Grocery's Digital Growth: AI and Pricing

A look at how industry attitudes have changed towards AI since COVID-19

Over the past five years, we’ve seen grocery retailers slowly begin to “embrace” (as countless headlines read) artificial intelligence to optimize any number of business areas: supply chain, product assortment, demand forecasting, fulfillment, pricing and promotions. Then there are newer use cases of the technology gaining attention, with AI combatting issues like food waste, or enabling autonomous checkout seen in cashierless Amazon Go stores.

It has also been widely discussed that the pandemic fast-tracked digitization plans businesses either already had in motion or as a part of their upcoming roadmaps. The pandemic has meant an acceleration in digital transformation by months or even years. Industry insights suggest that this broad trend isn’t slowing down yet. In fact, according to IDC’s Worldwide Semiannual Artificial Intelligence Tracker, “worldwide revenues for the AI market… are forecast to grow 16.4% year over year in 2021 to $327.5 billion.”

For some business leaders, the speed at which technology is being embraced – whether out of true necessity or to grasp at a perceived competitive advantage – is giving them pause. Even though they recognize the tremendous potential for AI to problem solve, 49% of retail and tech executives say that “AI is moving faster than it should,” according to KPMG’s Thriving In An AI World study released last month.

To add our collective voice to the conversation on AI adoption in grocery, we asked several Revionics team members for their perspectives from the last year. Here’s what they had to say.

Investment in AI will be motivated by perceived benefits

You could speculate that needing to put out supply-chain fires and adjust to re-prioritized IT spending may have slowed the adoption of AI technology in grocery, but even before last year, some areas of the business weren’t top of mind for the application of AI. Aditya Rastogi, VP Managing Partner, Global Strategic Consulting spoke to deferred innovation when he said, “The need for AI, particularly in grocery pricing decisions, has been apparent for years. However, many retailers have delayed the investment.”

He went on to say, “With COVID, grocers benefitted from increased demand and thus higher revenue and profit. They have been put under a lot of pressure from customers’ expectations around cleanliness, last-mile delivery via third-party partners, and the availability of curbside pickup. Retailers recognize the need to drive price perception but also need to fund the investment into these critical in-store and fulfillment capabilities.”

There is a long list of motivating factors for pursuing AI capabilities. As nuanced and multifaceted as the technology is, there are just as many reasons why a grocery retailer would be driven to adopt it emerging from COVID-19. Matthew Pavich, our Managing Director of Global Strategic Consulting, said, “The greatest motivating factor for an AI solution is that it enables a grocery retailer to rapidly adopt to changing circumstances, and in doing so a grocer can optimize share and profit growth. AI is faster and makes better decisions than manual processes.”

The constant feedback loop in the grocery purchase cycle contributes to AI’s advantages when applied to pricing, said Edward Kuehnle, Customer Success Director. “Customers shop multiple times a week and have a preferred grocery retailer or store location. As a result, the rich data on consumer demand and response to promos and price changes allows the grocer to constantly sharpen their prices.” According to Edward, efficiency via automation is another benefit of AI, along with the ability to respond to market conditions almost immediately.

At pandemic onset, retailers approached pricing with caution

In life and in business, we all learned to pivot last year. With so much change swirling around us, there really was no other option. So, when COVID-19 hit last year, Revionics got right into the trenches with grocery customers who’ve already embraced AI, working to help minimize margin loss and rethink normal pricing functions.

Matthew explained how the relationship between supply and demand presented grocery retailers with a unique pricing challenge during the pandemic. “Inherently, pricing helps retailers on both the supply and demand fronts – changing a price directly influences demand, which can help mitigate challenges in supply. However, most grocery retailers had to account for mounting cost increases as a result of the pandemic, while also seeking to understand new consumer demand patterns. Because of this, grocers and fast-moving consumer goods especially had to ensure any pricing actions were not perceived as ‘gouging’ during a crisis.”

Principal Data Scientist Alex Braylan agreed, “Before, price increases could be fairly common without being perceived to be exploitative. But ultimately, long-term customer lifetime value is more important than maximizing profit in the short term. We already saw how grocers opted to preserve brand image and customer loyalty by keeping prices in line with expectations at the start of the pandemic, to which our AI systems were configured to override their own short-term goals and prohibit price-gauging behavior. This was a reactive measure to a specific event, and fortunately we had the customization tools built in to adapt this way.”

Embracing AI pricing will separate leading grocery retailers from the pack

Even without additional benefits of AI, “pricing remains the quickest lever that retailers can pull to drive immediate change and influence their business,” said Matthew. “Grocers can’t easily change branding, assortments, private label strategies or supply chains overnight. In comparison, a quick change to a price, or the introduction of a promotion or markdown, can drive immediate and meaningful results.”

There are a number of motivating factors for grocers to invest in AI capabilities – automation, speed to value, accuracy, productivity and efficiency, to name a few. But as David Chaudey, our EMEA Director Customer Success, reiterated, AI’s biggest advantage in this moment could very well be the ability to better understand evolving trends in the new normal. “Understanding these dynamics more rapidly will make the difference between winners who leverage AI and machine learning, and those who don’t.”

The conversation around AI pricing and digitization didn’t stop there – soon we’ll have an interactive “flip book” containing even more feedback from Revionics team members.

In the meantime, check out our COVID-19 resource hub, where you’ll find helpful advice on revamping your retail price strategy. Or, Alex Braylan breaks down the need for AI price optimization, which you can find in a blog here.