Why the future of retail is not retail

The erosion of consumer loyalty

Retailers have traditionally relied on consumer loyalty. Realistically, they are failing to maintain consumer loyalty and probably have for many years, if not for decades.
 
The erosion of consumer loyalty, first by online retail, marketplaces and D2C brands, and now by AI agents, has seen consumers redefine value. Retailers have tried various strategies to counter this such as becoming fast moving consumer goods businesses – creating and selling their own in-house brands, a contraction of store networks, and even a cross border hunt for scale. These are also failing. Woolworths’ New Zealand experience is a good example of this, where the group saw a 93 percent decline in profits in 2024 largely due to the performance and costs associated with it’s New Zealand operations.
 

Brands now in a precarious position

The challenges facing the industry are only getting more powerful, leaving retailers – and many of their suppliers – the brands we used to buy – in a precarious position.
 
Additionally many retailers have gone beyond selling goods to diversifying to areas such as retail media, third-party marketplaces, financial services, and logistics. But this is putting greater price pressure across their supplier network and many of these areas are not generating the profits (if any at all) that retailers have been hoping for. 
 
Retailers are now hoping that AI and robots will run their businesses. There’s many problems with this though. First, at the moment AI is missing the I component. While it’s a useful tool, that’s all it is, as it only mimics human behaviour, having learnt from the information fed into it, but it doesn’t “think” as a human does…at least not yet. It could be 3-5 years, even a decade or more before AI is actually “intelligent”. Second, the AI agents work for consumers too. Consumers can use AI agents to search for the best deals bypassing any perceived loyalty retailers might have enjoyed and countering retailers attempts to use AI to provide more personal or contextual value. Third and probably most definitive, is the fast rise of D2C platforms that allow true partnerships between businesses to provide real value to consumers and improve their lives exponentially. These platforms can scale fast and at lower cost than retailers while providing better, highly personalised and more flexible outcomes for consumers. Some manufacturers project that these platforms will account for more than 70% of all consumer sales within the next 3 years.
 
While retailers are already embracing innovations like AI driven personalized pricing to digital twins that can simulate and optimize decisions, the problem with this is that consumers see this as price manipulation so that retailers can extract the maximum value from each consumer instead of providing the consumer with the maximum value. D2C platforms are now exploiting this lack of trust in retailers, (including online retailers and retail platforms such as Amazon that use algorithms to maximise their fees rather than providing the best value to consumers) to gain an ever increasing share of the consumer market. Consumer commerce relies heavily on ethical, transparent and flexible business practices that build trust with consumers. Retailers have failed dismally in this regard and probably have for decades.
 

The technical divide

This shift will amount to a commoditization of many of the core retail capabilities that have traditionally offered a competitive edge to the retailers that mastered them. With modern D2C marketplaces able to deploy the same or often greater expertise through AI tools, robotics and hyperautomation, retailers are unlikely to win by trying to play by the old rules –  or by trying to manipulate this technology to “outsmart” consumers. In fact, this technology actually works against them! For brands that don’t embrace the cutting-edge automation and customer centric practices of D2C marketplaces, they will likely miss out on a huge chunk of future consumer commerce, along with the growth, efficiencies and speed gains these platforms offer.
 
As D2C platforms grow and become even bolder in their application of new technology, they will continue to grab the savings and use them to gain new traction with consumers through reinvestment in lower prices and more healthy sustainable and higher quality products. This will leave retailers and the brands that rely on retailers, even further behind – and terribly uncompetitive.
 
One thing that the D2C platform has already mastered is that human intelligence is still needed to make the biggest decisions as well as build, train and validate AI & hyperautomation models, amongst other things. D2C platforms have already found new ways to build a fresh competitive advantage, using their human talent in areas such as strategy, product design, and customer experience. 

 

AI shifts consumer behaviour from” what’s cheapest or most visible” to “what’s vest for me.” This strongly favours high-quality, transparent D2C brands over generic, lower-quality retail alternatives.

 

Why AI shopping agents will see the death of retail

From a consumer’s perspective, shopping agents are likely to be one of the most exciting applications of AI over the coming years. Such agents will know a consumer’s preferences well enough to research and buy goods on their behalf – maybe even without having to ask for permission, anticipating what they’ll need and when they’ll need it. For many time-pressed shoppers, the convenience will be compelling, especially for lower-cost items or in areas that need more complex support, such as planning meals in line with healthy eating guidance. Take Onnero’s human overseen AI Health Coach for instance. It combines medical oversight, consumer health goals and personal health coaching together with shopping agents to ensure consumers get the best & healthiest products at the very best price – direct from manufacturers – bypassing retailers and their sometimes cumbersome supply chain altogether. These health driven, customer centric automated brand agnostic purchasing decisions are decimating the relationships retailers have traditionally manipulated to their advantage. Now all the power is with the consumer and the deficiencies and inefficiencies of retailers have become their Achilles heel.
 
Manufacturers and brands that create and sell products that are compromised, adulterated or made from lower quality, unhealthy or ultra-processed ingredients are now exposed. Retailers can no longer be seen to sell these products without risking confidence, reputation and destroying trust – permanently. But these are the very products retailers have built their businesses upon. They are also the same products that retailers are doubling down on, selling under their own brand names to help remain price competitive and profitable.
 
Whatever the future for retailers, with D2C platforms and quality, local & ethical manufacturers continuing their rise, price pressure for retailers is not going to abate in the future. In fact it is only going to accelerate. So is the need to understand each consumer’s individual needs, providing them with highly personalised, contextualised and relevant offers – for each member of the consumers’ household. 
 

Brands to become less relevant

About half of all shoppers now buy or seek out private label products whenever possible. Accordingly, in Europe private label grocery has already captured 50% market share and it’s showing no signs of slowing. In the US, Australia & New Zealand it varies from about 20-30%,  but is closing the gap to Europe fast. In Australia, even hardware retailer Bunnings now has over 6000 private label products trademarked. But with brand agnostic AI agents determining more of what consumers buy based upon their needs and life goals, brands that don’t meet these criteria will die along with the retailers that stock them.
 

Outcomes more important than brands

Using their AI assistants, consumers become only interested in outcomes, moving away from brands that don’t meet their life, health and budgetary goals, in other words, meet their value expectations. For consumers over the age of 55 – most of whom are tech savvy and who currently account for 50% of all consumer spending – and which is forecast to grow to 61% of all consumer spending by 2050, despite only comprising a much lower percentage of the population – outcomes are far more important than brand loyalty. They want reliability, quality and value, not the short-life, throw away consumer items that many brands and retailers currently sell. Brands and retailers that rely on product churn for revenue and profit will be found out and ignored by this most important segment of the consumer market.

 

Morgan Stanley: nearly half of online shoppers using AI agents by 2030 adding billions to e-commerce revenue due to easier discovery and frictionless buying.

 

Warning labels on less healthy supermarket grade products

There’s already legal obligations in some countries and in Europe for warning labels to appear on products containing certain ingredients. There’s a strong push to see this occur in more and more countries, such as Australia. We’ve already seen cigarette packs with warning labels and plain packaging. Soon your bread, milk and other staples may be next in line. And yes, many of these seemingly bland innocuous products contain ingredients that are downright appalling to the point they can be quite damaging to your health. member of the consumers’ household. 

 

Retailers closing stores to stay afloat

Non-food retailers have been closing stores in recent years, meaning lower sales for many brands who have relied on these locations for sales. Now food & grocery chains are having to optimise their capital allocation to serve the most urgent investment priorities, meaning the closure of stores and the reduction of store footprints to lower cost. This has the effect of reducing brands’ ability to service consumers as retailers push their private label products to shoppers in order to achieve higher margins and attempt to remain profitable and competitive. In the past few years, particularly since the Covid-19 pandemic, retailers have accelerated store openings while seeing store space productivity slam into reverse. This is neither sustainable, nor a platform for further investment in physical expansion.
 
With the current wave of consumer behaviour, development and honing of AI powered D2C platforms, and personal AI assistants factored in, it’s highly likely we’ll see a coming wave of store closures will be more extensive than many expect. The cost of closing these stores isn’t insignificant either and can take years to do in a financially sound way, putting even more pressure on profits – not to mention the lost opportunities for brands to reach consumers via these shrinking retail network

 

Brands will have to rethink thier sales channels

It’s also likely we’ll see mergers across the retail sector that will also reduce both competition in retail as well as brand availability. The challenge for brands is how will they stay relevant in a world with less opportunity? In a world where AI agents help consumers choose products based on value, need and reputation – not based on the name printed on the packaging, the prize will be big for those that act early and reinvest into D2C partnerships, joining forces with platforms and complimentary brands to provide a holistic, customer centred experience and of course, value.
 

The customer is always at the centre

Customers are now engaging with brands beyond the traditional retail transaction, forcing retailers to focus on delivering more tailored, seamless, responsive and valuable customer experiences. With or without AI assistants, consumers are looking for more immersive and more unique experiences both online and offline. Consumers are also increasingly aware of brands’ behaviour. Retailers have historically performed poorly in this regard, and so have many brands. With AI powered D2C platforms demonstrating the right behaviour while ensuring their purpose is tailored to and aligned with each customers’ values and expectations, retailers are facing competition at a level they have never experienced, challenges they are not well equipped to overcome and financial pressures that many won’t survive.