How might GenAI disrupt the retail sector in 2025?

Heading into 2025 is a tricky time to be a retailer, particularly in Australia.

While the initial phase of post-pandemic recovery brought a surge in customer spending, we now have had at least two years of persistent economic challenges. Inflation, though declining slowly, is still sky-high on certain essential products, and prices remain higher than what they were pre-pandemic.

As a result, customers are tightening their budgets, becoming increasingly selective about where and how they spend their money.

Research conducted by The Strategy Group in partnership with the University of Technology Sydney (UTS) underscores this shift. Our study revealed that customers have reduced discretionary spending in response to economic pressures, prioritising affordability and value over traditional brand loyalty.

This trend is particularly pronounced in essential sectors like grocery and apparel, where efficiency and independence in the shopping experience have become more important than ever.

There is a dual challenge now for retailers: how to maintain competitiveness while addressing the changing needs of their customer base.

Traditional strategies focused solely on product and price are no longer sufficient. Instead, the ability to deliver exceptional customer experiences (CX) has emerged as the key differentiator. This is where we believe that Generative AI (GenAI) is proving to be a transformative force, offering solutions that can fundamentally reshape the retail experience.

As we head into December, and traditionally the busiest time for retailers, might it be the right time to assess if the way we shop has changed?

Economic Pressures and Customer Expectations

The economic uncertainty of 2024 forced customers to reevaluate their purchasing decisions. While many continue to prioritise essential goods, their approach to non-essential purchases has become more calculated. The report highlights a rising preference for value-driven purchases, particularly in sectors like grocery and apparel. These trends reflect an increased emphasis on securing both affordability and quality without compromising on personal or ethical values.

This shift in customer priorities has led to a rise in what we term "value-driven shopping," where customers want the best price and experiences that align with their values and lifestyles.

This behavioural shift is particularly evident among younger demographics, such as Gen Z, who are poised to become the most powerful purchasing group by 2026. This generation is not only influenced by economic factors but also by social and environmental considerations. They expect brands to offer transparency, ethical practices, and personalised interactions that reflect their preferences.

The Role of GenAI in Retail Transformation

Generative AI offers retailers a powerful tool to address these shifting customer demands.

One of the most significant contributions of GenAI is its ability to deliver personalisation at scale. GenAI can leverage vast amounts of data to generate real-time tailored experiences.

Nike’s mobile app is a standout example of this. By harnessing GenAI, Nike offers personalised workout plans and product recommendations tailored to individual users. The app analyses data such as workout history and preferences to deliver contextual and relevant insights. Features like life-like virtual assistants and AI-driven customer insights further improve engagement and activation.

This approach ensures that customers receive a unique and value-added shopping experience aligned with their fitness goals and preferences.

Given that research indicates that more than 80% of customers are more likely to engage with brands that offer personalised experiences, it makes sense to utilise a tool that can do that for your customer base. Retailers can move beyond generic marketing and adopt a data-driven approach that speaks directly to the customer’s needs.

With GenAI, customer behaviour, preferences, and purchasing history can all be analysed to deliver personalised product recommendations, marketing messages, and dynamic pricing strategies.

Data-Driven Insights for Strategic Decision-Making

Another critical advantage of GenAI is its ability to generate actionable insights from complex datasets.

Retailers today are inundated with data from various sources, including sales transactions, customer feedback, social media interactions, and supply chain metrics. However, the sheer volume and complexity of this data often make it difficult to extract meaningful insights.

GenAI simplifies this process by using advanced algorithms to identify patterns, predict trends, and provide recommendations that can inform strategic decision-making. By accurately forecasting demand and optimising inventory levels, retailers can enhance the customer experience, improve supply chain efficiency, and increase profitability.

The Omnichannel Imperative

Today’s retail landscape requires a seamless shopping experience across digital and physical touchpoints. IKEA exemplifies this with its GenAI-driven innovation, IKEAKreativ. By combining decades of expertise with cutting-edge technologies like spatial computing, machine learning, and 3D mixed reality, IKEA has redefined the omnichannel experience.

IKEA Kreativ integrates a shoppable app, digital kiosks with "Scan & Go" functionality, and remote selling via web chat and video calls. These features facilitate personalised interactions and efficient shopping experiences, boosting customer satisfaction and loyalty across diverse markets.

The seamless connection between in-store and digital channels ensures customers enjoy a consistent experience, regardless of how they choose to shop.

We are proud that the findings from TheStrategy Group and UTS emphasise that the future of retail lies in the strategic integration of Generative AI to exceed evolving customer expectations.

At The Strategy Group, we are committed to helping retailers navigate this transformation, providing the expertise and strategic guidance needed to harness the full potential of GenAI and drive sustainable growth in a dynamic market.

Get in touch if you’d like to see the full report.

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