The GenAI bubble debate potentially has some free-shipping like consequences for retailers.
gettyThis week’s retail news has a lot of good economic news, some customer experience challenges that continue to impact retail operations, a whole lot of talk about whether GenAI will pay off, some new tidbits about how the store contributes to overall customer value, and the stranger side of the Saks/Neiman tie-up. Let’s dive in!
Retail Economic Indicators
First the good news, then the really good news.
Out of all the Western economies, the Eurozone has probably struggled the most with uncertainty – geopolitical, economic, and consumer. The Red Sea disruptions impact imports into the Eurozone more than North America and the ongoing conflict in the Ukraine continues to impact food and energy prices. So when retail sales move in a positive direction, it’s positive news. While it wasn’t a huge gain, and not enough to offset inflation, the 0.3% year over year growth in May for the Euro area and the 0.6% year over year growth in the EU, as reported by Eurostat, is good news.
Over in the US, retail sales as estimated by the CNBC/NRF Retail Monitor are up 3.42% year over year in June, compared to 3.03% growth year over year in May. Total sales are up 2.39% over the first half of the year, with core sales (excluding restaurants, cars, and gasoline) up 2.62% for the same period. The monthly year over year gain was the largest since November 2023. General merchandise, clothing & accessories, and personal care items were all up, while big ticket items like home improvement, furniture, and electronics were all down year over year. And most of the categories that were up were up higher than the inflation rate, however you measure it.
And then, also in the US, inflation cooled more than expected, with consumer prices declining 0.1% from May to June. June prices were up 3% year over year, the lowest rate in more than three years. Inflation has now declined for three straight months. The markets rejoiced, but not as much as they will when we get the first rate cut, still expected later this year.
Retail Tech & Research Data
The Food Marketing Institute released its annual survey of food retailers (primarily grocers). This year, 85% of food retailers cited theft and fraud as the biggest problems negatively impacting business. 64% said societal challenges – a lack of civility, drug use, and violence – have negatively impacted operations.
It’s never okay to take your frustrations out on someone else. But store design, stock levels, ease of navigation, staffing levels – these are all things that also contribute to consumer frustration, which can emerge as both theft and a lack of civility, and retailers need to think a lot more about how their operations play into that – or, potentially, help defuse it.
The more I see it, the more I believe that cognitive load is the underlying factor. The more that any service company, not just retail, pushes the workload onto consumers – cognitive or physical – the crankier they get. If you have to do college-level math plus give away your blood type and the personal details of your first-born child in order to get a discount, you’re going to be cranky. And if you have to do all that while dealing with a self-service kiosk that in the end can’t complete the transaction without an attendant, then yeah, you’re going to be even more cranky. And then when it takes ten minutes for the attendant to get to you because she has five other customers stuck in the same situation and no one else to help her, then yeah, you’re going to start thinking about just walking out with your stuff. This in no way makes it right. But it sure makes it easy to understand how someone might get there. (By the way, this totally applies to airlines too).
The FMI study said that supply chain issues are fading significantly – in 2022, 79% of food retailers said trucking and transportation were challenges, and in 2023 that declined to 35%, so stock levels should improve. And 81% of respondents said they are experimenting with in-store technologies to enhance the shopping experience. If they want to make real gains there, they need to think a lot harder about how those technologies ease frustrations and increase delight as the primary driver, rather than reduce labor hours or drive productivity. And “saving money through discounts” is a base expectation of consumers, not something that delights them.
AI & Retail
Goldman Sachs, in its Top of Mind publication, released a shot across the bow of the AI market. It follows very closely on the heels of the Sequoia report that asked where the revenue is, implying that more of it should be here than they’ve seen. The Goldman Sachs team brought together two contrasting views – that this is a bubble, and that this is just pre-inflection point runway. Their conclusion was a very investment banker point of view: whether it’s a bubble or not, there is money to be made before it becomes clear either way. The shovels and pickaxes are still winning out over tangible, sustained business value.
The publication interviewed Daron Acemoglu, Institute Professor at MIT, who is a skeptic: “He estimates that only a quarter of AI-exposed tasks will be cost-effective to automate within the next 10 years, implying that AI will impact less than 5% of tasks." He also said that AI model advances likely won’t occur nearly as quickly as past examples of tech advancements. He forecasts that AI will increase US productivity by only 0.5% and GDP by only 0.9% over the next decade. It takes me back to that Meta ad – yes, you can ask AI to tell you how to compensate for a sun-loving plant when you have lots of shade. Are you really willing to pay $20/month for that answer? What if answering that questions actually costs $20 – would you be willing to pay $100/month for that? $200? Because that’s more the price that stands any chance of recouping the investment made to-date, and the investment – in chips, data centers, and power grid – going forward. Forget about model advancements on top that.
Goldman Sachs’s own head of Global Equity Research, Jim Covello, is also on the side of bubble. He says that AI has to solve way more complex problems than it does today in order to justify the $1T investment that is already on its way. He compares GenAI to the internet in its early days – the internet enabled new solutions with radically improved cost equations, even in its infancy. GenAI is still a Lamborghini delivering pizzas.
Others at Goldman Sachs were more optimistic – the US software analysts argue that Capex spending happening now isn’t that far off from the Capex of the early days of the internet, or other innovation cycles. But the energy analysts believe that power is ultimately going to be the biggest constraint. They expect AI to drive an increase in power demand “the likes of which hasn’t been seen in a generation.”
Retailers know well a world where consumers aren’t paying the full price of a service – free delivery, anyone? Offering free, fast delivery seemed like a necessity to compete with Amazon, but it also hooked consumers on something that is very expensive to sustain, and most retailers have been trying to wean consumers off of that expectation ever since, because it’s just not sustainable. So when retailer execs are looking at hooking into customer service chatbots or offering Copilot to home office employees, just remember that you’re not paying the full price that covers the cost of what’s on offer. And if companies do start having to charge what it really costs, that whole business case might just come tumbling down.
Retail Winners and Losers
As Shein struggles with its IPO and Temu’s rocket rise in the West invites more scrutiny, it’s interesting to see how their success has impacted their home territory of China. AP took a deeper look at the toll of fast fashion in China. They may be exporting a lot of fast fashion challenges – disposable clothing that is hardly biodegradable and may even be contributing the microplastics crisis – but they are also wreaking havoc on landfills at home. Very little fabric is recycled in China, and it’s the population there that pays the price with deadstock and discarded clothing piling up. As demands for circularity, and Western demands to close the shipping loophole increase, it looks like the Shein/Temu business model may be under significant threat.
For a while you heard a lot about 4-day work weeks – and then it got quiet. But Asda recently announced they had tried a four-day work week and scrapped it after complaints from staff that they were “exhausted”. This is worth digging into a bit because I don’t understand what they were thinking. They took what was presumably a 5 day, 40 hour workweek and turned it into a 4 day, 44 hour work week? That seems counter-productive, and designed to fail. Parents complained about the stretch’s impact on child care, and 11-hour days definitely seems long. So before you use this one way or the other – for or against a 4-day work week – make sure the study is comparing apples to apples, because it sure doesn’t seem like that’s what Asda did.
Sara Del Fabbro, the Deputy COO at IKEA parent company Ingka Group, spoke at the Retail Innovation Conference & Expo in June, about the role of the store at the company. She said that Covid was the tipping point for them to realize that the store needed to play a different role. She highlighted adding digital to the store experience in order to capture more meaningful customer data about how they shop, as well as the supply chain and customer service benefits of the store as fulfillment center. She also noted that while they sell sofas evenly split online vs. stores, 70-75% of online shoppers went to a store to try it out first. Some nice little tidbits on how to look at how stores contribute value to the shopper journey – and the bottom line.
And finally, Saks Fifth Avenue is buying Neiman Marcus. After the FTC expressed displeasure at Tapestry buying Michael Kors, it’s not clear that they’re going to just let this one happen, as it would be another massive consolidation in the luxury space. But what is noted less often is that both Amazon and Salesforce are contributing investors. They won’t be controlling interests, either one, however, this starts to smack a little bit of the same kind of investment as Simon Group’s SPARC. When a mall property company buys a bunch of retail brands, you have to wonder if it’s not to help prop up a bunch of tenants that might otherwise close – which would have an impact on the rents they can charge the rest of their tenants, especially if occupancy falls too low. Similarly, are Amazon and Salesforce investing in luxury to help ensure some luxury technology buyers? Or, in Amazon’s case, investing in luxury to learn how to be a better luxury retailer – and future competitor? It is definitely the stranger angle of the deal – assuming it goes through.
The Bottom Line
This week it seemed like there was more economic/inflationary/retail sales good news than there has been for a while. We’re still a ways out from retailer earnings season, and despite this good news, I expect that more retailers will say they are not meeting revenue or earnings expectations in this last quarter, as more of a reflection of consumers trading down and holding back more spend and retailers having to lower prices beyond “disinflationary” pressures in order to keep whatever customers they can. Don’t let that be discouraging – it’s the lag between retailers reporting their results and consumers moving on to the next thing, which does seem to be encouraging.
There are more voices talking about a GenAI bubble now than there were even a week ago. Even the most promising use cases – like code development and chatbots – seem to have an upper limit in the complexity they can handle, and this may be setting a ceiling on what customers will ultimately be willing to pay. As retailers move into both these areas, they need to keep in mind that they are currently in no way paying what it even costs, let alone what drives a sustainable profit. Don’t love that chatbot too much!
And finally, it’s more important to walk a mile in your customers shoes than ever before. As consumers increasingly take their frustrations out on retail stores and staff, it’s worth considering if your processes and procedures are the root cause – they may save you money on the surface, but if they’re costing you in theft and/or employee turnover, are they really saving you money in the end? A question worth asking.
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{URL}https://www.forbes.com/sites/nikkibaird/2024/07/15/the-saks-neiman-deal-genais-bubble-debate-consumer-frustrations/{/URL}
{Author}Nikki Baird, Contributor{/Author}
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