Retail Revolutionized: Three ways to profit from artificial intelligence
Whether we’re receiving coupons based on our spending, or product suggestions based on other people’s spending, artificial intelligence (AI) is transforming how consumers shop and experience brands. For retailers, meanwhile, AI could increase profits by almost 60%1. It could be a game-changer in this labor-intensive sector, augmenting the workforce and enabling employees to become more productive.
Some retailers already recognize ways for AI to complement their human workforce and boost profits. Stitch Fix is a clothing retailer that combines the expertise of fashion stylists with algorithms that analyze unstructured consumer data to deliver hand-picked items based on their preferences2. Another forward-thinking fashion company is Original Stitch, which deploys AI to analyze customers’ photographs of their favorite shirts before custom-tailoring and delivering a brand-new piece of clothing3.
Yet some retailers are hesitant about AI, and unsure how they can keep up to speed with the technology – let alone make the most of it. We have identified three ways for these retailers to revolutionize the retail experience using AI.
1. Understand the consumer
AI allows companies to find out more about how customers behave and what they want, giving them confidence that they are stocking the right products, targeting them at the right consumers, and building the right loyalty programs.
The data they gather from their Web and mobile channels already enables online retailers to develop more detailed and accurate customer profiles. But this sort of insight does not have to be exclusively Web-based: physical retailers could use AI technology to learn about customer activity as they walk around stores. Which displays do customers linger over? Which products do they take off the shelves but then decide not to buy? This sort of data will tell retailers when, where and how to nudge customers toward purchases, and give them the insights they need to improve the customer experience.
2. Guide them to what they want – and don’t know they want
Similarly, retailers can use AI to make it easier for customers to find what they are looking for – and, crucially, help them find things they don’t yet know they want.
This is especially valuable for the largest online brands, with their vast range of products. Consumers who feel overwhelmed by the sheer quantity of items will go elsewhere, so retailers that can guide customers in the right direction have a serious competitive advantage. And it is the online retailers that were first to recognize the value of nudging customers toward further purchases by using machine learning to anticipate their needs.
Used sensitively, AI makes customers feel that retailers understand what they want. Progressive retailers are already using AI to provide more sophisticated online recommendations, but they are also looking into tailoring the homepage to each user so they are presented with the items they desire most.
Consumers already know that the adverts they see online are personalized to them; Google uses AI to tailor its search results for individual users; and some online retailers use structured data to adapt what they show customers according to what they have searched for in the past. What is stopping retailers from customizing each person’s experience of the entire site?
3. Knock their socks off
Online shopping impresses customers with its ease and efficiency. As AI makes online shopping easier, customers are less likely to go to stores for commodity products such as laundry detergent. But as far as providing memorable experiences goes, physical stores have the upper hand. So, this is the time to start exploring how to use AI to dazzle customers.
Grocery retailer Coop Italia is a great example. Customers can simply wave a hand over a box of grapes to see nutritional and provenance information on a raised monitor. It also uses “vertical shelving”: touch applications that enable customers to search for other products and find out about related products, promotions, and even waste-disposal4. At some Neiman Marcus department stores, meanwhile, customers can try out a “memory mirror” – a virtual dressing room to compare outfits, see them from 360 degrees and share video clips with friends5.
With so many of us consulting our phones while we shop – to read reviews and research product information – it is only a matter of time before retailers answer these queries on the shop floor, using bots. AI lets them carry out multidimensional conversations with customers through text-based chats, spoken conversations, gestures and even virtual reality.
This is not hype. AI advances have already given some retailers increased customer loyalty and higher profits. Now retailers have the opportunity to boost their profits further by using AI alongside the human workforce – producing even greater efficiencies, and truly revolutionizing the in-store experience.
Jill Standish is senior managing director of retail at Accenture.
Five Below bullish as Q2 profit, sales beat the Street
Five Below celebrated its fifth anniversary as a public company with an exceptionally strong second quarter performance that topped expectations.
Revenue rose 28.7% to $283.3 million in the quarter ended July 29, topping analysts' estimates of $276.6 million. Same-store sales jumped 9.3%, the highest since the chain's IPO in June 2012.
Five Below reported net income of $16.8 million, or 30 cents a share, compared to $9.8 million, or 18 cents a share, in the year-ago period. Analysts had expected earnings of 26 cents a share. Operating income increased by 67.4% to $26.3 million from $15.7 million.
"Our strong second quarter results demonstrate the amazing appeal of the Five Below brand," said Joel Anderson, CEO. "We exceeded the high end of our sales, comp and earnings outlook. Our top line results were accompanied by strong margin expansion, resulting in over 70% net income growth.”
On the company's quarterly call with analysts, Anderson noted that, since Five Below's IPO, it has nearly tripled its store count, more than tripled its revenue, and quadrupled its net income.
"What makes us even more remarkable is how consistent our growth and results have been," Anderson said. "It definitely feels great to celebrate this milestone anniversary with one of our best quarters of sales, comp and earnings growth ever as a public company."
Anderson noted that the retailer saw solid broad-based performance across all its worlds (key merchandise departments), with notable contribution from the spinner trend. Neil Saunders, managing director of GlobalData Retail, commented that there are many reasons for Five Below's success, including improvements in its merchandise mix. Categories such as technology now have more authority, he said, and include far more 'must have' lines. An updated store format, which includes greater visual appeal, brighter lighting, better signage and better defined worlds, is also proving a boon.
"The refreshed format, which makes product display across several categories more compelling and engaging, has also been beneficial," Saunders said. "This is helping to improve the return on investment from new stores and is aiding productivity at older stores where it has been applied. Again, there is much more runway here, so Five Below will likely accrue further benefits as the year progresses."
Five Below opened 31 new stores in the quarter, giving it a total 584 stores in 32 states. The company has said it sees the potential for 2,000 stores plus, a number analyst Saunders called "reasonable."
"One of the more encouraging aspects of Five Below's store expansion program is its ability to flex across different types of markets," he said. "The company now comfortably operates stores in rural, suburban, and urban locations. This allows much more headroom for growth and puts it ahead of other discount operators, many of which are still experimenting with urban shops." (For more, click here.)
For the third quarter, Five Below estimates earnings of 11 cents to 13 cents a share on revenue of $241 million to $246 million. Analysts had forecast earnings of 12 cents a share on revenue of $242.8 million.
"We are focused on the all-important fourth quarter and executing our strategic initiatives, which include continuing to provide a differentiated in-store experience, offering amazing, trend-right, quality merchandise at value prices, introducing new customers to our brand and increasing awareness while building out our infrastructure to support our 2,000+ store opportunity," Anderson said.
Analyst: Five Below posts ‘stunning set’ of second quarter numbers
The spinner craze continues to benefit Five Below which has produced a stunning set of second quarter numbers, beating even its own high expectations. Total sales rose by almost 29% over the prior year, supported by a 9.3% uplift in comparables. Meanwhile, a substantial expansion of margins fueled bottom line growth where net income was up by 71.4%.
As helpful as spinners have been, and as successful as Five Below has been in capitalizing on the craze, it would be unfair to attribute all of the group's success to this one trend. Certainly, spinners have helped to drive footfall and increase customer numbers, but we also believe that several other factors have boosted growth this quarter.
Foremost among these are improvements to the assortment. Categories like technology now have more authority, include far more 'must have' lines, and deliver some very compelling prices. These 'wow' products have proved popular among existing shoppers, and there is some early evidence that they are helping to draw in new customers. Fortunately, the process of range enhancement seems to be an ongoing process and, as such, we believe it will provide buoyancy to future quarters.
The refreshed format, which makes product display across several categories more compelling and engaging, has also been beneficial. This is helping to improve the return on investment from new stores and is aiding productivity at older stores where it has been applied. Again, there is much more runway here, so Five Below will likely accrue further benefits as the year progresses.
A smaller, but still important, contribution came from the later than usual tax refunds. This acted both as a slight drag on first quarter numbers and also provided a small but measurable boost at the start of the second quarter.
On top of these favorable dynamics, Five Below continues to expand at pace. Over the past year, store numbers have risen by 18.9%, and the company now has 584 stores across 32 states. That new shops quickly become profitable is allowing Five Below to drive this kind of fleet expansion while still posting good gains on the bottom line. Ultimately Five Below has set itself a target of 2,000 US stores — a figure that we still see as reasonable.
One of the more encouraging aspects of Five Below's store expansion program is its ability to flex across different types of market. The company now comfortably operates stores in rural, suburban, and urban locations. This allows much more headroom for growth and puts it ahead of other discount operators, many of which are still experimenting with urban shops.
Looking ahead we are optimistic about the prospects for Five Below. Its assortment and the way in which it sells remains distinct from other discounters and has captured the attention and spending of younger demographics. This should insulate it from some of the competitive pressures in the market and ensure that it maximizes share in the new locations it enters. Meanwhile, more embryonic projects — like the push into e-commerce, will augment an already strong growth story.