It wasn't until the beginning of the twentieth century that retail began to look like it does today. In 1909, Harry Selfridge opened the first department store on Oxford Street in London and introduced stunning window displays, the promise of excellent service, and an enjoyable shopping experience that turned stores into destinations. Then, in 1916, Piggly Wiggly popularized the self-service model. Prior to this innovation, goods were served over a counter by a shopkeeper, and products—coffee, flour, and sugar—were measured and placed in a paper bag.
Since then, we have seen the emergence of big box stores, malls, membership stores, and the mighty Amazon. Grocery stores operate like the early Piggly Wigglys, and department stores still look very much like the original Selfridges. We pay with plastic (or our phones and watches) and we order some of our stuff online, but in-store retail looks very much the same as it has for as long as anyone reading this book has been alive.
Change is coming. Retailers should expect more change in the next decade than the industry has experienced in the last century. Shoppers will browse differently, choose differently, buy differently, and expect to communicate with retailers through new channels, some of which don't yet exist.
The fastest growing stock of the 1990s was Circuit City. In 2008, Circuit City filed for bankruptcy and by 2009 they had closed their doors for the last time. Many of the iconic retailers of the twentieth century are either mortally wounded or gone. But all is not lost. Retailers that invest in technology to reimagine the shopper journey will continue to thrive in this $17 trillion sector.
With annual sales of a quarter-trillion dollars, Amazon has become the juggernaut of the e-commerce era, dwarfing even their nearest competitor. In 2019, the average American spent more than $2,000 per year online (Source: Statista). Global e-commerce sales of $2.2 trillion in 2020 will rise to $2.8 trillion by 2023 (Source: Statista). While people value the convenience of online shopping, they still prefer in-person, physical shopping for many of their purchases. In 2020, U.S. e-commerce sales will reach only about 12% of all retail sales. People shop in stores for many different reasons, seeking social, fun shopping experiences with friends and family that allow them to explore new possibilities in an appealing environment.
Retail is splitting into two distinct halves. The low-end is focused on price and speed, and the high-end is focused on quality, brand, and the shopper experience. Retailers left in the middle are neither one thing nor the other and have struggled to make their business models work. As this bifurcation continues, successful retailers will deploy technology to optimize either for low-price, high-speed fulfillment, or for high-touch, service-oriented, experiential shopping.
Consumers are becoming less interested in off-the-shelf products that look just like everyone else's. Three color options no longer count as offering personalization. Shoppers will expect to customize many of the things that they buy. This has obvious implications for the retail experience and the entire supply chain that supports it. Within the decade, it may not be unreasonable to walk into a clothing store and say, “I want this shirt, in that color, in my size, in five minutes.”
Shoppers love choice. But too many options can be time-consuming and stressful. A quick stroll down the toothpaste aisle of any supermarket highlights the problem. The simplicity of “good, better, best” has been replaced by myriad options, flavors, and packages. Shoppers need help to narrow choices with curation, personalized recommendations, and guided customization.
Sometimes we want to take our time and enjoy the experience of shopping. Other times, we need to grab and go. Trained by e-commerce experiences and trying to navigate busy lives, shoppers want options for fast fulfillment of their needs in a frictionless shopping environment. Frictionless means no queues, no waiting, no hassle, no checkout.
Physical store operations are changing as digital technology begins to blur e-commerce features with brick-and-mortar retail.
Physical stores are being fitted with digital technology. And pure-play digital retailers, including Amazon and JD, have started to build physical stores. Stores now make use of digital signage, sensors, beacons, and mobile payment terminals to boost the shopper experience. Digital-physical stores gather data on shopper behavior, which is used to optimize the selling environment and boost sales.
New shopping and fulfillment models are emerging. Shrinking delivery costs and sub-one-hour-delivery times might split browsing and fulfillment for some product categories. In this model, shoppers visit showrooms to browse and try product samples. Customers don't buy from in-store inventory; goods are shipped to their homes from centralized fulfillment centers. Men's clothing brand Bonobos has already embraced this direction with their “Guideshop” locations. These stores only hold enough inventory for customers to try sizes and styles. All purchases are shipped directly to customer's homes from centralized warehouses.
As retail footprints shrink, it may make sense to centralize inventory and split fulfillment away from the rest of the retail experience. As the desire for customization rises, we might see manufacturing or final finishing of goods colocate with fulfillment.
Amazon led the way on frictionless checkouts with their Amazon Go stores. Their “grab and go” experience feels magical. As you enter the store you scan a special barcode generated by the Amazon Go app on your smartphone. Once scanned, you put your phone away and forget about it. You wander the store and pick up whatever you want. If you change your mind, you simply put things back. When you're ready to leave, you just walk out. No checkout, no lines, no wait. Within seconds, your Amazon account is billed automatically and accurately. Honestly, the experience feels like you're stealing. Amazon Go stores feature a plethora of cameras and other sensors mounted in the ceiling and on shelves. AI keeps track of customers as they walk around the store and notes which items they take. Amazon plans to build 3,000 similar stores in the coming years.
Other brands have built automated stores that streamline the shopping experience and do away with almost all staff. Alibaba's Tao Café is a staff-less cafeteria and boutique located in Hangzhou, China. To use it, you must be a member of Alibaba's Taobao service. Facial recognition technology identifies shoppers and as they leave the store, goods are automatically scanned by RFID readers, which even capture goods placed inside bags. The checkout process takes about 10 to 15 seconds. JD's X unstaffed convenience store works the same way. Human labor is needed only to clean stores and to restock shelves at the end of each day.
Suning runs a number of unstaffed stores in China, selling sporting goods, personal electronics, food, and fast-moving consumer goods. Like the Tao Café, Suning uses face recognition and RFID technology. Cameras, AI, and analytics track in-store traffic flow and optimize product placement and store operations. In the future, Suning plans to use augmented reality to display additional products virtually, optimizing the use of physical space.
French supermarket giant Auchan plans to build hundreds of Auchan Minute convenience stores across France and China. These fully automated minimarkets are open 24/7, contain 500 different products, and are accessed with the scan of a smartphone app. Shoppers scan products at the cash register and pay with WeChat or Alipay before they exit the store. Auchan representatives are available by live video chat if any problems occur.
Generally, consumers like these unstaffed stores. In surveys, people say they are quick, easy to use, and avoid social friction—meaning any interaction with other people. Sad, but true. On the downside, some people report stores can be dirty and not well-maintained. They also worry about products being tampered with, an issue that can probably be resolved in the future with the use of sensors and AI.
Business Insight: Consumers Expect Frictionless Experiences
Busy consumers quickly lose attention. A realization of a need or want may not survive the next distraction. Amazon's Echo platforms and one-click “Buy Now” website buttons show the power of removing friction from the purchase process. Fickle shoppers will switch to other suppliers in a heartbeat if they offer a more efficient way to find, choose, and buy what they need.
No matter your business, pursue a relentless effort to remove unwanted friction from every customer interaction, remembering that sometimes friction is a desired part of an experience for customers. Use AI to predict needs so customers don't have to invest the cognitive effort to express them. Automate away all transactional pain and use technology to support sales associates and customer service agents so they can deliver unparalleled service. Make it so easy to do business with you that customers never want to go anywhere else.
Grocery store Kroger has begun deployments of its EDGE (Enhanced Display for Grocery Environment) smart shelf technology. These high-definition, color digital displays line the edge of store shelves and replace traditional printed signage, which speeds store operations. Price changes, special offers, and coupons can be deployed with the touch of a button. Displays offer additional information to customers, including nutritional information and suitability for special dietary needs. Kroger generates additional revenue by selling advertising on the displays. The brightness of the displays allows them to lower overall store lighting, saving money.
Smart shelf technology like Kroger EDGE may one day offer fully personalized shopping experiences. These could include personalized offers that are triggered by the proximity of your phone and personalized shopping guidance: As you walk down each aisle in the store, specific items on your digital shopping list are highlighted in a chosen color, speeding the shopping process.
Chatbots may be integrated into next-generation store shelving and fixtures to answer simple questions and provide additional information about the products on display: specifications, online customer reviews, and warranty information. Chatbots could help consumers to make purchase decisions and answer questions: “What's the difference between the V200, V300, and V500 models?” As they gain sophistication, sales chatbots might engage in full sales conversations, answer more complex queries, understand the customers’ needs, preferences, and price sensitivity, and recommend the right product solution for them.
Beyond store infrastructure, sales chatbots may be embedded in a store's mobile app and inside store robots. Robots at hardware store Lowe's can answer simple customer queries and guide shoppers to products inside the cavernous stores. The LoweBot speaks multiple languages and has a touch screen. When not helping customers, LoweBot roams the aisles, running visual checks of store inventory.
Bossa Nova Robotics makes robots for retail stores. Martin Hitch, Bossa Nova's Chief Business Officer, told me he estimates that up to 40% of grocery store workers’ time is spent auditing the shelves. Bossa Nova's robot uses both 3-D and high-resolution 2-D cameras to count products on shelves. It then builds a picklist for the human shelf-stackers to work from—more cornflakes on aisle 7 and more aspirin on aisle 4. The robot spots misplaced products, too. Shoppers are notorious for putting products in their basket, having second thoughts, and then dumping them wherever the mood strikes them. As it audits, the robot builds a map of the store (known as a planogram) and learns exactly where every product is located. To perfect their technology, Bossa Nova ran multiyear trials with several big box stores. Their partnership with Walmart is perhaps the most visible. Giant have deployed a similar robot named Marty. Marty searches their stores for safety issues, using eight cameras to find spills, debris, and other trip hazards. Marty warns nearby shoppers and alerts store employees by paging them over the store PA system. Ultimately, Marty will also be used for inventory monitoring and to do price checks. Expect robots to become a common sight in the aisles of a retail store near you.
Auto retailers Carvana in the United States, Autobahn motors in Singapore, and Tmall in China have created gigantic, robotic car vending machines. The Autobahn robot holds up to 60 high-end and classic cars. Tmall is a collaboration between Ford and Alibaba in Guangzhou. Customers must have at least two social credits to access the program via Alibaba's Taobao mobile app. Customers are given a three-day test drive and qualify for discounts at the dealership if they go on to make a purchase.
The shopper journey describes the entire shopping process, from the moment someone becomes aware of a need, through exploration, discovery, selection, purchase, delivery, and then subsequent use of a product. Retailers are turning to AI to help them improve the shopping experience and deliver better service throughout the shopper journey.
The Campbell Soup Company built AI-enhanced online ads that, when clicked, hold a conversation with the customer and recommend recipes they might like, based on ingredients they have at home.
Target added visual search capabilities to their smartphone app. Customers snap a picture of items they're looking for using a phone app, which responds with links to similar products that Target has in stock. Next-generation visual search tools may use AI to disassemble entire scenes, for example, a shopping app shown an image from a home decor magazine would identify every item in the room and provide purchase links for each one.
Some retailers use AI to help their customers discover new products and services. Travel company Thompson's “inspiration engine” guides holidaymakers to find the perfect vacation using a conversational chatbot feature. In a Thompson survey, 77% of people said they wanted a virtual travel agent feature. The 1-800-Flowers group of companies, including Harry & David, Cheryl's, Wolferman's, and The Popcorn Factory, have deployed an AI-based curation chatbot named Gwyn. This personal gift concierge assesses the needs of customers and curates a short list of products to help them find the ideal gift. Outdoor wear company North Face offers a similar curation tool.
Brands like to know how their customers are feeling, so they can offer assistance when they are confused, respond appropriately when they are upset, or understand moments of delight. Bentley's Inspirator app uses a device's camera to assess the sentiment and mood of customers as they flick through a catalog of cars. The app automatically creates a customized “dream” car for customers in the background, based on a customer's reactions. Future in-store applications of sentiment analysis might use smart cameras to anticipate when a customer needs service, automatically alerting the nearest store associate.
Box-fashion company StitchFix curates and mails a box of clothing based on a client's personal taste. Customers keep what they like and return what they don't. StitchFix uses AI to curate these clothing collections and to predict overall demand for styles. While AI makes recommendations for clothing kits, human stylists review the kits and act as final decision-makers. Such personalized outfitting and styling may extend to other categories in the near future, for example, home furnishings. A customer would submit a photo of their living room and offer guidance on their tastes and goals for a new look. Artificial intelligence, using GAN technology, would respond with a photo-realistic image of that same room, now filled with furnishings that are curated based on the customer's expressed tastes.
AI plays a vital role in the operation of retail stores. Smart cameras spot safety issues and optimize the planogram (the layout of the store) based on sales data and observations of customer traffic. Robots perform stocktaking and AI-powered algorithms predict future demand at a granular level—by line item, by distribution center, and by store. AI sifts through social media feeds to assess customer sentiment, observe emerging trends, and gather customer needs and wants. The task of “cool spotting,” where hip observers populate hip locations—nightclubs, major city streets, trendy bars—to observe what the cool and groovy people are wearing, is being taken over by AI.
AI designs new products, too. Myntra, an Indian clothing company owned by Flipkart, uses Generative Adversarial Networks (GANs) to design clothing. They claim the sales of AI-designed garments is growing 100% per year. Another AI-based tool helps Myntra's purchasing department to assess how well a new item will sell based on past sales of items with similar colors, sleeve lengths, fabrics, etc. Buyers are empowered to ignore these projections but often find the guidance to be invaluable.
Le Tote, an online retail store for women's clothing, has a tiny six-person team that does all of the buying for their site. They use AI to augment their intuition and help them find dresses, tops, pants, and jackets to sell on their site. The AI analyzes digital wish lists, online ratings, and recent purchases to predict future demand and set stock levels.
Business Insight: Decision Support Is Important in Every Industry
Retailers must sell the right products, in the right way, at the right time, at the right price, to the right people. Success requires many decisions to be made accurately and quickly.
Data-driven decision-making is transforming retail. AI crunches data to spot trends and design new products with high chances of market success. Store operations are measured and optimized to boost sales, limit markdowns, and maximize profits. Gut decisions are being replaced by data-driven decisions. Gut decisions have no place in retail. They have no place in your business, either.
Predictive analytics find patterns in customer purchases and predict what they might buy next. Unexpected but statistically significant patterns emerge. A white goods retailer worked in partnership with Intel to review sales data. Initial findings were unsurprising: customers who bought a TV were likely to buy a replacement television 10 years later. What shocked the retailer was that customers who bought a TV were highly likely to be in the market for a new washing machine seven years later. Weird, but true. This insight led to a successful shift in the retailer's marketing strategy.
Retailers are eyeing your home as their next, and perhaps most important, piece of real estate. People lead busy lives, and there is little pleasure in sourcing toilet paper, milk, and shampoo. We are fundamentally lazy, and retailers know it. They want to make it as easy as possible to supply you with the goods you need on a regular basis. Google and Amazon have invested heavily to place retail outposts into millions of homes. Amazon Echo and Google Home platforms are designed to reduce purchase friction by moving the point of purchase close to the place where customers realize they have a need. Authors Chip and Dan Heath call this “shaping the path” in their excellent book Switch.
One of the major challenges for v-commerce platforms (voice-based shopping) is to establish specifics. If you order “milk” do you want soy, whole, 1%, 2%, almond, coconut, chocolate, lactose-free, lactose-free 2%, or lactose-free 2% milk with added calcium? Amazingly, this list of choices is just a small subset of the milk options available at some grocery stores. One solution is to build v-commerce systems that learn your preferences over time and reduce the number of times clarification must be sought. Another is to use another communication modality—gesture—to express selections naturally and efficiently.
Augmented reality (AR) will turbocharge home shopping, creating delightful, natural shopping experiences in the living room. Issue a simple voice command, “Show me gray sweaters under $60” and a range of gray sweaters appear all around you. You browse, point, and say, “Show me more like this one.” Perhaps you'd prefer to experience a private, personalized fashion show in AR, complete with catwalk models parading through your living room, each wearing garments that have been selected to match your personal style and taste. You might use AR to try a new piece of artwork on your wall or to explore a kitchen remodel.
Virtual browsing affords the possibility of being able to shop for items that don't yet exist. Manufacturers might create a product digitally, test it with a variety of potential customers, and only manufacture it once they find sufficient interest. AR and VR (augmented and virtual reality) offer an excellent interface for shoppers to design customized products, choosing colors, configurations, finishes, and adding unique personal details before placing an order. With 78% of millennials expressing interest in customized products (Source: The Cassandra Report), retailers should be ready to offer customization in every category.
Business Insight: Boost Your IT Budgets Now to Avoid Catch-Up Later
The retail sector underinvested in technology for decades. New lighting and a zigzag checkout queue passed for innovation. The graveyard of dead retailers is testament to a stagnant sector that failed to invest forward. In retail, a long-range strategic plan has a horizon of perhaps two years. Most managers are focused on the next few weeks of operations. Complacent retailers were outmaneuvered and left bewildered by the rise of Amazon, which invested billions in technology and infrastructure as part of a multidecade strategy for domination.
Caught flat-footed, retailers are playing catch up. They know they must double down on WACD (What Amazon Can't Do) and leverage their physical assets to delight shoppers in ways that Amazon cannot. Historically, retailers invested only 1–2% of revenues in IT. They probably need to increase that spend to 5–8% of revenues if they are to remain relevant. Already operating in survival mode, this is money that struggling retailers just don't have. For many, it's too late.
Don't wait for an Amazon-like tech company to start eating your lunch before you reluctantly increase your IT budgets. As a strategic exercise, imagine that Jeff Bezos lays eyes on your industry next (because he might). Consider WWJBD (what would Jeff Bezos do?), look at your current assets and business processes, and determine where you can invest in technology infrastructure to remake your business and remain competitive. Don't wait. Invest now to build capabilities that will streamline operations, delight customers, and stave off competitive attack.
Never assume that your future is ensured just because you were fine in the past. A failure to increase IT budgets now is essentially a surrender of your future. This is the crux of The Innovation Ultimatum. Bite the bullet and innovate now or face painful catch-up and possible destruction later.