AI-Driven Digital Transformation in Retail

Is artificial intelligence (AI) disrupting or innovating the retail industry?  

This past year, retail industry sales have totaled over $5 trillion. This substantial growth stems from the many benefits, opportunities, and competitive advantages AI brings to the retail sector.  

While the retail industry continues to steadily grow, there are a lot of factors to consider that can make or break a company in this highly competitive market.  

The Retail Industry in the Digital Age 

Retail Industry Analysis 

Industry Challenges 

Since COVID, the retail industry has been dealing with ongoing supply chain disruptions, inventory shortages, and unpredictable events, such as the writer’s strike that has delayed production and retail strategies that were tied to those releases. 

To add fuel to the fire, prices are rising due to inflation which continues to drive storages, raising prices for consumers, and reducing profitability for retailers.  

In the current state of the economy, consumers will not stop spending money but they will be more cautious when buying.  

Forbes shared that consumers are more willing to pay higher prices for better shopping experiences. 

As we are living in the Amazon era, consumers expect the same consumer experience that the world’s largest online retailer provides.  

• 83% of U.S. shoppers stated free delivery was the most important factor when online shopping. 
• 61% of shoppers will abandon their cart if shipping is too high.
• 53% of consumers reported that the speed of delivery is an important factor when ordering online.
• 38% of buyers say they will never purchase from a retailer again if they had a poor delivery experience.
• 25% of purchasers have canceled orders due to slow delivery times.  

Besides having to keep up with e-commerce giants like Amazon, the online retail space has become a highly saturated, competitive market.  In 2019 there were 9.2 million eCommerce sites which rapidly grew to 26.5 million in 2023 and continues to increase daily.  

Consumer Trends & Expectations 

 To stand out against the competition and provide the best customer experiences, retailers must meet the fluctuating demands of buyers. Consumer behavior has shifted towards multiple, integrated digital and physical touchpoints.  

Consumers want a seamless shopping experience no matter the channel, adding heightened pressure for retailers to provide a consistent, interconnected omnichannel presence. 

A robust omnichannel strategy goes beyond an online website – retailers must connect their brick-and-mortar stores to their digital stores, across marketplaces and social media channels. Especially with social commerce growth expected to total $82 billion in 2024, with a year-over-year growth rate of more than 23%.  

Paid social and ads that promote deals, discounts, and new products are going to be essential in driving consumer spending. When creating promotions, it is important to strategically place and personalize ads for the target audience to maximize conversions.  

Digital Transformation in Retail 

While retailers have their hands full, technology is evolving to level the playing field and lend retailers a helping hand. 

80% of retailers expect to be using AI in some capacity in the next few years. This is why it is essential for retailers to digitally transform or else they will fall behind the competition. Automation and artificial intelligence (AI) data-driven analysis are enabling retailers to reduce costs, and enhance efficiency, and the overall customer experience.  

The Role of AI in Retail Industry Analysis 

With fierce competition, heightened expectations, and demand - AI is swiftly transforming the retail sector. Tasks that have traditionally been tedious, error-prone, and labor-intensive but essential for business success, are now being automated and streamlined with new technologies.  

Enhancing the Buyer Experience and Customer Service with AI  

Since consumers are more likely to purchase from retailers based on their experience, retailers must improve the buyer journey. 

AI can help provide a better customer experience by: 

• Giving customers personalized product suggestions based on their buying patterns and preferences 
• Enabling AI virtual assistance to answer questions for faster customer service 
• Streamlining the checkout process in-person or online and automatically providing the order tracking number. 

Leveraging AI to Analyze Buying Patterns  

Data-driven analytics can help retailers gain a better understanding of their customer's behavior from preferences to purchase history. These valuable insights can help retailers see what channels are performing the best and where to focus on improving the customer experience.  

AI can even analyze customer reviews, support messages, and other feedback to understand consumer needs and provide recommendations on how to meet those needs.  

Improve Inventory Tracking and Management using AI  

Using AI to track these buying patterns and fluctuations, retailers can adequately prepare to have the right amount of inventory. Analyzing supply and demand to determine whether sales were higher or lower from a certain event, offering, or season.  

Using AI to Optimize Strategies with Analytics in Retail Industry  

AI algorithms can give recommendations on pricing strategies by monitoring competitor prices in real-time, in alignment with consumer behavior and buying patterns.  

Using AI to accurately identify a retailer's target audience and determine how much they would be willing to pay for a product and what promotions would interest them. 

Leveraging Analytics for In-Store Promotions 

AI-powered analytics can enhance in-store and online promotions. AI can be very influential in promotion strategies since it tracks consumer behavior online and in-store.  

Allocate Shelf Space Appropriately  

Tracking shopping data to determine what items customers buy in-store versus online to predict how much shelf space a product needs. This helps retailers gauge the adequate level of inventory to avoid stockouts for improved customer satisfaction and reduce excess inventory so capital is not wasted. 

Improve Traffic Flow 

AI helps retailers understand how consumers typically navigate through the store to adjust the layout to mitigate aisle congestion and optimize product placement for maximized sales. 

To improve store design layout and product placement, AI visualizes heat maps based on customer traffic with recommendations on where to move items or create end-of-aisle displays. 

Optimize Product Placement 

Using video cameras, AI can analyze consumer activity in-store to track their behavior.  For example, monitoring in-store heat maps, can give retailers insight that if no one buys, touches, or looks at an item that sells well online, then maybe they should change the display, placement, or promotion.  

Along with suggestions on what items to place in retailers' point-of-sale displays, such as an item that customers stop and look at but usually do not pick up, which might change if that same item was in front of them during checkout. 

Creative End-of-Aisle Promotions with AI 

Brands will often pay a retailer for specific promotional placements within their store. Using AI shelf imaging helps ensure that promotional displays are set up correctly and maintain the same appearance throughout the promotional period. Not only does this help improve brand relationships but also effectively executes promotional strategies.  

AI data-driven analytics can measure the success of a particular in-store display to determine if it was effective or not. Based on the display's results, retailers can incorporate similar display concepts, if the display was successful.  

All of this data enables retailers to improve their strategies to sell more items and increase revenue. 

Digital Transformation in Retail Revolution 

There are many benefits of digital transformation in retail. By not digitally evolving in this highly competitive landscape, retailers can fall behind rivals by missing out on huge opportunities to improve in-store interactions and optimize the digital retail experience. 

AI is enabling retailers to work smarter, not harder to achieve their goals. 

Case Studies in AI-Driven Retail Transformation 

The biggest brands have already begun their retail digital transformation with much success, and you can too.  

 Walmart’s Leveraging AI to Enhance Employee Productivity and Customer Experiences 

Walmart found that American families spend roughly six hours per week on household planning and shopping.  

So to allow their customers to spend more time on things they enjoy versus scrolling, tapping, and searching – Walmart started using a type of AI that helps generate text, images, and other media to assist their customers in finding what they want and need faster.  

How does this work? Instead of looking up plates, decorations, gift bags, and the rest of the buyer’s list, customers can search “superhero toddler birthday party” to find all the items they need.  

Walmart’s generative AI goes beyond simple purchases to assist customers with complex purchases like choosing the right cell phone that is compatible with their current wireless provider.  

The retail leader is continuing to adopt innovative technology to improve the customer experience with text message and voice shopping capabilities, in addition to creating virtual shopping experiences that ensure customer satisfaction. 

Going beyond the customer experience, Walmart is using AI-powered assistants to help employee productivity. Walmart is among the few companies that are leveraging AI at scale and did so in just 60 days with over 50,000 US-based employees.  

CVS Using AI to Improve Efficiency and Drive Brand Awareness  

After CVS surveyed US consumers and healthcare providers about the kind of healthcare experience they want, the retail leader took that information into account and invested over $3 billion in their digital transformation.  

CVS is using AI to improve the processing of prescription medications to eliminate more than 30 manual steps and has already greatly improved its operational efficiency.  

AI has helped CVS employees be more productive and respond to customer needs faster. CVS is not using AI to replace their employees but rather to complement their skills and help provide a more frictionless customer experience. Using AI, CVS can unify multiple prescriptions to be ready on the same day so customers do not have to make multiple stops and employees do not have to fill multiple, individual orders.  

Additionally, CSA is utilizing AI to target and engage with customers in high-risk flu areas to drive awareness to their flu shot and medication offerings. One particular CVS campaign targeted individuals as they checked their weather channel app which drove over 59 million impressions to their daily deals' promotion page.  

Overcoming Challenges and Ensuring Success  

Besides having to compete with e-commerce giants who have already started using AI, there are a number of challenges stopping retailers from starting their digital transformation journey.  

Although the younger generations are driving e-commerce and social channel sales, there are still consumers who prefer the traditional methods of shopping.  

Finding a balance between digitally evolving while not overcomplicating the shopping process to provide an experience for all ages is key to keeping both audiences happy.  

The retail industry typically operates on thinner margins in comparison to other industries, so making sure that the technology is being adopted by customers and employees is critical to achieving the maximum ROI of the AI investment.  

Another hurdle with new technology investments is making sure they can be easily integrated with legacy systems for a seamless retail digital transformation. The same challenge applies when it comes to making sure all data is synced across channels, systems, and stores. Data and technology must be able to integrate smoothly with high security and data protection to be considered as a successful implementation.  

The Future of Retail with AI 

Once retailers find the right solutions for their technology stack and business needs, the challenges are a lot easier to overcome.  

It is expected that in the next year, retailers will spend $7 billion in AI-powered solutions and that number will skyrocket ro almost $30 billion in the next 4 years.  

Looking ahead, AI will continue advancing to elevate experiences and streamline efficiency. Here are digital transformation in retail trends you should expect to see in 2024: 

Strengthening loss prevention and safety programs 

Since retailers do have tighter profit margins, the bottom line is extremely important, and so is mitigating theft and fraud loss.  

AI-powered solutions will enable retailers to take a more proactive approach by highlighting thieves stealing patterns, tracking at-risk items, and improving store layouts to avoid loss.  

Improving supply chain management and customer satisfaction  

AI predictive analytics will become more precise in forecasting traffic, sales, and buying patterns to anticipate future stock outs in advance. As machine models continue to track data, these analytics will become more accurate to avoid excess inventory and stock-outs for in-demand items. 

Enhance employee productivity, satisfaction, and retention  

AI assists employees by automating manual, tedious work and allows them to work on higher-valued, more rewarding tasks that can help accelerate their careers.  

AI can also help managers schedule the right number of employees so no one is stretched too thin or is scheduled to work with nothing to do. 

Maximize Creative Insights for Higher ROI in Retail 

While AI is no “secret weapon”, it is a competitive advantage that if retailers do not hop on board, they will miss the boat. 

AI is playing a pivotal role for retailers, their employees, and customers. AI-driven digital transformations will provide significant change by improving supply chain efficiency, loss prevention strategies, customer experiences, employee satisfaction, and profit margins.  

If you have not begun your digital transformation, what are you waiting for? There will never be a better time than now.