How In-Store Tech Will Transform Retail

Retail stores are being challenged like never before. Not only are consumers buying more goods online (a trend accelerated by the pandemic), but digital-first companies like Amazon are attacking brick-and-mortar retailers’ home turf by opening their own physical stores that combine online and offline attributes. To stay competitive, traditional retailers need to consider how adopting digital technology can improve the in-store customer experience, provide access to more data on customer preferences and habits, and potentially improve omnichannel operations.

The so-called frictionless store has become the new gold standard in the retail world. However, the term is a bit of a misnomer. The goal is to use digital technology to meet consumer expectations of flexibility, instant gratification, convenience, immersive shopping, safety, and speed. But early adopters aren’t removing all points of friction. Rather, their strategies vary substantially depending on which friction points they want to remove.

Adopting digital technologies that remove friction from the traditional retail model can produce several advantages. The first is an improved customer experience. Customers today expect the same speed and convenience in person that they get online. Stores that can deliver that experience will strengthen customer loyalty, making them more competitive with online sellers and creating an advantage over physical retail competitors that don’t offer comparable speed and convenience. The pandemic, which forced social distancing, also led customers to expect more space and less physical contact in stores.

Second, digitizing gives retailers a chance to collect and analyze more — and more granular — data on customer preferences and behavior, leveling the playing field with online sellers and enabling personalized recommendations and promotions. In addition, physical retailers can capture what customers do in stores: the paths they traverse, which products they pick up and put back down, and even how long they hesitate while trying to choose between two products. Stores can use this data to improve operations, including inventory management, pricing, and physical product placement.

Finally, stores can make better use of human capital: By automating routine work like stocking shelves, companies free their employees to do the higher-value work of helping customers. This human touch can provide a competitive advantage over e-commerce.

However, the frictionless store is not without potential pitfalls and risks. Privacy is among the biggest. Consumers are concerned about how retailers might track them, as well as how much and what kind of data companies collect. A data breach, a regulatory fine, or even headlines about a company using data improperly can significantly damage a company’s reputation. Similar reputational damage might come if automation displaces large numbers of a retailer’s employees. Finally, adopting and deploying digital technology is expensive and time-consuming, and it won’t necessarily work as promised. Time and cost can be significant barriers, especially for midsize and small companies.

At the least, large retailers need to consider frictionless stores simply as a defensive strategy — to protect against encroaching competition from digital natives. The pandemic highlighted the advantages of online shopping and accelerated its adoption while decimating foot traffic and physical sales in retail stores. While retailers may be drawn to the benefits listed above, the most compelling reason to adopt these technologies may be to help them hold their own against new competitors.

The Industry Landscape of Frictionless Retail

The earliest implementers of frictionless stores are Chinese and U.S. retail giants, specifically Alibaba and JD.com (China) and Amazon and Walmart (United States). They aim to improve the customer experience in significant ways but also have strategic objectives to improve the operation of the business.

• In 2015, Alibaba introduced Hema in China. The strategic goal is to integrate digital, online operations with physical stores. Hema stores serve as both physical supermarkets where people can shop and online order fulfillment centers. Hema promises to deliver online orders within 30 minutes within a radius of 3 kilometers.
• In 2018, Amazon introduced Amazon Go, which uses a cashierless grab-and-go model, in Seattle. The company’s strategy enables it to gather data on its Amazon Prime members’ physical shopping activities while making shopping experiences quick and easy for them. Amazon expanded the concept with Amazon Go Grocery in February 2020.
• In 2018, JD.com launched its frictionless grocery store, 7Fresh, in China. Similar to Hema, 7Fresh stores operate as both physical supermarkets and online order distribution centers and pledge to deliver online orders within 30 minutes.
• In 2019, Walmart created a 50,000-square-foot store in Levittown, New York, that serves as a retail innovation lab. Walmart’s strategy is to improve inventory management and product freshness.

Each of these companies uses technology in different ways, depending on its specific goals. Amazon Go, for example, uses what the company calls “sensor fusion” — a combination of overhead cameras, lidar, RFID (radio-frequency identification), and shelf-weight sensors — to identify customers through their body positioning and detect the products customers pick up and put down. Customers enter the store using a QR code from a mobile phone app, grab their goods (while being tracked), and just walk out. The items are automatically charged to their Amazon Prime accounts.

In contrast, Alibaba’s Hema focuses on ultrafast order fulfillment and delivery. It does not use cameras or sensors. Customers place orders from their mobile phones, and then store associates pick and pack orders in shopping bags traveling on overhead conveyor belts. Scooter drivers pick up the bags and deliver them to customers.

Three Key Strategic Considerations

Frictionless retail is poised to become more widespread. CB Insights recently reported that funding for in-store technology quadrupled from the first quarter of 2020 to the first quarter of 2021, reaching $2.2 billion. But for these investments to pay off, retailers’ strategies must be tuned to their particular business goals. Grab and go might work well in convenience stores. Luxury stores might use augmented reality to show clients how they would look in a custom suit, but high-touch personal service will remain key to their value proposition.

Here are three important questions retail executives should consider when developing a plan to adopt in-store technology.

1. What do you most want to accomplish? A retailer can reduce friction in any number of areas to increase customer convenience, improve back-end operations, integrate online and physical operations, or collect more data. It’s crucial to know which is the primary goal, however. You can have secondary objectives, but be crystal clear about which one is most important. A driving priority is critical because it determines the type of technology to use, how to deploy it, and the return on investment to expect.

For example, Walmart’s goal is to improve inventory management, reducing instances when an item is out of stock or a food item remains on the shelf beyond its freshness date. That focus determined its choice of cameras, sensors, and algorithms. It’s more interested in the “grab” than the “go.” It reportedly has no plans to change its checkout processes.

While none of the early adopters has emphasized it, another potential objective of adopting frictionless in-store technology is reducing or eliminating theft, which costs U.S. retailers more than $13 billion annually. That can be accomplished by requiring customers to identify themselves via a payment method or their personal account in order to gain entry; subsequently, tracking technologies can record which products they leave with and charge them accordingly.

2. Which technology will you use, and how will you source it? Your strategic goal determines the technology required and how it will be deployed. Amazon Go uses overhead cameras and sensors that sense weight on shelves so that it can track where customers go and what products they select (and put back). Walmart also uses cameras and shelf sensors but deploys them differently to achieve its goal of improved restocking. Companies that use stores as mini warehouses, like Hema and 7Fresh, do not use cameras and sensors. Rather, they use overhead conveyor belts, people, and scooters. The Chinese stores also deploy several technologies aimed at improving the in-store physical shopping experience. For example, interactive displays show customers detailed product information, like country of origin or ingredients — similar to the information available when shopping online. Some stores have autonomous carts that follow customers as they shop and automatically scan product bar codes as items are added.

Most deployments require significant investment, both in the technologies themselves and in the infrastructure to support them. This makes the decision of whether to build or buy key. There are several prepackaged, integrated systems available from third parties. In fact, in 2020 Amazon announced plans to launch a new business selling Amazon Go’s technology to other retailers. Other tech players and startups include Standard Cognition, V7 Labs, and AiFi.

3. How will you address concerns about personal data? Some consumers are alarmed at the level of in-store personal surveillance that some retailers are implementing. Facial recognition is the most controversial technology. In the U.S., Amazon Go stores do not use facial recognition, but in China, certain Hema and 7Fresh stores accept payment based on facial recognition technology. A camera scans a shopper’s face, matching it to and charging a registered account. The shopper confirms their identity by entering their mobile phone number. Even with no facial recognition, frictionless stores collect vast amounts of data, which can introduce a certain “creepiness” factor. How comfortable will people be as cameras track them moving throughout the store, record “dwell time” — that is, how much time they spend in each section of the store — and collect information on exactly what they picked up or looked at? Retailers can use such data to construct behavioral metrics such as customer attention, distraction, engagement with products, and movement throughout the store.

Consumers worry about how that data is used, and regulators are increasingly stepping in: Europe’s General Data Protection Regulation has led a general trend toward better protection of customer data, such as the California Consumer Privacy Act. However, retailers should not only make sure they comply with pertinent regulations but also be transparent with customers about what data they collect and how they use it.

McGill University, where two of us teach, studies such issues at its Retail Innovation Lab, launched in January 2021 as a partnership between the university’s Bensadoun School of Retail Management and Alimentation Couche-Tard (Circle K), one of the largest convenience store chains in the world. The goal of the lab — which is a real-world, fully operating frictionless store — is to investigate how to use various frictionless technologies for responsible innovation. We study how retailers can use data to make better operational decisions, and we are looking at ways to balance that data use against privacy concerns. For example, we are experimenting with how to aggregate anonymized data in ways that characterize certain shopper “personas,” which would protect personal data and yet be useful to retailers.

Frictionless stores are still nascent, but we expect the concept to infiltrate the retail world at a daunting pace, as tech giants like Amazon and Alibaba continue to invest in it heavily. Physical retailers will need to meet rising consumer expectations for convenience and speed while collecting and analyzing more data in more useful ways. That doesn’t mean their strategies should duplicate Amazon’s or Alibaba’s. It does mean that each retailer must figure out how to use technology to eliminate the friction points that matter most to its customers and its own bottom line.