Why
it matters:
- Retail
is the primary driver of the U.S. economy, with consumer spending
accounting for 70% of GDP. - Retailers
ended 2024 with better-than-expected sales growth for the year of
3.6%, but executives are concerned about the potential for slower
growth this year. - Retailers
increasingly are turning to AI solutions to address their biggest
challenges, including supply chain, e-commerce, marketing, and
product returns, and to drive growth.
The
retail industry began 2025 on an upbeat note.
Sales
during the holiday season were significantly better than expected,
and full-year sales growth for 2024 was up 3.6%, beating forecasts.
But
instead of resting on their successes, retail executives who gathered
at the annual National Retail Federation‘s
convention
to kick off 2025 said they will have to work even harder this year to
drive growth.
John
Furner, President and CEO of Walmart U.S. and
Chairman of the NRF,
applauded retailers for finding ways to cope with, and succeed in
spite of, challenges such as lingering inflation and elevated
interest rates.
“We’d
love to say that’s all in the past and this year is going to be
smooth sailing, but as you know, this year will bring more
uncertainty, more challenges,” he said.
Among
the top challenges retailers expect to face this year are the demand
for rapidly accelerating AI integration, price sensitivity by
consumers, escalating product returns, and changing shopping habits.
Here are solutions businesses are choosing to address those concerns:
AI
acceleration: ‘You need to have the top executives in your company
believing in it,’ says Nvidia exec
Retailers
began 2025 knowing that AI—artificial intelligence—reached a
tipping point in 2024 and is poised to transform retail.
Nearly
all of the 175 sessions at the NRF conference had some mention of AI
and tech companies presented ways that AI can be used to manage
inventory, analyze customer data, make product recommendations,
create shoppable videos, conduct employee background checks, or
perform dozens of other functions.
More
than half of the 50 companies in the NRF Innovators Showcase,
which features businesses with transformational tools for retail,
demonstrated AI-powered solutions.
Retailers
who are late in figuring out how to leverage AI will be left behind,
Azita Martin, Vice President and General Manager, Retail and CPG at
Nvidia,
said in the conference’s keynote discussion.
“AI
is real and I encourage all of you to get started,” Martin said.
She likened the changes coming in AI to the
first
days of the e-commerce revolution, where “those that adopted it
early became the leaders in the industry.”
Martin
recommended that retailers wondering where to start using AI look at
how it can be applied to their biggest challenges—supply chain,
in-store experiences, and e-commerce.
Martin
also recommended that AI initiatives have to be “top-driven.”
“You
need to have the top executives in your company believing in it,”
she said.
Price
sensitivity: Tapping private-label goods and personalized discounts
to counter sticker shock
While
consumers spent more than expected in 2024, particularly over the
holiday season, they also showed that they were extremely
price-sensitive, and that trend is expected to continue in 2025.
Even
though economic fundamentals are good and holiday spending reached a
record
$994.1 billion in 2024, logging 4% growth, consumers remain budget
conscious, according to the NRF.
NRF
Chief Economist Jack Kleinhenz, during a panel on the economic
outlook, said there is “a disconnect with consumer attitudes,” as
people express pessimism about the economy while spending strongly.
Kleinhenz
said he believes much of that pessimism is due to people comparing
today’s prices to pre-pandemic prices in 2019.
Gregory
Daco, Chief Economist at global accounting firm Ernst & Young,
agreed. “Average prices rose about 21–22%
since 2019—and some categories rose 40% [to] 60%,” he said.
The
fact that people remember the dramatic price change compared to
pre-pandemic 2019 costs means that, because “you have a reference
point that is so much lower,” the overall perception is that prices
are increasing despite a lower inflation rate, Daco said.
One
impact of this price sensitivity is that consumers are abandoning the
brands they typically purchase in favor of promotions.
“There’s
been a shift in the way consumers are buying items on promotion,”
with the basket mix shifting more heavily to discounted items, Parm
Singh, Head of Retail Analytics at NielsenIQ,
said during a session on dynamic pricing.
Your
data is actually a gold mine, and it is a replenishable resource.
John Bible, Senior Director of Oracle Retail Labs
One
solution grocery retailers have been turning to is using private
label brands as lower-priced options and by offering more promotions
and deals involving private labels, Singh said. They also have been
opening discount branches of their stores.
Going
forward, Singh said, advances in technology are giving retailers the
ability to quickly adjust prices across an entire store and to
personalize discounts to individual shoppers. Ultimately, he said,
the goal is to enable shoppers to have a mobile app that will show
prices and deals tailored to match their individual shopping lists.
In
another session, John Bible, Senior Director of Oracle Retail Labs,
and Juan Hernandez, Director of Omnichannel Pricing at Dick’s Sporting Goods,
talked about how Oracle’s AI Foundation platform is helping
retailers like Dick’s forecast demand and plan for markdowns.
Retailers,
thanks to AI, are now becoming able to leverage all of the data they
collect everyday in their stores and websites, Bible said. “Your
data is actually a gold mine, and it is a replenishable resource,”
Bible told retail attendees.
Oracle
Retail’s AI Foundation
platform is providing Dick’s with the tools to make decisions about
what products to mark down in which markets, Dick’s Hernandez said.
With
the data it supplies, he said, he can explain “why my markdown
program applies to five zones instead of 12, or why a product that
seems to have a poor sell-through or very poor checkout is not
recommended for a markdown that particular month.”
Being
able to better forecast demand and optimize pricing and markdowns,
retailers can protect their margins, Hernandez and Bible said.
Leveraging
AI to mitigate return fraud
The
new omnichannel world of retail, where goods can be bought online and
returned in store, or bought online and returned online, has made
return fraud a growing problem.
Common
return fraud examples include people falsely claiming that an online
item was not received, purchasing a luxury item and returning a fake,
or making a non-receipted return of a stolen item in store, according
to a presentation by fraud and risk-prevention tech companies
Riskified
and Appriss Retail.
Digitally
originated return fraud is now costing retailers $19 billion in the
United States, and in-store return fraud is a $100 billion–plus
problem in this country, according to Riskified and Appriss Retail.
If
retailers don’t protect themselves from return fraud, “you’re
going to make it easy for people to steal from you,” said Jeff
Otto, Chief Marketing Officer at Riskified. But if a retailer adopts
return policies that are too restrictive they can lose a valuable
customer, Otto said.
“You
will risk falsely accusing a good customer and that insult rate means
that [many] of them will never come back to your store,” he said.
“The
key here is how do we surgically identify and resolve those abusers,
and make sure that everybody else gets a great experience,” Otto
said.
AI
is a tool that is “purpose-built” to be able to detect serial
fraudsters and give retailers the information they need to deny a
return in real time, as the fraud attempt is happening.
Merchants
are increasingly tapping artificial intelligence to mitigate the high
cost of product returns in a variety of ways. They are using AI to
make more detailed product descriptions and sizing information
available to shoppers before they make a purchase, and they are
optimizing return logistics to determine the most economical ways to
get items back to a store or warehouse.
“I
would say preventing returns up front is probably the easiest place
to deploy AI, and where we’re seeing merchants use it the most,”
Kristen Kelly, Vice President of Product at Loop Returns,
told CO— this year.
Finding
shoppers where they are: Social commerce drives ‘amazing
engagement’ for PacSun
The
2024 holiday season also was a tipping point for mobile shopping,
with 54.5%
of online transactions conducted on a mobile device.
In
addition, shoppers showed they increasingly are willing to use their
phones to buy directly from a social media site or other marketplace,
rather than going to a retailer or brand’s website.
“We
are seeing a new generation of consumers that are ready to buy
wherever that buy button is,” Caila Schwartz, Director of Consumer
Insights and Strategy at Salesforce,
said in a session on consumer trends.
“Being
able to connect and sell to your shopper wherever they are is really
powerful and we’re going to see that evolve so much in the next
year to two years,” Schwartz said.
Figuring
out where their shoppers live online and where they can best be
enticed to click on “buy now” is critical, retailers and retail
analysts said.
In
2024, retailers that invested in social shopping platforms saw that
20% of their sales came from those platforms, Schwartz said.
PacSun
CEO Brieane Olson, in a session on consumer trends, said social
commerce is one of the strongest growth drivers she sees for her
company. PacSun has expanded its presence on YouTube Shopping and
TikTok Shop over the last two years and has seen “just amazing
engagement” with consumers through those platforms.
The
need to meet consumers where they are is requiring retailers to
create massive amounts of content for social media as well as their
own websites.
At
the NRF conference, Adobe
introduced a new AI product that allows brands to quickly update
thousands of pieces of digital content with a single click. Other new
AI tools from Adobe allow retailers to translate spoken dialogue into
dozens of different languages, with matching lip sync, and to create
digital avatars that can promote products on web sites.
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Published
Joan Verdon
