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A Frost & Sullivan White Paper Brian Cotton, PhD and Robert Worden www.frost.com 50 Years of Growth, Innovation and Leadership Smarter Computing For Retailers: Meeting The Needs Of The Smarter Consumer Through Insight And Action

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Page 1: Smarter Computing For Retailers: Meeting The Needs Of The Smarter Consumer Through Insight And Action

A Frost & SullivanWhite Paper

Brian Cotton, PhD and

Robert Worden

www.frost.com

50 Years of Growth, Innovation and Leadership

Smarter Computing For Retailers: Meeting The Needs Of The Smarter Consumer Through Insight And Action

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CONTENTS

Abstract ..................................................................................................... 3

The Retail Industry Environment: Savvy Customers And Agile Competitors ............................................... 3

The Business Need For Smarter Computing To Transform The Retail Industry........................................................... 7

The Business Value Of Smarter Computing In The Retail Industry .............................................................................. 11

Building A Responsive And Efficient Retail Business Infrastructure ................................................................. 12

References ................................................................................................. 14

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ABSTRACT

Retailers today are facing more technology-savvy, demanding customers and moresophisticated competitors, which are forcing them to transform their businessmodels. This transformation is being guided by three imperatives defining the retaillandscape: 1) deliver a smarter shopping experience; 2) develop smartermerchandising and supply networks; and 3) build smarter retail operations. Inresponse, retailers are becoming more customer-centric, which requires them totransform their information technology (IT) infrastructures. Forward-thinkingcompanies are moving quickly and strategically to embrace Smarter Computing, aprogressive approach to building IT infrastructures that return real business value.Smarter Computing enables retailers to connect with manufacturers, suppliers andconsumers globally for better real-time decision-making. Retailers embracingSmarter Computing are also finding that they can keep pace with their customers’changing buying preferences and demands, while realizing increased availability andresiliency of transaction systems, and lower operating costs.

THE RETAIL INDUSTRY ENVIRONMENT: SAVVY CUSTOMERSAND AGILE COMPETITORS

The retail environment across the globe is challenging retailers as changes inconsumer behavior interact with an unstable global economy, rapid advances intechnology, and increased competition and regulation. In some parts of the world,the economic recession has decreased consumers’ spending ability, but has notstopped it completely. In June 2011, for instance, the retail sales index decreasedby 0.4 percent in the Euro Zone, but in the U.S., retail sales posted a slight gain of0.5 percent . There are also some signs that certain segments of the retail industry,such as apparel, are picking up. The economic mood in growth markets such asChina, India and Brazil is positive. Low unemployment and rising wages, coupledwith greater access to consumer credit, have fueled spending to the point thatgrowth markets are expected to account for 60 percent of world GDP by 2020 andcontribute significantly to world retail sales. This all suggests that consumersaround the world are becoming more conscious about their spending, which isforcing retail models to adapt.

Retailers are also confronting the empowered consumer. The continued spread ofmobile communications and the rapid rise of social networking have given consumersthe power to redefine their relationship to retailers. Armed with more informationand an ability to make purchases from virtually any Internet-connected device,consumers are better informed during the purchasing process. Whereas some retailwebsites provide consumers the ability to compare products and services, pervasivesocial media open up multiple forums for shoppers to post comments and makerecommendations about a retailer’s products, pricing or customer service. Theseconsumers are savvy and seek out the highest value for products and services, as well

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as demanding a consistent shopping experience across all channels. Retailers need totake advantage of the opportunity to engage with their consumer on a personalizedbasis, and provide platforms for a new vision of electronic commerce.

Changes in retail competition and regulatory rules are causing additional challengesfor retailers as many seek to expand internationally to take advantage of growthopportunities outside of their home markets. Some U.S. retailers, for instance, areentering into Canada and this is creating a highly competitive retail market north ofthe border. Over the past decade, seven of the top 10 U.S. retailers have expandedinto Canada . Wal-Mart, for instance, operates approximately 329 stores in Canada,having made the decision to enter that market several years ago. In September 2011,Target Corporation announced plans to open another 84 stores in Canada, bringingthe total of new stores due to open in 2013 and beyond to 189 locations . In additionto Target, Nordstrom’s and Kohl’s are investigating opening retail operations inCanada as well . Existing Canadian retailers have responded with lower prices,adjusting their merchandizing mix and examining acquisition targets.

Regulatory initiatives in the U.S. also have retailers concerned about rising operationalcosts. The Patient Protection and Affordable Care Act (PPACA) employer mandateprovision, for example, has retailers concerned about not being able to affordhealthcare for employees, a situation that may lead to layoffs . A U.S. Department ofTransportation initiative to reduce driving time hours for freight companies couldimpact delivery schedules by mandating drivers have two consecutive nights off. Thoseretailers using night-time shipping would be most affected. All of this means thatretailers need to develop leaner, more efficient operations.

The drivers of today’s retail environment have shifted power to the consumer,which is compressing margins and changing the retail paradigm. Retailers arescrambling for the right strategic approach in this challenging environment, astraditional retail models such as warehouse stores, department stores and specialty

Retail Industry Drivers

• An unstable global economy

• Increased access to mobile technology

• Changing consumer behavior

• Intense retail competition

• Changing regulatory rules and expectations

• Fast changing online and mobile technologies

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retailers are reaching maturity, and online retailing is growing. Retailers need tofind ways to be more agile, and to expect that their suppliers will do the same.

The challenges of the retail environment create complexity for retailers trying to adaptto the 21st century economy, and this is requiring them to transform their businessmodels, and the technology that supports them, to succeed. This transformationprocess is guided by three vital retail imperatives, as shown in Figure 1.

Deliver a smarter shopping experience: enabling a shopper to engage on apersonal basis with retailers, shopping whenever and wherever they want, and matchinventory and brand experience across channels, in stores and via mobile devices.

Develop smarter merchandising and supply networks: gatheringcustomer information continuously at every touch point, to manage and deliverassortments based on customer insights.

Build smarter retail operations: inserting intelligence into customer datamanagement and processes to understand real-time sales trends, while improvingmanagement across production, product development, and assets to driveoperational excellence and lower costs.

Figure 1: Imperatives Guiding the Transformation of the RetailIndustry

Source: Frost & Sullivan Analysis and IBM

Build Smarter Retail Operations

• Financial Performance Management• Financial Analytics• Energy Performance Management

Develop Smarter Merchandising &Supply Networks

• Supplier Integration & Management• Supply Chain & Inventory Optimization• Transportation & Warehousing

Management• Supply Chain Performance

Optimization

RetailIndustry

Transformation

Deliver a Smarter Shopping Experience

• Customer Intelligence & Insight• Online Customer Experience & Selling• In-Store Point of Service• Cross Channel Order Management

& Fulfillment• Cross Channel Campaign Management• Social Retailing and Analytics

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The imperatives shown in Figure 1 revolve around how a retailer can transform itsbusiness model to be more attuned to the customer, make changes to theorganization and improve the shopping experience for the customer. Thetransformed model equips the retailer to listen to the customer, through multiplemedia, and learn from their choices, feedback, and behaviors. This allows them toservice customers flawlessly, and predict and grow customer loyalty. It enables theretailer to develop a single, “truthful” view of each customer across multipleshopping channels, and use this information to guide changes in merchandising andmarketing to make interactions more personalized and service-oriented. Finally,the new retail model enables the customer to select the methods and channels ofinteraction, while taking control of social media so that a customer’s suggestionsand feedback are able to build a retailer’s brand. The retailer who embraces theseimperatives will become a lean, informed and versatile organization capable ofdriving operational efficiencies and growth. The key requirement of success,however, is the need to adapt the retail IT infrastructure to handle the demandsimposed by these imperatives.

The conundrum for smarter retailing is how to support the imperatives with an ITarchitecture that is collaborative, scalable, secure and integrated. Theinfrastructure must be scalable in response to increased demand, such as consumerresponses to promotions or seasonal shopping periods. The systems must alsosupport high-performance computing across multiple workloads to accommodatelarge numbers of consumers shopping on a website, for instance. The infrastructurealso needs to be flexible to adapt to changes in demands and new applications,enabling IT managers to direct resources where they are needed most, and it mustbe reliable and robust to ensure constant uptime. Finally, it is crucial that theinfrastructure be standardized to close gaps in the existing architecture,governance rules, and process management simultaneously across the enterprise.Many retail IT infrastructures have often been implemented without thesenecessities as top considerations and over time expanded to handle singular tasksthat were not part of an integrated design.

Key Infrastructure Requirements

• Scalability

• Performance

• Flexibility

• Reliability and Availability

• Standardization

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Retail industry leaders are beginning to seek advanced IT solutions to help themaddress their rapidly changing environment. Forward-thinking CIOs are starting totransform their IT infrastructures to respond to the imperatives driving 21st centuryinnovations in retail business models. Retailers need a modern IT infrastructurepowered by an efficient set of operations to successfully deliver a smarter shoppingexperience backed by an agile merchandising and supply network. The architecturaldesign of this infrastructure must accommodate a constantly updated stream ofinformation from customers and the supply network, feeding into analytic platformsthat enable quicker reactions to changing customer preferences and operationalconditions. They also need to perform complex information capture and processingefficiently, and support different types of business models to keep costs down.Smarter Computing is an approach that can help retail industry CIOs transform theirIT infrastructures to address these imperatives.

THE BUSINESS NEED FOR SMARTER COMPUTING TOTRANSFORM THE RETAIL INDUSTRY

Introducing Smarter Computing

Smarter Computing is a new approach to transform IT infrastructures to enableretailers to optimize the shopping experience for today’s digitally-empoweredconsumer. This approach is based on three fundamental capabilities:

• Designed for Data means designing an IT infrastructure to harness allavailable information, including real-time streaming data, to unlock insights forbetter decision-making. It is about extending beyond traditional sources of datato generate insights by leveraging new forms of information, which can beincorporated into a retailer’s information supply chain to reduce operationalcosts, master a single version of a customer profile, simplify data security, andget insights from huge volumes of complex data.

• Tuned to the Task means matching workloads to systems that areoptimized to the workload characteristics, ranging from transaction processingand database management, to business intelligence and analytics, to managingcommunications across merchandising and supply networks. Optimizing thesystems to the workloads enables greater performance and efficiency, helpingCIOs working to enable smarter retail operations.

• Managed in the Cloud means changing operations to support evolvingbusiness models and enable delivery methods that bring greater efficiencies outof existing IT assets, and deploy resources flexibly, dynamically and quickly tomultiple store locations, distributors, and suppliers in a cost-effective manner.

Smarter Computing supports business transformation by creating a technologyframework to enable business operations that realize the business imperatives, andgenerates business value in a competitive, cost-conscious environment. The

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Smarter Computing approach in the retail industry revolves around howcustomers’, suppliers’, store, and partner data is collected, processed, analyzed,saved, and shared. The IT infrastructure that supports the model’s businessoperations delivers business value by using data to guide decisions, using optimizedsystems to maximize efficiency, and leveraging the cloud to transcend geographicborders and legacy system limitations. Figure 2 illustrates the application of theSmarter Computing approach to retail industry innovation.

Figure 2: Smarter Computing and Retail Industry Transformation

Source: Frost & Sullivan Analysis

Retail company CIOs can use Smarter Computing-based IT infrastructures to carryout the operations underlying the transformation imperatives. Because the variousbusiness operations have different characteristics, workload-optimized systemsyield efficient computing infrastructure designs. The efficiencies lie in systems thatare flexible enough to meet peak-level workload demands, such as back-to-schoolor holiday sales, and enable resources to be deployed elsewhere during off-peakperiods. Smarter Computing’s cloud capabilities facilitate the deployment andimplementation of new processes and models that encourage collaboration andcontributions from customers, retailers, and suppliers across the value chain, whilegiving managers a unified view of the insights derived from customer and businessintelligence. By being able to capture all available data for advanced analysis, aSmarter Computing infrastructure can help managers predict preferences andbehaviors and make decisions accordingly. Importantly, the approach gives CIOs

Retail Organization Transformation

Deliver a Smarter Shopping Experience

• Customer Intelligence & Insight

• Online Customer Experience & Selling

• In-Store Point of Service• Cross Channel Order

Management & Fulfillment• Cross Channel Campaign

Management• Social Retailing and Analytics

Develop Smarter Merchandising & Supply Networks

• Supplier Integration & Management

• Supply Chain & Inventory Optimization

• Transportation & Warehousing Management

• Supply Chain PerformanceOptimization

Build Smarter Retail Operations

• Financial PerformanceManagement

• Financial Analytics• Energy Performance

Management

Process Automation Business Process Management

Event Processing Customer Intelligence Business Intelligence Transaction Processing

Data Storage, Sharing, & Management

Physical World Interfaces (Sensors, Systems, Devices) & Data Acquisition

DESIGNED FORDATA

WORKLOADOPTIMIZED

CLOUDENABLED

High Availability, Multi-tiered Transaction Processing

Customer-Specific Offers and Outreach Activities

Scalable Operations for Seasonal Promotions and Events

SMARTER COMPUTING-BASED IT INFRASTRUCTURE

Business Imperatives

Business Operations

Business Value

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control over capital and operational expenditures because existing ITinfrastructures can be transformed and need not be completely replaced.

Delivering a Smarter Shopping Experience

Delivering a smarter shopping experience requires retailers to develop a deepinsight into the needs and shopping behaviors of their customers and offer thempersonalized products and services, often in real time at point of sale. This is basedon intelligence about past purchases and behavior, and incorporates social retailingand mobile commerce patterns. Retailers use this insight to develop customizedoffers and product mixes, conduct cross-channel campaigns, and fulfill ordersquickly and cost-effectively. A smarter experience also relies on communicationbetween a retailer and a customer across channels in whatever media the customerchooses—in store, online, or mobile—and offering social networking to theircommunity to gather and interpret customer feedback.

The key to a retailer’s ability to deliver a smarter shopping experience is puttingthe savvy, digitally empowered customer at the center of their operations. Thereis a wealth of data, both structured and unstructured, available to retailers that canbe captured and analyzed. The resulting insight can be shared across the valuechain. By building an IT infrastructure that is designed for data, retailers canharness large volumes of rich data and apply sophisticated analytics to it, enablingthem to redefine their relationships with their customers. By deploying systemsand components that are optimized to their IT application and operational tasks,and hosting the applications in the cloud, retailers can quickly scale out to maintaina personalized connection with all of their customers—without the need to buildcostly infrastructure at multiple store locations.

The Smarter Computing approach also creates business value for a smartershopping experience by:

• Capitalizing on social and mobile commerce;

• Contributing to growth by enhancing and extending the value that the retailergives to their customers; and

• Enhancing customer loyalty by supporting customer-specific offers andoutreach activities.

Developing Smarter Merchandising and Supply Networks

Developing smarter merchandising and supply networks requires retailers tosynchronize operations across the supply chain, optimizing inventory and orderfulfillment processes to bring the smarter shopping experience to customers quicklyand efficiently. This involves not only managing vendor relationships, but alsoenabling open collaboration between retailers, customers, suppliers, and shippers to

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ensure that the products customers want are available and can be delivered rapidly.

Retail industry CIOs can apply the Smarter Computing approach to build an ITinfrastructure that sustains smarter merchandising and supply networks byintegrating and managing suppliers in the process of developing customer insight todeliver product assortments that customers want. Applications that enable assetand inventory management and tracking would be able to run on infrastructurecomponents architected to harness and analyze customer and operational data. Inan online and mobile commerce model, retailers would use cloud computing toenable suppliers, outlets, and customers to remotely access storefronts andwarehouses and input data securely. A cloud model would also enable supply chainperformance optimization using real-time analysis of data to dynamically allocatesupply chain resources and coordinate workflows across the chain.

Smarter Computing can help CIOs gain business value from smarter merchandisingand supply networks, including:

• Optimized supply chain performance, from product manufacturing throughwarehousing and distribution;

• Efficient, robust, and resilient supply networks; and

• Secure and seamless transaction processing and order fulfillment.

Building Smarter Operations

Retail CIOs can apply Smarter Computing to build smarter operations to improvebusiness processes, make production more efficient, and control costs across thebusiness. The big data capabilities used to develop sophisticated customer insights canalso be applied to better understand the financial performance of retail operations andsupport management decisions. An IT infrastructure that is optimized to handle aretailer’s workloads can save operational costs, such as energy, and reduceunnecessary infrastructure expenditures. By applying virtualization technologies,retailers can deploy resources during off-peak times of demand for other projects,such as application development or backup of mission-critical systems.

Smarter Computing can also help realize other business value from having smarteroperations, including:

• Improved business intelligence;

• Support for high-availability, multi-tiered transaction processing; and

• Cost and consumption management.

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THE BUSINESS VALUE OF SMARTER COMPUTING IN THERETAIL INDUSTRY

Retail organizations are facing an unprecedented set of challenges that are forcingchanges in their business models. Global economic uncertainty is making customersmore careful about their spending, and mobile communications and social networkingare giving them the means to demand more from retailers. Competition amongretailers for this business is increasing, and the successful merchants will be those thatconsistently deliver a smarter shopping experience to their customers. Commercialsuccess will also depend on smarter merchandising and supply networks, and smarterand more efficient operations. All of these factors are driving retailers’ IT departmentsto transform their IT infrastructures to adapt to the imperatives of today’s retailenvironment. Some progressive organizations have embraced the Smarter Computingapproach to direct their transformation to meet these imperatives.

Staples: Delivering a Smarter Shopping Experience

Staples is the world’s largest office products company and provides products andservices in office supplies, copy & print, technology, facilities, breakroom, andfurniture. The company is a leader in eCommerce sales and considers the continualimprovement of the online shopping experience to be a strategic priority. As part ofthis, Staples’ marketing teams need the ability to model customer responses tovarious promotions before taking them to market. Staples recognized that its currentIT architecture would be unable to provide the computing platform necessary for thistransformation, and it would need substantial investments in it to achieve itsambitious goals. Rather than taking on a huge cost burden, it partnered with IBM toimplement a Smarter Computing approach to guide the process.

The goal of the project was to develop a next-generation platform that would giveStaples’ customers a differentiated shopping experience, and save the companycapital and operational costs. The core of the transformation involved replacing 35older servers with seven new servers, built specifically to support Staples’ e-commerce initiative. The architecture design enabled Staples to apply real-timeWeb analytics to a range of customer data, which was used to create targetedmarketing messages and offerings. The system is also designed to scale to handlespikes in activity during peak load periods. During off-peak periods, it can redeployresources on the fly to do promotion testing alongside production, boosting theflexibility and efficiency of the system. Staples’ system was built with futurecapabilities in mind, such as leveraging its cloud capabilities to serve multiple microe-commerce sites. By consolidating its servers and building them to handle specifice-commerce tasks, Staples reduced data center space requirements by 56 percent,cut hardware maintenance requirements by 80 percent, and saved tens ofthousands of dollars in energy costs in the first year.

“The goal was toensure that ourcustomers would have a great siteexperience relative to performance. We wanted todecrease our total cost of ownership for the hardwaretechnology whileincreasing flexibilityand scalability for the future.”

—Rob McClellan, Vice President of IT,Staples.com

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Rocky Mountain Chocolate Factory: Automating Business ProcessesIncreases Insight and Effectiveness

Rocky Mountain Chocolate Factory, a candy maker, franchisor, and retailer with 300locations in North America and the Middle East, applied Smarter Computingprinciples to develop a smarter merchandising operation. The company maintains afocus on developing and producing candy, and leaves the majority of sales operationsto the 300 franchise stores. Each of them, in turn, maintains a separate point-of-sales(POS) system and manually e-mails sales and inventory data to the company’s mainoffice. This manual approach was time- and labor-intensive, which meant that theimportant findings in the data reports were often out of date and not useful to thecompany’s merchandising strategy. Trends were also difficult to identify, andproducts were often not delivered to meet these trends. Rocky Mountain ChocolateFactory’s management decided that the threat to business was substantial anddecided to team up with IBM to standardize the POS system, which would feed dataquickly into an IT system designed to manage the company’s merchandising andsupply network. By applying the Smarter Computing approach, the company is ableto identify trends more quickly, and act on them, to increase sales and profitability.

BUILDING A RESPONSIVE AND EFFICIENT RETAIL BUSINESSINFRASTRUCTURE

Retail industry CIOs and IT managers are under constant pressure to ensure thattheir IT infrastructures enable their companies to be lean and agile in theirintensely competitive retail environment. Value-conscious customers areconnected and empowered, and demand personalized service across a number ofchannels. At the same time, retail in a globalized world is fiercely competitive ascompanies contend for business at brick-and-mortar stores and e-commerce sites.To succeed, retailers need to adapt their business models to deliver a smartershopping experience to respond to their customers, while building smarter retailoperations and smarter supply networks to maintain cost-efficiency. Retail CIOsneed a smarter way to transform IT infrastructures to capture complex customer,competitor, and operational insights underlying retail business models that areresponsive and efficient.

The application and operational requirements to realize these imperatives comewith substantive IT workloads, and traditional IT infrastructures that weredesigned around a one-function-one-hardware system principle cannot cope withthese workloads. In today’s austere economic climate and highly competitiveindustry, retail CIOs have the additional requirement for their IT infrastructures toreduce operating costs, be flexible and scalable to deploy computing resourceswhere they are needed, and to encourage collaboration across the value chain.

“We can run ourbusiness so much

more effectively and with so much

more insight using the IBM system.”

—Key Jobson, CIO,

Rocky MountainChocolate Factory

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The Smarter Computing approach is a holistic solution that can guide retailers’ ITdepartments along the path of establishing the IT infrastructure to support theimperatives of a responsive, efficient, and reliable business infrastructure. Anumber of retailers around the world are beginning to realize the benefits ofimplementing a Smarter Computing approach. Industry CIOs may wish toinvestigate using a Smarter Computing approach if they are considering:

• Establishing a sophisticated program to capture customer intelligence andderive insight from a variety of data types and sources;

• Supporting a global network of merchandise suppliers, store outlets, and virtualstorefronts for serving customers across multiple channels;

• Enabling the rapid development and deployment of promotions and offerings totake advantage of emerging product and customer trends; and

• Creating a company-wide data management system, with shared access tomaster records.

Forward-thinking retailers, such as Staples and Rocky Mountain Chocolate Factory,have employed a Smarter Computing approach to help them meet the needs ofdemanding customers and succeed in a competitive, cost-conscious environment.

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1 U.S. Census Bureau. “ADVANCED MONTHLY SALES FOR RETAIL AND FOOD SERVICES JULY2011,” August 12, 2011.

2 “IBM Forecast: Fall Looking Bright for Apparel Retailers.” IBM Press Release, 31 August 2011.3 The Conference Board, “Global Economic Outlook 2011.” http://www.conference-

board.org/data/globaloutlook.cfm4 Colliers. “The Retail Report Canada,” Spring 2011 Edition.5 Target Corporation. Press Release “Target Finalizes Real Estate Transaction with Selection of 84

Additional Zellers Leases,” September 23, 2011.6 Reuters, “Canada a magnetic north for U.S. retailers,” September 26, 2011.7 National Retail Federation. “NRF Testifies on Health Care Reform, Asks Congress to Eliminate

Employer Mandate Penalties,” February 9, 2011.

This report was developed by Frost & Sullivan with IBM assistance and funding. Thisreport may utilize information, including publicly available data, provided by variouscompanies and sources, including IBM. The opinions are those of the report’sauthor and do not necessarily represent IBM’s position.

XBL03015-USEN-00

REFERENCES

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