Smart speakers like the Echo could take the burden of choice away from consumers ©Amazon
Smart speakers like the Echo could take the burden of choice away from consumers ©Amazon

What will smart speakers do to your supply chain?

16 August 2018

What will the Western consumers voracious appetite for digital personal assistants – be it Amazon’s Alexa or Google Home – do to your supply chain?

If you are a consumer-facing business, either as a retailer or a manufacturer, that is a question that needs to be explored sooner rather than later. Online shopping has forced companies to adapt their supply chains – a process that has proved expensive, time-consuming and, in many cases incomplete – and now they may have to adapt them again.

To understand why, let’s take a step back and consider shoppers’ behaviour. Asked whether they want choice or convenience, most consumers will say both. In reality, at different times, and for different purchases, one of those factors will be more important than the other. A bibliophile may be happy to spend an entire afternoon perusing a second hand bookshop but for a commuter buying something for tea on the way home from work, time is of the essence.

In a fight for market share, many retailers – especially supermarkets – have prioritised choice. There will be 60,000-70,000 stock keeping units in a typical Tesco store. In some categories, the retailer gives consumers a wealth of choice – up to 50 kinds of loaves and 24 variations of tomato ketchup. Before the retailer reduced its range in 2017, it offered 228 brands of air freshener.

This approach wasn’t particularly cost effective. As a rule of thumb, 1,400 stock keeping units (SKUs) account for 80% of a food shopping trip and shoppers only pass by 30% of stock on shelves, so is Tesco giving shoppers too much choice? Would it do better to emulate Aldi, which has one brand and size of tomato ketchup and only 13 loaves of bread? Even going online isn’t necessarily going to help the time poor shopper: when Quartz searched for “paper towels” on Amazon, it produced 30,000 results.  

Which is where Alexa, Google Home and similar devices come in. They are at the forefront of a revolution called A-commerce (Automated Commerce) in which a growing number of consumers are effectively outsourcing a host of retail experiences to algorithms, automation and smart devices. This year, eMarketer predicts, 91m Americans will use a smart speaker or a voice assistant every month.

There is some logic in this. In an age when the work-life balance is tilted heavily in work’s favour, even middle class consumers are time poor. Millennials, it is sardonically suggested, are interested in any innovation that will provide them with the services they used to rely on their mother for – meals, cleaning, ironing and shopping tips. And, according to a recent survey by French media agency Havas, millions of Chinese consumers barely wait for the day their refrigerators refill themselves automatically.

Yet such convenience could come at a cost. If a shopper asks Alexa or Google Home for a bar of soap, it will provide a few of the most popular products. As Adam Gerhart, CEO of Mindshare, wrote on Quartz: “While you can ask for more options, it is an extra step you’ll need to actively take.”

Once the consumer has ordered that bar of soap, the smart device will automatically present that option, encouraging repurchasing, unless the shopper names a different brand. Buying the same brand will be, in industry jargon, frictionless, encouraged by what Gerhart calls “incidental loyalty” where consumers will stick to popular brands without consciously thinking about it.

This could have a multiplier effect, widening the gap between dominant market leading products – especially those with instant name recognition such as Kleenex – and the rest to such an extent that smaller brands will struggle to survive. It may also be bad news for brands that aren’t as well known or are difficult to say. Consumers who pronounce “Del-mont” instead of “Del-mont-tay” – apparently a common mistake – may find themselves disappointed.

The logical conclusion of this process could, as Gerhart says, “start to see monopolies and duopolies of everyday items”. The unwitting consumer might then wonder what happened to the days of the 60,000 SKUs, 50 kinds of bread and 24 varieties of tomato ketchup.

This trend is not inevitable. Niraj Dawar, professor of marketing at the Ivey Business School and author of Marketing In The Age Of Alexa, is more optimistic: “With AI in the picture, we begin to see the automation of shopping. AI starts discerning patterns of consumption, the contextual needs for different products, and starts adjusting inventory based on consumption rates. This allows the 200 to 300 products that consumers use at a regular rate to start flowing to their house like electricity.” (For Nawar and his ilk, the only foreseeable constraints on a household’s purchasing power are technological, rather than financial.)

Amazon founder and CEO Jeff Bezos has said a device such as Alexa “is good for reordering consumables, where you don’t have to make a lot of choices, but most online shopping will continue to be facilitated by having a display”.

That sounds reassuring but this barrier to entry would make it harder for start-ups to break through? This is a concern for the consumer and retail sector as a whole because start-ups in all kinds of markets – from Chobani in Greek yoghurt to Halo Top in ice-cream and Dollar Shave Club in razors – supply almost all the revenue growth.

Manufacturers may also worry about how level the playing field will truly be, with Amazon selling so many private label products. Even Dawar admits this is a “huge risk for brands”, saying: “Brands have to ask: will consumer allegiance shift from trusted brands to a trusted AI assistant?”

The age of Alexa poses profound questions for procurement and supply chains in the consumer goods industry.

 

  • At the moment, the top six global brands spend $40bn in promotion primarily to remind consumers of their existence. In an age of trusted AI assistants, how will your company acquire, retain and satisfy customers?
  • How strong is your brand recognition?
  • What percentage of your business will come through A-commerce? How will that influence your existing – and future – supply chain?
  • If you are not a market leader – or a strong second – what do you need to do to become one? Remember, not being in the top two in your sector might be as rewarding as finishing fourth in an Olympic event.
  • How do you make sure that platforms choose you – and continue to do so? You can pay them – depending on your budget – but it might be more sustainable to focus on differentiation, innovation and competitive advantage.
  • How confident are you that you are technologically capable of adapting to the A-commerce revolution?

Technological revolutions are seldom smooth or predictable. At this point, even broad-brush timelines are distinctly speculative. Procurement and supply chain leaders must avoid our innate tendency to overestimate change in the short term and underestimate it in the long term.

The A-commerce revolution will happen. We may not know where, when or exactly how it will happen, but the sooner the industry begins exploring the “known unknowns” the better.

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