Join us in this discussion with Greg Buzek, President and Chief AI Officer at IHL Group, as he dives into the transformative role of Artificial Intelligence in retail. Discover how AI is reshaping consumer experiences, driving efficiency in supply chains, and altering the economic landscape for small and large retailers alike. From the impact on employment to the potential for a retail recession, this episode covers the future of retail in an AI-driven world.
Greg Buzek 0:00
Those small retailers that are not using AI are in real trouble. And we really believe this is going to be the most transformational thing we have seen in retail, really since the barcode. But certainly, since the the creation of the Super Center, we had, we lost 2 million retail or small retailers with Walmart growing out their super center network, we have four Super Centers in 1990, we had over 2000 By the year 2000. In that process, 2 million small retailers went out of business. Okay. So when you look at the scale, and what the opportunities that sit between the big boys here, they’re just tremendous opportunities there. So if you’re a small retailer, it you definitely have to be using AI tools, because it is a tremendous force multiplier.
Eric Chemi 0:56
Welcome to Wealthion. I’m Eric Chemi. We’ve been talking so much recently about artificial intelligence, what will it mean for consumers? For companies both big and small? What will it mean for investment opportunities? And ideas? Is AI is going to be a creative force of destruction, right? Or is it going to allow more opportunities for people to have ideas start new businesses be more competitive? Is it growth creating? Or is it actually shrinking, because there’ll be less work for all of us to do. So. Those are some of the questions that I wanted to talk about. And today, I’m really glad that we’ve got Greg Buzek here. He’s the founder and president of IHL group. He’s also their expert on AI, the chief AI expert or something like that. We’ll get into that with Greg in a second. He’s also one of the founders of the retail orphan Initiative, a charitable foundation that seeks to help the 400 million orphans and vulnerable children around the world. So we’ll get into that as well, retail ROI. But in terms of your work as a retail industry analyst, you’ve been noted by RIAs news is one of the top 10, influentials in retail, the net, the National Retail Federation says Greg is on the list of people shaping retails future. He’s also a member of the top 100 retail influencers, from rethink retail, and he’s frequently quoted in BusinessWeek, information week, the Wall Street Journal Time Magazine, and so many other well known outlets. So, Greg, let’s get right into it. AI is actually going to help these companies grow, or is it gonna help these companies?
Greg Buzek 2:28
Yeah, and we’ll share the data. Eric, it’s pleasure to be with you. First of all, it will share the data, lots of data coming up guys here, but it’s the only way retail grows from here on out. And you’ll see from what we’ve seen for the last several years, I think Jamie Dimon said, he said that we’ve been on a sugar high and nothing’s benefited more than retail of that sugar high. And the question is, how do you grow from here, and AI is critical for that?
Eric Chemi 3:00
I hear two different arguments. And I know you’ve got some data, you’re going to show us some of your research. One argument is that AI will crush big companies, because they’ve got too much bloat too much infrastructure, and it’ll be all these small companies. Maybe you and me would start a company with two people and a bunch of AI, we can take down the big companies. That’s one argument I see you shaking your head, if the exact opposite. And then I hear the exact opposite argument. So it sounds like I know which camp, which camp you’re in. And obviously it has impacts for do you want to invest in the s&p 500? Do you want to invest in the biggest companies in the world? Or do you want to start looking away from that and start looking at other ideas? Right, it has those those implications. So I know you’ve got a lot of data, a lot of charts you’ve brought with us today. So let’s let’s walk through it. We’ll put up the chart on the screen here that we see the good, the bad, and the ugly, retail inventory distortion, but But I assume there’s going to be a lot more than just about inventories. Right?
Greg Buzek 3:56
Yeah, we’re gonna start wide, we’re gonna go through the inventory issues, which have been the biggest most pressing issues retailers have faced with and then we’ll get into the AI impacts. Not only that, but overall, with what’s happening with AI. So with that, if you’re ready, let’s jump right in. All right, well, once again, everybody, it’s a pleasure to be with you here today. Here’s my email and follow. There’s a lot of statistics here happy to share the slides with you and go through that if you email me there. So with that, let’s start wide. Let’s talk about what’s going on with the economy retail economy worldwide. And basically, if I had to shorten it, very, very quickly, Western Europe has been in a retail recession for the last year, year and a half. They got a big bump with the influx of refugees. However, that changed dramatically here in with the war and with things there. So Germany in the UK have been down Germany’s actually in a recession. The UK looks to be in a recession there. France, the only Part of Western Europe that has grown has been those sectors that saw a big influx a US travelers, Spain and Italy for the summer. That is there, Poland is still doing well, Hungary has been in a freefall mainly because of their own isolation there. And now if we switch to Asia, China is starting to come back. Now, at 7.6% growth, it’s almost to where it has been traditionally, for growth that has been healthy in retail, but it’s taken them a long time to get there, it’s taken about eight months, nine months, since they stopped the COVID lock downs to get there. Japan’s going strong, they’re actually looking at doing a stimulus package there that will further assist retail. Vietnam is the star though in that region where it’s been up for literally 10 months, ranging from seven to 13%. growth there. So that’s where we’re looking at most of the retail around the world. So its ups and downs, etc, there. Now let’s look at the US specifically. And this is where the bulk of what we’re going to talk about economically is going to be now I’ve got a level set, where have we been? And quite honestly, we’ve been on that sugar high there because the government gave out so much money over $2.1 trillion to consumers. We added the entire retail economy of India, as growth in 2021. That’s the annual economy of India for retail for 1.2 or 1.4 billion people we added as growth in the United States in 2021. And in 2022, we added the UK. Now, keep that in mind, because we did that with 3 million fewer workers. So another way of looking at that is we’ve been adding about a Home Depot every month to the US retail economy in terms of extra things happening there. So
Eric Chemi 7:02
An extra Home Depot location or an extra Home Depot,
Greg Buzek 7:05
annual revenue company, annual revenues.
Eric Chemi 7:10
All of Home Depot, you mean the entire home depot company. Correct?
Greg Buzek 7:13
Correct. That slowed recently, it was as high as $190 billion a month more. It slowed. Now we’re looking here we’re looking at about 150 billion in October. So it slowed as money starts to run out. But just a massive increase in retail, since before the pandemic.
Eric Chemi 7:33
Is all that going to get sucked up. We had a conversation recently with a banking expert and John Maxwell. And he said whenever you get these massive liquidity, events in the economy, it gets to get put somewhere. And banks, for example, they do dumb things with all that extra money because they really, they are not equipped to handle so much influx right away. That’s why we saw those bank failures almost a year ago, because it was too much money for them to handle. Do you see the sugar crash coming in? What will that mean?
Greg Buzek 8:02
I think we’ve got a sugar crash coming in, we’re starting to see it already. But it’s not as devastating as you might think. There because the labor market is still strong. And this gets to the heart of where that spend goes. And we’ll go a little bit more into that there. The main point that I want to make right now is what the government says as terms of the rosiness of the retail market is not really true. Out there. As we look forward in 2023. Going forward, there are haves and have nots in the retail economy, just like there are in the consumer economy. Are that
Eric Chemi 8:42
not not true in which way just the fact that it’s it’s more heterogeneous, like there’s it’s good in some places, but down and others are? What are the government? Where’s the government saying that is specifically not true?
Greg Buzek 8:54
The government data, in my opinion has been about three months behind what’s really happening in the retail market, when you say that mass merchants and warehouse clubs are up. But both Walmart and Target said their numbers were down, there’s a different connection. They’re on it in a particular month. Now, I’m not talking about this latest month, it just seems that the government data is off this year. One of the things that happened without getting in the weeds as we used to have 61% of the market was part of their survey that’s down into the low 40s. Now, that’s part of the issue. But it seems to be delayed in reality to what’s really happening at the at the store at the retailer level. And that that is delayed. And the danger of that is the Fed has been making decisions based on that delayed data, the NRF and CNBC just came out with a new, more real time view of retail that I’m really, really excited about. That just was released this past month. So I’m really looking forward to their latest data of what’s going on because it’s more up to date, I believe in what the government state is,
Eric Chemi 10:02
if you know it’s delayed, and you know, you’re not trading on inside information, or the government must know, it’s still a right. Other people must know. It’s like they, I hope so. I hope the Feds not making decisions on data that, you know, is delayed,
Greg Buzek 10:15
I hope. I hope so. Man, I don’t want to open up Pandora’s box. But I’ve done a little bit of explanation of exploration here, even with AI and learn some things that I was shocked to learn that impacted the accuracy of the data this year from the government.
Eric Chemi 10:34
Can you give us one example?
Greg Buzek 10:37
Well, there’s been there’s always been this view that, hey, there’s partisanship in there whether or not that is true or not, I don’t want to get into the politics. However, the government has publicly said that the one of their systems, the systems that provides x exporting of data was hacked earlier in the year. And that because of that date, and I forget the name of it, it’s make it something I believe, is the name of that system. Was was hacked and that there’s been some concern about the inputs of the data that was coming out of there that that could be making it a little more bullish than it really is in the marketplace. Okay. Okay. Well, I could go off on a real side tangent on this one for sure.
Eric Chemi 11:23
That could be a real side tech. So yeah, let’s get back on trucks. We’ve got the growing of an entire Home Depot’s all the Home Depot’s in the country, we grew that much more every single month.
Greg Buzek 11:35
So we did it with 3 million fewer people working in retail, which is crazy. Keep that keep that in the head. Right now, as you think about how do you grow from here? How do you move forward from here. So if we look at the numbers, this is what the government releases. They’re in terms of September, this is what it releases in terms of October, everything’s rosy, everything’s great. Everything’s growing. They’re in most of the segments here. Once you add the CPI into things, we’re barely up for October there, and we’re up slightly for the year. The only reason we’re up for the year right now. Through year to date. Overall, right now this is prior to the inflation being added is because the convenience, the gas prices are so much lower than they were a year ago. Generally, we find that every penny sustained and gas prices takes $2 billion out of consumers wallets if that Penny is sustained for a year. So when that scales back, that gives an influx of funds that are going into other sectors of retail. But when you add overall inflation to retail for the year, we’re down 1.2% for the year in retail, so how’s that play out with the with holiday sales, and quite honestly, it’s been a Yo yo, we had an early start with Prime Day that was relatively strong. Target and others came out. So the first two weeks of November were really slow out there. And then we got some card data that I’ll show you that demonstrates that. And then we had traditional black Friday and cyber week, which was off the charts in terms of ecommerce growth there. But the stores, the stores number was about 2.1% down from a year ago in terms of store sales there. So it’s all over the place. NRF projects were going to be between four and 5% growth rate if you add inflation to that were at one to 2%. And quite honestly, that’s fantastic. When you consider where we’ve been and how much money that was flowing into things, people are still spending. My concern personally is that we’re seeing this massive growth in the Buy Now pay later, as well as debt laden purchasing. I think most people are looking at the headlines and are using retail as therapy. In a lot of ways. I don’t know if that’s good for the consumer that may come back to us in terms of credit card defaults and things like that in the future. But for retail to be up after all this money now being gone, that the government had handed out is a positive is a positive number there. So So to show you a little bit of a data this is the data that showed how fast things dropped from the end of October to early November. So this was this was a chart from the beginning of November and we saw a really steep drop in comparative spending on card data. During that first week in November. However we saw a big boost start happening in terms of what happened with Black Friday and Cyber week. Now I want to show you a couple charts just to show you how much of a yo yo this is it. This is now health and beauty has been driving a lot of growth for the whole year Alta and Sephora and those guys have just been Going back gangbusters for things that are but this is Black Friday online traffic alone. So you see, this is what’s changed year to year. And the really strong category was health and beauty. The consumer electronics was down sharply in terms of traffic. However, when you add in average spend, all of a sudden you see a different story. Less people shop for consumer electronics. But when they did buy, they bought more. So the average order value changed and went up. As a result of that online, and health and beauty becomes more moderate, but it actually improved. So when you look at health and beauty, Home Goods luxury, still growing, where we see a order value for sporting goods and toys and gifts and things like that, that it’s gotten much lower there. Now, the thing to keep in mind,
Eric Chemi 15:52
can I can I cut? Yeah, you said events and fewer orders. But if you have an order, it’s a bigger order.
Greg Buzek 16:01
It’s a bigger order. So it’s people buying for consumer electronics, they may not buy the TV, but they’ll buy the phone. Okay, so the phone may be more expensive, or they’re in that cycle of, hey, I need to replace the laptop, because I bought the laptop during COVID. And now I need to replace that. Now again, and I’m looking at a surface or a MacBook Pro or something like that. So that’s driving these costs. That’s the cost per transaction up.
Eric Chemi 16:28
And I see all this in my main question is, and maybe we’ll get to later my main question is, so are we in a recession or not? Are we headed? Mixed commentary from people
Greg Buzek 16:42
the beauty, that’s the beauty of it. It’s almost like politics, pick your flavor. And you can make a case for it. It’s all over the place. That’s why I’m so excited about this NRF CNBC thing, is I think we’re finally going to have a far more accurate view of things. And just like we have the CPI from the government, there’s a site called Truth relation, that brings like a Nielsen report real time view of inflation that I think is far more accurate of what’s going on with inflation
Eric Chemi 17:12
to inflation.com without the E right, Tru inflation, correct,
Greg Buzek 17:15
truinflation.com. And then, and then that’s the new thing from CNBC, and NRF, which just was released, so we’ve only got the first month worth of data.
Eric Chemi 17:26
Okay, okay. Yeah. So let’s keep going here. Because I’m looking at downs because when you say, fewer people are ordering, but when they ordered, they ordered more, the fewer people you might say that’s that’s negative, other people would look at me they ordered more, that’s positive, right? But you get both. So make, right,
Greg Buzek 17:41
right. So this, this chart looks at online spending only. And it’s really fascinating to me that 47% of the growth isn’t experiences, it’s live events, it’s eating out at restaurants, those are the things that are driving the growth here. The non gift are buying for yourself, it’s another 29%. So So gifts for the holiday for the holidays, gifting is actually third, in the rankings here of what’s purchased online, there is a lot of buying that’s happening personally. And it’s happening at a rate of three to one of people buying for themselves for the holidays and rewarding themselves there. So is that free, it’s not new, it’s not new. Maybe it’s new in terms of realization of the spread. Of that. That is happening right now. Like I said, there’s a lot of retail therapy that is happening right now. So So with that, a shift to the consumer themselves. And we’ve got a consumer that is house rich and cash poor. That because of the interest rates, we’ve had massive swing in the cost of homes, in the amount of homes. This is not a big story for anybody watching this here, but it costs a lot more to buy a home right now. The good news is in the US market as compared to some of the other markets we have very, very low interest rates. there that is not true in some of the other markets like Australia and Britain where variable interest rates have been much higher than norm in those environments. When you look at the data we’ve have homeownership is at the highest rate we’ve ever had in America. And most of those mortgages are much lower there or 40% own their home free and clear. Part of the migration that happened due to COVID, you took people that basically were able to own their homes by moving to another state as they moved out of of some of the more restrictive states like New York and California to Texas, Tennessee, Florida, etc. And that put the consumer in much more better position there. There are big differences by demographics and locations though, there that you have to factor in, and this inflate One that we’re seeing is particularly harsh to those that are on fixed income. So racing through that data, the excess money that the government handed out is essentially gone, that money is gone. This chart breaks it out by income there. So the only money that was left there after June of this year was those who had on the top 20% of incomes that are driving things. And part of the concern for me from the retail side is, a lot of this has been driven by credit cards, we’ve seen the highest credit card debt in in the US, we’re now over a trillion dollars there in the third quarter. And those interest rates have skyrocketed. for that. I think what you saw is we saw a lot of people get their student student loans taken away, and they went spending out there as a result of that on some retail spending. So how long that lasts, I don’t know. But the consumer at the low end is being squeezed in the middle on high end continues to spend. But a lot of that is being leveraged spend right now. So that’s, that’s the challenge for retail is how long can that last. And I think we can have that soft landing, so to speak, and retail, as long as the employment situations stay strong. So
Eric Chemi 21:23
I’m hearing you say credit card debt is up, the interest rate on that debt is up. So now they gotta pay a lot more. If you try to get a new house, your mortgage is way higher. So all of a sudden, money that you could use for retail to buy stuff that’s getting soaked up. And like you said, all the COVID stimulus money, that’s all gone. So back to where you were, with higher interest rates and more debt. That doesn’t sound like a great place to be,
Greg Buzek 21:49
it’s not a great place to be. It’s a very, very tough place to be. And getting back to your AI question, which I’m going to get into in a second. That squeezes the smallest guys, first, the big guys can always work through this through mergers, acquisitions, whatever, they can work through a lot of the stuffs as long as they were not leveraged with a lot of debt there. But the smaller retailers, the smaller outlets, those are the ones that are going to see things there. I will tell you there’s another piece of the of the macro economic perspective that is coming into play here as well, when it comes to the restaurant side, and that is the retirees and the aging retirees, they’re they’re eating out a lot more than previous generations do. And primarily because the cost of food at the supermarket if you’re only making food for one or two people, it is actually cheaper in a lot of cases for those folks to go eat out than it is to just buy those products and cook for themselves at the local at home. And as we see more and more baby boomers retire that is now driving more restaurant spend there which will continue to buoy what’s happening in our retail and restaurant numbers.
Eric Chemi 23:05
Okay, let’s see what else what else we got on our on our great chart. Dave? Is there is there more to share? What do we got here?
Greg Buzek 23:12
That’s it for the economy stuff now getting into the technology, the AI and the retail problems, specifically operational. So let’s, let’s move on from that precursor that we’ve got here. And let’s talk about tech priorities. What are retailers investing in, and I want to focus on a couple areas here, personalizing the customer experience has always been number one there. But you’ll notice some of the other things to CRM, empowering store associates, Walmart now has their ask Sam AI tool that’s available to 500,000 Associates around the world in all the different languages now. Those are the big ones. But when we look at inventory inventory is a big issue for retailers we had if I had to use a metaphor, we had retail was Hamann prior to the pandemic and maybe a low end NASCAR type of operation with just in time inventory and everything. The problem is, is that COVID threw a wrench into that and we had a bomb on turn two. And and so the big retailers started to reroute what they were doing, it’s a no problem, we’re going to shut down. We’re gonna go past the concession stand there and go around and get back on the track. We’ll be fine. And then and then we had other disruptions that happen. In particular, we had the war in Ukraine. That created a massive problem as well. And so you’ve had these continual bumps and I believe we’re about seven years into a disruption in inventory that is causing retailers to really struggle through how do I get my inventories correct for things there. So there’s a lot of input right now in terms of of prioritizing inventory visibility and optimizing the customer journeys because the average retailer loses five to 15 points of margin. On a buy online pick up in store situation today because they haven’t optimized those processes. And so that’s where a big part of the investment is
Eric Chemi 25:09
to mention, they lose how much margin on pickup
Greg Buzek 25:13
between five and 15 points of margin on the deal compared to what they make by just a regular in store shopper because
Eric Chemi 25:19
they make money, they just make less money
Greg Buzek 25:23
depends on the segment, the typical supermarket chain, depending on the item, a buy online pick up in store free free service actually loses them money. Because the margins are so, so low when it’s over. So like Kroger, for instance, Kroger, Kroger released their earnings, their net earnings, I believe were 1.9%. Net income at the end of the day. And as a result of that, when you’re looking at something, we’re now you’re paying an associate to run around the store to find things, and you’re not charging for that, that labor cost is just eaten up the margin there for those individual items. So it has to be a certain level of product before order before you can actually make the money there. And that’s one of the reasons why we’ve seen the big flood of self checkout. in there is because self checkout traditionally, I haven’t done this in a number of years. But we found the self checkout could be profitable when a $9 transaction where you were looking at about 18 to $19 an hour, or $19 transaction for a staffline. And so that’s the economics for the self checkout piece of it. So the leaders, the leaders are people who grew their sales 10% or more, and 2023. So we looked at what are they doing differently, because they’re going to be leading this charge here. And you’ll notice when it comes to the inventory in the optimizing the customer journeys, they are investing considerably more in those particular areas, as well as now we start to see the AI thing come in, and that’s cleaning and training of storing their AI data. They’re spending considerably more they’re, they’re spending less on the inventory visibility. And the reason for that is because they spend a lot more. And since they spend a lot more, they’ve already done the hard work on inventory. Visibility. So we start seeing AI creep into this for the leaders associated with that. Now when we look at emerging technologies, you start seeing some other things here, you start seeing the single data lake start to creep in here overall for everybody. But you’ve got things like RFID communications out to the parking lot to make things faster for those fine line pickup at store journeys here using 5g, etc. What What about the leaders and this is where we really start to see the separation start to happen. The single data lake getting to a single data source for AI purposes. Number one by far in the leaders are spending tremendously more in this area of particular. So look at it, this is my Usain Bolt chart here. And what this is, is what the IT spending growth is by the size so are leaders are 10% sales growth, or higher average of zero to 10% are below average is zero or negative. They’re in we can see that in enterprise IT spend, the leaders are their growth is close to four times that of the others. And it’s like Usain Bolt. Okay, so if I was racing Usain Bolt, he would not only be further ahead on the first step, but every other step he would continue to, to get further ahead. And that is what’s happening with retail, the rich are getting richer, and those that are struggling, that are leveraged, that can’t invest are getting beat up. And as a result of that our largest retailers I believe are going to benefit from some of these tools that we’ve got coming forward. Many questions there.
Eric Chemi 29:07
So, so many questions. I like the Usain Bolt analogy, he gets out to pasture start, and then continues to get out further and further away from you every step. He’s getting away from you. So I see your point, the bigger companies, because that was my thought when I was talking to somebody a couple of weeks ago, they said, AI and it is going to allow smaller companies to take over. But I’m thinking you need a lot of people still behind it, you need a lot of investment, you need a lot of time and effort. And his point was well, but big companies have old processes. They have old infrastructure, you can’t tweak it for AI, but I’m still thinking I’d rather have 1000 people working on AI than three people working on AI. That’s my guess.
Greg Buzek 29:48
Yeah, I’ll share my metaphor and all that as soon as we get to that AI stuff. So I want to get into this inventory thing real quick. Just to get through so we call it the good, the bad and the Ugly. So I’m going to race through this date. We’re here to get to the AI data so we can have more discussion. But inventory distortion, which is the difference between what the consumer wants to buy and what retailers have on on stock to buy. The idea for our study that we started in 2008, actually came from a Wharton case study that we read, that basically said that the retailer thought they were in stock 92% of the time, but the consumer actually said, No, you’re only in stock 75% of the time, when they did exit interviews, because the consumer considered you out of stock. If there weren’t enough people working there, if it was locked up, and you couldn’t get to it. If the person there couldn’t find it, you found people that would work there. But you couldn’t find that or the pricing was wrong, the consumer was losing about one, one and four items that they were coming in the store to buy, because of these issues. And so we started looking at how big is this issue? And how does it change. So it’s about a $1.8 trillion overall problem in retail, which is bigger than the entire retail GDP of Mexico on South in the Americas, in the Latin and South America. Market, it’s bigger than that entire market overall, most of that is out of stocks, we went through overstocks through the quick period of the early part of the of the Ukraine war there, but that has been mostly worked out. And we’re still dealing with a lot of out of stocks there. The biggest issue is in Asia overall, because we’ve had a rapid increase in retail without a lot of sophistication in some of those cases, or an infrastructure that can support that kind of growth. That was coming into play. So we still have a lot of issues there. North America is relatively modest. They’re a 244 billion. So the North American and AMEA are pretty efficient comparatively to the rest of the world when it comes to that. This is the breakout of that where that money is spent you can see shelf empty is by far the largest piece of that at $700 billion in lost cause lost costs. Because of those, those issues there. Now, when you ask retailers, so we serve a retailers and we serve a consumers when we ask retailers who’s to blame when this happened, the vast majority of it remained supplier issues, we have issues where one piece can’t finish the product would talk to a guy whose family makes pot pies. And they couldn’t ship 12 inch pot pies to restaurants because they couldn’t get the aluminum pant. They had every other ingredient but they couldn’t get the aluminum pan. So the supplier issues remain a major issue and a major problem that we’re facing with things now the cost issue is no longer at the point of production, the cost issues more in the transportation and the warehousing of products where the cost growth is. But supplier issues remain the big thing. personnel issues, I don’t have enough people working or they’re not properly trained. There is another big issue that’s there. And then we see a rising theft. And we’ll talk about that in nature. So if we fix the problem, it would basically be about 5.7% increase in same store sales in North America and higher in regions around the world. So what’s the good what what’s happening good and what’s what’s happening and move things forward? Well, we made some major improvements in inventory distortion, we dropped the cost of that $172 billion, or roughly the Home Depot again, for their that improvement was on the overstocks. We greatly improved our inventory position and lowered our lower the Overstock issue and having the right merchandise and stock versus having a bunch of patio furniture. When the war started, like we saw with Home Depot, Lowe’s and target during those initial stages of things. We made major improvements around the world in terms of overstocks. And we made improvement every region in the world in terms of our stocks in every region in the world in 2023 With the exception of North America. And that brings me to the bad we saw a major drop in efficiency in our stocks in North America for this year. And that actually the reason for that is the ugly and that ugly is everything related to theft and what’s happening. Organized retail crime by our estimation now is $100 billion problem in and of itself, beyond just the average theft and the average shrinkage that is happening in a retail store. Our numbers for North America for shrinkage are considerably higher than those you may see from the NRF primarily because the NRF doesn’t count restaurants doesn’t count convenience stores as part of retail. And so there’s a very limited data set in terms of what’s there now. So organized retail crime, we could go on and on about that. But those of you watching may have encountered all of these things hear, at the end of the day, a product that has a 5% 5% net margin margin there. If they have 75%, gross margin, I mean, they’re literally betting that 15 of these things, I’m going to lose 14 sales and still be ahead. By locking it up, where people are going to walk away, I’m still better, more ahead than I was when I, if I lose one from a theft. So see those numbers again. So they’ve got it’s just it’s, it’s mine, it’s mind boggling. So a retailer that only makes 5% net income there, but their if their, their gross margin was 75%. On that item, they’re there, they have to have 14 before they 14 and a half before they would lose by law. So 14 customers would have to walk away before they would lose the margin that they would lose if they lost one through theft.
Eric Chemi 36:17
Stealing one is the same loss as 15 people not by not buying because of that. So like give me an example number. So if you have 75%, gross margins and 5% net margin, so what is the like typical? Let’s say it’s a $10 item. So no item. So you’re saying the net margin really means it’s 950 $9.50? What were we giving an example of the cat Oh,
Greg Buzek 36:43
it’s all over the map. Generally, in that case, mark things up for x, what you pay for him. So it’s a 20, it’s a 25% Depends on how competitive the market is for that particular item. When you get into high end consumer goods, you don’t have that benefit. It’s a much, much tighter in that environment. But generally, on average, the gross margin I’m sorry, that the the SGA is about 28 to 29%. For things so your your gross margins, there have to be in the 40. I’m sorry, it’d have to be if I had to do the math, you’d have to be 40% or higher there for your gross margins to have that 5% net margin as a result of that. So it depends on it depends on the product. I was just throwing that out as
Eric Chemi 37:36
I liked your example. I’m just trying to think through just for people watching, you know, okay, let’s say if you had 5%, net, and 775 Gross, so what would that be? Let’s add a $10 item. Does that mean the cost of goods is $2.50? Or the cost of goods is? What do we?
Greg Buzek 37:54
It depends on it depends on what it is. It would be it would Yeah, it would be, it wouldn’t be that for toothpaste, but it might be for the what is that eyedrops or something on the other side of that? It might be for that because you have a higher multiple, but you’ve got with the the toothpaste, you have a much, you know, tighter supply chain and much more higher competitors as a result of that. So it varies per for product there. So obviously we
Eric Chemi 38:22
would much rather not have it get stolen, we would much rather we really don’t want it to get stolen. But we’re okay with people walking away because it’s locked up. Yeah.
Greg Buzek 38:32
And we’re not we’re not good with either one of them. That’s why we’re closing stores.
Eric Chemi 38:37
Greg Buzek 38:37
You know, if you look at what Walgreens experienced in, in San Francisco, they had shared that their losses, they lost 10% of same store sales in that particular market. It was their theft when the average theft is 2%. Nationwide, right? So they were seeing five times more economic losses there. So what’s their response is you have to lock it up. And what’s the response by the customer? If they may walk away because it’s such a frustrated and friction fool?
Eric Chemi 39:13
Right buying experience? And then then you just call it the store at that point.
Greg Buzek 39:16
Exactly. Exactly. They were spending 40 times the arm security budget as well versus the others around the country. It’s just a massive it’s a massive problem that’s in play there. So but that’s that’s what caused the inventory issue. Or that so so all of that leads to this AI discussion. It really is retailers have to do more with less if we grew India in the UK with 3 million fewer workers. How do you grow from here? And how you grow from here is now we have to look at AI and this is where my metaphor comes in with things and when you comparing retailers. It’s kind of like getting to LaGuardia from midtown. All right. There are some major retailers like a Walmart, like an Amazon, these guys have been investing in cleaning their data, getting their data ready to take advantage of AI for a number of years targets another one where they they’ve done the hard work, they’ve cleaned the data, those guys are through the tunnel getting ready to go past the toll booth. And they’re starting to see incredible benefits. The vast majority of retailers are stuck between eighth and ninth in bumper to bumper traffic on 42nd trying to get across town. And that is where we are now. And then all of a sudden, a year ago, we had chat GPT get announced and generative AI came onto the scene. And most people didn’t start realizing it until we got till the March timeframe. And that leads us to now generative AI now having all the headlines, but it’s really generative AI on top of the hard work and the clean data that is there that’s driving the big value. And then we’ve got this elusive AGI coming, that will have an impact. But that’s going to be later on in the decade. And it really in our forecast is going to be a small part of the through the end of the decade for things here. So we did a product, we did a forecast for the retail industry overall. And I thought we’d share how we went about it for you folks. Without having an exhaustive use list of use cases we went through and we said, you know what’s the best way of looking about what the impact of AI can have on this industry. Realizing that a lot of retailers were already starting to get the traditional AI ml benefits in 2022. And so we said, well, the best way to look at is just look at it from an income statement standpoint. So we looked at sales growth opportunities for AI, then we looked at gross margin improvements. And then we looked at SGMA improvements. And then we looked at each of those categories of traditional AI ml, and machine learning the generative AI, and then the artificial general intelligence and we started putting things into buckets as a result of that. And that was at our high level. And then we took it down. And once again, not having an exhaustive use of use cases of how AI could be used yet, we used our IT spending model as a way of putting it into buckets to show where would these benefits what would be the technologies that would help drive when they’re AI enabled will help drive these benefits. And that’s how we put this, put this together. So we I believe we had 10 or 11 segments, retail segments that we looked at. And then we looked at these categories. And then we went down through that. So we did a top down analysis first, when we started to do it. And what we came out with was a massive number. It was an unbelievable number at first $9.2 trillion. And impact through the end of the decade. Now when you consider we’re looking at about $5.5 trillion for North America or for the US scuze me, US retail economy today. This seems like a massive, massive number. But this is a worldwide number. And it’s through combined through the end of the decade here. Now, this is benefit that only comes from now AI enabling on things we didn’t really include economies of scale benefits to this as we went through we just other other than the AI improvements associated with that, because it just became a circular wheel as it went forward. But that’s how we went about creating our forecasts. And when you look at it, here, you see, this is our growth rate, wrong screen here, growth rate overall, the traditional AI machine learning the people that done the hard work, the blocking and the tackling, are going to see the greatest benefits going forward. But when you start adding the generative pieces on top of clean, accurate data, you get astounding results, as we’re going forward, there. So that’s how we went about it. Our view is it’s almost going to be 5050 by the end of the decade there in terms of traditional AI versus generative AI as we go and forward. However, that benefit is going to be radically different. And I think this chart is next chart, Eric gets to the heart of small companies, large companies in terms of benefits, because AI greatly favors the single channel retailer. And that’s where a small company with just a few people could create a new business without all these locations and take significant market share by leveraging AI tools. And that can definitely be true but when When it comes to AI to do AI, right, you have to have a lot of data, that data has to be tagged, that data has to be told what it is there, and it has to be accurate. Otherwise, you get forecasts just bad forecasts much faster, you get other things much faster. And you get errors much faster. So you need a lot of data there, that data has to be accurate, it has to be relatively uniform as well. So UPC based businesses, where every product has a unique barcode has a tremendous benefit over things like clothing, where you have color and size added to things there as well. So when you look at the purse segment benefits, it’s a pure play ecommerce, then it’s your grocery and your hypermarkets that have tremendous advantages over other segments in deploying this because they’ve got cleaner data that is more ubiquitous and homogeneous data that they can leverage to take advantage of that, their loyalty plans and things like that they have a lot more clean data on the consumer side as well, not just the inventory side. And so there are tremendous benefits as a result of that. And then at the heart of that, and this is where we firmly believe on our end, it’s the rich get richer, and it’s the biggest retailers that benefit because to make the AI ml stuff work, you have to have lots of data to train the models. And that data has to be accurate and tagged and you have to have enough data to where it gets accurate in that way.
Eric Chemi 46:37
That’s the irony of all right, you need all these people to make sure that the data is accurate. And you need to have all these transactions were fundamentally you need people to transact with you to get the data in the first place.
Greg Buzek 46:47
Correct. Correct. And that is, that is the thing, reason why we say those small retailers that are not using AI are in real trouble. And we really believe this is going to be the most transformational thing we have seen in retail, really since the barcode. But certainly, since the creation of the Super Center, we had we lost 2 million retail or small retailers with Walmart growing out their super center network, we have four Super Centers in 1990, we had over 2000 By the year 2000. In that process, 2 million small retailers went out of business. Okay. So when you look at the scale, and what the opportunities that sit between the big boys here, they’re just tremendous opportunities there. So if you’re a small retailer, it you definitely have to be using AI tools, because it is a tremendous force multiplier, and generative AI in particular is a huge force multiplier. What
Eric Chemi 47:48
exactly is the AI helping these big retailers? Do? Is it just better pricing? Is it Yeah. What does it actually do?
Greg Buzek 47:55
Can I get through that? Let me go. Let me go through that here. Because I’ll show you. This is our line of business areas of things here. So we believe merchandising and supply chain, it’s estimated that over 50% of the trucks on the road are 25% or less full. Right now. That is a massive problem in terms of fuel logistics, everything else massive opportunity for AI to improve that scheduling of raw scheduling of deliveries. There massive improvement opportunities there for that. The other thing is, is you have mass customization. When you think of a Walmart or Target today, they can’t do personalization. Well, with AI, they can do personalized ads. And at the end of the day, the goal is to become convinced the consumer that I could see myself doing that I could see myself buying that or driving that. That’s where AI comes in from the sales standpoint. But then there’s also a lot of opportunities on the gross margin standpoint, as well. And that’s where you get into supplier negotiations. Walmart has already saved 3% on store fixtures when an AI a generative AI model has negotiated the terms because the AI never had a bad day, their kid was never sick, they weren’t cranky, they were always looking for a win win solution. And it was actually rated higher by the humans on the other end who were negotiating against the AI. that’s those are some of the things so demand, better forecast, better optimization of the inventory, better store clustering as to what products go into which store as to how much the routing logistics, the quality control negotiations. This is where you have clean data accurate data has a huge benefit when you add that generative AI on top of it to make it better. So right now those benefits are mostly in the traditional AI ml, but they’re growing dramatically as we get later in the years when that generative AI is added onto things going forward. Then then generative AI when it jumps to lightspeed when it comes to impact of SGA, so where the benefits and sales, as well as the gross margin improvements have a lot to do with traditional AI and ML and having lots of data that’s clean, tagged and accurate. You can get tremendous benefits on the knowledge worker in the SGMA side, tremendously using those tools, chat GPT and derivatives of that, particularly when you’re limiting it to your particular data. And this is why the Microsoft 365 copilot can be so powerful as a tool, automating routine tasks, their car Max has shared that they were able to update all their cars across all their systems and basically do things in a matter of hours that were taking a month to do. We saw in New Mexico, a new baby being born there, they said it would take a person a month to get them installed and listed and all the systems and all the programs and they had to be set up for that. Now they’re doing it in less than 10 minutes using artificial intelligence. So these are routine tasks that are the same over and over again, major issues, reduction of labor costs, better labor scheduling, better viewing of what’s happening, forecasting and deploying your labor. There the personalized targeted marketing, as we talked about, you know, your your family is different than my family right now. My kids are graduating college right now, Eric, your house is full of little ones.
Eric Chemi 51:36
Behind you. Yeah.
Greg Buzek 51:38
So the ad that you see mimics your family structure, the ad I see fit, sees mine is going to be more college age and colors that match my color, you know, all those sorts of things. The the improved communication, this is where generative AI is going to shine the brightest, and it’s just absolutely huge. As well, we’re going to see some of those operational issues in terms of analytics. This is prescriptive analytics is where we see a lot of AI in use today. Store performance is the biggest area. But we see this massive growth of loss prevention. So at the end, to close this up, just want to talk about, you know what, what is happening in terms of retailers, when they use AI ml, what are the actual results, and for the first time, we actually have survey results that now show this. So we looked at 11 different solution areas, everything from order management, all the way down to HR and loss prevention activities here, where AI and traditional AI and machine learning was used today. And then we looked at that by the performance of those companies here. And what we have found here is that those using AI and machine learning in those categories saw sales growth, that is 2.3 times that of those that were not. So if the average was five, they’re seeing 11 and a half percent sales growth. Those people that are using AI and ML across all those those different tools for profit growth, their profit growth is two and a half time. So that’s 5% versus 12 and a half percent for those that are looking at it, when they looked at 2024, what they expected to see their massive increases, literally up to three times the profit growth, for those that are already using AI in their solutions there. So it really is a force multiplier and an opportunity to grow. So I have my warning here, and it’s not related to job loss and all that sort of thing. But when it comes to doing AI, using the sports metaphor from Reese Davis, dumb loses more than smart wins. And that is definitely true. When it comes to AI, you want to start where you have the cleanest data, the most accurate data. And that’s where you want to deploy AI. And where you see what’s our greatest benefit. When those three mash together. If you did those Venn diagrams together, where those overlap, that’s where you start with AI to make a difference. So we took this data and then we started to analyze it down to the individual retailer basis. So we created an algorithm with 9.2, that it had things like aI matured, I’m sorry, analytics, maturity, data maturity, the segment itself because of the segment benefits, we looked at, are they involved in the local in the overall broader economy of retail, sharing what they’re doing getting input from others there. And then we had things like scale in there as well as other things. We have public as well as private data that we could leverage for that and we put it on 100 point scale where zero was not ready at all and 100% says totally ready to take full advantage of things. And our rankings came out like this. Amazon came out number one, the rating of 83.7 their Walmart number two target Number three, and we’ve ranked North American public retailers here. So we’ve got to believe 185, we excluded the oil companies. And we excluded some of the cell phone companies there because of the trying to figure out where their revenues were versus service revenues. Related to that, but out of the other 185, their Amazon came out as number one, the benefit there is they own the infrastructure, as well as, as being very, very well prepared in the traditional AI and machine learning side of things. And Walmart for several years was actually hiring more data scientists and Google, and thus, they are very, very advanced and what they’re doing from an AI standpoint as well, we then took that to look at, okay, we have this $9.2 trillion from a top down what’s it look like if we can bottoms up now looking with the opportunity is when we match it up to that data that we have on these individual retailers. And we saw 316 billion potential increased benefits, okay, this is potential benefits for Amazon another 264 billion for benefits for for Walmart here. And these extra extra benefits, extra benefits that are there, if they optimize everything related to that. And they don’t use that to lower prices or, you know, drive people out of business or things like that, if they take it through there. Now, they, they may do a tweak of this to do other things and actually use that as competitive advantage to take out competitors.
Eric Chemi 56:34
Imagine what this means from a market cap point of view. That much extra revenue, now used to come multiple on it, add that kind of market cap to the stock. That’s a massive growth opportunity in terms of if you were invested in these stocks for the next few years.
Greg Buzek 56:50
Yeah, Eric, and this is where that 9.2 that we saw was so huge. When we started doing it from the bottoms up, the scary part about that is we think the nine to is low. When we had to make these two models where we could only make Walmart margins go from I believe, 24.2 to 25.6, for gross margins. Now, do I think it’s going to be better than that? Yes. I couldn’t do it, though, and fit into my 9.2. So yeah, it could be even bigger than the numbers that we’re showing here. In terms of improving. And that’s the scariest thing about it. And this is why we said this is really a big retailer thing, versus a small retailer thing, because if you think of this a 1% increase for for Walmart right now is what is that 6.4 trillion? No, it’s more than that. It’s six, four. Yeah, it’s $6.4 billion. Right? There. $640 billion company. Right? My math right there. Okay. Your average small retailer is a million, a million dollars. Right?
Eric Chemi 58:05
Right. Just incremental is so much bigger. And I didn’t realize that they were hiring more data scientists than Google. Right? That’s a scary. You see Amazon, you think, all right, they’re a tech company. But then you realize nobody, they’re competing against these other retailers are really a retail company, right? We think of them as a tech company based on who works there. So it makes sense that their direct competitors are probably hiring very similar people.
Greg Buzek 58:27
Correct. Now this is going to this is going to mind boggling here too. Because when you see these numbers at the top, and then you think of a company like Macy’s and see how these multipliers play out, we then took this down, and we now have these AI readiness profiles on individual retailer. So we have for all those 185 retailers, we now have this, which looks at those specific retailers and what that forecast is per year and more of those benefits will come per year. So we’re projecting seven and a half billion dollars for Macy’s there. And we tend to think of Macy’s in the same baileywick as a Walmart in terms of competitors. It’s like, no, they’re not even close because of the scale difference. And when you’re talking about AI, you can’t get away from the scale of the retailers of being the benefit because it is such a huge part of what happens with AI is the amount of data that you have access to the cleanliness of that data, and how much of it you control versus your competitors related to that. So this is page one of those profiles because the forecast and we break it down by the line of business benefits of where those benefits would come whether it’s infrastructure store systems, merchandising and supply chain. And then the individual technologies underneath those that drive will drive these benefits where they’ll derive these benefits from so those are some of the products we have we’ve got aI forecast, so the over Well forecast, top level is free, you can get that on our website, that inventory distortion, stuff is free, then we’ve got a variety of these tools that we offer that are available for sale. So,
Eric Chemi 1:00:14
so much there. The Good, the Bad, the Ugly, we went through a lot there offer kind of walking us through the research. I’ll take the chart down now the table, but but that’s good to remind people. So actually, you’ve got actually I’ll put it back up for a second. So people IHL services.com is the website, right is your email, Greg hl services.com. So if people want to get to free research, they can, they can pay for some research to if they want to get a little more advanced, and down in the real nitty gritty details there. But it does really open your eyes to investing in retail going forward. Because I do think that we often look at these macro factors on well, what’s the Fed going to do? And what are interest rates and gas prices and all of these things? And then we think, Okay, well, if the economy’s weak, these retailers are going to suffer. But it’s possible that these retailers will be fine over the next 10 years, because they’re gonna eat up all of the market share of you know, like you said the Walmart example, you had 2000 Super Centers, 2 million other retailers disappear as a result, right. So you might have a generally negative environment. But these giant companies might still get even more giant, because it’ll be the smaller millions of retailers that disappear.
Greg Buzek 1:01:31
Right, right. And it gets the end of the day. So you had mentioned the smaller you, you and a couple people. Okay, so yeah, you’re gonna build a $10 million retailer or $100 million retailer. That’s a blip when you’re comparing yourself to Amazon, or Walmart or somebody else that are using these tools. Yeah.
Eric Chemi 1:01:51
What, what are just a couple other myths before we go in terms of when people think about, you know, they look at retail to figure out the economy or vice versa? What are some other myths that you find that people don’t understand in terms of how the industry works? So you can’t just say like, a lightning that was weak, so I’m going to short retail?
Greg Buzek 1:02:10
Yeah, the biggest thing we see, the biggest myth is that, oh, retail retail must be like banks, you have branches, you have stores, they should just be that easy. And our product works here, we can move it over to here and make a difference. I think the thing that surprises people is how complex retail is. The reason that Walmart target Home Depot and Lowe’s got in trouble with Overstock, is because they were actually better positioned than anybody to take advantage of things. As long as Russia didn’t invade Ukraine. They they leased their own ships, they weren’t in the bottleneck out in Long Beach in LA, they had smaller ships. And as a result of that, they were incredible position to fully take advantage of things. But then we’ve got this macro event that just changed everything and they got crucified, because they had all this inventory. That was there. We’ve got to get to a and that’s the challenge with ai ai does not do major disruptive events well.
Eric Chemi 1:03:17
It doesn’t predict.
Greg Buzek 1:03:20
Yeah, what’s consistent now it can recover faster? Computer Aided ordering saw that, for instance, you know, you need to order 100 times more toilet paper at the beginning of the pandemic, that computer saw it, place the order, and human being said, Oh, that must be a mistake. And they and they did that. And they cancelled those orders in some cases. So that’s the challenge with this AI type stuff is you need the circumstances to be pretty well perfect in those environments to get the full benefit.
Eric Chemi 1:03:51
Where can I go wrong, though, in these circumstances,
Greg Buzek 1:03:55
Where AI generally goes wrong is where your inputs are incorrect, or the data is not clearly defined. Like I tell everybody. If you’re using chat GPT, or any of these tools, the first the first step is you need to tell it what it is. Because it’s got this massive data set of the internet. And then you say no urine expert retail analyst, okay. Right, right. Now I know my subset of data, then you tell it, you ask it exactly what you want to know. And then you tell it how exactly you want that output. And you’ll be astounded by the results. Where the mistakes made is that that front part where you don’t have clean data is not accurate data is not your data. And that’s why those guys like I said, the people that did that hard work that that that training of the data, cleaning the data tagging the data are so much further ahead in that metaphor getting across New York City, because anything they do with AI on top of that is far more accurate as a result.
Eric Chemi 1:04:59
Excellent. Very cool. Greg, just leave us real quickly. Just tell us a little bit about retail ROI. What are you doing with the retail orphan initiative?
Greg Buzek 1:05:06
Yeah, I guess you can see the pictures in the back there. So we started an organization in, really the day Lehman Brothers went under, it was at Oracle OpenWorld, a bunch of people in the retail industry to help orphans and vulnerable kids. We wanted to use our skill sets to make a difference. We have an event called Super Saturday and I hesitate I should have put the chart in here. You can find more information at retail roi.org. This is an analyst Day is a day like this, where we’re going to talk a lot about AI to Manhattan on the 13th of January, we call it Super Saturday. And the proceeds from that event, from sponsorships basically have helped over 325,000 Kids, we do three things with retail ROI we use who we are in our platforms to share the needs. Number two is we use those skill sets to make a difference. And example is we had a school of 650 kids that needed food. Through networks and connections, we were able to provide two train cars worth of corn delivered to that school for about $7,500 in fed those kids for a year, as a result of that, because of who we knew and how those networks there. And then we come alongside great charities where we can bring executive talent to double, triple quadruple the work. So that’s what we do.
Eric Chemi 1:06:26
Amazing. So RetailROI.org, Super Saturday, January 13. In Manhattan, if anyone is interested. This is great, Greg appreciate it. You know, if anyone’s curious, get IHL services.com. And so people can find you there, obviously. And for those of you watching, you know, thank you again for watching. If you liked this episode, you know like it, share it forward, it subscribe, all of those things really help get the content out there. And if you’re watching this, and you think maybe I need an expert in finance to help me with my investments get on track. So I don’t have to spend an hour myself going through all of these charts and every single industry to try to do it yourself. We’ve got investment professionals that we firstname.lastname@example.org You can fill out the short form right there, very short form, and there’s no commitment, there’s no obligation, you can just have a conversation. If you like them great. If you don’t like them, that’s also great, but we just provide this as a public service for more people who want to help get their family’s finances on track. So you’ll find that short for that wealthion.com Thanks again for listening for watching. We hope you enjoyed it and I’ll see you next time.