RETAIL INDUSTRY TRENDS Q2 2016
TECHNOLOGY-FUELED INNOVATION IS NOT AN ANOMALY, BUT RATHER A NEW REALITY.
The ability of a company to both foresee and manage fast change increasingly dictates success in the marketplace and CART is seeing a growing number of retailers, wholesalers, and brand manufacturers diving into emerging technologies. The increasing pace of technology-fueled innovation is not an anomaly, but rather a new reality. With more than 45,000 users, the CART platform provides powerful insight into what technologies and innovation the retail industry is focused on.
The second quarter of 2016 has seen a growing number of retail industry executives realize that the frenzy of technology-fueled innovation is not an anomaly, but rather a new reality. Like a tidal wave crashing upon a beach, new innovation can transform the landscape, creating a new normal as some companies are swept away, others adapt to a changed environment, and new businesses are carried in.
But as the pace of change grows, these waves of innovation are crashing into each other, creating yet more and faster transformation. As new capabilities in one area trigger disruption in a heretofore unrelated area of the business, the ability of a company to both foresee and manage fast change increasingly dictates success in the marketplace.
In discussions across the industry, CART is seeing clear trends that are expected to grow stronger including:
- Smaller retailers increasingly leveraging new cloud-based capabilities to access
sophisticated solutions previously unavailable;
- Some of the largest retailers being increasingly hobbled by their size and scale to take
advantage of new technological innovation;
- A growing innovation-
implementation gap as retailers of
all sizes simply do not have the
resources needed to research, test,
and implement new innovation
across their organizations.
This innovation-implementation gap opens the door to industry competitors leapfrogging market positions by deploying new capabilities. As a prime example, Amazon’s use of robots in its distribution centers is powering significant reductions in operating costs and opening up an increasing performance gap with more traditional distribution center operators.
These trends are made clear when looking at the technologies CART is seeing accelerate in the second quarter. Robotics is poised to dramatically transform the supply chain, as self-driving trucks take to the roads, robotic order pickers staff warehouses, and robots provide customer assistance. In a similar way, artificial intelligence is finding its way into a growing number of retail applications, most noticeably in marketing. AI powers marketing personalization, a key retail trend driven by consumer expectations and business results.
eCommerce remains the top priority of retailers. The space is beginning to evolve as younger solution providers start to more fully develop their solutions, established companies move to next generation technology platforms, and retailers realize the need for efficient fulfillment operations and integration with other systems.
Rounding out the top areas of focus are merchandising, data analytics, and payments.
ROBOTICS
The use of robotics in retail is already transforming distribution centers, retail stores, and delivery of product to the customer. Robots in different forms are profoundly shifting the economics and business models of leading companies, creating a performance gap that will only grow. Industry executives must understand the fast-moving developments in this area and the impact it will have on operations and on their workforces in the very near future.
There is no better showcase for the disruptive power of robotics than Amazon. Four years ago, in 2012, Amazon acquired Kiva, a maker of robots for use in distribution centers, for an estimated $775 million. Jeff Bezos, Amazon’s CEO, foresaw the strategic importance of this technology and quickly shut down sales of Kiva robots to other distributors and retailers, wanting to keep the technology for Amazon’s sole benefit. Those other companies were forced to look elsewhere but found there were few options.1
Today, Amazon has an estimated 30,000 Kiva robots working in its distribution centers around the world and has publicly stated that the use of the technology has reduced operating costs by 20%. And Amazon will realize an additional $2.5 billion in savings as it brings Kiva robots into the estimated 100 distribution centers not yet having the technology. Just how efficient is this technology? The “click to ship” cycle previously was an estimated 60-75 minutes, the time it took an employee to pick a product, pack it, and ship it. Robots now handle the same job in 15 minutes.2
But it’s not just Amazon that is benefitting from robotics in distribution centers. Rick Cohen, owner of C&S Wholesale Grocery and another retail industry visionary, quietly acquired Symbotic several years ago, another company focused on creating robots for use in distribution centers. Like Amazon, C&S keeps the technology for its own benefit, only permitting Symbotic to sell to non-competing industries.3
Not to be left behind, Walmart is employing drones — aerial robots — inside its massive distribution centers to monitor inventory levels, slotting accuracy, and out-of-stocks. The company is doing an extensive pilot of the technology and has plans to deploy it across a growing number of its distribution centers soon.4
The use of robotics is already profoundly altering the economics of distribution. The technology is also poised to transform store level operations including customer service.
Lowes, the DIY company, is piloting OSHbot, a robot that prowls the aisles providing customer assistance. OSHbot has the ability to approach a customer and ask if it can help locate a product or provide other assistance. If the customer needs help locating ‘lightbulbs’ (for example) OSHbot will bring up on a screen the different types of lightbulbs available. Selecting one, the customer is then led by Oshbot to the aisle and product.5
It certainly doesn’t take much of a leap to change ‘lightbulbs’ to ‘cereal’ and see the power of this technology in a supermarket. Not only can a robot help the shopper locate the product but can also easily convey recipe ideas, direct the shopper to sale products or to related products the shopper might find interesting. Carry this idea one step further: by wirelessly connecting to the retailer’s app on the customer’s smartphone, the robot can know that the customer it is in front of is a gold customer, likes to by organic foods, and will probably appreciate a recommendation for a new organic private label cereal the retailer is offering.
Bossa Nova is applying retail store robotics to a persistent issue: out-of-stocks. The company’s autonomous machines roam store aisles looking for empty shelves, misplaced products, and over- stocked displays. Bossa Nova states that five leading retailers are piloting its technology in stores.
Robotics technology is also transforming home delivery as reported in many stories about tests underway by Amazon, Walmart, Google, and others using drones to ferry an order from the distribution center to the end customer’s home. Other companies are testing smaller delivery robots for use in neighborhoods that share sidewalks with people. And another company is piloting robots that will actually refill your refrigerator at home.
Earlier this year, Flirtey helped create retail history: the first urban delivery using a drone. The company’s drone delivered a package weighing several pounds to a home in Hawthorne, Nevada, as a real-world test of the technology.6 Companies like Matternet, headquartered in Menlo, CA, have been using drones to deliver medical supplies in different areas around the world for the past five years. Amazon is working with the FAA to establish regulations governing the commercial use of drones as it pushes to use the technology to hasten getting the ordered product to the customer in hours if not minutes.
Robotics is remaking the supply chain, profoundly altering the economics of distribution, retail store operations and customer service, and delivery of products to the end customer.
Implications:
- Operating cost disparity between distribution centers using robotics and those without;
- Technology is poised to improve out-of-stocks, increasing sales and improving service levels;
- Potential for improving customer service;
- Many retailers will be looking to robotics to reduce labor costs across the supply chain as the technology begins to displace human resources.
ARTIFICIAL INTELLIGENCE
Google defines artificial intelligence as ‘the theory and development of computer systems able to
perform tasks that normally require human intelligence, such as visual perception, speech
recognition, decision-making, and translation between languages’. The aforementioned robotic
capabilities would not be possible without artificial intelligence.
Artificial intelligence, and related machine learning, are hot topics in retail. Increasingly powerful yet cost efficient computing power is fueling the growth of AI. And AI, boosted by machine learning, is feeding off the massive data available across the retail industry to transform everything from manufacturing to marketing.
AI is behind the recommendation systems used by companies like Amazon (making product suggestions based on items in your cart or items you’ve looked at), Netflix (recommending other shows based on your past behavior and others like you), and The North Face (which is using IBM’s Watson AI system to power natural language recommendations).
One of the best ways to showcase the disruptive power of artificial intelligence in retail is by way of example. Many in the industry are familiar with dunnhumby’s work with Kroger7, and their use of hundreds of data analysts to power precision promotion targeting amongst other customer-centric activities. While incredibly effective, and one of the key drivers of Kroger’s now 50 consecutive quarters of same store sales growth, the massively expensive approach is available to only a handful of the largest retailers.
Contrast that with a company like Birdzi, a young company with technologists employing the latest big data and artificial intelligence technologies to automate the process of strategic promotion targeting. This approach leapfrogs dunnhumby’s customer segmentations to work at a true segment-of-one level, using hyper-personalization to ensure maximum relevancy to the individual customer. The company then uses machine learning to turbocharge the results; the system itself ‘learning’ from how the customer responds ― or fails to respond — to each targeted promotion, and applying that learning to the next iteration of targeting.
This approach to marketing is transforming how retailers and brands go to market. And just as robotics is creating a growing performance gap between distribution centers using robotics and those that do not, AI powered marketing is creating a similar performance gap between retailers using the approach and their competitors continuing to rely on mass promotion.
But the use of AI goes far beyond marketing. The ACT Operations Research team of data scientists use AI and machine learning in the company’s next-generation optimization solutions. A key element of ACT’s ‘secret sauce’ is ever-increasing accuracy through the use of machine learning relative to product promotional activity, long the bane of retail optimization. The power of this approach is evident in retailer’s use of ACT’s demand forecasting as the ‘control tower’, guiding other point-focused optimization solutions like labor scheduling and others.
OTTO is a startup company started by ex-Google technologists which is focused on developing self-driving trucks, at the heart of which is artificial intelligence. There are many people betting that self-driving trucks will be commercially viable before personal autos. Just as robotics are transforming distribution center operations, self-driving trucks have the potential to disrupt and transform costs related to trucking. Self-driving trucks don’t need mandatory rest breaks, don’t break speed limits, and can operate 24x7. When you consider that shipping a full truckload of goods from L.A. to New York costs an estimated $4,500, with labor representing 75% of that cost, its easy to see how transformative this technology is.8
At the other end of the supply chain, AI is poised to change how people shop online. Digital assistants like Amazon’s Alexa, Apple’s Siri, Google’s Now, and others, are powered by artificial intelligence and quickly learn about the humans using them. Alexa will quickly learn that when you say ‘Alexa, put paper towels on my shopping list’ that you mean a three-pack of Bounty paper towels. Conversely, you could also mean ‘whatever paper towels are on sale’.
The fast growing use of home-based digital assistants represents yet one more frontier for the retail industry to adapt to. At the very least, as digital assistants start shopping for their human masters, brick & mortar retailers without a digital presence will be left behind.
Implications:
- Performance disparity as AI powered personalization is more effective at driving increases in customer spending, visits, and retention than mass promotion;
- Leaders enjoying superior marketing ROI;
- Customer-intelligent promotion assortment at store level reduces cost of inventory, lowers out-of-stock rate, grows top line sales, and provides superior customer shopping experience.
Download the full Q2 2016 Retail Innovation Report Here
1 “Amazon Distribution Center Robots”, Chicago Tribune, accessed July 1, 2016, http://www.chicagotribune.com/bluesky/technology/ct-amazon- distribution-center-robots-20160629-story.html
2 “Amazon is Just Beginning to Use Robots”, quartz.com, accessed July 1, 2016, http://qz.com/709541/amazon-is-just-beginning-to-use-robots-in-its- warehouses-and-theyre-already-making-a-huge-difference/
3 “Symbotic De-Stealths a Bit”, boston.com, accessed July 2, 2016 http://archive.boston.com/business/technology/innoeco/2012/01/ symbotic_formerly_known_as_cas.html
4 “Walmart Looks to Drones to Speed Distribution”, New York Times, accessed July 2, 2016 http://www.nytimes.com/2016/06/03/business/walmart- looks-to-drones-to-speed-distribution.html?_r=0
5 “What the Lowes Robot Will Do for You and the Future of Retail”, Fast Company, accessed July 2, 2016, http://www.fastcompany.com/3056640/what- the-lowes-robot-will-do-for-you-and-the-future-of-retail
6 “The First Drone Delivery Just Happened in Nevada”, Popular Science, accessed July 2, 2016, http://www.popsci.com/first-urban-drone-delivery- successful
7 “Kroger and Dunnhumby Restructure Relationship”, Supermarket News, accessed July 3, 2016, http://supermarketnews.com/retail-financial/kroger- dunnhumby-restructure-relationship
8 “Want to Buy a Self-Driving Car? Big-Rig Trucks May Come First”, New York Times, accessed July 1, 2016, http://www.nytimes.com/2016/05/17/ technology/want-to-buy-a-self-driving-car-trucks-may-come-first.html