Why it matters:
- Retail is the primary driver of the U.S. economy, with consumer spending accounting for 70% of GDP.
- Retailers ended 2024 with better-than-expected sales growth for the year of 3.6%, but executives are concerned about the potential for slower growth this year.
- Retailers increasingly are turning to AI solutions to address their biggest challenges, including supply chain, e-commerce, marketing, and product returns, and to drive growth.
The retail industry began 2025 on an upbeat note.
Sales during the holiday season were significantly better than expected, and full-year sales growth for 2024 was up 3.6%, beating forecasts.
But instead of resting on their successes, retail executives who gathered at the annual National Retail Federation's convention to kick off 2025 said they will have to work even harder this year to drive growth.
John Furner, President and CEO of Walmart U.S. and Chairman of the NRF, applauded retailers for finding ways to cope with, and succeed in spite of, challenges such as lingering inflation and elevated interest rates.
“We’d love to say that’s all in the past and this year is going to be smooth sailing, but as you know, this year will bring more uncertainty, more challenges,” he said.
Among the top challenges retailers expect to face this year are the demand for rapidly accelerating AI integration, price sensitivity by consumers, escalating product returns, and changing shopping habits. Here are solutions businesses are choosing to address those concerns:
AI acceleration: ‘You need to have the top executives in your company believing in it,’ says Nvidia exec
Retailers began 2025 knowing that AI—artificial intelligence—reached a tipping point in 2024 and is poised to transform retail.
Nearly all of the 175 sessions at the NRF conference had some mention of AI and tech companies presented ways that AI can be used to manage inventory, analyze customer data, make product recommendations, create shoppable videos, conduct employee background checks, or perform dozens of other functions.
More than half of the 50 companies in the NRF Innovators Showcase, which features businesses with transformational tools for retail, demonstrated AI-powered solutions.
Retailers who are late in figuring out how to leverage AI will be left behind, Azita Martin, Vice President and General Manager, Retail and CPG at Nvidia, said in the conference’s keynote discussion.
“AI is real and I encourage all of you to get started,” Martin said. She likened the changes coming in AI to the first days of the e-commerce revolution, where “those that adopted it early became the leaders in the industry.”
Martin recommended that retailers wondering where to start using AI look at how it can be applied to their biggest challenges—supply chain, in-store experiences, and e-commerce.
Martin also recommended that AI initiatives have to be “top-driven.”
“You need to have the top executives in your company believing in it,” she said.
Price sensitivity: Tapping private-label goods and personalized discounts to counter sticker shock
While consumers spent more than expected in 2024, particularly over the holiday season, they also showed that they were extremely price-sensitive, and that trend is expected to continue in 2025.
Even though economic fundamentals are good and holiday spending reached a record $994.1 billion in 2024, logging 4% growth, consumers remain budget conscious, according to the NRF.
NRF Chief Economist Jack Kleinhenz, during a panel on the economic outlook, said there is “a disconnect with consumer attitudes,” as people express pessimism about the economy while spending strongly.
Kleinhenz said he believes much of that pessimism is due to people comparing today’s prices to pre-pandemic prices in 2019.
Gregory Daco, Chief Economist at global accounting firm Ernst & Young, agreed. “Average prices rose about 21–22% since 2019—and some categories rose 40% [to] 60%,” he said.
The fact that people remember the dramatic price change compared to pre-pandemic 2019 costs means that, because “you have a reference point that is so much lower,” the overall perception is that prices are increasing despite a lower inflation rate, Daco said.
One impact of this price sensitivity is that consumers are abandoning the brands they typically purchase in favor of promotions.
“There’s been a shift in the way consumers are buying items on promotion,” with the basket mix shifting more heavily to discounted items, Parm Singh, Head of Retail Analytics at NielsenIQ, said during a session on dynamic pricing.
Your data is actually a gold mine, and it is a replenishable resource.
John Bible, Senior Director of Oracle Retail Labs
One solution grocery retailers have been turning to is using private label brands as lower-priced options and by offering more promotions and deals involving private labels, Singh said. They also have been opening discount branches of their stores.
Going forward, Singh said, advances in technology are giving retailers the ability to quickly adjust prices across an entire store and to personalize discounts to individual shoppers. Ultimately, he said, the goal is to enable shoppers to have a mobile app that will show prices and deals tailored to match their individual shopping lists.
In another session, John Bible, Senior Director of Oracle Retail Labs, and Juan Hernandez, Director of Omnichannel Pricing at Dick’s Sporting Goods, talked about how Oracle’s AI Foundation platform is helping retailers like Dick’s forecast demand and plan for markdowns.
Retailers, thanks to AI, are now becoming able to leverage all of the data they collect everyday in their stores and websites, Bible said. “Your data is actually a gold mine, and it is a replenishable resource,” Bible told retail attendees.
Oracle Retail’s AI Foundation platform is providing Dick’s with the tools to make decisions about what products to mark down in which markets, Dick’s Hernandez said.
With the data it supplies, he said, he can explain “why my markdown program applies to five zones instead of 12, or why a product that seems to have a poor sell-through or very poor checkout is not recommended for a markdown that particular month.”
Being able to better forecast demand and optimize pricing and markdowns, retailers can protect their margins, Hernandez and Bible said.
Leveraging AI to mitigate return fraud
The new omnichannel world of retail, where goods can be bought online and returned in store, or bought online and returned online, has made return fraud a growing problem.
Common return fraud examples include people falsely claiming that an online item was not received, purchasing a luxury item and returning a fake, or making a non-receipted return of a stolen item in store, according to a presentation by fraud and risk-prevention tech companies Riskified and Appriss Retail.
Digitally originated return fraud is now costing retailers $19 billion in the United States, and in-store return fraud is a $100 billion–plus problem in this country, according to Riskified and Appriss Retail.
If retailers don’t protect themselves from return fraud, “you’re going to make it easy for people to steal from you,” said Jeff Otto, Chief Marketing Officer at Riskified. But if a retailer adopts return policies that are too restrictive they can lose a valuable customer, Otto said.
“You will risk falsely accusing a good customer and that insult rate means that [many] of them will never come back to your store,” he said.
“The key here is how do we surgically identify and resolve those abusers, and make sure that everybody else gets a great experience,” Otto said.
AI is a tool that is “purpose-built” to be able to detect serial fraudsters and give retailers the information they need to deny a return in real time, as the fraud attempt is happening.
Merchants are increasingly tapping artificial intelligence to mitigate the high cost of product returns in a variety of ways. They are using AI to make more detailed product descriptions and sizing information available to shoppers before they make a purchase, and they are optimizing return logistics to determine the most economical ways to get items back to a store or warehouse.
“I would say preventing returns up front is probably the easiest place to deploy AI, and where we’re seeing merchants use it the most,” Kristen Kelly, Vice President of Product at Loop Returns, told CO— this year.
Finding shoppers where they are: Social commerce drives ‘amazing engagement’ for PacSun
The 2024 holiday season also was a tipping point for mobile shopping, with 54.5% of online transactions conducted on a mobile device.
In addition, shoppers showed they increasingly are willing to use their phones to buy directly from a social media site or other marketplace, rather than going to a retailer or brand’s website.
“We are seeing a new generation of consumers that are ready to buy wherever that buy button is,” Caila Schwartz, Director of Consumer Insights and Strategy at Salesforce, said in a session on consumer trends.
“Being able to connect and sell to your shopper wherever they are is really powerful and we’re going to see that evolve so much in the next year to two years,” Schwartz said.
Figuring out where their shoppers live online and where they can best be enticed to click on “buy now” is critical, retailers and retail analysts said.
In 2024, retailers that invested in social shopping platforms saw that 20% of their sales came from those platforms, Schwartz said.
PacSun CEO Brieane Olson, in a session on consumer trends, said social commerce is one of the strongest growth drivers she sees for her company. PacSun has expanded its presence on YouTube Shopping and TikTok Shop over the last two years and has seen “just amazing engagement” with consumers through those platforms.
The need to meet consumers where they are is requiring retailers to create massive amounts of content for social media as well as their own websites.
At the NRF conference, Adobe introduced a new AI product that allows brands to quickly update thousands of pieces of digital content with a single click. Other new AI tools from Adobe allow retailers to translate spoken dialogue into dozens of different languages, with matching lip sync, and to create digital avatars that can promote products on web sites.
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