Amazon resembles The Blob of the classic horror film — devouring everything in its path and growing bigger all the while.
The company now sells almost anything you can think of, has a great product line with the Kindle, Echo & Alexa, Fire Tablet, and hosts some of the top websites in the world through Amazon Web Services.
The company’s stock has doubled over the last two years and Jeff Bezos is on the verge of becoming the world’s richest person.
Over 40% of U.S. online retail sales go through Amazon and 75% of shoppers believe no one can deliver a better online experience than Amazon.[1] The company is worth more than Walmart, Target, Best Buy, Macy’s, Nordstrom, JCPenny, Costco and Sears combined.
With the acquisition of Whole Foods, the company now has fulfillment centers within 10 miles of 80% of the population and 95% of Prime users, and service is expected to keep getting better.[2]
So, the question for these large retailers is, what can you do to try and keep up with Amazon as the world moves online?
The Problem Opportunity as We See It
As consumers continue to move online, traditional retailers are at a great disadvantage to Amazon. Amazon has 20 years of consumer purchasing data and a huge engineering team (39k+) to figure out how to utilize that data.
Traditional retailers know the importance of accelerating their e-commerce offerings — see Walmart’s $3 billion acquisition of Jet.com and $310 million acquisition of online retailer Bonobos — but they were not built to adapt to a rapidly changing consumer landscape.
Luckily for these retailers, there are startups utilizing artificial intelligence (“AI”) to help companies compete with Amazon. These AI businesses are working to improve personalization, recommendations, voice search, provide personalized shopping assistants and more.
The team at B Capital believes these AI startups will be vital to the success of traditional retailers as they compete online. If retailers fail to incorporate AI, it is not a matter of if, but when they will fail.
Enter Artificial Intelligence
There is a lot of excitement around AI, and nearly as much nervousness, too. The mainstream media is focused on showcasing how robots are going to take over the world and steal human jobs.
We believe the industry is decades away from robots being a serious threat to most jobs but, as investors, we are excited to see how AI is transforming the software industry. It is hard to ignore the number of startups utilizing AI and the amount of money being invested in the space. Below are some eye-popping stats about the growth of AI in recent years from CB Insights:[3]
- $15+ billion invested in AI focused startups since 2012
- 700 startup investments in 2016 alone
- 200+ acquisitions since 2012
- 11 acquisitions by Google; 7 acquisitions by Apple
There is clearly a lot of hype and before we dive into what is going on in the e-commerce landscape, it would be helpful to provide some background on artificial intelligence.
What is Artificial Intelligence?
AI is a branch of computer science that focuses on building computer algorithms that can analyze large datasets and then make predictions based on this analysis.
The specific area of computer science that has shown the most promise is machine learning.
These algorithms are not creating artificial general intelligence that replicates human intelligence but instead a narrow intelligence that is really good at specific tasks. When you look under the hood of machine learning, the techniques are driven by a variety of different statistical models…yes, sadly it’s not magic.
Why is AI exciting now?
There are four reasons why artificial intelligence is exciting today:
1. Data: Exponential growth in unstructured data that can be used to drive machine learning algorithms. For example, Google examined 10 million YouTube videos to develop image recognition technology. That was simply not possible 10 years ago.[4]
2. Hardware: Graphical Processing Units (GPUs) evolved out of the video game industry and have proven to be much better at running machine learning algorithms than traditional CPUs. Additionally, the cost to store data has dropped to almost zero, so companies have more data to analyze than ever before. Yes, Google knows basically everything about you.[5]
3. Algorithms: Old AI techniques that required too much computing power for older machines have become useful as hardware has improved and data sets have grown. Deep learning, specifically, has driven a reemergence of interest in artificial intelligence.[6]
4. Use cases: There are specific use cases that have brought AI to the forefront. Autonomous vehicles, automation, and improved healthcare treatment are all demonstrations of the power of AI.
At B Capital, we are excited about AI. It is still early days for this technology, but it is touching all the verticals on which we focus as investors — consumer enablement, financial services, healthcare, and industrial. Given the importance of data for machine learning, one of the areas we are focused on is e-commerce.
Artificial Intelligence in e-commerce
The global e-commerce market was estimated to be $1.9 trillion in 2016, and predicted to grow to $4.0 trillion by 2020.[7] For being such a large market, the industry has struggled to promote impulse purchases, which have been estimated to account for ~60% of in-store purchases.
[8] There are limited opportunities for product discovery or unplanned purchases online. This explains why retailers are struggling to generate comparable sales online and are hesitant to fully embrace e-commerce.
AI is the perfect solution. The beauty of online commerce is that everything is trackable and digitized AI algorithms can process the data created daily in fractions of a second to determine a shopper’s style, provide personalized recommendations and present tailored search results.
This personalized experience should allow retailers to drive product discovery online and therefore increase sales.
There are several startups trying to transform how we shop online.
These companies are focused on the following areas:
Personalize the shopping experience.
There are numerous ways to personalize shopping:
- Improve recommendations and product targeting based on user history
- Convert potential customer into buyers with dynamic pricing and incentives
- Customize website layouts to match each user’s preferences
- Enhance product discovery to drive impulse purchases
Improve search through natural language processing, voice, and visual search
Create adaptive chat through chat bots and personal shopping assistants to assist customers and increase the time spent on a website
These improvements will lead to a shopping experience focused on adaptive, in-the-moment personalization. Every step of a buyer’s journey will be improved through AI — from discovery, search, and personalization.
If Target, Best Buy, or Nordstrom can provide a better user experience, we believe they will be able to take market share back from Amazon. The large barriers to entry Amazon has built through 20 years of e-commerce experience can be broken down with AI.
Less data is needed to produce results and it can provide customer information at speeds that were never possible with human management of these platforms.
The e-commerce store of the future should be an immersive, personalized experience for every user.
Our homepages will be completely customized — clothing recommendations will match our individual styles; the page layout will be unique; even small things like text size and where the search bar is located will be customizable.
The AI powering these sites should know my preferences through social media posts, past purchases, returns and will know about upcoming trips based on email confirmations and web surfing. The data shows that consumers are willing to provide certain companies this level of detail if they can receive the benefits of a very customizable experience. We are excited to see how the future of e-commerce evolves.
B Capital Group’s Forecast
1. Amazon has the pedal to the metal and it will be the most valuable company in the world by the end of this decade. There are few competitive threats to its core marketplace businesses and it is ahead of competitors with its cloud computing offerings. Alibaba and Tencent will win the e-commerce battle in Asia, but we see Amazon winning in every other e-commerce market, including vs. Flipkart in India.
2. AI will be commoditized by large technology companies like Google, Facebook, and Microsoft, and will be utilized by startups focused on specific verticals like e-commerce.
3. Retailers that don’t embrace e-commerce to improve the user experience through AI will continue to struggle and fall into bankruptcy; they may last for 5 or 10 years without embracing AI, but eventually they will fail.
4. Those startups that are first to market and can develop a proprietary data set of customer information will be the winners. Unique data sets (e.g., loyalty accounts that track historic browsing preferences and transactions) will make these startups attractive acquisition targets, as well.
5. The companies best poised to win in the AI e-commerce space are:
a. Personalization: Eversight, Jetlore, RichRelevance
b. Search: Voysis, Twiggle, AddStructure
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[1] https://intelligence.slice.com/echo-turns-volume-amazons-ambitions-audacious-bets-pay-off/
[2] http://www.latimes.com/business/la-fi-amazon-logistics-delivery-20170616-story.html
[3] CB Insights
[4] https://www.wired.com/2012/06/google-x-neural-network/
[5] https://www.wired.com/2017/04/race-make-ai-chips-everything-heating-fast/