Michael Feindt, founder of AI firm Blue Yonder, on digital transformation in retail.
The retail sector is going through a period of unprecedented change and disruption as digital transformation takes hold. Online giants like Amazon are putting intense pressure on margins and taking consumer spending off the high street, where ‘brick and mortar’ retailers are feeling the pain.
With their online rivals using entirely data-driven business models to optimise their operations, traditional retailers must move beyond their legacy infrastructure and adopt the technologies of digital transformation, such as artificial intelligence (AI) and machine learning.
Superior choice and convenience has in large part fuelled the rise of online grocery shopping, but the high street has been more resilient than many in the industry expected. Consumers still want to visit physical shops and see the food that they are purchasing.
However, competition from online retailers is driving innovation and technological development within the sector. We have seen this in the deployment of self-service checkouts and other technology to improve the customer experience, but fundamental business processes such as pricing and replenishment, remain manually operated and prone to human error.
The ethical consumer
There has been a fundamental shift in consumer priorities in recent years. Where consumers were once driven primarily by price and brand loyalty, myriad other factors are now in play.
A retailer’s environmental credentials are increasingly important to many consumers, particularly among millennials, and can have a tangible impact on a retailer’s brand. One unfortunate photo of a pile of wasted food that goes viral across social media can cause real damage to a retailer’s public image and potentially affect their bottom line.
Food wastage occurs for a number of reasons in the grocery market, but primarily it is because retailers are unable to accurately predict customer demand and therefore cannot plan their stock levels accordingly. In most supermarket chains, replenishment is a time-consuming, manual process that results in sub-optimal stock levels, shelf gaps and product wastage.
The scale of replenishment in nationwide supermarket chains is such that it cannot be managed efficiently and accurately by human intervention. Online grocery retailers, which are increasingly gaining market share, are not encumbered with these legacy systems and can therefore react with greater agility and flexibility to changing market conditions, adjusting their replenishment models to reduce the rate of food wastage.
However, most supermarkets also have a vast quantity of data available to them, in the form of historic sales patterns. When this is combined with external data (such as weather predictions, nearby events such as football matches, and even TV shows like the Great British Bake Off) and analysed through an AI-enabled algorithm, retailers can generate accurate predictions for customer demand across every product in every store on a daily basis.
This granularity can ensure that retailers only need to order the stock that they actually need, significantly reducing food wastage.
One of the most prominent sustainability issues for retailers is plastic waste. A report from The Guardian earlier this year indicated that supermarkets in the UK are responsible for over 800,000 tonnes of plastic waste, most of which cannot be recycled.
This plastic waste is largely derived from the packaging of wasted food, which further underlines how important it is for retailers to ensure that they optimise their replenishment strategy, to reduce food and, ultimately, plastic waste.
Of course, optimising replenishment processes has benefits that go beyond saving the planet. Retailers that use AI to stock their stores to reflect customer demand will find that they see a significant decline in shelf gaps, ensuring that customers can always find the products that they want whenever they want them.
Product availability is critical to keeping customers happy; if they can’t find what they want on your shelves then they will go elsewhere, and it can be very hard to win them back. With the grocery market ever-more competitive and supermarkets engaging in constant price wars to win customers’ affections, having the right products available in-store can give retailers a crucial competitive advantage.
However, it is of course a delicate balancing act for retailers to ensure that they have the right products available, without ordering too many so that food ends up being wasted. To strike this balance, retailers must adopt a data-driven strategy to replenishment, using AI to analyse vast datasets that can generate customer demand predictions and enable retailers to optimise their replenishment.
Paying the price
It is not just their approach to replenishment that retailers must adapt if they are to remain competitive with the new generation of online grocery retailers. Pricing is a critical factor in this battle, as the online players continue to put huge pressure on margins of brick and mortar retailers, with lower operating costs and more efficient distribution models.
The established retailers need to adapt how they price their products, using AI and machine learning algorithms to analyse the data at their disposal to ensure that the prices they charge reflect changing market conditions such as sales, promotions, customer demand and even the weather or events.
This more digitally focused approach to pricing can help retailers to price their products to maximise sales, while improving profitability and revenue. AI can be the catalyst to drive this digitally focused approach to pricing, giving retailers the intelligence to align pricing with the business strategy while maintaining the brand identity, of which pricing is a core part.
Digital transformation required to remain competitive
Amazon, Ocado and others are fundamentally changing the retail landscape, led by technology, and the traditional market incumbents must respond.
However, the transition from legacy systems to the technology of digital transformation is not a straightforward process. With so much hype around robotics and AI, retailers must ensure that they focus on what is actually achievable with the technology, such as optimised replenishment and pricing, to help their business remain competitive in an increasingly digital era.
Michael Feindt is the founder of Blue Yonder, a leading provider of AI solutions for retail.