AI Comes to Retail: Here Are 3 Benefits and 3 Planning Steps You Need to Take

After years of hype and anticipation, artificial intelligence (AI) is starting to have a real impact on the retail industry.

Within the next few years, AI will transform retailing, affecting everything from cost structures to the customer experience. AI goes hand-in-hand with e-commerce, and surging e-commerce growth rates — accelerated by the coronavirus pandemic — make AI adoption even more urgent. Advantages gained through AI will remake the sector. This means that retailers need to start planning now. And those plans should be at the level of business strategy, not just technology.

Many companies see the value of AI, but there are major barriers — e.g., talent shortages, employees that lack the right skills, IT infrastructure that doesn’t measure up, nebulous strategies for commercialization and adoption. Furthermore, retail AI is evolving rapidly, developing new capabilities for learning, prediction and ultimately mimicking human interactions. The challenge for retailers is to use those capabilities effectively, and to make sure their organizations are up to the task.

How will AI impact retail? There are three main benefits:

1. Lower cost-to-serve as AI transforms the workforce. While routine tasks will surely be automated, AI will also support and enhance increasingly demanding work. AI will help optimize labor scheduling, delivery tracking and route planning for deliveries, among other tasks.
2. More effective promotion and merchandising. AI will drive marketing and merchandise planning, helping segment customers, generate content, and plan and execute targeted advertising programs. For example, Walmart is already using AI to scan competitors’ offerings and, in the near future, it hopes to use robotics to scan its own shelves to optimize its product mix.
3. A better, and richer, customer experience. Some of the most valuable benefits of AI will be in the store itself. Store associates can use AI-enabled mobile devices to help with sales, and thus drive higher conversion rates and order values. For instance, Nordstrom’s sales associates use data about customer types to make personalized in-store recommendations. Eventually, AI will provide more leverage to in-store labor by coupling AI assistants to augmented reality tools on customers’ own devices.

There’s a high upside. Retail margins are thin. That means that any cost or customer advantages can be game-changing. For example, if AI can help customers find what they want more efficiently online, the traditional online browse-and-find model will be disrupted. Instead, the AI tool becomes the consumer’s shopping buddy and prompts higher conversion at lower cost by suggesting products more likely to resonate. Savvy retailers will put those cost-of-conversion issues at the heart of their planning.

To make best use of AI, retailers will need an effective planning process that includes:

1. A baseline analysis of the workforce that identifies key activities and determines which can be automated and which need to be supported or enhanced by AI.
2. Continued focus on high-value uses to ensure the highest priority goes to the AI opportunities that address the most critical customer needs and pain points, create great customer experiences, or radically improve workflows.
3. Set realistic timelines and prioritize practical, near-term opportunities over “moonshot” use cases.

Retailers making AI plans should remember that fundamental economic laws haven’t changed. AI strategy must start with user needs and a strong case for return on investment. Also, changing technology is easier than changing the way people work. To succeed, you have to do both — and remember that changing behavior takes time. However, for companies that get AI right, there’s the potential for a brighter future.

Dan McKone and Harsha Madannavar are managing directors at global management consulting firm L.E.K. Consulting.