Even though inflation has been easing in recent months, a majority (70%) of retail CFOs say they plan to raise prices in 2024 — although 60% said the price hikes would be slight rather than significant, according to the 2024 Retail CFO Outlook Survey from consulting firm BDO. In contrast, just over half (51%) of respondents to last year’s survey said they would be raising prices in the coming year.
The survey of 100 retail CFOs, representing companies with revenues ranging from $250 million to $3 billion or more, was conducted in October 2023 by Rabin Roberts Research, an independent market research firm, for BDO.
Discussions with two of the report’s authors revealed the context of many of its findings, including:
- Price hikes are likely but not certain, and retailers can use customer behavioral and purchase data to mitigate their impact;
- Generative AI continues to attract both keen interest and concern, with 45% of CFOs saying their organizations are building proprietary gen AI platforms and 24% barring access to certain AI-powered chatbots; and
- Retailers should follow five key steps to maximize the success of their AI implementations.
Can Retailers Win a Pricing ‘Game of Chicken’?
“We think it will be more likely that everyday commodities, other essential goods and certain discretionary retailers may try to gradually increase or slightly raise prices this year, in order to offset increasing costs,” said David Berliner, National Business Restructuring and Turnaround Services Practice Leader for BDO in an email interview with Retail TouchPoints.
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There are many reasons for retailers to be cautious about charging higher prices, but the report indicated that it will be even tougher to do so this year without losing sales or customers. “Retailers have been caught in a pricing ‘game of chicken’ that will almost certainly continue throughout the year ahead,” wrote the report’s authors. “While discounts are typically a last resort, toward the end of 2023 it became clear that consumers were winning this game, as many retailers offered steeper discounts than [in the] last four years ahead of the holiday season. However, as December continued, retailers tried to pull back on those discounts, underlining the ongoing pricing limbo that retailers find themselves in.”
Berliner offered advice on how retailers can best mitigate the negative impact of price increases: “Retailers should lean into customer data to make price increases as painless as possible,” he said. “By leveraging customers’ behavioral and purchase data, retailers can better understand how much of a price increase their customers are likely to absorb, which items they’re likely to pay more for versus forgo all together, and potentially even understand which segments of their customers — such as broken down by region or by city — will tolerate price increases. All of this enables a more informed pricing strategy overall.
“Some retailers may consider experimenting,” Berliner added. “For example, take packaged goods where multiple sizes or varieties of the same product are available — retailers may be able to raise prices on certain products or types, but not all, to see how consumers respond.”
AI Continues to Generate Keen Interest
AI (and automation in general), selected by 48% of respondents, will be the top cost optimization tool CFOs will use to craft their pricing strategies. Nearly as many, 45%, will re-evaluate sourcing strategies, while 40% plan to outsource or co-source work. Other strategies include conducting layoffs and reducing real estate footprints, each selected by 37% of respondents.
That’s just one use case for AI, particularly generative AI, which has continued to attract enthusiasm — and some caution: 55% of CFOs have formalized or are in the process of formalizing a usage policy for gen AI, and 45% are building a proprietary gen AI platform. Nearly one in four (24%) have restricted internal access to certain gen AI chatbots.
Kirstie Tiernan, National Data and AI Practice Leader at BDO, provided context regarding the surprisingly large percentage of companies building proprietary systems: “We’ve talked a lot about what’s a proprietary system and what’s not,” said Tiernan in an interview with Retail TouchPoints. “Some companies are taking, for example, Microsoft’s Open AI-as-a-service and making it a secure, in-house ChatGPT-style system. People want to make sure it’s known that they’re not just taking tools off the shelf and using them, that they’re using them in a secure way and putting in an application interface that makes it proprietary to you. I think that’s probably what we’re getting at [with this data point].”
As gen AI is brought to bear in more use cases, Tiernan sees additional possibilities to make the technology more valuable for a retail organization. “It’s not the typical technology; you have to figure out how AI applies for each role in retail,” she said. “A CFO would have [one set of use cases], which would be different than those for an accounts payable clerk, and different from a store associate. Companies need to ensure they’re figuring out where it will apply in their day.”
However, “once you start getting to this ‘AI in your day’ stage, adoption, enablement and the ability to build more proprietary applications is probably much more possible,” Tiernan noted. “With proprietary systems, you can get a lot of value if you have unique data. For retailers that’s usually customer behavior data, and the more they have, the more proprietary benefit they’ll have.”
Early Adopters Will Find a Workaround
As for the 24% of CFOs who have banned certain AI-powered chatbots, Tiernan attributed this to the fears that ChatGPT stirred up when it was introduced late in 2022, but she calls banning access to generative AI a short-sighted solution.
“At some point, your early adopters are screaming for [gen AI], and eventually you’ll lose people” to organizations that are embracing it, said Tiernan. “I’ve been in meetings where every one of the employees came in with two laptops, because their work laptops couldn’t access generative AI. It exists and it can help you, so it’s hard to align to a policy that bars it altogether.”
Tiernan added that she believed such full-body blocks “should be tapering off, and rather than blocking it, [companies] have issued governance and a policy.”
5 Steps for Optimizing AI Adoption
Tiernan also identified five key steps organizations should take to maximize the benefits of AI:
1. Education: “This could be an AI briefing by a consultant or just going out on YouTube or following LinkedIn influencers sharing info,” said Tiernan, who recommended that companies build a strategic AI task force: “It should have fewer than 10 people but represent people from across the organization — not just IT, senior-level people and early adopters. Have this task force be the leaders of staying on the cutting edge of AI, because not everyone can keep up.”
2. Carefully develop internal use cases: During this phase “a lot of people forget to think about bias and ethical AI and that this is a model that needs maintenance,” said Tierney.
3. Build a foundation for AI: “This is where organizations have to ask, do I have the data? Is it clean? This is the time to do a ‘data health check,’” said Tiernan. “Additionally, who should have access to [the AI]? Addressing security is something you can do immediately: secure your cloud environment and optimize your licensing before you start.”
4. Use change management: “We often forget about change management, and the lack of it is often the demise of any IT project,” said Tiernan. “We’ve made it an entire separate step with AI, because there’s still fear around this. You have to help people understand it and that it’s not taking their job, which requires ongoing training and change management.”
5. Go and grow: “If you’re not already experimenting with AI in your business, you’re definitely behind,” said Tiernan. “It can be a competitive advantage if you’re agile enough, so you have to jump in and be all in to ensure you’re not missing the boat, because things are moving so fast.”
