Key takeaways
Profitability
Transformation
Supply chain
Technology
Workforce
Key challenges in the retail industry
The retail industry is undergoing significant challenges as changing consumer expectations, rising costs, rapid digitalisation, and increasing operational complexity reshape the sector. Key challenges include margin pressure, the need to scale AI and digital transformation, supply chain resilience, technology modernisation, and workforce readiness. Addressing these interconnected challenges will be critical for retailers seeking to protect profitability, improve operational efficiency, and maintain competitiveness in an increasingly digital and demanding market.
Margin pressure from value-driven consumers
Profitability is under sustained pressure as value-conscious consumers intensify price competition while operating costs continue to rise. Around 40–47% of consumers remain strongly value-driven, limiting retailers’ pricing power, while retail sales are expected to grow by only 3.5% in 2026, constraining revenue growth. Cost pressures are also widespread, with approximately 95% of retail executives expecting higher operating costs driven by inflation, logistics, labor, and supply-chain challenges. Returns add further pressure, averaging 16–17% of sales, as reverse logistics, shipping, fraud, handling, and markdown losses increase the cost of serving customers and further compress margins.
Scaling retail transformation
The retail industry is accelerating its transformation as companies invest in AI, automation, and integrated digital capabilities to respond to changing customer expectations and cost pressures. 75% of retail and CPG leaders identify AI as a top priority, yet only 16.5% can measure AI ROI and enterprise AI adoption outside IT remains below 36%, highlighting the difficulty of scaling AI beyond pilot initiatives. With global e-commerce sales expected to exceed US$8 trillion by 2027, retailers must increasingly integrate physical and digital operations through unified inventory, fulfillment, and customer engagement. This transformation is further driven by cost pressures, with 95% of retail executives expecting higher operational costs in 2026 and 77% of European grocery CEOs identifying cost and margin pressure as their top concern, reinforcing the need for automation, AI, and unified commerce.
Building supply chain resilience
Retail supply chains are under increasing pressure from e-commerce growth, rising logistics costs, and changing customer expectations. With global e-commerce sales projected to exceed US$8 trillion by 2027 and return rates remaining around 16–17% of sales, retailers face growing challenges in last-mile delivery, reverse logistics, inventory management, and omnichannel fulfillment. These pressures are compounded by rising operating costs, with 95% of retail executives expecting costs to increase in 2026. Retailers are responding by restructuring their supply chains, with 66% planning to adopt supplier diversification, nearshoring, or onshoring, while 30% already use AI for supply-chain visibility, expected to rise to 41% within the next year; 59% also expect positive returns from AI-driven supply-chain initiatives within 12 months. Modern inventory systems can further reduce stockouts by 40–65% and increase inventory turnover by more than 30%, highlighting the importance of resilient, data-driven supply chains.
Modernizing retail technology
Retailers face growing technology complexity as omnichannel operations expand and businesses invest in AI, cloud platforms, and automation. Global retail technology spending is projected to exceed US$320 billion in 2026, while 91% of retail IT leaders prioritize AI adoption, increasing the need for scalable and integrated technology environments. Yet 70% of retail digital transformation initiatives continue to face delays or underperformance due to fragmented systems, disconnected data, and poor interoperability, highlighting the need for stronger system integration and real-time operational visibility across retail operations.
Adapting the retail workforce
The retail workforce is facing significant disruption as AI adoption and digital transformation reshape roles, skills, and operating models. Up to 40–60% of retail tasks could be partially automated, increasing the need for reskilling, workforce adaptation, and effective change management. Employee anxiety and resistance to AI-driven transformation can further slow implementation, while frontline turnover remains high at around 60%, compounded by shortages of digitally skilled and technology-focused talent. Building the capabilities required for an increasingly digital retail environment will therefore depend on effective reskilling, employee engagement, and stronger workforce retention.
Next steps
Retailers should prioritize initiatives that strengthen margins while improving supply chain resilience, technology integration, and operational efficiency. Scaling AI, automation, and unified commerce should be supported by robust technology foundations and targeted workforce reskilling to ensure successful adoption. A coordinated approach across profitability, operations, technology, supply chains, and talent will enable retailers to build more agile and sustainable business models.
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