Technology has transformed the shopping experience for consumers, changing everything from where we buy and how we pay to how we consider value in making purchasing decisions.
Now, advances in retail media, artificial intelligence and automation are bringing further disruption to the retail sector, helping the largest players consolidate their positions through higher profitability, faster growth or both.
“After years of profit challenges due to e-commerce, retailers are now finding the right mix of in-store and online operations,” says Simeon Gutman, Morgan Stanley's Hardlines, Broadlines, and Food Retail Analyst. “Big data is creating a fresh revenue stream through retail media, which allows retailers to use their consumer insights for customized brand advertising. Automation is also making distribution more efficient and helping boost profits.”
As the sector continues to bounce back from the effects of the pandemic, increased inflation and supply chain disruptions from geopolitical conflicts, the largest retailers could keep getting larger as they disproportionately invest in these new technologies and further increase market share. Smaller retailers, on the other hand, may find it harder to keep up, Gutman says.
Indeed, the valuation spread between the best-positioned companies and others is growing to around 40% compared with a historical average of 20%.
"The retailer of the future will leverage retail media, automation and AI to enable margin expansion, and consolidation and share gains will accelerate these drivers," says Gutman. "Margins could expand by more than 200 basis points for the best-positioned retailers over time from around 9.5% on average today."
Here’s a closer look at the three tech pillars ushering in a new phase of retailing.
Retail Media
Retail media is a type of advertising that uses retailers' unique customer data sets to create targeted ad campaigns. The biggest retailers benefit the most because they can invest more in these technologies, leading to faster growth and higher market share. Meanwhile, their high traffic offers new opportunities for advertisers to reach consumers and influence their behavior.
Onsite advertising places the advertiser's products prominently on the retailer's website or search results page, while offsite advertising displays ads across the wider internet.
Retail media is becoming one of the most profitable revenue streams for retailers, many of which partner with ad tech companies to implement their ad campaigns rather than developing the technology in-house. Analysts expect the fast-growing retail media category will reach $130 billion, or around a quarter of total online ad spending, by next year, creating $104 billion and $26 billion opportunities, respectively, for retailers and their ad tech partners.
Automation
In a bid to cut operational costs and boost profitability, retailers could use automation to bring efficiency to up to 70% of routine tasks by 2025.
This transformation may help streamline retail operations by managing and analyzing inventory, optimizing supply chains, automating point-of-sale systems and implementing self-checkout kiosks, among other applications.
Meanwhile, automating a distribution center can double productivity using half the labor, while automating a fulfillment center can reduce costs by about 60%, analysts estimate.
Beyond cost savings, automation's other benefits include allowing retailers to deploy staff to more strategic or customer-facing roles; reducing the chance of human error in order management; improved quality control; and higher sales, resulting from an enhanced customer experience.
The scale and complexity of larger retailers' operations create a prime opportunity to enhance efficiency via automation. With more areas open to innovation, the potential cost savings make the return on investment more appealing, while the larger retailers can afford to invest in robotics and autonomous systems in a way their smaller counterparts cannot.
"Automation could reduce the best-positioned retailers' unit costs by as much as 20% over time, translating into margin expansion of 50 to 100 basis points," says Gutman.
Artificial Intelligence
AI has the potential to drive the next wave of growth in the retail sector, and new use cases are emerging all the time. Retailers are better able to collect and capitalize on consumer data to drive more customers to their platforms, analyze shopping trends, improve search results and optimize distribution with robots, to name just a few examples. AI is a key component of retail media implementation as retailers leverage customer purchase data to better target and personalize advertising.
The grocery sector offers a good example of the various uses of AI, which could enhance recommendations for online grocery shopping and lead to the development of the next generation of personal shopping assistants that could predict, suggest and order groceries. It could provide data for advertising, a main driver of growth in take-up rates and profitability for online grocery platforms. Analysts estimate that every percentage-point increase in advertising as a proportion of online grocery spending in 2025 would add an incremental $2.8 billion to revenue. All told, the best exposed retailers could save between 5% and 10% of corporate costs with AI, yielding up to 25 basis points of margin expansion over time.
“Companies with extensive data sets, a willingness to explore alternative revenue streams and a strong focus on operational efficiency are likely to benefit the most,” says Gutman. “And the rewards could be substantial, both in terms of revenue growth and cost savings.
