Key takeaways
Profitability
Transformation
Supply chain
Technology
Workforce
Key challenges in the retail industry
The retail industry is undergoing significant challenges as it grapples with rising costs, shifting consumer priorities, and the pressures of digital transformation. With a slowdown in growth and increased focus on value, retailers face tighter profit margins and a heightened need for effective customer retention strategies. As consumer behavior continues to evolve, businesses must adapt swiftly to the demands of omnichannel operations and manage supply chain complexities, particularly related to returns.
Retail profitability under strain
Retail growth has decelerated to around 3.5%, while approximately 40% of consumers now prioritise value. This shift intensifies price competition and puts pressure on profit margins. Returns account for roughly 15% of total retail sales, equivalent to $743 billion in the United States, with an estimated cost of €4.50 per return shipment, excluding additional handling and labour expenses. This significantly increases operational costs. At the same time, customer churn is rising. Since retention is more cost-effective than acquisition, this drives higher marketing and customer acquisition spending, further compressing margins.
Retail digital transformation faces scaling challenges
Retail transformation is accelerating but remains difficult to scale. Around 91% of retail IT leaders prioritise AI by 2026, yet many initiatives stall at the pilot stage. Meanwhile, e-commerce sales are projected to grow by ~23%, compared to ~14% for physical stores. This widening gap increases pressure on retailers to integrate omnichannel operations effectively. However, this shift requires significant investment, while fragmented execution and integration gaps increase complexity and slow ROI.
Supply chain challenges from returns and low-cost imports
Rising customer expectations and global competition are increasing pressure on retail supply chains. In 2024, approximately 4.6 billion low-cost packages entered the EU, intensifying competition and delivery demands. Returns account for around 15% of retail sales (approximately $743 billion in the US), adding significant reverse logistics cost and operational complexity. Alongside this, delivery delays impact stock availability and increase fulfilment costs. These combined factors drive higher volatility, raise logistics expenses, and make inventory management more challenging.
Retail technology gaps impact AI and omnichannel growth
Rapid digitalisation and AI adoption are increasing complexity in retail technology environments. By 2026, around 91% of retail CIOs prioritise AI, yet many still operate fragmented systems with limited integration. In addition, omnichannel growth is accelerating, with online sales expected to grow by ~23% compared to ~14% for physical stores. This increases the need for seamless system connectivity. However, poor integration limits real-time visibility, reduces the effectiveness of digital investments, and creates data silos and operational inefficiencies.
Workforce readiness challenges in retail digitalisation
Retail faces a growing digital skills shortage, while employee readiness and engagement remain critical for successful transformation. Resistance to new technologies continues to slow adoption and limit outcomes. As digital transformation accelerates, organisations require stronger digital and analytical capabilities. However, skill gaps and adoption barriers reduce effective implementation across retail operations. AI adoption can also create employee anxiety and resistance, lowering engagement and slowing progress. These challenges impact productivity, consistency, and the ability to scale across large global retail workforces.
Key solutions for retail industry challenges
Retailers can adopt tailored solutions to address inefficiencies and boost resilience:
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Profitability: To address profitability challenges, software is developed to improve operational efficiency and automate resource-intensive processes. These solutions enable real-time cost tracking and advanced analytics to identify inefficiencies and support better decision-making, helping to protect margins and reduce overall expenses. Manual workflows, such as returns processing, are also automated to streamline operations and improve scalability.
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Transformation: Scalable digital platforms and custom software are developed to support retail transformation and enable omnichannel integration. These solutions are designed to integrate new technologies into existing systems, reducing the complexity of digital transformation. With a focus on AI adoption and integration, retailers are supported in moving beyond pilot phases toward broader organisational change.
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Supply Chain: Integrated systems are developed to improve visibility and efficiency across supply chain, logistics, and fulfillment operations. These solutions help retailers manage demand fluctuations more effectively by reducing delivery delays and streamlining core processes. Reverse logistics is also optimized to lower costs associated with returns and improve overall operational efficiency.
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Technology: Legacy and modern systems are connected to enable seamless data flow and reduce fragmentation, while scalable and modular architectures are implemented to support faster innovation and easier integration. At the same time, data governance and security are embedded into system design to improve reliability, ensure compliance, and build trust across the entire ecosystem.
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Workforce: Skills gaps are addressed through training programs and tools that enhance employee readiness and engagement. The adoption of new technologies is supported, fostering a workforce equipped to meet modern retail demands. Consistent performance across locations is enabled, helping build a more capable and adaptive workforce.
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