Artificial Intelligence offers $340 billion opportunity to retail sector

16 January 2019

The use of Artificial Intelligence could offer as much as $340 billion in cost-saving opportunities for retail companies able to scale and expand the scope of their existing deployments, according to a new global study. The news comes as retailers in the UK and across the world battle against falling sales figures and a crunch in costs related to running stores, while ecommerce continues to eat into the market share of bricks-and-mortar entities.

While global retailers face headwinds from increasing import costs, trade wars and the threat of ecommerce to traditional models, the UK high-street is enduring an even more torrid time. In Britain, debt-burdened consumer companies have been repeatedly hit by a difficult trading environment. A potent blend of spiralling debts, climbing business rates, and crippling costs related to a weakened pound triggered by Brexit have seen multiple casualties in the British leisure and retail scene throughout the year, with no end in sight. In this context, many retailers are desperate to find savings to keep their companies profitable, moving forward.

One major way in which stores can find savings is to apply Artificial Intelligence (AI) to their organisations. A new report has seen Capgemini Research Institute look at 400 global retailers – representing 23% of the global retail market by revenue – which are implementing AI use cases at different stages of maturity. On top of this, the study further included an extensive analysis of public data from the world's largest 250 retailers, by revenue.

AI Penetration-By Subsector

The researchers found first and foremost that, unsurprisingly amid the clamour for digital technology to deliver improved business performance, the share of retailers deploying AI has risen drastically in the past three years. In 2016, the portion of retailers leveraging the new technology rested at just 4%. By the end of 2018, that stood at 28%, and is likely to rise further within the coming years. Thanks to the previously mentioned British retail slump, this is even higher in the UK, where AI penetration has reached 39%, two points ahead of nearest equivalent France, and a whole 10 points ahead of the global average.

Of the subsectors to have deployed AI, multi-category retailers are far and away the most common users of AI – perhaps as their diverse stock range would most clearly benefit from the qualities AI offers, including faster and more accurate stock management and pricing metrics. Apparel and footwear followed, at 33%, while food and grocery sellers were just behind at 29%. Automotive retailers were the least likely specified group to use AI, at just 19%. With car sales stalling across Western Europe, however, this is likely to change quickly, as such organisations look to turn around their troubled operations.

Proportion of benefits expected by retailers

While AI use is being used more heavily by the retail sector, though, it is not being used to its full potential by the majority of those engaging it. According to multiple reports, focusing automated technologies and AI on back office practices can yield huge savings, with one study from McKinsey & Company finding that for one example, banks that effectively utilise such potential will spend, on average, 41% less on day-to-day IT operations than banks that are experiencing deficiencies in these fields.

Despite this, the vast majority of retailers using AI are aiming it at customer-facing improvements. 9.4% of respondents told Capgemini that they had used AI to enhance customer satisfaction, while a further 8.4% had leveraged it to improve promotion efficiency.

Most retailers focus on customer-facing AI initiatives

While in a crowded and competitive market, demonstrating top-level customer service and experience is a major boon to stores, pricing pressures and an up-spike in tax and import costs mean that operations-focused AI use is essential in the future. Indeed, according to Capgemini, AI in operations is a $340 billion prize that cannot be ignored.

The paper cited Walmart as one key example of this. Walmart has used AI-driven image optimisation to realise savings of $86 million, with estimated savings of over $2 billion over the next five years. In the UK, meanwhile, Morrisons – which is coming under pressure from new competitors Lidl and Aldi – used AI for stock replenishment to reduce the company’s shelf gap by 30% during trial sessions, demonstrating the potential for major savings in the future. To that end, the 26% currently using AI for these purposes will almost certainly grow rapidly in the coming years.

In a release accompanying the report, Capgemini said, “Many retailers are going after complex use cases and overlooking a $340 billion prize offered by use cases in operations. AI is an opportunity every retailer will soon be taking advantage of, but it will be the organizations with a dual customer and operations approach to AI implementation that will be the ones staying ahead of the game.” 


Consumer goods start-ups grow interest from venture capital

23 April 2019

Funding the latest consumer goods start-up has been a real money-spinner for venture capitalist firms, with a number of $1 billion companies – or unicorns – having emerged in the space in recent years. New analysis has explored the resulting corporate consumer products activity in the acquisitions space.

Consumer products have enjoyed years of strong growth as new markets opened in developing Asia. China in particular has enjoyed strong growth across a range of consumer good types as the country’s middle class expanded. Private equity firms have been keen to pick up targets in the space as they expand their portfolios to include additional local capacity as well as customers in new markets.

As a result, a study from Bain & Company has found that interest from PE firms in the consumer product space grew sharply in 2018, hitting 6.1% of all invested capital for the year, and making it the third most sought-after category. It is now only behind financial services (23.9%) and advanced manufacturing and services (13.9%).

Corporate venture capital investment

The ‘M&A in Disruption: 2018 in Review’ research found that growth in the segment reflects key changes in the segment as a whole. This is particularly true of insurgent brands, which often leverage local expertise in order to take on international giants in domestic markets.

Short change

The market changes have led to shifts in motivations for consumer goods company investments from PE firms. The number of strategic investments stood at 50% in 2015 compared to deals that increased scope. This has shifted significantly, with 34% of deals focused on strategic outcomes in 2018 compared to 66% for scope. The move towards scope reflects companies seeking out fast-growing products that enable stronger revenue growth streams.

Acceleration in scope-oriented M&A in consumer products

However, there were other motivations for deal activity in the space. Activist investors have put pressure on companies to expand their portfolios in recent years, with the trend expanding from just US targets to Europe.

Further trends

The other key shift in the space regards outbound deal activity. The study found that outbound deal activity has increased significantly in the Americas (up 363%) with total deal volume up only slightly (15%). Key deals included Coca-Cola and Costa, Procter & Gamble and Merck’s consumer health unit, and PepsiCo and SodaStream. In the Asia-Pacific region, outbound deal activity rose 195% while total deal activity fell sharply, by -36%. The EMEA region saw both a sharp decline in outbound deal activity, at -68%, as well as lower overall deal activity, which fell by 32%.

Cross-regional deal making

Deal-making in the current environment is increasingly fraught with uncertainties, as business models change on the back of new technologies, new consumer sentiments and wider market changes from new entrants. As such, acquisitions are increasingly useful as possible hedges on changes in market direction. As such, companies are increasingly pressed to take a future-back position, making sure to incorporate a vision of how the company needs to look in five years into acquisition strategy.

The firm notes that certain acquisitions which enhance a remembrance of a nobler mission, revive a sense of entrepreneurialism and engage directly with consumers may be necessary qualities in acquisitions that transform a company to fit market expectations in the coming decade. While going forward, focus on innovation, partnering with retail winners, reducing cost base and constantly reallocating scare resources will be necessary to protect market share in areas where insurgent local and strategic competitors are active.

Related: Private equity asset growth top priority for 2018.