Artificial intelligence (AI), which had a widespread lack of familiarity only a few years ago, is today increasing its presence within a rapidly expanding number of industries including technology, manufacturing, finance, healthcare, and insurance. As AI technology advances, it will revolutionize almost every industry and our everyday lives.
B&M retailers who have, until recently, depended on legacy tools and category management approaches built nearly half a century ago are now beginning to understand that era is ending, and they are moving to the forefront of the AI transformation. The speed, complexity and reliance on massive amounts of data in modern retailing are the perfect conditions for AI to thrive, its value gaining further momentum as a consequence of the impact felt by the pandemic. As the world emerges from COVID-19, customers now expect a seamless multichannel shopping experience which adds layers of complexity and challenges for retailers. Confronted by the volume of data generated by their business, Merchants recognize the limits of their current intelligence tools that are no longer up to the task. In a recent survey of B&M retail executives in North America, 83% had implementation of AI as priority over the next two years.
When done properly, the benefits of moving to the cutting-edge of AI are transformational to both a retailer’s short and long-term future.
The benefits of using AI in merchant organizations
- Better customer experience – The ultimate measure of AI success in a Merchant organization is improved customer satisfaction based on consistently providing the right items at the right prices and making them available in the right channels. This, of course, is always the goal of retailers. But when AI technology manages this function instead of an analyst using legacy tools, most retailers see customer satisfaction metrics increase and sales improve up to 5% year over year.
- Ideal assortment – AI considers millions of possible item combinations, continuously learning, and ultimately recommending the best scenarios for retailers in the context of their specific strategy (Hi/Low, EDLP etc.). At the heart of the AI algorithm is the Halo Sales Impact, which is similar to the idea of associated sales, but extends much further. It mathematically considers, not only the millions of associated sales, but factors like cannibalization, pantry loading, seasonality and price points to recommend the ideal assortment and range.
- Optimized pricing – In addition to establishing the optimum range of items, the more advanced AI technologies solve for all item price points across all channels. Though very complex, the AI assigns price points based on what items should be promoted to drive customer trips (typically the items that drive Halo Effect), and which items should remain at regular price (typically the items that are only associated with the promoted Halo driving items). The AI technology takes what is very complex and provides the best blend of price points to maximize the bottom line. Normally, with the most advanced technologies, these calculations are completed within the algorithm that calculates item selection, channel selection, etc. to achieve a fully considered solution with the best margin for the total store.
- Superior promotions – AI algorithms significantly extend the reach of promotions by determining the best combination of items that reach the greatest number of customer segments. It is better to have five great deals for five customer segments than five great deals that are only relevant to one customer segment. Moreover, while calculating the greatest reach, it selects the items that have the greatest amount of associated sales impact across the store (Halo impact).
- Accurate forecasting – Consistently accurate sales forecasts across all channels is certainly a cornerstone for any retailer. The technical reason AI achieves superior forecast accuracy vs. the traditional approaches lies in its ability to consider thousands of variables, including incorporating the complex Halo impact of every item offered by the retailer. Importantly, this affords Merchants real time dynamic scenario planning and the power to adapt to a rapidly changing market and customer shopping patterns. The limitations of traditional forecasting methods certainly came to light over the course of COVID-19.
- Attracting talent – According to McKinsey, between 40% and 50% of work currently carried out by traditional Merchant organizations is replaceable with today’s AI and automations tools. The roles and responsibilities that these technologies eliminate are the more outdated less desirable manual and tedious ones, while new roles, that the best talent of today are looking for, are being created.
- Improved vendor alignment – The nature of AI is to bring full transparency of every item sold across all channels of a retailer. This transparency enables Merchants to identify the full impact that every vendor’s portfolio has on the bottom line and develop more aligned partnerships with the right group of complementary vendors. The vendors in turn gain, through their recognized value to the retailer, better forecasts and alignment with other complementary vendors.
- Process automation – Retailers are working hard at process automation (PA) to supplant much of the manual work of Merchants, making back-office tasks such as item ordering, transferring prices to stores and loading promotions into the various channels. For the technologically leading retailers, AI is the brains that enables a fully autonomous enterprise and drives the automated processes, optimizing the individual processes based on feedback loops from of all processes, ensuring continued improvement.
- Deeper Insight – Retail focused machine learning institutionalizes a deep understanding of the market and the Halo Effect, knowledge that will continue to expand as the algorithms learn through experience and as additional data sets are added. Historically, B&M retailers have relied on the experience of Merchants and armies of data scientists, but in the age of AI, that is shifting quickly, allowing people to focus on strategy and innovation while applying machine intelligence to do what machines do much better today.
- Future proofing – COVID-19 has served as a powerful example of how important it is for business leaders to future-proof their businesses. To succeed through unexpected, turbulent times, retailers must be prepared and cannot rely on business as usual. Digitizing assets, employing low-touch process automation for critical functions and having the ability to effectively adjust for new market circumstances is a critical component of preparing. AI technology provides that resiliency and ability to quickly run scenarios and plan for numerous potential circumstances.
A road map for the future
The scale, speed and complexity of modern retailing is accelerating at an incredible rate and compelling retailers to adopt new technologies to meet these challenges. Taking the measures to adopt AI technology certainly provides results in the near future, but it is about more than just the current challenges and the short term. Adopting AI and process automation becomes an inflection point in a company’s history, substantially changing the trajectory of the organization. In the not-so-distant future, AI will power retail ecosystems that include all aspects of merchandizing and every function of a company. Most B&M Merchants are dipping their toes in, but a smaller number of retail organizations have gotten a head start, truly leveraging the power of AI as it grows organically within their company, transforming for the future.