It is essential that retailers are able to create effective algorithms to make the most of the large quantities of data they possess if they are to ensure competitive advantage.

This is according to Gartner, which said that this can help them cut costs and improve their top-line revenue in a digital economy where there is a huge volume of information available for analysis.

Speaking at the Gartner Symposium/ITxpo in Australia, principal research analyst at the firm Kelsie Marian said there are several examples where retailers who have acted aggressively to implement such solutions have seen strong results.

She noted this sector is particularly well-placed to take advantage of the technology, as it is traditionally a major hoarder of data, with many companies having years' worth of store-level data available to them. But while this has been used for activities such as demand planning since the 1980s, today's solutions need to be drastically different.

"Data is ubiquitous in the new retail environment, and retailers will survive only if quality data is embedded into every decision, minute by minute, across the retail organisation," Ms Marian said. "But retailers can't humanly scale to keep pace with growth of data, so a fundamentally different approach is necessary." 

Gartner therefore described the future for the sector as being 'algorithmic retailing', which it defined as the application of advanced big data analytics across a complex retail structure, in order to "deliver an efficient and flexible, yet unified, customer experience".

By 2020, the organisation forecast that leading firms in the retail sector will have embraced algorithmic approaches to planning their operations, which will lead the top ten companies to cut up to a third of their headquarters' merchandising staff.

Gartner highlighted several key areas where these advanced analytics are set to have an impact on retail operations.

One of the major operations will be to assist in determining the cost of goods sold. This is dependent on a number of factors, and is driven by the selection, assortment, pricing, promotion and inventory levels of items. Therefore, there is a great deal of potential for algorithms to improve performance, reducing overall costs and increasing top-line revenue.

Elsewhere, this technology can also help optimise how labour is deployed, improve customer service and improve the handling of back-office administrative tasks, from HR to distribution.

In order to take full advantage of the potential of big data and advanced algorithms, Gartner noted there are several steps that retailers must take.

Firstly, it recommended that chief information officers (CIOs) in the sector need to formulate a plan for identifying and classifying all sources of data within their business, as well as spot any gaps that need to be filled.

They also need to be prepared for the explosion in data generated by products, customers and stores that will be caused by the introduction of Internet of Things devices to their ecosystem.

Developing a framework to identify current and future opportunities where algorithms and automations can improve performance is also a must, as is reviewing how other retailers are using the technology.

"Retail CIOs and their teams play a pivotal role in helping business leaders understand the benefits and limitations of algorithms, and how algorithms can support their business goals," said Ms Marian.