Cost-Saving and Customer-Facing Advantages Will Remake the Landscape; Retailers Must Build Strategic Plans, Says L.E.K. Consulting Report
BOSTON, MA (September 29, 2020) – After years of hype and anticipation, artificial intelligence is starting to impact the retail industry. The current pandemic makes it even more urgent that retailers anticipate, and get ahead of, AI disruption.
Within the next few years, AI will transform the sector, affecting everything from cost structures to the customer experience. Advantages gained through AI will remake the sector – which means that retailers need to plan at the level of business strategy, not just technology.
That’s according to Artificial Intelligence Arrives – For Retailers, the Time to Adopt and Disrupt is Now, a report by global management consulting firm L.E.K. Consulting.
“Unfortunately, while AI is moving forward, many organizations in the retail sector are still unclear where exactly they should lean in,” says Dan McKone, Managing Director at L.E.K. and report coauthor. “Many companies see the value of AI but there are major barriers – talent shortages, employees that lack the right skills, IT infrastructure that doesn’t measure up and nebulous strategies for commercialization and adoption.” As AI arrives in the retail industry, it is evolving rapidly – developing new capabilities for learning, prediction and ultimately mimicking human interactions. The challenge for retailers is to use those capabilities effectively, and to make sure their organizations are up to the task.
McKone notes that while COVID-19 has prompted a crisis mentality that can put AI investment on the back burner, the pandemic makes the need for AI even greater. “There has been a step-change in online shopping. It already represented a double-digit percentage of commerce in many categories. Now, a variety of areas, such as pantry items, home goods, pet supplies and others, have seen surges in online activity as consumers have chosen, or been forced, to seek alternative outlets. AI-driven strategies go hand-in-hand with e-commerce, so the need to adopt AI is becoming more urgent and central to business success,” says McKone.
Why adopt AI? Lower costs, better merchandising and a richer customer experience
The report explains that AI will result in three main benefits to retailers:
- Lower cost-to-serve, as AI transforms the workforce. Routine tasks will surely be automated, but AI will also support and enhance increasingly demanding work. Among other things, AI will help optimize labor scheduling, delivery tracking and route planning for deliveries.
- More effective merchandising and promotion. AI will drive marketing and merchandise planning, and will help segment customers, generate content, and plan and execute targeted advertising programs. Wal-Mart is already using AI to scan competitors’ offerings. In the near future, it hopes to use robotics to scan its own shelves to optimize the product mix.
- A better, richer customer experience. “Some of the most valuable benefits of AI will be in the store itself,” McKone says. Store associates can use AI-enabled mobile devices to help with sales, and thus drive higher conversion rates and order values. For instance, Nordstrom’s sales associates use data about customer types to make personalized in-store recommendations. “Eventually, AI will provide more leverage to in-store labor by coupling AI assistants to augmented reality tools on customers’ own devices,” he says.
According to the report, margins are so thin in retail that any cost or customer advantages can be game changing. For example, if AI can help customers find what they want more efficiently online, the industry’s traditional online browse-and-find model will be disrupted. Instead, the AI tool becomes the consumer’s shopping buddy and prompts higher conversion at lower cost by suggesting products more likely to resonate. “Savvy retailers will put those cost-of-conversion issues at the heart of their planning,” says Harsha Madannavar, Managing Director at L.E.K. and report coauthor.
Savvy retailers will take a commercial approach to AI
The report points out that, despite the emergence of AI, fundamental economic laws haven’t changed. “AI strategy must start with user needs and a strong case for return on investment. Also, changing technology is easier than changing the way people work. To succeed, you have to do both – and remember that changing behavior takes time,” says Madannavar.
Accordingly, the report says an effective retail planning process should involve:
- A baseline analysis of the workforce that identifies key activities and determines which can be automated and which need to be supported or enhanced by AI.
- Continued focus on high-value uses, to make sure the highest priority goes to the AI opportunities that address the most critical customer needs and pain points, create great customer experiences or radically improve workflows.
- Pragmatism. Set realistic timelines and prioritize practical, near-term opportunities over “moonshot” use cases.
“Just remember, retail businesses that commit to AI will evolve to both look and function quite differently from that which we’ve become accustomed,” McKone says.
About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public-sector organizations, private equity firms, and emerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,600 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.