Outlook ’24: What the C-suite Should Know About Retail

Vicki M. Young
·6 min read

Customer data platforms—hello AI—will become even more important in 2024 as retailers seek to better understand the consumer mindset, as well as leverage learnings to improve the customer experience and their own retail operations.

Artificial intelligence (AI) is expected to permeate through every stage of the customer journey. Younger Gen Z consumers can be viewed as the “Do-It-Yourself” (DIY) generation that trades up and down as they hunt for value hacks as ways to reduce spend without sacrificing quality. Brand building takes center stage, both as a way to attract new customers and because the cost-per-wear analysis means value isn’t just solely about price. Those are the key takeaways from a report by TD Cowen retail analysts, led by retail and luxury analyst Oliver Chen, on retail themes for 2024.

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AI, AI and even more AI

Retailers will increasingly rely on AI to capture data before, during and after a purchase. How retailers use the data will also shift. Learnings will advance from merely predictive, forecasting future outcomes from past data, to focusing on prescriptive analytics, using the forecasts to recommend specific strategies moving forward.

The shift will see retailers build a customer data platform powered by a loyalty scheme that will help foster greater efficiencies in merchandising, labor and inventory management. “AI’s automation capabilities reduce fulfillment labor to reinvest in service,” the analysts noted, while improved demand forecasting and pricing can help eliminate stock levels by as much as 15 percent or more.

And retailers such as Walmart and Macy’s, which have the strongest loyalty programs, are “likely best positioned to harness first-party data for use in artificial intelligence,” the analysts concluded, adding that they see an opportunity “for these retailers to chase competitive advantages in maximizing full priced sales, reducing labor costs and driving faster inventory turnover.”

Walmart was identified as the leader in AI adoption and integration, given its advancements in stocking and picking e-commerce orders, supply chain automation and use of generative AI in chat bots and online search optimization to improve customer experiences.

The DIY generation

This Gen Z consumer cohort are value hackers who lack loyalty. They might use credit card points for travel purchases, research online for “dupes” or buy private label apparel but trade up for select luxury accessories, according to TD Cowen’s research. This DIY generation has eclectic hobbies and interests and value self-expression.

The retail analysts believe Costco and Walmart are among the retailers that could be key beneficiaries of this consumer group because of their increased private label categories.

“We believe ‘value-hacking’ or frugal innovation is central to capturing Gen Z wallet share. Amid a mixed macro backdrop, today’s younger consumers are increasingly interested in private label clothing and ‘dupes’, or cheaper alternatives to luxury products,” the analysts wrote, noting that brand loyalty has weakened as pricing becomes top of mind.

And with thriftier consumer behaviors, retailers will need a new brand strategy that prioritizes a deeper understanding of consumers through stronger segmentation and personalization. One example cited was direct-to-consumer apparel brand Quince.com, which offers high-quality version of luxury products and transparent messaging on price and how the brand can keep pricing low by avoiding traditional supply chain costs. The analysts also wrote that with consumers mixing and matching brands, price points and styles to create unique looks, individuality and experimentation are likely key trends where effective opening price points might give brands the ability to capture incremental demand from new customers.

But there could be pitfalls in focusing on price alone. “Overproduction of poor-quality dupes could lead to brand dilution and ethical or sustainability concerns,” the analysts concluded. “Partnering with manufacturers to develop low-cost alternative products, while less fixed cost-intensive compared to an in-house approach, could lead to lower margins and poorer quality control.” And the analysts noted that the ultra-fast fashion retailers—think Shein and Temu—face potential legislative intervention regarding tariff loopholes heading into the next presidential election cycle. Moreover, intensification of U.S.-China relations “could reduce profitability and disrupt production processes and sourcing relationships.”

As for Shein, the report noted that its key competitive advantage is its LATR (Large Scale Automated Test and Reorder) Model that uses proprietary audience engagement based algorithms to detect fashion trends, replicate the designs and manufacture and distribute to drive speed of concept to delivery in as little as 10 days. Already the number one preference among 18 to 24 year-olds for fashion apparel per TD Cowen’s proprietary Gen Z survey, a recent joint venture with Forever 21 also represents additional in-store opportunities.

The analysts also said that other winners could be LVMH’s Loro Piana and Kering’s Bottega Veneta as consumers, after assessing value through a cost-per-wear analysis, include higher-priced items that stand the test of time. In addition, they concluded that aspirational luxury could account for as much as 70 percent of the luxury goods market with consumers buying one or two handbags in their lifetime. But that also could mean that luxury brands whose sales are more focused on leather goods could be more exposed to macroeconomic headwinds, given the higher percentage of aspirational shoppers.

For brands, it’s back to basics

“Retailers need to rethink their physical footprint and pursue more of an ecosystem approach integrated across stores, online, digital app, and loyalty programs to protect margins and extract as much value as possible,” the analysts concluded.

That means brands will need to return to the basics of brand building via physical stores and integration of bricks and clicks, with store expansion a key component in accelerating customer acquisition. But they still need to be careful of where they are opening doors. Poor locations could result in low-store productivity. E-commerce brands with differentiated products can protect margins through less price competition and lower return rates.

Another option for fashion firms could be limited edition collaborations with other brands to drive premiumization and gross margin expansion. Denim could be the sector that’s best positioned to tie-in creative expression with cultural issues and values. Successful examples cited by the analysts include Levi’s x ERL Californian-inspired denim collection, AG x Emrata NYC style capsule collection, Reigning Champs x Prince streetwear influences and Levi’s Studio Ghibli and New Jeans collabs that tie in Asian youth culture. From a product perspective, denim also could see strength due to silhouette shifts to wide leg and product innovation around comfort.

Over time, short-form video marketing—still in its early stages—could become an opportunity for expanding customer outreach with lower cost-per-clicks when compared with advertising on legacy social media platforms. The analysts expect this marketing format used on TikTok and directly on retailer and brand websites will “gain significant adoption in 2024.” While TikTok has the highest user engagement levels among modern social platforms, the quick “snackable” content format remains an underutilized advertising strategy as monetization capabilities and attribution metrics aren’t yet fully developed.