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AI in Retail: How Is Artificial Intelligence Changing the Retail Industry?

By Contributing Writer
Lisa Frank
December 21, 2023



Artificial intelligence is slowly revolutionizing most industries – according to the IBM Global AI Adoption Index, AI is now being used by 35% of companies in general, with over 40% more planning to explore it further. From customer service to content creation, AI technologies can be applied in so many ways it’s difficult to find a business that wouldn’t benefit from them. This rings particularly true for the retail industry. This is how it’s been affected by AI.

AI in Retail

A study by Contrive Datum Insights estimates that the market size of AI in retail can reach an astounding $32.58 billion by 2030. While the AI-retail correlation is the strongest in North America, the impact of technologies such as machine learning or natural language processing is becoming stronger and stronger in the entire industry. This growth is driven by the prevalence of smart devices, which have become a small gold mine of information on modern customers. Everything smartphone users are doing online leaves a trace that can be used as a valuable source of data about their behaviors, habits, likes, or even locations. Through sophisticated algorithms, artificial intelligence enables retailers to gather this info and create a more personalized shopping landscape catered to evolving customer needs and preferences.

Top 7 AI Applications in Retail

Chatbots and customer service

When there’s retail, there’s a need for customer service. And AI-driven chatbots are amazing at handling clients’ queries, providing product information, processing orders, and offering general assistance 24/7. They never get tired, don’t get impatient with customers, are much faster, and store a LOT more knowledge than a human customer service agent. As a result, they streamline work and reduce operational costs. A great example of this is Amazon Go and Amazon Fresh – fully automated checkout-free stores.

Personalized recommendations

Leveraging comprehensive, AI-powered insights into consumers’ behavior, purchase histories, and preferences enables retail companies to enhance the shopping experience by offering exactly the type of products clients may be interested in. AI tools help analyze customer data and channel it for recommendations that are often displayed prominently on websites or apps, guiding shoppers toward items they are likely to find appealing. This effectively drives brand loyalty, customer engagement, and sales.

Geofencing 

With an average American spending up to 6 hours on their phone (and carrying it with them pretty much everywhere), our mobiles work a bit like personal tracking devices. Like it or not, it’s good news for retailers who can use it to their advantage. In fact, they do exactly that with geofencing – focused on a real-time geographic proximity marketing strategy in which personalized recommendations are sent to customers based on their location.

Automated inventory management

AI-driven algorithms (or even robots) can assist in tasks such as inventory management, shelf-stocking, or even product segmentation. Real-time monitoring via AI-powered systems tracks inventory, triggering automatic reordering when levels drop, reducing manual errors, and enhancing operational efficiency. This technology streamlines inventory workflows, minimizes carrying costs, and ensures products are readily available to meet customer demand, ultimately improving the entire supply chain process.

Predictive analytics for demand forecasting

Just like they do with inventory management, AI analytics can be used for demand forecasting. In fact, according to a Gartner survey, “demand forecasting is the most widely used machine learning application in supply chain planning.” Why? By analyzing vast datasets like sales history, market trends, and consumer behavior, these tools enable very accurate predictions and can prevent any possible stockouts. And data shows it simply pays off. “Using AI-powered forecasts in supply-chain management can reduce errors by up to 50%, reducing lost sales and product unavailability by up to 65%,” says a study by McKinsey Global Institute.  

Fraud detection and security

The Global Retail Theft Barometer report estimates that in 2021, fraud and theft caused a $93 billion shrinkage in the global retail market. From identifying anomalies in transactional data to machine learning algorithms scoring transactions in real-time, artificial intelligence can – and does – go a long way in preventing such losses. It’s one of the most optimal tools for fraud detection and increasing security in the retail industry.

Visual search and image recognition

Another way AI technology is leaving its mark on the retail industry is by introducing computer vision and natural language processing. These techniques enable users to search for products using images or voice rather than text, which saves time, makes shopping more seamless, and generally enhances customer satisfaction. Some companies take it even further and are now offering the option of shopping with smart interactive mirrors – a technology that has proven to raise customer basket size by 20%.

The Future of AI in Retail

With so many benefits of AI in retail at hand, the industry future is definitely poised for continued transformation. Though we can’t say that with certainty, there are a lot of signs that advancements will focus on hyper-personalization, with AI algorithms leveraging real-time data to offer bespoke shopping experiences. AI-driven chatbots may evolve to provide more empathetic customer service (which is something they are now lacking). Enhanced visual recognition and augmented reality can also redefine online shopping, allowing customers to experience products virtually.



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