By Francois Chaubard, the CEO of retail AI company Focal Systems
Retail has only increased the rapid pace of new technology adoption in recent years. In part mandated by the Covid pandemic and the need for less face-to-face interaction to increase customer and employee safety, these stores have enabled many new technologies and processes. This includes expanded self-checkout lanes, robots that traverse stores and perform tasks like cleaning spills in aisles, computer vision cameras that digitize the store’s inventory every hour, and more robust online ordering and in-store pickup options.
E-commerce spending as a whole jumped significantly since the beginning of the pandemic, up to $1.7 trillion, with the grocery segment of retail having a major impact on that growth. And it doesn’t look likely that the new ways we’ve come to shop retail will take a backseat anytime soon.
So then—what’s next? If retail is often one of the first industries to test the practical applications of new technology, what can we expect to see in the coming years?
The Metaverse
Experts are making a variety of large predictions on which up-and-coming technologies will have the biggest impact on retail. One that has caught the interest of our sci-fi imaginations is the metaverse; according to McKinsey, it is entirely plausible for “more than 50 percent of live events could be held in the metaverse, and more than 80 percent of commerce could be impacted by something consumers do there.” McKinsey also predicts that the metaverse has the potential to generate up to $5 trillion in value by 2030. No, that’s not a typo—that’s trillion with a T.
Let’s break that down a bit. Walmart sells $570 billion of products every year. McKinsey is predicting that in seven years from today, 80% of the products sold at a Walmart, or $456B annually, will be either sold directly to consumers on—or the in-person purchase thereof will be impacted by—the metaverse. That is a big statement.
Having first-hand experience with VR headsets, I personally can not last 10 minutes with my Quest 2 without wanting to vomit. And I’m not alone; cybersickness is fairly common. Researchers have reported that virtual reality makes between 40% and 70% of people feel nauseated after just 15 minutes, with some applications causing that sensation in 100% of people. This has been an issue of VR for more than 30 years—remember Sega VR and Nintendo’s Virtual Boy? Those failed, hard. If the problem of cybersickness is not solved, I do not see the metaverse having any significant impact on consumers’ behavior because there will be so little adoption. In that case, the metaverse could destroy value through more failed experiments, rather than create it.
Many tech companies are hard at work trying to solve this, most notoriously Meta (Facebook) who has bet the farm on the technology. Other companies like Microsoft have walked away from it quite abruptly, laying off their entire Metaverse Team—around 100 employees—just 4 months after its creation.
But there are other technologies whose impact we’ll feel far sooner in the retail space, with a much higher probability of making a lasting mark. In fact, they’re on the scene already.
Artificial Intelligence (AI)
While ChatGPT and other AI programs online are the hot topics right now, artificial intelligence has already been put to use in retail stores for some time now, even without us realizing it.
Already today, AI is used to power inventory management, automated ordering, scheduling of labor, planograms, and much more, reducing shrink, food waste, and increasing availability with far less labor. Piggly Wiggly has stated publicly that this powerful technology can literally double profits. That’s 100% growth in EBITDA. And that is happening now, not in 2030.
So why is anyone focusing on anything else?
Perhaps it is easier to comprehend and more popular to imagine how a virtual world, such as the one displayed in the movie Ready Player One, can one day be more alluring than the physical world. But it is much more difficult, less popular, and perhaps scarier, to visualize the full impact that AI will have on the world over the next 10 years. But rest assured, it will certainly have a more broad and sweeping impact on every part of our lives, and certainly on low-margin retail businesses where for example a 1% reduction in OpEx can lead to 7% increase in EBITDA.
I posit that AI will be so ingrained in running a retail store in the next 7 years that it will be almost impossible to run a store without it—like trying to run a retail store without accepting credit cards. Reminiscent of the fable of Paul Bunyan vs. the machine, there is no world where a human will be able to order as accurately for a Just In Time inventory model as an AI algorithm with full knowledge of what is on the sales floor and backroom, keeping inventory ordering cycles in the “sweet spot” between over- and under-ordering, and adjusting to consumer demand and CPG supply instantly. One could make the same argument for SKU selection, planogram creation, schedule writing, and much more.
So does that mean the metaverse will have no impact on retail? No, I actually think there is a very important, but narrow, use case of the metaverse in retail. It just doesn’t involve consumers putting on headsets and shopping in a digital world.
What about AI and the Metaverse together?
Just like you or I cramming for a midterm back in college, AI models need to “study” (or be trained) in a practice world where errors are okay. Restricting the AI models to real-world data only will limit the intelligence of the AI. Instead, we can create a “digital twin” of all of a retailer’s stores, the warehouses, and the full supply chain then plug that into a simulation of common real-world events, such as hurricanes, pandemics, recessions, and more. The AI can then “play the game of retail” over millions of different circumstances to try to learn how to best maximize future discounted free cash flow over different ordering strategies, planograms, SKU mixes, store layouts, staffing budgets, and much more. I believe this to be the most important implication of the metaverse as it is applied to retail.
With such a metaverse simulator, retailers can also run A/B studies that typically take 2-4 months to conduct in as short a time as 10 minutes. With such power, retailers can make better decisions faster, which will lead to huge increases in profits.
So in closing, which is more important? AI or the metaverse?
I don’t think it’s an either/or. I think AI on its own will be very useful, but to get to the next level will need the metaverse to learn. And I think the metaverse on its own can help retailers run quick A/B studies, which is helpful, but will need AI to take full advantage of its digitized world.
