By Sabrina Escobar
Ever since the launch of ChatGPT in 2022, Chandhu Nair can't escape talk of artificial intelligence.
"Everyone is talking about AI," says Nair, senior vice president of data, analytics, and computational intelligence at Lowe's, the home-improvement retailer. "It is the topic that I have to present at almost every single forum."
Enthusiasm about AI has permeated American business, and the retail industry is no exception. From big-box chains such as Lowe's and Walmart to specialty merchants like Victoria's Secret and Rent the Runway, companies are ramping up AI investments, lured by the prospect of better productivity and profitability.
Many retailers have used some form of AI for years in demand forecasting, supply-chain logistics, and online-shopping algorithms. But whereas traditional AI can respond to specific inputs and predict outcomes, generative AI offers something new. It uses advanced machine learning to better mimic human intelligence, and can engage in conversation and create images, text, videos, sound, and computer code.
The use of generative AI eventually could add $2.6 trillion to $4.4 trillion to the global economy annually, McKinsey estimates, while the retail and consumer-goods sector could see productivity gains of $400 billion to $660 billion a year once the technology ramps up.
AI could help retailers streamline a host of processes, from customer service, marketing, and product design to inventory, pricing, and supply-chain management. TD Cowen estimates that artificial intelligence could increase retailer gross margins by up to 0.6 percentage points, while lowering labor costs by 2% to 9%.
Investors shouldn't expect a near-term payoff, as most retailers are still fine-tuning their AI strategies. But the long-term payoff could be huge. "People probably overestimate what AI will do for retail over the next two years, but dramatically underestimate what AI will do for retail over the next 10 years," says Jay Sole, an analyst at UBS.
Implementing AI
For Nair's team at Lowe's, the first challenge was deciding where to start. The group coalesced around several high-value, low-risk initiatives that the company could gradually test. One is Lowe's Product Expert, a chatbot powered by ChatGPT and trained on Lowe's database of manuals, operating-procedure documents, and product brochures. Consumers can ask the chatbot questions about their home-improvement projects or share pictures of product parts they need, and the chatbot will respond with links to Lowe's products or services.
Chatbots look to be one of the more popular use cases for generative AI, and are driving top-line growth. Victoria's Secret, Rent the Runway, Shopify, and Walmart have also rolled out versions of AI-powered search. Walmart executives say the company's AI search bar is driving an "increasingly significant" number of searches on its app.
In the next few years, AI search chatbots may replace the search function altogether, says Rob Garf, vice president and general manager of retail at Salesforce.
While revenue will get a boost from AI, the bigger gains could come in profits, as retailers start integrating generative AI into more labor-intensive procedures such as marketing and customer service. Ralph Lauren, for instance, is using generative AI to write marketing emails and website product descriptions.
Research suggests that investing in AI will help to improve retailers' productivity and margins. A working paper from the National Bureau of Economic Research and Stanford University found that giving customer service agents access to an AI tool increased productivity by about 14%.
David Schick, a vice chairman at Stifel, estimated that AI marketing initiatives could help improve advertising campaigns' return on investment. For e-commerce companies, which spend heavily on online advertising, AI could help margins expand by as much as 0.57 percentage points, Schick found.
Investing in AI Winners
Most retailers are still exploring AI, and most lack the data foundation needed to scale AI models. In a Salesforce survey of almost 1,400 retailers, only 17% of respondents said they had harnessed their data effectively enough to create a well-rounded customer profile. But that will change with time.
Investors have bid up the shares of AI software makers in the past year or so. A year after the release of ChatGPT 3 in November 2022, the 15 equities in the S&P 500 index with the greatest exposure to AI had outperformed the rest of the index by 66%, according to Schick's estimates, with Meta Platforms, Nvidia, and Palo Alto Networks in the lead.
Retailers will spend billions of dollars to acquire the technology from these software makers. Total spending on generative AI software will grow from under $1 billion in 2022 to more than $80 billion by 2027, TD Cowen calculates.
Some retail stocks, too, could be winners in the race to AI adoption. Companies with a head start on data collection are likely to pull ahead first, analysts say. Companies with robust customer-loyalty programs and e-commerce businesses may be best positioned.
TD Cowen analysts say Nike and Lululemon Athletica probably can scale AI quickly due to the size of their membership models. Ralph Lauren could be another winner, says Sole, the UBS analyst. The company has enhanced its digital capabilities for years, helping it post strong quarterly results.
Walmart is another likely winner. The tech-savvy company has partnered with Microsoft to develop proprietary AI technology, and has rolled out several initiatives in conjunction with the app's new search function. Jefferies analyst Corey Tarlowe believes that AI and automation can help Walmart generate about $20 billion in incremental earnings before interest and taxes by fiscal 2029.
"It's not super-clear now because we're such early innings in AI," Sole says. "But over time, it will be clear which companies are taking advantage of AI -- and which companies aren't."
Investors should pay attention.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 22, 2024 01:00 ET (05:00 GMT)
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