Retail’s Comeback Plan

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.

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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.

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