10 Retail industry predictions for 2023

If someone had asked me to predict 2022’s “word of the year,” I would have guessed “metaverse.” Maybe “cryptocurrency.” There is absolutely no chance I would have conjectured “goblin mode.” But it turns out the slang term that refers to a type of behavior that is “unapologetically self-indulgent, lazy, slovenly, … (and) rejects social norms or expectations” was the top pick with the public at large, according to the publishers of the Oxford Dictionary.

My point: Forecasting the future is not for the faint of heart, no matter how much you’ve studied the market or how many times you’ve made predictions.

Trying to get a handle on what will happen in retail in 2023 is especially capricious. (So much so that it almost makes me want to tuck into goblin mode.)

Retail companies — all businesses, for that matter — continue to experience disruption. Geopolitical unrest is ongoing. And every executive is trying to get their arms around financial volatility. Has global inflation peaked or is there a recession in the wings? Will the housing shakeout have a ripple effect? Has our industry weathered the last of supply chain breakdowns? Will the recent historic string of rate hikes pause — or maybe even roll back a bit?

While retailers wrestle with the “what ifs,” there is still an appetite for turning disruption into opportunity. Yes, government subsidies have dried up, budgets will be tighter and skilled staff will continue to be in short supply. Still, retailers that focus attention and ability on a handful of projects including strengthening infrastructure, improving margins and polishing the customer experience are likely to move the profit needle to the right.

What are some developments that will shape the retail world in the next 12 months? Here are 10 predictions likely to influence our industry — for better or for worse.

Investments in the metaverse would best be described as a “hard maybe.”

There’s no question retailers believe they should have a metaverse strategy. With consumers increasing their virtual interaction with brands, it has quickly emerged as a linchpin of brand positioning. That said, recent KPMG research found that while 56% of U.S. adults are aware of the metaverse, only 8% have tapped into it. So, if you’re under 40, your eyebrows just raised; if you’re pushing 50, you probably guess that’s about right.

The metaverse blends physical and virtual worlds to create dynamic new ways for people to interact. Fortnite, best known by tech-savvy gamers, has welcomed users to live concert events in the metaverse, while Roblox is better known in retail circles: Numerous brands including Nike, Vans, Gucci, Ralph Lauren and Forever 21 have created virtual worlds in Roblox that allow users to interact with their products.

In the future, the metaverse could be a platform for virtual stores, various types of entertainment, education, even a brainstorming session with work teams. The good news is that much of the technology needed to make it happen has already been created. But a whole lot of folks still are not fans of virtual reality headsets — or the hefty price tag that accompanies these devices. Is the metaverse over-hyped? That’s a “hard yes.”

Progress in Web3 is advancing — especially blockchain technologies, but overall acceptance is still in the early stages.

The metaverse weaves together an assortment of technologies that are the building blocks of the emerging Web3 platform. These include decentralized blockchain systems, digital currencies and tokens. Among retailers there continues to be an increase in the adoption of blockchain technology; it’s taking root in the supply chain realm, being used to create a data trail that can trace a product from its source to retail shelves. In addition, it’s surfacing as a tool for other processes including inventory management, authenticity verification and customer data and loyalty programs.

At a recent MIT Platform Strategy Summit, one expert forecast that Web3 will signal a paradigm shift in retail, whether that’s virtual versions of physical products or redesigned bricks-and-mortar stores with fewer aisles of products and more space for experiences.

Peter Evans, chief strategy officer at McFadyen Digital, believes retail is well positioned for the shift. “It’s not the metaverse over here and a store over there. There are going to be things you can do in the metaverse that will earn you rewards you can redeem in the physical store. Or you go to the physical store and redeem them in the metaverse. There’s going to be an exchange between these two spaces.”

That might all be true, but this is in a formative stage; we’re years from it approaching mainstream.

Look for more retailers to jump on the retail media network bandwagon. The channel casts a wide net when it comes to new possibilities for increased revenue.

Retail media networks are an opportunity for retailers and brands alike to deliver highly targeted marketing. Throughout 2022, it seemed as though a new retail media network launched every day. Along with stalwarts Amazon and Walmart, the ever-growing list includes Lord & Taylor, Target, The Home Depot, Dollar General, 7-Eleven, Macy’s, Ulta, CVS and Walgreens.

While the concept has been around for about 10 years (Amazon launched its RMN in 2012), it has accelerated for two key reasons: the first being the pandemic and the shifts that promoted in the way consumers engaged with brands; the second being the depreciation of third-party cookies and data and the loss that has created for marketers and advertisers. RMNs offer access to a retailer’s coveted first-party customer data and channels by way of the retailer’s app or website. For brands, this translates into a chance to reach captive audiences at the point of sale.

The fast-growing channel is estimated to represent 11% of total advertising spending globally; GroupM forecasts ad revenue for retail-based companies will hit $101 billion by the end of 2022 and could reach $160 billion by 2027. A word of caution, however: While the potential feels infinite, media dollars remain finite. The space is evolving and clearly there are many choices for brands and CPG providers. Growth is expected for 2022 but that should be tempered with due diligence.

In 2023, AI shifts from singles and doubles to home runs.

We’ve been talking about artificial intelligence for many years, documenting its maturity and keeping close tabs on its proficiency. Now it’s being talked about in glowing terms — phrases like “analytics for everyone, everywhere,” and “an intrinsic part of what makes a successful enterprise.”

Progress has ramped up over the last 12 to 18 months, and both new and improved AI applications across multiple disciplines have made this technology essential for retailers. In the second quarter of 2022, both Google and Meta executives shared that investments in artificial intelligence technologies were already paying off: Google reported improvements in search, translation and mapping services, while Meta noted that AI apps were recommending content across its platforms.

Why now? The answer is tied in part to advancements in quantum computing chips. Chip makers like Intel and Nvidia are partnering and/or developing advanced chips that are reportedly poised to herald next-level computational capabilities.

In retail, companies are excited about the prospect of AI-generated, personalized communication. Until now, much of the AI-powered technology — like chatbots — were not especially relevant. As the next generation of AI computing power takes root, experts believe retailers will be able to deliver personalized and relevant digital marketing messages, enhanced by first-party data, that not only cuts through digital noise but, more importantly, drives conversion.

In late November, media began heavy coverage of AI-supported digital content creation primarily focusing on consumer applications. The “generative” AI apps Lensa and ChatGPT — each of which create content based on user text input — have grabbed the spotlight. They also quickly raised eyebrows about ethics and boosted concerns about transparency and regulations. Artificial intelligence is capable of many things, but generative AI makes mistakes — lots of them. Expect plenty of good app/bad app discussions for some time to come.

Smaller footprint stores will flourish as retailers experiment with new formats.

The idea of dabbling in smaller footprint stores is not new, but early success stories are providing tailwinds for others to test whether “small but mighty” is a relevant adage. Over the last 12 to 18 months, retailers have opened physical stores at a more rapid pace than expected after the pandemic, buoyed by shoppers’ return to bricks-and-mortar. But the days of cookie cutter units are ancient history; today’s new builds deliver competitive advantage with a precise mix of neighborhood awareness, personalized inventory assortments and right-sized footprints.

Examples abound: Target has been on the cutting edge of this shift for several years now, and earlier this year DSW opened a small format store called Warehouse Reimagined. There’s Market by Macy’s, Bloomies, Nordstrom Local, Kohl’s, Schnucks Fresh stores, Publix’s GreenWise, and the list goes on and on.

What’s more telling are the moves by some specialty retailers and brands to partner on smaller in-store representation. Sephora has announced plans for shops in 850 Kohl’s locations in the coming year. Toys “R” Us partnered with Macy’s for toy shops this holiday season. And Petco is working with Lowe’s to open shops in select locations — a move that makes sense for shoppers craving convenience and fewer shopping trips.

Then there’s Best Buy, which has adopted a different take on smaller format with the introduction of showroom/digital-first stores. The first of its kind debuted in North Carolina this past summer. At one-seventh of the size of a traditional Best Buy store, this location includes a curated selection to encourage the customer to “do everything from shop, select your product and get advice digitally,” according to a company press release. Lockers are located outside the store “for around-the-clock pick-up options.”

Bottom line, 2023 will deliver more iterations on the evolution of shopping physical stores. Shoppers are open to new ways of engaging with retail. Retailers that dip a toe in experimental waters are likely to be rewarded.

Generation Alpha, better known as Gen A, is poised to be the largest and most technologically connected demographic in history. And they will test retailers like none before.

Generation Z is the demographic du jour right now but woe to the retailers not paying attention to the group that will succeed them. Experts are reporting that Generation Alpha, born from 2010 onward, are set to number over 2 billion by 2025 with huge collective spending power. It’s been reported that these young shoppers have $360 million in disposable income annually, and by 2030, they will make up 11% of the global workforce.

Most members of Gen A are the children of Millennials. While experts say this group tends to have a close bond with their parents, there are notable contrasts. Millennials are considered the first digital natives. Their successors — Gen Z — grew up as social media was taking root and use it today to express themselves. For Gen A, social media is a way of life; it’s where they learn the latest lifestyle trends in everything from health to fashion to eating, and where they’ve come to embrace the notion that young people have more power than any previous generation.

What does this mean for retailers? It translates into new ways of interacting with this emerging generation. Experts describe them as wanting to be active participants in practices, along with wanting to play a part in finding solutions — two traits born of early and frequent interaction with video games.

It also suggests they will want to have relationships with brands and not just passively consume. Early exposure to world issues implies that Gen A will have a heightened awareness of the world. In other words, this generation, which is already more diverse than any that came before, will expect inclusion and equality to be the norm and experiences to be culturally diverse.

Sustainability becomes the thread that weaves through every business process; greenwashing is tantamount to brand sabotage.

We’re done talking about the emergence of ESG initiatives, questioning climate change and trying to determine the role of sustainability. It’s time to press the pedal and act. Consumers’ tolerance for greenwashing has reached a crescendo and they’re voting with their wallets. Retailers that have been in the early stages of work on carbon emissions, sustainable sourcing, environmental labeling, etc., need to shift their efforts into the next gear — and make moves that will be effective.

Nudging their efforts are policies bubbling up at both the state and federal levels. California’s two largest cities, Los Angeles and San Diego, recently voted to ban distribution of the foamy plastic used in disposable coffee cups and takeout food containers. Also in play is the U.S. FABRIC Act, which aims to protect workers’ rights and incentivizes reshoring, and New York’s Fashion Act, which includes requirements for chemical use and climate targets, more specific due diligence criteria and expanded enforcement provisions, and protection for garment workers.

Shoppers are continuing to support resale across retail verticals and retailers have heard the message loud and clear. As brands hawking resale achieve increasing success and clothing rentals become de rigor, more and more brands are getting in on the act, offering resale through their own services or third parties. Operational elements still need to be tackled, but the commitment is real.

Luxury retail is also benefiting; price consciousness appears to be growing among top-tier shoppers, yet the desire to own coveted labels endures. Thus, the luxury resale market is enjoying strong tailwinds.

2023 marks a new normal supply chain. Expect less chaos, a greater focus on projects that enable visibility and a spotlight on emerging third-party logistics platforms.

Supply chain executives started to breathe normally around mid-December and it appears that collective sigh of relief will hold for the next 12 to 18 months. That’s not to say that retailers are completely out of the woods, but their focus has shifted from operating 24/7 in crisis mode to investing in technologies that enable greater accuracy and visibility of inventory with the goal of full visibility into merchandise lifecycle and chain of custody.

In the wake of the pandemic, American Eagle Outfitters and Gap started selling logistics services, inviting other businesses to use their warehouse and distribution networks to manage the flow of goods — thereby creating a new revenue stream. Similarly, Walmart’s GoLocal effort, launched in 2021, uses the retail giant’s delivery service for other partners. Meanwhile, Target, The Home Depot, Ikea and Costco have begun chartering their own cargo ships to import goods.

All these moves suggest that retail companies are looking for ways to prop up their supply chains in the hopes of sidestepping any upheaval that might arise. But whether uber-competitive retail companies will be willing to forego control of their networks — along with data privacy — remains a sticking point.

The concept of nearshoring continues to pepper forecasts as businesses look to futureproof against disruptions, although shifting supply chains built up over many years is an enormous undertaking. The one area of early success has been among startups.

Retailers acknowledge that robots can be a powerful means to reduce risk, increase efficiency and boost sustainability efforts, but they continue to move cautiously. Last-mile deliveries by autonomous vehicles will increase and more robots will cohabitate with human workers in warehouses, but we’re still years away from mainstream.

Retailers have been sounding the alarm on theft for years; 2023 could generate a collective response on the federal and state level.

Retailers have been the victims of rising theft and an unrelenting surge in crime. Couple that with gut-wrenching active shooter incidents and spikes in store violence, and you begin to understand why they’re saying “uncle.”

If there’s a silver lining, it’s that the rise in crime has caught the attention of policymakers in Washington and legislation that can help is in the works. The recently introduced Combatting Organized Retail Crime Act looks to increase coordination between federal, state and local law enforcement agencies by establishing a Center to Combat Organized Retail Crime at Homeland Security Investigations. It would combine expertise from state and local law enforcement agencies as well as retail industry representatives, create new tools to aid in federal investigation and prosecution of organized retail crime, and help recover lost goods and proceeds.

In the coming months, loss prevention and asset protection teams will increase their use of artificial intelligence and sensor technologies, focusing on the use of stream analytics to allow multiple data and sensor sources into a single analytical environment.

On the digital side of the house, increased online fraud will require fraud prevention teams to focus on new mitigation techniques to deter and prevent fraud, but do so in a frictionless approach throughout the customer journey and not affect good customer engagement with the online shopping experience.

In the cyber realm, the focus is still on adding layers of security that make it harder for bad actors to infiltrate networks. Managing cyber risks with resilience and agility is the overarching goal, yet the current environment remains fluid and unpredictable. Before retailers can map out plans, efforts are compromised. Further worsening the problem is the size, unpredictability and lack of borders of the current threat environment. The forecast for 2023: more headaches to come.

Consumers’ shopping behaviors will ultimately determine if 2023 is a good year for retail — or not!

Predicting how shoppers feel and how they will react is difficult because they’re human; what they say and what they do can be very different. What seems clear is that shoppers are worried about the talk of recession and reeling from rising prices tied to inflation. They certainly took advantage of the endless promotions and low prices retailers served up this past holiday season, but it seems unlikely they will keep the spending spree going.

Experts believe that if recession fears grow, shoppers will buy fewer things, but no one expects them to compromise quality, value and durability. The desire for inspiration from brands and retailers continues to hold sway with shoppers — particularly as they experience a constant stream of new interactions from media and technology.

Bottom line: The customer is still king, and retailers’ job is to serve shopper royalty.