The TD Cowen Insight
TD Cowen identifies the implementation of marketplaces, integrated advertising, and artificial intelligenas as the new nexus of retail. These advancements are most important for traditional brick-and-mortar stores given existing scale and the opportunity to increase customer relevance. Each element of the new nexus will drive incremental revenue, profitability, and customer satisfaction.
An Evolving Retail Landscape
Traditional retailers need to invest in building an ecosystem to improve customer service and satisfaction. They also need to drive alternative streams of revenue through higher profitability business, including advertising and marketplace functions.
Artificial intelligence is a necessary tool to integrate into all retail operations. It will match supply to demand by optimizing merchandising, labor, and inventory. This includes its role in advancing elements into both the advertising and marketplace features through generative AI and machine learning.
Key advantages for retailers to leverage:
- A base of millions of loyal customers
- Integrated e-commerce sites
- In-store retail operations
- Curation to drive an assortment more tailored for the customer
Part I: Assessing Retail Media Network Advertising Opportunity
Part I of this report assesses the retail media network digital advertising opportunity and shifting industry dynamics. We forecast retail media network spending will reach ~$82B by 2027, implying a +17% five-year CAGR. We also compare the advertising offerings of leading retailers and the corresponding EPS and margin accretion opportunities. Our industry analysis considers the industry leader’s position within brand advertising and the opportunities for other retailers to take part in brand retail media network spend.
Part II: Retailer Marketplaces
In Part II, we discuss the advent of retailer marketplaces. This includes who can participate and how retailers can capture incremental revenue through third-party selling. The average take rate is between 8-15% and carries margins of 70%+. Retailers can also leverage an existing supply chain and store network to offer seller fulfillment options, which could increase the take rate by 15%+.
Part III: Optimizing Free Cash Flow Via AI
Part III includes our analysis of how artificial intelligence will optimize free cash flow and return on invested capital through better management of merchandise, labor, and inventory (MLI) flows. We identify generative AI and co-pilot services as the foundational baseline for retail’s adoption of AI. We also outline a framework for AI’s ability to help drive competitive advantages through increased full priced sales, reduced labor costs and faster inventory turns.
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