By Stephen DeAngelis
From the consumer’s standpoint, the retail sector looks a bit messy right now. Mergers and acquisitions, store closings, and bankruptcies dominate the news and online competition has sparked accusations of fraudulent products and unfair trade practices. The turmoil is real. McKinsey & Company analysts note, “It now sounds like a cliché, but that doesn’t make it any less true: the retail sector has experienced as much disruption in the past [few] years as it has in the previous 25. Consider this: perhaps never before in the history of the industry has every single one of retail’s primary stakeholder groups — customers, suppliers, employees, and investors — dramatically changed their behavior and expectations, all at the same time.”[1] They add, “In light of unprecedented industry disruption, a retailer’s actions today could determine whether it spends the next 20 years as a leader or a laggard.” They call this the “retail reset.”
The need for a retail reset
According to the McKinsey analysts, “Nearly one in five retailers have posted negative economic profit since 2015. And while the retail sector in aggregate has created value over that time, the gap between winners and losers is widening. Becoming a winner isn’t easy; staying a winner is even harder. And it’s a particularly Herculean effort when the rules of the retail game are changing as drastically as they are right now.” A retailer wins when a consumer repeatedly opts to buy its products and services. However, McKinsey analysts note that once-loyal consumers are changing their behavior. “Browsing in stores used to be one of the primary ways that shoppers came across new products,” they write. “But the purchase journey is now more fragmented. Nearly half of consumers — and approximately 70 percent of millennials and Gen Zers — say they rely on social media, celebrities, and articles or blogs for purchase inspiration. And they’re shopping fluidly across channels.” Journalist Whizy Kim agrees that in-store shopping has changed. In fact, she insists the once enjoyable trip to “go shopping” is now a trial because stores have “sucked the fun out of an American pastime.”[2] She explains, “[Going shopping] was both a social and languid activity, an opportunity to connect with a friend or explore our materialistic desires in contented solitude. Retail therapy, we called it. Now going to the store … is a battle that leaves consumers feeling defeated.”
The reason for consumer frustration, Kim asserts, arises from a combination of understaffing, inventory problems, and heavy-handed theft prevention measures. She notes, “[These challenges] are hardly new to the retail industry, but the problems have become more commonplace in the last few years, when the dial of frustration and discomfort turned higher.” Omnichannel operations has contributed to the retail challenge. Kim explains, “Fewer shoppers mean retailers have been stocking fewer items in-store, instead having inventory delivered to brick-and-mortar locations when a customer places an order for pick-up. That only reinforces the experience of the modern store as an under-stocked desert, making people even less likely to want to shop in person, and stores less inclined to spend their tightened budgets on staffing stores adequately or improving them.” Nevertheless, retailers know that mastering omnichannel operations is a must in today’s retail environment.
Another reason a retail reset is needed is because supply chains have been so disrupted over the past few years. As a result, on the supply side of things, journalist Helen Atkinson confirms that retailers are planning to shake things up. She writes, “After weathering the blows to supply chain operations in the last few years, mid-market retail and consumer packaged goods companies have plans to change their supply chain strategies.”[3] As evidence, she cites a survey from Carl Marks Advisors that found, “More than half of respondents plan to diversify their supplier base (53%), while a substantial percentage plan to increase onshoring (46%), invest more in supply chain technology (44%) and increase automation (43%). Fewer than 1% of respondents said they planned on taking no actions to evolve their supplier chain.”
As the McKinsey analysts observe, “The pace and magnitude of change have been jarring to even the most seasoned retail leaders.” The one thing that most discussions about the retail reset have in common is the expectation that artificial intelligence (AI) will play a big role.
AI and the future of retail
On the consumer side, McKinsey analysts note, “Software is disrupting and transforming every industry, and the impact is particularly pronounced in consumer-facing organizations. With the rise of the direct-to-consumer model, revenue increasingly comes from online rather than traditional channels. … Investing wisely in software across the entire value chain, from initial customer interactions to internal corporate functions, can help consumer packaged goods (CPG) and retail companies meet these rising expectations.”[4] Content marketer Autumn Whitefield-Madrano agrees that artificial intelligence/machine learning can help retailers meet rising expectations. She writes, “Customers want convenience; retailers want growth. Machine learning can help with both.”[5] Explaining how this is accomplished, she writes, “Nearly three-quarters of consumers expect personalized experiences, according to research from McKinsey. And when they don’t get it, 76 percent say they’re frustrated. … [Using consumer data], machine learning can provide customized recommendations that give customers the sense that their preferences are understood and accounted for. This, in turn, helps build loyalty. It’s a win-win proposition: Customers leave satisfied, with the items they planned to purchase along with a few ‘surprise and delight’ items that have been curated for them. The result? Retailers increase their sales.” AI strategist Vidhi Chugh suggests AI can also be used successfully used to optimize the quality of product images to improve sales conversion rates. She explains, “Retailers [can] leverage AI, specifically computer vision techniques, to enhance the visual appeal of product images, increasing the likelihood of the buyer clicking on the product.”[6]
Chugh also notes that AI is useful on the supply side of retail operations helping with activities like demand forecasting and inventory optimization. In fact, AI is becoming so important on the supply side of things that Atkinson reports the Carl Marks Advisors survey found, “Artificial intelligence (AI) … was top of mind, with more than half of respondents saying they plan to invest in AI to support their marketing (56%) and financial forecasting (52%), and fewer than 1% reporting no AI investment strategy for the coming year.” Journalist Lindsey Wilkinson reports that a survey conducted by MIT Technology Review Insights and published by Databricks confirms the Carl Marks Advisors findings. That survey found, “Retailers and consumer packaged goods companies are investing in data and AI more actively than any other industry. … More than half of retail leaders say their company is experimenting with generative AI, the report found. Supply chain optimization via AI-powered tools is the most high-value use case in the industry over the next two years.”[7]
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Chugh insists, “We are living in a highly competitive world where it is crucial to have a differentiator. Managing and mitigating risks of fraud highlights the retailer’s commitment to customer-centricity, leading to increased trust and brand loyalty from customers.” Artificial intelligence solutions are essential ingredients in helping make retailers winners now and in the years ahead.
Footnotes
[1] Steven Begley, Becca Coggins, Carson Green, Jad Hamdan, Dymfke Kuijpers, and Franck Laizet, “Retail reset: A new playbook for retail leaders,” McKinsey & Company, 10 July 2023.
[2] Whizy Kim, “‘Going shopping’ is dead,” Vox, 22 August 2023.
[3] Helen Atkinson, “Retailers Are Planning to Shake Things up in 2024, Survey Finds,” SupplyChainBrain, 30 January 2024.
[4] Aman Dhingra, Chandra Gnanasambandam, Rahul Mangla, Roger Roberts, and Hannah Mayer, “Turning consumer and retail companies into software-driven innovators,” McKinsey & Company, 6 September 2023.
[5] Autumn Whitefield-Madrano, “3 Ways Machine Learning Is Changing Retail for the Better,” BizTech, 12 February 2024.
[6] Vidhi Chugh, “How AI is Transforming the Retail Industry,” KD Nuggets, 30 May 2024.
[7] Lindsey Wilkinson, “Most retailers are all-in on AI,” CIO Dive, 22 January 2024.
