The Future of Retail Is AI and Robotics

First-quarter struggles from most large U.S. retailers underscore the ongoing shift in the retail business toward a more technology-driven model. (ticker: AMZN) and other e-commerce retailers will certainly play a major part in the future of retail, but even brick-and-mortar stores may be in for a major overhaul in the coming years.

In the fourth quarter of 2016, online retail sales accounted for 8.3 percent of total U.S. retail sales, up from only 5.1 percent five years ago. Amazon investors see that more than 90 percent of the brick-and-mortar market is still ripe for disruption, but Loup Ventures analyst Andrew Murphy says the brick-and-mortar model won’t be going away anytime soon.

“Based on our analysis, we believe that 55 percent of total retail sales will eventually happen online, leaving 45 percent of retail sales for the offline world,” Murphy writes in a new research note.

While e-commerce continues to grab market share from traditional retailers, remaining retailers will be forced to adapt their brick-and-mortar businesses to maintain an advantage over online competitors. Their key to survival may lie in either a combination of artificial intelligence and robotics or creativity and community, Murphy says.

For Macy’s (M), J.C. Penney Co. (JCP), Sears Holdings Corp. (SHLD) and other retail giants looking to survive the evolution of retail, store closings and cost-cutting likely won’t be good enough. The next era of giant brick-and-mortar retail stores will rely heavily on technology, with human employees replaced by shelf-stocking robots and cashiers replaced by smart sensors, Murphy says.

However, there will also be a small segment of brick-and-mortar stores that leverage the type of shopping experience that only human employees can provide. Murphy calls these retail stores “empathetic offline retail.” These stores will survive by relying on employees to solve customer problems, connect with customers on a personal level and provide the type of unique service that robots and sensors can’t.

“Some of your favorite stores probably already leverage these capabilities, like retailers of handmade goods with a unique story and shops where you’re a regular—you know others and feel known by the community,” Murphy writes.

These types of small, specialized, community –centered shops don’t offer much of an investment opportunity because of their limited size and growth potential. On the other hand, the major transition from human employees to automated stores will be…

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