Our Head of U.S. Internet Research Brian Nowak joins U.S. Small
and Mid-Cap Internet Analyst Nathan Feather to explain why the
future of agentic commerce is closer than you think.
Read more insights from Morgan Stanley.
----- Transcript -----
Brian Nowak: Welcome to Thoughts on the Market.
I'm Brian Nowak, Morgan Stanley's Head of U.S. Internet Research
Nathan Feather: And I'm Nathan Feather, U.S.
Small and Mid-Cap Internet Analyst.
Brian Nowak: Today, how AI-powered shopping
assistants are set to revolutionize the e-commerce experience.
It's Tuesday, February 17th at 8am in New York.
Nathan, let's talk a little bit about agentic commerce. When was
the last time you reordered groceries? Or bought household
packaged goods? Or compared prices for items you [b]ought online
and said, ‘Boy, I wish there was an easier way to do this. I wish
technology could solve this for me.’
Nathan Feather: Yeah. Yesterday, about 24 hours
ago.
Brian Nowak: Well, our work on agentic commerce
shows a lot of these capabilities could be [coming] sooner than a
lot of people appreciate. We believe that agentic commerce could
grow to be 10 to 20 percent of overall U.S. e-commerce by 2030,
and potentially add 100 to 300 basis points of overall growth to
e-commerce.
There are certain categories of spend we think are going to be
particularly large unlocks for agentic commerce. I mentioned
grocery, I mentioned household essentials. We think these are
some of the items that agentic commerce is really going to drive
a further digitization of over the next five years.
So maybe Nathan, let's start at the very top. Our work we did
together shows that 40 to 50 percent of consumers in the U.S.
already use different AI tools for product research, but only a
mid single digit percentage of them are actually really starting
their shopping journey or buying things today. What does that gap
tell you about the agentic opportunity and some of the hurdles we
have to overcome to close that gap from research to actual
purchasing?
Nathan Feather: Well, I think what it shows is
that clearly there is demand from consumers for these products.
We think agentic opens up both evolutionary and revolutionary
ways to shop online for consumers. But at the moment, the tools
aren't fully developed and the consumer behavior isn't yet there.
And so, we think it'll take time for these tools to develop. But
once they do, it's clear that the consumer use case is there and
you'll start to see adoption.
And building on that, Brian, on the large cap side, you've done a
lot of work here on how the shopping funnel itself could evolve.
Traditionally discovery has flowed through search, social or
direct traffic. Now we're seeing agents begin to sit in the start
of the funnel acting as the gatekeeper to the transaction. For
the biggest platforms with massive reach, how meaningful is that
shift?
Brian Nowak: It is very meaningful. And I think
that this agentic shift in how people research products, price
compare products, purchase products, is going to lead to even
more advertis[ing] and value creation opportunity for the big
social media platforms, for the big video platforms. Because
essentially these big platforms that have large corpuses of
users, spending a lot of time on them are going to be more
important than ever for companies that want to launch new
products. Companies that want to introduce their products to new
customers.
People that want to start new businesses entirely, it's going to
be harder to reach new potential customers in an agentic world.
So, I think some of these leading social and reach based video
platforms are going to go up in value and you'll see more spend
on those for people to build awareness around new and existing
products.
On this point of the products, you know, our work shows that
grocery and consumer packaged goods are probably going to be one
of the largest category unlocks. You know, we already know that
over 50 percent of incremental e-commerce growth in the U.S. is
going to come from grocery and CPG. And we think agentic is going
to be a similar dynamic where grocery and CPG is going to drive a
lot of agentic spend.
Why do you think that is? And sort of walk us through, what has
to happen in your mind for people to really pivot and start using
agents to shop for their weekly grocery basket?
Nathan Feather: I think one of the key things
about the grocery category is it's a very high friction category
online. You have to go through and select each individual
ingredient you want [in] the order, ensure that you have the
right brand, the right number of units, and ensure that the
substitutions – when somebody actually gets to the store – are
correct.
And so for a user, it just takes a substantial amount of time to
build a basket for online grocery. We think agentic can change
that by becoming your personal digital shopper. You can say
something as simple as, ‘I want to make steak tacos for dinner.’
And it can add all of the ingredients you want to your order. Go
from the grocery store you like. And hey, it'll know your
preferences. It'll know you already like a certain brand of
tortillas, and it'll add those to the cart. And so it just
dramatically reduces the friction.
Now, that will take time to build the tools. The tools aren't
there today, but we think that can come sooner than people
expect. Even over the next one to two years that you start to get
this revolutionary grocery experience.
And so, it's coming. And from your perspective, Brian, once
agentic grocery shopping does start to work, how does that impact
the broader e-commerce adoption curve? Does it pull forward
agentic behavior in other categories as well?
Brian Nowak: I think it does. I think it does
lead to more durable multi-year, overall e-commerce growth. And
potentially in some of our more bull case scenarios, we've built
out – even an acceleration in e-commerce growth, even though the
numbers and the dollars added are getting larger. But there is
some tension around profitability.
We are in a world where a lot of e-commerce companies, they
generate an outsized percentage of their profit from advertising
and retail media that is attached to current transactions.
Agentic commerce and agents wedging themself between the consumer
and these platforms potentially put some of these high-margin
retail media ad dollars at risk.
So talk us through some of the math that we've run on that
potential risk to any of the companies that are feeding into
these agents for people to shop through.
Nathan Feather: Well, in our work for most
e-commerce companies, a majority – or sometimes even all – of
their e-commerce profitability comes from the advertising side.
And so this is the key profit pool for e-commerce. To the extent
that goes away, there is one potential offset here, which is the
lower fee that agentic offers for companies that currently have
high marketing spend. To the extent that agentic offers a lower
take rate, that could be an offset.
But we think it's going to be very important for companies to
monitor the retail media landscape and ensure they can try to
keep direct traffic as best as possible. And things like onsite
agents could be really important to making sure you're staying
top of mind and owning that customer relationship.
Now, on the platform side, search today captures an implied take
rates that are 5-10 times higher than what we're seeing in the
early agentic transaction fees. If this model does shift from CPC
– or cost per click – towards a more commission based model,
Brian, how do you think search platforms respond?
Brian Nowak: I think the punchline is the
percentage of traffic and transactions that retailers or brands
or companies selling their items online that's paid is going to
go up. You know, while search is a relatively more expensive
channel on a per transaction basis, search works because there's
a very large amount of unpaid and direct traffic that retailers
benefit from post the first time they spend on search.
Just some math on this. We're still at a situation where 80
percent of retailers' online traffic is free. Or direct. And so
if we do get into a situation where there's a transition from a
higher monetizing per transaction search to a lower monetizing
per transaction agent, I would expect the search platforms to
react by essentially making it more challenging to get free and
direct and unpaid traffic. And we'll have that transition from
more transactions at a lower rate; as opposed to fewer
transactions at a higher rate, which is what we have now,
Nathan, in our work, we also talked about a Five I’s framework.
We talked about inventory, infrastructure, innovation,
incrementality and income statement, sort of a retailer framework
to assess positioning within the agentic transition. Maybe walk
us through what your big takeaways were from the Five I’s
framework and what it means that retailers need to be mindful of
throughout this agentic transition.
Nathan Feather: Well, for retailers, I think
it's going to be very important that you're winning by
differentiation. Having unique, competitively priced inventory
with infrastructure that can fulfill that quickly to the consumer
and critically staying on the leading edge of innovation.
It's one thing to have the inventory. It's another thing to be
able to be actively plugged into these agentic tools and make
sure you're developing good experiences for your customers that
actually are on this cutting edge. In addition, it's one thing to
have all of that, but you want to make sure there's also
incrementality opportunity.
So [the] ability to go out, expand the TAM and gain market share.
And of course what we just talked about with the margin risk, I
think all of those are going to be very important. And so on
balance for retailers, we do see a lot of opportunity. That's
balanced with a lot of risk. But this is one of those key
transition moments that we think companies that really execute
and perform well should be able to perform nicely.
Now finally, Brian, over the next five years, how do you think
agent commerce reshapes competitive dynamics across the internet
ecosystem?
Brian Nowak: I think over the next few years,
we're going to realize that agentic commerce is no longer a
fringe experiment or a concept. It's a reality. And we may get to
the point where we don't even talk about agentic commerce or
agentic shopping. We just say, “‘This cool thing I did through my
browser.’ Or, ‘Look at what my search portal can do. Look at how
my search portal found me this product. Look at how my groceries
got delivered.’ And it'll become part of recurring life. It'll
become normal.
So right now we say it's agentic, it's far off. It's going to
take time to develop. But I would argue that every year that goes
by, it's going to be becoming more part of normal life. And we'll
just say, ‘This is how I shop online.’
Nathan, thanks for taking the time today
Nathan Feather: It was great speaking with you,
Brian.
Brian Nowak: And 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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