Retailers need technology to offset waning consumer demand in 2025

As retail growth reverts to pre-pandemic levels, more retailers will be challenged to drive revenue and profit in 2025. The lowest-margin categories such as grocery will have the hardest time, but the future will be tough for every sector. 

We forecast that the overall US retail industry will grow, but factors such as higher wages, decreased purchasing power from higher prices (consumer goods prices in the US were 20% higher in December 2023 than in January 2020), and even Chinese merchants taking advantage of US shipping rules mean that all retailers will need to explore technology solutions to provide strong service to retain and grow shoppers in a scalable way.

Inevitably, some of these tech solutions will be hits and others misses. As we’ve learned from the tech titans like Alphabet and Amazon, to cultivate long-term growth, every business must be both willing and organizationally ready to continually experiment and fail. We predict the following five outcomes for the retail industry in 2025:

* One in five US and EMEA retailers will launch customer-facing genAI applications. Already, 15% of global business and technology professionals at retail and wholesale companies who are knowledgeable about AI say they havemultiple generative AI (genAI) deployments at an enterprise scale. The best genAIuse cases in retail improve both customer outcomes and business efficiencies in competitive sectors. 

Retailers like Bloomingdale’s, Instacart, and ThredUp leverage genAI attribute creation to map more useful search results and categorynavigation. GenAI can produce explanations to customers about why the retailer recommended products, as Best Buy does on some laptop pages. Although retailers must meticulously monitor AI output, we will see genAI getting closer to consumers in 2025. For your list of potential genAI experiments, start with those that support better site search and navigation or that help to explain recommendations and other content that otherwise may seem arbitrary to shoppers.

* Two major US retailers will launch biometric-powered solutions to curb internal theft. Wary of the public’s focus on consumer privacy and data, risk-averse retailers have mostly shied away from using biometrics for customer identification. Consumers already use biometrics (face, fingerprint, palm, voice, etc.) to unlock phones, move through airport security, and access websites. 

Banks and credit card companies trust biometrics to enable secure payments in physical locations. But, for nearly half of retailers, employee theft was an even higher priority in 2023, than it was in 2022, per NRF. For retailers, biometric identification can protect access to employee-only parts of stores, warehouses, and wherever expensive products are displayed or stored. 

We foresee two US retailers with recognized security issues and easy-to-steal, high-priced and/or high-demand assortments(perhaps in drugstore and consumer electronics sectors) making the costly investment and launching internal biometrics use. In 2025, retailers shouldevaluate biometrics vendors to mitigate internal theft and losses.

* US grocers’ operating profit margins will decline by 150 basis points or more. Revenue growth for US grocers will see significant pressure: US food-at-home inflation has been in the 1% to 1.2% range since January 2024. Plus, we see low real growth in consumer spending on off-premises food and beverages. 

As inflation subsides, grocers will lose pricing power, exacerbated by waning consumer sentiment and a slowing job market, which may turn real growth negative again. As consumers spend more on services than on goods due to persistent inflation in the services sector, grocers will increase promotional activity and adjust the product mix to low-margin essentials to retain market share. This strategy, along with higher wages and increased shrinkage, will further squeeze margins. 

To stabilize their profit margins, grocers will implement cost-cutting measures such as reducing store counts and staff. Grocers: Analyze and test potential revenue and margin gains by growing your private-label shelf space, product mix, and retail media offerings. Brands: Invest in retail media to offset lower share of shelf.

* One major retailer will discontinue its genAI tool for in-store associates. Large retailers like Lowe’s, Target, and Walmart are deploying LLM chatbots to assist new hires, answer questions, and/or help associates find items in-store. However, usage, training, and trust will determine the successful adoption of these tools. 

Associates have told us anecdotally that the results often are unhelpful or misleading, so they use them less. An executive at a US national specialty chain emphasized that usefulness drives associate engagement with genAI in stores. The high cost of genAI — and the comparative utility of other solutions like camera vision to identify where store associates are needed — will cause retailers to pull back on genAI for store associates. 

Notably, 19% of global AI decision makers in retail said AI-based decisions have caused harm to customers or employees in the past year. Retailers need to train store associates on the seven trust layers of AI and be acutely sensitive to “coherent nonsense.”

* Temu and Shein’s growth rates will plummet. High-profile Super Bowl ads and relentless digital advertising make online Chinese stores Shein and Temu appear fast-growing and ubiquitous. But, complaints about the quality of goods, unethical production processes, unfair advantages in shipping, and increased nationalism have made them targets of industry organizations, environmentalists, and government entities. 

Not surprisingly, in mid-2024, Temu’s parent company said that “high revenue growth is not sustainable,” in large part because its customer acquisition costs are very high. Furthermore, Shein still hasn’t executed its much-anticipated IPO. Retailers: Don’t be distracted by these players; similar to the pandemic era, when digital marketing was distorted, patience and creativity are key. 

Wait out these behemoths, and in the meantime, actively look for other means to retain loyal shoppers. Depending on your target customers, try a mix of newer tactics like retail media websites and podcast marketing or good old-fashioned retention/loyalty programs and lifecycle marketing.

Summary
In 2025, more retailers will be challenged to drive revenue and profit. The year will be tough for every retail sector — not only the lowest-margin categories such as grocery. Overall continued US retail industry growth notwithstanding, factors such as higher wages and lower purchasing power from higher prices mean that all retailers will need to explore technology solutions to provide strong service to grow shopper loyalty and share of wallet in a scalable way. 

To cultivate long-term growth, every business must be both willing and organizationally ready to continually invest in tech solutions, experiment, and fail — and then apply those learnings to the team and the business.

-- Source: Forrester Research, USA and Australia.