People used to shop til they dropped. Soon, it will be the bots who can't stop.
Artificial intelligence is increasingly part of industries beyond the tech sector, and that includes your favorite store. Trends like predictive algorithms and automation have been happening for years, but AI's impact is accelerating alongside its power. And while consumers are learning to use it too, its most transformative power is likely behind the scenes.
TD Cowen analysts led by Oliver Chen warn that AI isn't without its challenges, however. And how companies tackle those will likely determine the next round of winners and losers.
For example, brands spent years optimizing so search engines would direct consumers to their products. Now they have to optimize for AI-generated recommendations-a task Chen thinks will require a blend of inventory, visibility, reliable fulfillment, and machine-readable "trust signals" that can communicate across systems.
In other words, if machines are doing the buying and selling, they have to talk to one another and know which ones will deliver the goods.
Likewise, shoppers themselves are increasingly searching not for individual products, but with tasks or projects in mind, or even with questions. "As AI becomes the front door to commerce, recommendation relevance may matter more than traditional search visibility, elevating the importance of first-party data and customer relationships," he writes.
Of course, customers have to believe that AI is really looking out for their best interests. Transparency and controls will matter when it comes to showing shoppers that the price AI is giving them really is the best deal. "We believe the winners will pair innovation with responsible AI deployment and strong consumer trust," Chen notes.
The biggest changes are likely happening behind the scenes. Forecasting demand, managing inventory, right-sizing labor and supply chains, and setting prices are all tasks where AI has the potential to be most meaningful. "AI becomes most valuable when it improves growth, margins, inventory productivity, and free cash flow," he writes.
Nonetheless, AI is still just one tool that retailers have. The most successful retailers are those that can harness it in conjunction with loyalty programs, marketplaces, and memberships, which lead to consumers regularly engaging with brands and sharing their data.
Walmart is Chen's top pick, given its increasing dominance in the grocery business and its proprietary data. "We are seeing both higher and lower income cohorts attracted to the convenience of Walmart+, and the marketplace is already materially built out [which] further supports WMT's retail media business, allowing the company to see transactions in a wider array of categories without taking on inventory risk."
Elsewhere, he also likes Costco Wholesale and BJ's Wholesale Club Holdings are also at an advantage, he writes, given their membership-based models that are "effectively loyalty ecosystems with exceptionally rich customer data."
Cosmetics retailer Ulta Beauty is another winner, Chen writes, as it too has a marketplace, a strong loyalty program, and plenty of proprietary customer data. Beauty as a category also seems ripe for AI, he notes, given how important personalization is for products that are purchased frequently.
One thing the retailers in Chen's coverage have in common is that they aren't standing still: Retailers are already using AI to connect with customers and manage inventories and supplies. Now it's just time for the stocks to catch up.
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