Our Retail analyst and U.S. Internet analyst connect the dots on
how technology is helping the retail industry to cash in on the
future.
----- Transcript -----
Simeon Gutman: Welcome to Thoughts on the
Market. I'm Simeon Gutman, Morgan Stanley's Hardlines,
Broadlines, and Food Retail Analyst.
Brian Nowak: And I'm Brian Nowak, Morgan
Stanley's US Internet Analyst.
Simeon Gutman: And on this episode of the
podcast, we'll hear how retailers are using technology to make a
comeback and set themselves up for the future.
It's Monday, July 15th at 6pm in London.
Brian Nowak: And it's 1pm in New York.
Simeon Gutman: Retail has taken a big hit
over the last few years. The long tail of the pandemic, outbreaks
of war and inflation have had a big impact on the landscape.
However, our research suggests retail is finding its feet, and
technology is playing a significant role.
Automation, AI, and retail media are the game changers here. And
we're seeing retailers of larger scale and larger size
disproportionately invest in these technologies -- which means it
will not benefit all retailers equally.
My colleague Brian is here to help explain the technology and how
these are manifesting themselves across the internet and
technology landscapes. Brian, can you talk about how these things
are materializing across your coverage universe?
Brian Nowak: Thanks, Simeon. Across the US
internet space, we're seeing early emerging use cases for
Generative AI of many types. We are seeing improved targeting on
the advertising side. We are seeing new diffusion and creative
models being built where advertisers can create new types of
advertising copy using large language models. We are seeing new
forms of customer service using large language models and
Generative AI. And in effect, we are seeing companies across the
entire internet space better analyze their first party data to
drive more new people and customers to their platforms -- to
drive higher conversion and share of wallets from those
customers. And ultimately more durable multiyear top-line growth,
which in some cases is also leading to higher free cash flow
growth over the long term as well. It's early, but it's very
encouraging with what we're seeing for Generative AI and retail
media across the space.
Simeon Gutman: Can you talk about in more
detail how retail media is influencing the success and the
prospects for some of your companies?
Brian Nowak: Retail media is a emerging,
rapidly growing, new high margin revenue stream that is moving
across the internet space. Large companies are analyzing more of
their data and essentially creating new advertising units that
users and consumers can click on to drive transactions. And
they're finding ways to better link these advertising dollars to
transactions and ultimately creating a new revenue stream that we
think is going to drive more durable top-line growth -- and
because of its high margin nature, also more durable, multiyear
free cash flow growth. It is benefiting the commerce players. It
is benefiting the online advertising players. And it's also
benefiting the advertising technology players.
So with that as a backdrop, Simeon, where are you seeing
Generative AI, retail media, and maybe even automation, start to
manifest itself throughout the retail landscape?
Simeon Gutman: Those are the three pillars
of technology that are influencing retailers. Taking a quick step
back, what's changing is that market share in retail is
concentrating and consolidating among the largest players. And if
you think about the investments required for some of these new
capabilities, the companies that have the greatest ability to
invest should see the greatest benefits. That means that the big
could get bigger at an even faster rate. And this is why the
stakes in retail are growing even faster.
Now with, respect to these technologies. Let's start with AI. AI
is helping retailers analyze big pieces of data that they never
had an ability to do in such a quick way. That could help them
refine their search criteria to consumers scanning a website.
That could help them improve the algorithms in a distribution
center with robots creating orders.
Second, speaking of robots, bringing automation to distribution
centers, supply chains for retailers can cost anywhere between 2
to 6 per cent of sales. There's a significant opportunity to
reduce the amount of labor -- human labor -- in these
distribution centers by automating them; whether it's dry goods,
whether it's grocery items, as tricky as frozen and perishable
items.
And then lastly, retail media, the way that you mentioned, Brian,
the benefit to your companies is very similar to retailers. There
are now advertising dollars that are moving into new channels,
whether it's closed loop advertising in store or retail media
that's appearing on websites -- where some of the larger and more
successful companies have a lot of traffic and advertisers are
intrigued to show them offers and deals to try to change their
perception or behaviors.
So those three pieces of technology are slowly transforming the
retailer. So next time you step into a retail store, there may be
more technology that meets the eyes.
Thanks for listening. If you enjoy Thoughts on the Market, please
leave us a review wherever you listen and share the podcast with
a friend or colleague today.
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