It’s no secret that online retail is slowly killing offline retail.  In Q4 2016, 8.3% of total US retail sales were online (about $103 billion), up from 5.1% just five years ago (about $53 billion). Offline sales were 91.7% of the total, about $1.1 trillion. We don’t typically talk about the percentage sales that happen offline, but it’s powerful to see how large that market remains. The longer-term question is: how much of total retail will eventually happen online?  We looked at the breakdown of US retail sales by category excluding gas and restaurant expenditures. Based on our analysis, we believe that 55% of total retail sales will eventually happen online, leaving 45% of retail sales for the offline world. But how will brick & mortar retail defend its territory?

We believe the answer lies largely in a combination of artificial intelligence and robotics.  Where AI and robots are superior to humans in terms of efficiency, logic, and raw productivity, we believe humans will remain superior at creativity, community, and experience. Machine-driven retailers are uniquely qualified for convenience, speed and selection. Human-driven retailers are uniquely qualified to create personalized service based on empathy.

Human retailers are uniquely qualified to create personalized service based on mutual understanding – empathy.

The degree to which retailers are successful in leveraging creativity, community and experiences in their stores is the degree to which they will be successful in defending their businesses against online commerce and automated retail.

Given that backdrop, we see the future of retail delivered in three ways:

• Online Shopping
• Automated brick & mortar
• Empathic offline retail

The Future of Online Shopping

Our analysis of US retail sales by category leads us to believe that 55% of total retail sales will eventually happen online. The consumer benefits of convenience, quick shipping and expansive product selection are too powerful to slow the gains that online shopping is enjoying at traditional retail’s expense. Amazon gets it, and they’re playing the long game, aggressively denying short term gains to establish itself as the owner of the operating system for commerce in the future. But Amazon also gets the fact that not all retail is best suited for the internet, which is why we’ve seen them dabbling in automated brick & mortar concepts. More on this below.

More immersive buying experiences will be a major driver of further gains for online shopping. Specifically, augmented reality and virtual reality will allow shoppers to experience a product in lifelike ways before they purchase it. Test out a new outfit in VR and get feedback from your friends. Show your significant other the new couch in your living room with AR before you order custom furniture. The likelihood of returns goes down, customer satisfaction goes up, and so too does the share of online retail.

The Future of Automated Brick & Mortar

We also expect a portion of retail to move to an automated model with few if any employees.  Stores will be monitored by computer vision systems. Shelves will be stocked by robots. Customers will be helped by service robots that understand natural language.  Checkout may resemble Amazon Go where customers simply walk out with their purchases. We’ll likely see the lines between online shopping and automated brick & mortar blur as some stores become more like warehouses for delivery personnel or delivery robots.

This automated model works best for commoditized goods from large chain retailers and grocery stores where price is the primary selling point. Categories in which personalized service, a unique experience, and technical expertise matter less. In these commoditized categories, reducing human overhead means lower prices, which will help retailers defend their territory.

Think of the last time someone bagged your groceries. The cashier monotonously repeats his first of two questions: “Did you find everything okay today?” before cutting off your reply to drone on… “paper or plastic?” Then you watch as he puts the egg carton on top of your groceries and the carton tips sideways as he hands you your bag. These jobs are ripe for automation. And the transition has the added benefit of eliminating low wage workers that may not enjoy their jobs and provide a neutral to negative experience for customers.

For human-delivered brick and mortar retail to survive, every time a customer visits a local store, that store has to deliver a great customer experience. The store can’t afford to have employees that don’t care or, even worse, project their own bad days onto customers. And if retailers don’t care, then they don’t give shoppers a reason to interact, build community, or share an experience.

The Future of Empathic Offline Retail

The remaining share of retail sales will be built on those uniquely human capabilities: creativity, community, and experience. 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.  There will always be a place for these retailers – but they’ll need to be laser focused on empathy.

Sales quotas and commissions are antithetical to empathic retail – they compel sales personnel for selfish reasons. In the context of empathic retail, a employee must be motivated to solve customer problems, find mutual interests, and connect on an interpersonal level. And technology can help turn retail employees into super employees – amplifying their skills and capability to deliver a highly personalized and interpersonal experience.

Personalized retail will thrive when the retailer understands and connects with its client’s challenges and customizes a solution. Only people who truly care about other people will be capable of the work and employable in this environment. Even still, they’ll need tools to help maximize the effectiveness of their empathy. We’re excited about services that leverage emerging technologies to empower people to do what they are uniquely qualified to do. This could be as simple as helping retailers remember a customer’s name, their shoe size, or their favorite color. These services will also eliminate or reduce a current competitive advantage for online retailers (knowing who you are, what you’ve purchased, how frequently you buy, etc.).

We see a huge opportunity in the future of retail, especially in the emerging automated retail and empathic retail categories. As brick & mortar retailers fight to defend their businesses against online retail, they’ll look to technology to help them compete.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.