The retail AI industry takes stock as the holiday season wraps up

As the holiday season reaches its pinnacle moment, retail tech — including retail AI — is facing an uphill battle amid a looming recession and poor Q3 results. It was the sector’s worst quarter for funding in five years, CB Insights reported — and between Fed interest rate hikes and widespread layoffs across the tech industry, Q4 may follow suit. 

Despite this, the retail industry has increasingly made moves toward widespread adoption and use of artificial intelligence (AI) technologies, including chatbots, supply chain solutions and ecommerce tools. Some say the increased focus on AI amid the current economic climate points to companies looking for a solution that can lower operational costs while aiming to increase sales as budgets begin to tighten further. 

Does the slowdown in funding for retail tech mean AI innovation in the space is at risk?  

“The retail tech market has become saturated with one-point solutions, which has created extremely complicated tech stacks for retailers,” said Marcel Hollerbach, cofounder and chief innovation officer at Productsup, a commerce software company. “We’re at a pivotal moment in the industry where companies are looking to condense the number of systems they operate. This doesn’t mean retail tech is struggling, but rather that investors are looking at a smaller list to pour their money into.”

Where retail AI is still growing

Right now, physical stores still lead retail sales with retail management software company, Aptos, reporting that around 85% of retail sales still happen in real life away from screens. But even with a poor Q3 in funding, ecommerce still topped the list of most retail tech deals made during the period. 

“Ecommerce is getting the majority of that focus and investment because it’s where we’re seeing the fastest innovation and most entrepreneurial spirit,” Hollerbach said. “There are a number of AI technologies and startups that aim to help ecommerce become more efficient and scalable while reducing operational costs, so I anticipate that to continue as an area of investment.”

For now, this leaves plenty of room for retailers to closely examine their adoption of AI-powered tools and strategize on how to incorporate solutions for both ecommerce and physical retail. 

It’s in problem areas like returns, supply chain management, customer experience and workflow optimization where AI solutions will continue to provide retailers with the most benefit, industry experts say. 

“In addition to the exorbitant cost of reverse logistics, returns increase crowding at already overstocked warehouses and compound the likelihood of dead stock and waste,” Karin Cabili, founder and CEO of retail optimization platform, Dropit, told VentureBeat. “With a majority of consumers shopping this way, retailers could put a dent in the profit-margin-eating returns machine with a smart AI strategy. AI can be used to identify bracketing practices and calculate the probability of returns. … The best defense is a good offense, and retailers can find that in the strategic use of AI.”

Cabili and her colleague, Dropit’s chief operating officer, Stuart Ford, also recommend retailers ask themselves whether they are investing time or money into the proper tools to accomplish what they need to meet sales goals.

“The cost of return and restocking is higher than the price of selling and it’s also massively wasteful to operate this way,” Ford said. “This is where AI can play a great game and start to predict that stuff for them to optimize processes.” 

Retail AI in 2023 and beyond

AI’s takeover in retail business processes will continue to rise, experts say. As a market sector, AI in retail is anticipated to reach $24.1 billion globally by 2028, increasing by a compound annual growth rate of 24.4%. 

As part of that growth, some say chatbot adoption will not only sharply increase, but will become vital to retailers’ success long-term.

“If you don’t embrace the bots, you won’t survive,” said Muddu Sudhakar, founder and CEO of AI-powered customer service and IT solution platform, Aisera. “It makes economic sense to do rather than having a human answering the most mundane tasks.”

In addition to improved customer service and work processes, AI-driven supply chain solutions will also see growth in the year ahead, noted Mark Collin, managing director of experience and product for digital transformation consulting company, Kin and Carta, Europe.

“If you can optimize your total inventory efficiency, you’re going to be well-placed,” Collin said. In 2023, he explained, there will be more just-in-time inventory models, using smart algorithms to hold stock in the right place. “What cannot be denied is that supply chain flexibility and efficiency is a critical underlying capability that must be improved upon,” he said. 

As to whether physical retail will phase out and be replaced fully by ecommerce, it is not likely to happen — at least anytime soon.

“AI won’t pit physical retail against online retail at any point,” Hollerbach said. “The technology can improve the in-store shopping experience through avenues like inventory management and customer service, while simultaneously improving ecommerce.”

Stil, AI has more opportunity to innovate in the latter, Collin added. 

“There is less room for AI to help in-store experience than online and also in the supply chain,” he said. “AI is an absolute fit for working on complex problems like inventory modeling and movements. The ability to harness AI to ‘unify inventory’ is a bigger multiplier than thinking about its use just to solve for the challenge of declining physical store presence.”