How AI Is Changing Retail

We speak with Anjee Solanki, National Director of Retail Services and Practice Groups for the U.S., about the trends shaping retail and spending today and how new technologies like artificial intelligence (AI), will impact the retail industry.

What’s the biggest trend shaping retail and spending today?

After several years of organizing and reorganizing, retailers are heading into 2024 with an enterprising interest in expanding their brick-and-mortar footprints, intending to open more stores than they plan to close. Nearly half of U.S. retailers plan to expand their physical footprint over the next five years, with grocers the most bullish about growth plans.

Retail growth remains healthy, and we expect retailers, large and small, to sustain their expansion efforts as they seek to diversify their geographical reach and enter new markets. This push for wider reach is the big driver and it also means that some existing markets will likely be more saturated with individual retailers.

The southern region of the U.S. has established a substantial lead in retail leasing, surpassing an impressive margin of 60.5 million square feet, adding more than 1.3 million residents in the past years. Most retailers want to test new formats in response to changing consumer behavior, and customer demands, as they maintain relevance with the competition. Retailers and investors have swiftly adjusted to these adjustments, demonstrating refined adaptability and agility within the sector.

How will the above trend impact investors?

The retail asset class has generally ranked lower in asset allocation than multifamily and industrial. However, retail is gaining some attention with solid fundamentals — low vacancies, limited new development and rising rents. Retailers that have survived the post-housing-bust fallout and the pandemic have adapted to the changing landscape, making them stronger tenants overall and adding to the sector’s attractiveness.

Retail drove 18% of all sales volume in the third quarter of 2023, the highest share since 2018. Investors are likely ‘underweight’ to retail exposure, and while it is unlikely that retail will see a 30% share as it did in the early 2000s, there is room for it to take on a larger share of the investment market in the near term.

How do you think retail trends will evolve in the next decade?

New retail formats, like pop-up shops, subscription services, and direct-to-consumer (DTC) brands, will continue to mature and gain popularity. These agile and innovative models offer flexibility and unique value propositions that resonate with modern consumers. Along with retailers eyeing the U.S. as a new opportunity to expand their global footprint.

We predict that:

• Physical stores will evolve into experiential destinations, with live, immersive experiences incomparable to their online counterparts.
• Retailers will focus on creating engaging environments that encourage social interaction, entertainment, and community building to attract and retain customers.
• From point-of-service, retailers will leverage advanced technologies like artificial intelligence (AI), machine learning, and robotics to streamline operations, enhance customer experiences, and optimize supply chain management.
• We anticipate the continued growth of e-commerce, with online shopping becoming the norm across various sectors. Retailers will likely prioritize UX design to enhance their online platforms and improve the user experience.
• Online sales are poised to propel retail growth, accounting for 20% of total retail sales by 2027. Additionally, U.S. retail social commerce sales will total $82.82 billion, growing 23.5% year-over-year in 2024.
• The proliferation of digital wallets, one-click purchasing, and secure payment gateways will seamlessly integrate the social commerce ecosystem into the shopping experience, enabling consumers to pay directly with their preferred social media apps.

How will new technologies like AI, machine learning, and blockchain, impact your industry?

Over the past year, 69% ​of retailers credited AI with increasing their annual revenue, while 72% ​saw a decrease in operating costs. As retailers commit to investing heavily in automation in their stores and warehouses, expect a surge in robotic arms, autonomous vehicles, and intelligent software navigating fulfillment centers to boost operational efficiency. This automation revolution will not only slash costs and increase productivity but translate into faster deliveries and increased inventory.

Artificial intelligence (AI) deployment is expected to grow nine-fold in the next two years, enhancing store analytics, loss prevention and asset protection to reduce costs and lead to higher profits. Retailers will likely use AI in-store to enrich the consumer experience with personalized recommendations, augmented reality interactions, and automated marketing content generation.  Early adopting retailers have leveraged AI for chatbots, virtual assistants, and cashier less self-checkout systems that have reduced checkout times and staffing needs.

Nearly 3/4 of retailers plan to expand their AI infrastructure investments over the next 24 months.

Retailers worldwide plan to invest $143 billion in Generative AI solutions in 2027, up from nearly $16 billion in 2023.

What’s a news headline you are keeping an eye on?

The shift in consumer shopping behaviors is top of mind as folks continue to feel the burden of financial pressures and adjust their buying habits. The diminishing savings reserve accumulated during the pandemic has consumers carefully evaluating their purchases. GlobalData analysis shows credit card balances increased by $55.6 billion in December 2023 compared to the previous year’s period. Additionally, Buy Now Pay Later became a more relevant and widely adopted payment method, up 17% from last year’s usage.

As student loan payments resumed last Fall, analysts predicted a curb in consumer spending by around $9 billion a month to $70 billion a year. Amid rising living expenses, individuals with credit cards prioritize essential purchases over non-essential ones, compounding their financial concerns. According to a Newsweek Poll conducted by Redfield & Wilton Strategies, more than 55% of Americans are concerned about their ability to pay off credit card debts this year, especially during rising inflation. Consumers will remain considerate in their purchasing habits by researching prices and products and using a more comprehensive number of retailers to get the right product and price, stabilizing total retail spending growth to 3.3 percent at the end of 2024.

What’s the biggest challenge facing your industry?

A lack of quality space and high construction costs currently challenge the retail industry. In 2023, retail absorption outpaced new deliveries, but projections for 2024 indicate a stabilization, with the likelihood that new supply will surpass demand. The desire to expand remains robust, and we expect retailers to sustain their expansion efforts as they seek to increase geographical reach and market saturation.

Retailers grappling with a scarcity of quality space are expected to slow down leasing activity in 2024, pushing the U.S. vacancy rate by ten basis points. Limited nationwide construction has significantly contributed to rebalancing the retail market, with an anticipated 25% increase in new retail space delivery to approximately 52 million square feet in 2024. Despite these challenges to open, retail store openings have outpaced store closings over the past three years.

Which specific trends in your industry are you most excited about?

We are most excited about the continued growth of omnichannel and how retailers will evolve their in-store and online strategies to meet consumer preferences and demand. Retailers can enhance customer satisfaction and loyalty by integrating seamless experiences across multiple channels to drive business growth.

• 73% of consumers use multiple channels during their shopping journey, highlighting the increasing importance of omnichannel strategies.
  Source: Harvard Business Review Analytic Services Survey
• Retailers with robust omnichannel customer engagement strategies retain an average of 89% of their customers compared to 33% for those with weak omnichannel strategies.
  Source: Invesp
• 67% of consumers have used click-and-collect or buy-online-pickup-in-store (BOPIS) services, underscoring the significance of blending online and in-store experiences.
  Source: Retail Dive

How are CFOs identifying the most suitable areas within finance for automation and AI implementation?

It's important to have clear objectives in mind first. I think the best use cases are those that have a strategic focus from the start. For example, asking “how will evolving a given repeatable workflow or analysis with AI create a compelling advantage for my business and ultimately return incremental shareholder value?” An obvious starting point is reducing costs, and it's not simply people costs. All too often there is a quick reaction to suggest that GenAI will create further automation that will simply replace all finance management functions, and that's simply not true. Rather, adopting AI intelligently into an existing strategic workflow can yield incremental shareholder value. 

Within our focus in Corporate Treasury, we are seeing AI drive more insightful and confident cash flow forecast analysis, which in turn means CFOs can invest excess cash for longer durations and pick up incremental yield. Or conversely, for regions or organizations who rely on short-term borrowings to fund working capital, a more accurate short-term forecast powered by AI allows CFOs to borrow from lower cost debt instruments as opposed to convenient and expensive overnight debt facilities. These benefits have real and significant P&L interest income and / or interest expenses benefits that can be well into the millions of dollars, especially in the higher interest rate market we operate today.

What are the biggest challenges CFOs face when implementing automation and AI solutions?

Accuracy, confidence and cost. With the benefits of automation, there runs a risk of decision-making control. This is compounded when you consider AI is based on datasets, and the risk of quality data. Thus, if the datasets being incorporated into the AI and ML output are not complete, or contain errors, then of course the output may be flawed. GenAI and co-pilot recommendations are not infallible, thus ensuring the CFO has validation approval control is very important, particularly in the early adoption phases. Another challenge is cost and talent. Large data sets require more hosting and computing throughput, and this comes at a cost both in the form of technology and also the correct talent to build, interpret and tweak the models.

Are there specific AI applications, like chatbots, that CFOs are finding particularly valuable?

Yes. Like many aspects of professional and personal technical experience, individuals expect answers to very specific questions quickly and accurately. Chatbots, including integration to commonly used messaging services like Microsoft Teams and Slack, have been adopted by CFO teams to quickly ask specific questions and return accurate answers quickly and easily. For example, "What was my LATAM free cash flow in Q2 2023?" or "What is my bank balance in Indonesia?" are now questions that can be answered in seconds leveraging APIs and APIs into leading FinTechs from messaging services or bespoke built chatbots.

Looking ahead, what are some emerging AI applications that you are excited about for the future of finance?

I am particularly excited about how GenAI will augment many of the daily repeatable workflows in the office of CFO. Whether this is preparing journal entries, investigating bank reconciliation discrepancies or preparing insightful analysis of future FX hedging strategies. I think the future is very exciting with the many applications of AI within the office of the CFO to perform routine functions more quickly, accurately and ultimately at a lower cost.

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.