 75% of purchasing decisions are made; and that digital message boards are far superior to paper posters because they can be changed at short notice, can be programmed remotely, and can of course offer sound, music and action rather than just a static image.

By hanging large screens from the ceiling or placing them on the actual supermarket shelves shoppers can be guided around the store and given irresistible urges to grab products and thrust them into their trolleys.

With supermarkets more than adept at ensuring that others pay for such experimental investments much money has been lost in this area, and shares such as Mediazest, Avanti Screenmedia and Screen FX have cost investors plenty.

Most of these pioneers have failed because of the difficulty of proving a link between the on screen image and subsequent purchasing behaviour. So the crucial attraction of Retec’s product is that its use can be clearly linked to higher sales.

This is partly because these information terminals, or ‘kiosks’, can do more than just provide information to the customer and check the availability of items in store. By having the customer present his loyalty card, the retailer can capture his or her identity. And by incorporating chip and pin systems, shoppers can actually make a purchase while at the kiosk.

Big customers

So big retailers seem to be finally acknowledging the advantages of such terminals and Retec’s customers include Tesco, Sainsbury, Argos and Boots, to which it either sells directly or through a partnership with IBM.

And it is an example from Sainsbury that really proves the worth of Retec’s proposition. Retec supplied the supermarket giant with its ‘Entertainment Xtra’ display stands.

These stands display DVDs and, through a number of screens, enable shoppers to watch a brief preview. For Sainsbury and Retec the deal works something like this. Sainsbury pays for the Entertainment Xtra unit – but it then quickly recoups its investment by selling display and advertising space to the DVD suppliers.

Retec then makes its money through a service contract, the main element of which is to provide the screen content which is devised at its office in Lutterworth. The result is that Entertainment Xtra has boosted Sainsbury’s sales of DVDs by 24%, making its investment very well worthwhile.

So Retec is going strong, and in its latest half year delivered to its customers over 2,500 units, which will underwrite its service-based income in the future. Market forecasts suggest that it will achieve earnings per share of 0.3p this year, rising to 0.7p in 2009, putting the shares on a 2009 PE ratio of just under four.

Retec is a minnow in a stock market that is currently turning a blind eye to micro-caps. But with big retailers finally convinced of the merits of digital, in-store display units and now thinking of rolling them out to other departments such as electrical goods and DIY, Retec could be the company in this hitherto disappointing sector that finally achieves stock market success.

Tom Bulford knows his onions when it comes to stock picking. We have taken him to task in the past when he has been inaccurate with the likes of ScreenFX and Avanti Screenmedia but unlike many other financial journalists and editors he is very open to (constructive) criticism and has been particularly good to us as we have learnt the ins and outs of AIM as well.

If you look at the Retec screens in Sainsburys they are absolutely awful. Poor positioning, poor content, poor interface, awful audio and we have seen BSODs more often than you can mention.

We are sure that with Liquid Digital’s help they can and will improve the content and the interface (they have had a few BSODs of their own in WHScreen as well mind) and make the network one that the industry can be proud of.

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