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Will AI solve this problem or make it worse?

Nothing is more analogue than a trip to the cash and carry to buy stock. But this story of soup offers a warning about the dangers of AI and the digital supply chain we are headed towards.

At the cash and carry the retailer is told that 12 tins of lentil soup price marked at £1.09 will make them a cash margin of £3.09 when sold. At a margin of just under 24% that appears to be a good proposition.

But one retailer looked closer. Gaurave Sood noticed the tins also promised shoppers they could buy three for £2.50. He did the maths. Buying 12 tins for £9.99 and selling them for £10 was a really bad deal.

Instead of buying, he chose to shame Heinz, the manufacturer, on Twitter. A few other retailers have replied to say they had come to the same conclusion and stopped stocking these products. Heinz has kept silent. It may or may not monitor social media.

There is a history in the wholesale channel of suppliers pushing through bad deals like this until they are called out by retailers. The problem is one of asymmetric information. The brand manager is fully invested in the success of this promotion. For the retailer, it is just one brand among many.

The brand manager has an idea of the price that shoppers will find attractive and likes to print this on their product. Then they have an idea about how to increase the number of tins purchased and so they create a lower price to reward a shopper who buys three. The brand manager tells the wholesaler when this deal will run and provides images and data.

Then the retailer has to pay attention. Miss the small print and she takes the hit.

Or does she? How many shoppers actually take up the “three for £2.50” deal? No-one knows.

This way of operating is under threat because it is inefficient and because margins are being squeezed at all levels.

Avoiding losses is not a great use of a retailers’ time. It will not be long before retailers are offered the chance to have a digital supply chain where their margin parameters can be input and poor deals automatically blocked by AI. They should pause before saying yes.

The bigger issue for retail owners is how supply chain data is used and what they have to agree to. This price marked pack example shows how control shifts to the person who has the biggest data set and the resources to action them.

Article written by Nick Shanagher of New Convenience Retailing

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