The Risks and Rewards of AI Adoption in Retail

Retailers are bullish on AI’s growing record for transforming marketing and customer service performance, though this enthusiasm may border on over-optimism.

According to BDO’s 2024 Retail CFO Outlook Survey released in February, more than half (55%) of retailers are already formalizing policies for internal use of generative AI, and nearly as many (45%) are already building a proprietary generative AI platform.

Retailers are not wasting any time in pushing the gen AI agenda. However, they may be moving a bit too fast by overlooking some valid concerns about the unrecognized risks that lie ahead.

Only 12% of retail CFOs listed AI bias as a top risk. Meanwhile, almost half (45%) of today’s retailers already use AI to optimize pricing strategies. As retailers are forced to increase prices, using AI to time discounts and promotions will be critical for securing sales.

Kirstie Tiernan, national data and AI practice leader at BDO, thinks this is happening with generative AI for two main reasons:

• The simple use cases it provides are driving demand.
• Employees have a growing appetite to use and experiment with generative AI.

“The early adopters in every industry want to leverage it. So, at some point, organizations have to come up with policies for usage and set parameters to empower employees, rather than bar new technology altogether,” she told the E-Commerce Times.

Pitting Creativity Over Forecasting Analytics

Tiernan views both objectives as crucial yet emphasizes that generating greater value and differentiation in a competitive market is the primary driver of marketing strategies. The advent of generative AI’s creative capabilities presents retailers with boundless opportunities, though it’s happening without a comprehensive assessment of the associated risks.

Retailers face constant pressure to innovate, adapt, and personalize their offerings to meet changing customer preferences and expectations. Tiernan explained that Generative AI can enable retailers to create new and novel products, services, and experiences that appeal to customers and increase loyalty.

“Generative AI is one of the preferred AI outlets for retailers because it can help them,” she offered. “They can also use generative AI to improve operations and create efficiencies, such as applying it to vendor contract review.”

For example, retailers can harness their customer data and apply it to generative AI to develop highly tailored marketing content that will have a better chance to resonate with segmented audiences. AI can also help retailers design new product collections, create realistic product images, or generate personalized recommendations based on customer data.

According to BDO’s CFO Survey, retailers have been caught in a pricing “game of chicken” that will almost certainly continue. Retail CFOs plan to keep raising prices while consumers seek deals and discounts.

CFOs Plan Continuing Price Hikes

As last year ended, it became clear that consumers were winning this game thanks to many retailers offering steeper discounts ahead of the holiday season than previously. Now, retailers are trying to pull back on those discounts, fueling the ongoing pricing limbo engulfing them.

Supply chains lack actionable data, noted BDO. Inadequate predictive analytics is the primary rub here. Retailers cannot act on the data quickly enough, which limits their ability to make real-time, let alone predictive decisions, with confidence.

To fix this supply chain dilemma, retail CFOs are turning to advanced technologies such as scenario modeling and predictive AI. To that end, 59% plan to leverage customer data analytics to better predict, align, and manage demand to inform inventory decisions.

“What really stands out to me this year is that retailers are going all in on technology and AI across functions and for different reasons,” said Tiernan.

Deliberate Approach to AI Adoption

How retailers adopt AI is critical. They need to do it carefully and strategically. Rushing in is not the best method.

“When implemented deliberately, retailers can enable their data, technology, and employees to work together to provide meaningful value,” advised Tiernan.

She outlined a structured five-step process to achieve realistic goals, foster maturity, and progressively integrate AI to improve different facets of the business without an upfront all-or-nothing commitment.

The approach begins with education, followed by identifying and prioritizing potential AI applications. The third step involves establishing a solid foundation by ensuring data governance, security, and privacy. The fourth step focuses on change management. The final step involves continuously revisiting, refining, and iterating the AI implementations.

Creativity vs. Analytics Solutions

To overcome today’s supply chain hurdles, the BDO report recommends that retailers consider four essential tactics:

• Leverage scenario modeling software
• Reassess the necessary skillsets for supply chain roles
• Prioritize ESG (environmental, social, and governance) reporting compliance
• Proactively manage disruption when switching suppliers

We asked Tiernan to discuss these recommendations and the retail industry’s growing optimism about relying more on generative AI to offset supply chain inadequacies. She said retailers are optimistic about artificial intelligence because it offers a competitive edge in a rapidly changing and challenging market.

E-Commerce Times: What makes the retail industry optimistic about artificial intelligence?

Kirstie Tiernan: It helps retailers unlock the potential of their longstanding data to enhance customer experience, optimize inventory management, reduce costs, and increase revenue. They can gain insights into customer behavior, preferences, and needs and use them to create hyper-personalized recommendations, offers, and promotions.

AI can also help retailers forecast demand, automate replenishment, and prevent stockouts or overstocking.

What role can AI play in retail back offices?

Tiernan: AI can completely transform the finance function by automating tasks such as invoice processing, fraud detection, and risk management, freeing up time and resources for more strategic activities. It can also enhance collaboration and communication across different departments, such as marketing, sales, and operations, by providing data-driven insights and recommendations to improve efficiency and customer satisfaction.

What strategy is better: using gen AI as a customer-facing tool or limiting its use to employee-facing?

Tiernan: Increasingly, retailers are deploying customer-facing genAI applications for better personalization, customer service, and operational efficiency. Many customers are willing to share their data in exchange for convenience. Still, retailers need to find the right balance between greater convenience and preserving consumer trust through transparency, ethical AI use, and demonstrating clear benefits to consumers.

How can retailers optimize pricing strategies other than by using AI to time discounts and promotions?

Tiernan: By analyzing vast amounts of data, AI can provide valuable insights into customer preferences, buying patterns, and price sensitivity. This goes beyond simply timing discounts. AI can dynamically adjust prices in real time based on factors such as demand, inventory levels, and competitor pricing.

AI can also offer individualized prices based on customers’ shopping behavior and price elasticity.

Retailers can leverage AI through predictive analytics to strategically forecast future demand trends and set prices, maximizing profits and market share.

What risks come with retailers and marketers using AI?

Tiernan: For retail marketers, monitoring offensive, incorrect, or biased content generation will be imperative. Retailers must carefully consider the data inputs they use and refine the outputs of generative AI to align content or messaging with the brand’s values without violating data privacy regulations or laws.