The Evolution of AI in Retail and Why it’s Only the Beginning

Artificial intelligence is no stranger to the retail industry. Amazon.com was an early adopter of AI, leveraging it more than two decades ago to provide online shoppers with fairly rudimentary product recommendations. The use of AI in retail has advanced substantially since then and is now an important staple for brands’ e-commerce technology stacks, driving tailored and relevant product recommendations, improving the overall customer experience, and providing more accurate product discovery capabilities, to name just a few applications.

To illustrate AI’s current impact on retail, the North American market for AI solutions in retail was valued at $2.20 billion in 2022. That figure is expected to grow to over $18.8 billion by 2027. One of the key reasons for this explosive growth is generative AI, the much hyped and much discussed process of using algorithms to generate or create text, photos, videos, code, data and 3D renderings from the data the algorithms are trained on. Two of the most popular applications are ChatGPT and DALL-E. Gen AI promises to be the next big disruptor in retail, as well as across many other industries.

Retail is projected to be a big winner in the AI economy. According to McKinsey & Company, generative AI could increase profits for apparel, fashion and luxury retailers by $150 billion to $275 billion over the next three years to five years.

With brands challenged by an ever-expanding technology stack that drives their e-commerce, merchandising, supply chain and customer service functions, can AI really make a difference to their bottom line? The short answer is yes.

AI is Transforming Retail ... for Good

Brands can leverage AI in multiple ways to better the customer experience, provide more self-service support options and, ultimately, boost profits. Some of the most impactful ways to employ AI in today’s e-commerce environment include:

• Driving smarter business decisions: Using search data, plus other signals, brands can leverage AI to derive the deep insights necessary to align merchandise levels more closely with expected customer demand. For example, a sporting goods retailer can use AI-driven insights to determine when demand for certain items increases or decreases based on the number of searches. It can then use this knowledge to know how much product to order and stock. Not only does this help the retailer to have adequate merchandise on hand when demand spikes, but it can also decrease the potential for overstocks.
• Powering more personalized experiences: It’s almost a given that today’s retailers deliver highly personalized online shopping experiences to their customers. Personalization is expected by tech-savvy shoppers. In fact, a 2022 consumer research report by Oracle Retail claims that 69 percent of shoppers want brands to reach out to them with personalized messages such as discounts and offers, or predictions about products they may like (32 percent). AI is key to providing relevant, meaningful product recommendations. By using data from a variety of sources, including past purchases, browsing history, trending products, even geolocation, a brand can deliver recommendations in near real time, guiding the customer’s journey to the products they’re looking for, in less time. AI can also boost retailers’ profit margins by automatically prioritizing products that have a higher margin and cost less to ship, for example.
• Transforming customer service: Poor customer service continues to plague retailers. In fact, our 2023 Customer Service Relevance Report found shoppers will leave a brand after only two or three negative experiences. The report also found that 46 percent will abandon a brand because of conflicting information they receive from a customer service representative. Interestingly, 46 percent also said they want more intelligent self-service chatbots. It’s estimated that retailers will spend $12 billion on chatbots in 2023, and up to $72 billion by 2028. With the rapid rise of generative AI applications such as ChatGPT, brands can now tap into gen AI-powered chatbots for more than just basic tasks such as helping customers track an order. They can also make recommendations, answer questions, and guide customers to the products that suit their needs. The use of AI to provide self-service support isn’t exactly like the personal one-to-one help you get from a knowledgeable store employee, but it’s close, and will get better as the technology matures.

This is only a short list of how AI can make a real impact on the online shopping experience for the better, and it’s only the beginning. AI is advancing quickly. It will eventually become ubiquitous in retail, with forward-looking brands leveraging it to create more efficient and profitable operations, letting AI do the “heavy lifting,” freeing retail merchandising and IT teams to manage higher level tasks. And if brands decide to put AI to work to determine how many pumpkin pies to stock before Thanksgiving, so be it.

Sergio Iacobucci is the senior director of commerce marketing at Coveo, a leader in AI platforms that transform digital experiences with intelligent search, recommendations, 1:1 personalization, and merchandising.