Alexa – The end of retail as we know it?

After telecom, media, energy and banking, retailers are facing the far reaching implications of the brutal internet economy. This is what the rise of Artificial Intelligence and Alexa means for the retail industry.

Retail, once a boring appendix in the digital game, is becoming more and more interesting.  Only some years ago, the most important transformation taking place was that every brick and mortar retailer was opening a webshop.

Then we got omnichannel, with the clear aim of coordinating all contact moments with the customer across webshop, customer service, social media and the physical store.

Payment became suddenly an issue too. As soon as Apple launched Apple pay In USA, the biggest retailers, with Wall Mart leading the pack, went DEFCON1 and developed their own payment NFC system: MCX. It didn’t work though, and yesterday it got sold to yet another desperate bank: JP Morgan Chase.

Then we got home delivery of groceries. Here in Norway services like Godt Levert or Kolonial.no are growing at astonishing rates.

Finally, digitalization is opening for the possibility of unmanned checkout, like we have seen examples here in Norway. 

However, all these changes are still characterized by one common element: They are based on a local environment and the core value chain remains intact. Will the digital Four Horses (Amazon, Google, Facebook and Apple) let it be that way?

They won’t.

Enter Alexa, the trojan horse into your shopping wallet. Launched in 2015, Alexa is the artificial intelligence assistant from Amazon that powers the Echo, a tubular device that can be set anywhere in your home. It is ready to listen to your orders and execute them.

So how could this be a game changer for retail? A personal assistant will of course be used for the normal stuff? Ask for directions, recipes, play music, maybe read the newspaper for you, some cute smart home applications… just like Siri, right?

Not quite.

The point with Alexa is that you do not need to grab your phone. You just have to talk freely. This eliminates a friction in the customer journey that an increasing amount of consumers are clearly eager to pay for. Five million units had been sold before last year’s Christmas season.

The removal of this friction leads potentially to a huge difference in behavior when it comes to shopping: The user voluntarily sacrifices additional information for decision making for the sake of convenience. Thus, Alexa (and Amazon) acquires a great power as the gatekeeper trusted by the consumer.

This opens indeed for an alarming scenario for retailers, but also for producers and manufacturers. Specially those with fairly undifferentiated goods that relay on the power of their brands to achieve customer loyalty should be specially worried.  Products like  detergents, milk, batteries etc. are an easy target. Say a user wants to buy more toothpaste. In how many cases will the user ask for a specific brand or type? For a segment of the population, it would take too much effort to check the brand they use or grab the phone to go online and search. They will just say «order a new tube of toothpaste».

From that point in time, the decision power is now in the figurative hands of Alexa. She can decide to order the same product you ordered last time. She may also do a quick search in order to find an equivalent product but cheaper and suggest it to the user. Or she may order the product from the producer or retailer that has paid the most for being the preferred one on Alexa’s product list.

Therefore, the implications of Alexa can be huge for all players in the retail value chain.

First of all, it will put a massive pressure on prices. The power of the brand may be minimized to the point of quasi- irrelevance. Houses of brands like P&G or J&J will see their margins erode and face a difficult decision: Should they spend even more resources on brand building hoping that the user will ask Alexa for their specific brand or should they focus on cost cutting and operational efficiency?

Retailers may face a similar challenge. Over time, their role can be reduced to a simple logistics distribution hub. Nor they will decide which products to sell either. Amazon, through Alexa, will optimize their product portfolio for them, along with a maximum admissible purchasing price. Their role may even be erased totally, as the biggest producers and manufacturers may decide to sell directly to Amazon from their warehouses. As a reminder, only 10 companies control almost all consumer goods in the world. They won’t necessarily need the aggregator role of retailers if Amazon organizes the distribution to the consumer for them.

AMZN-fresh
Amazon has launched Amazon fresh for perishable groceries in several countries

In addition, producers and manufacturers may reduce their advertising efforts and channel those resources to buy a top position in the Alexa shopping list instead.  Search advertising may lose in such case much of its appeal. Google understands the potential disruption that this means for its business model. The search giant has therefore launched its own version of Alexa: Google Home together with the delivery service Google Express. The consequences for the rest of the advertising industry, from TV to Facebook can be far-reaching.

Alexa may create some winners as well.

White labels may acquire an even more prominent role and enjoy the best of times. The rise of white labels at grocery stores has been a trend for years now. However, the dawn of Alexa will give them an obvious opportunity to increase their market shares, as brands will see their power undermined by rational purchasing decisions taken by an Artificial Intelligence powered assistant.

The small convenience stores around the corner of your street may also benefit. Their role can be enhanced as a gap-filler between deliveries for very basic or exotic items.

After telecom, media, energy and banking, it is now the retail industry that faces far reaching technology-driven changes. These changes will of course take time, but once a critical mass of users is reached, there will be no way back. Those players that don’t want to see or are willing to understand the challenges of digitalization may be the first ones to disappear.

Interesting? Share it with your peers!

Forfatter: Salvador Baille

Daglig leder ved Intelis, et rådgivingsfirma med fokus på Innovasjon og teknologiledelse.

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