Artificial intelligence adoption is accelerating in the retail industry. While all eyes are on big-box stores and e-commerce giants, a more significant change is happening on a much smaller scale. This technology could be a silver bullet for mom-and-pop shops, finally leveling the playing field between them and their superstore counterparts.

Large Retail Chains are Pushing out Small Businesses

For decades, chains and franchises have pushed smaller independent merchants out of retail spaces. The rise of online shopping and same-day delivery eliminated geographical barriers, cementing their dominance in even the smallest towns. 

Consumers have grown accustomed to omnichannel shopping, personalized marketing messages, around-the-clock customer service and advanced product recommendation algorithms. Many prefer major chains’ convenience, familiarity and affordability — features local stores have difficulty competing with. 

Big-box stores even have a competitive edge in the labor market. They often offer higher salaries and more consistent hours. Local shops may struggle to run payroll on time or keep the store staffed during the off-season. 

E-Commerce Supremacy Is Not the Answer

Matt Van Gilder is the former director of e-commerce and digital experiences for SpartanNash, an American grocery company. He has said Walmart’s omnichannel capabilities far exceed those of independent retailers. However, he believes multichannel shoppers are the industry’s most valuable resource, so participation in online spaces is nonnegotiable. 

Small business owners cannot build an e-commerce empire that rivals industry giants like Walmart or Amazon — and they should not want to. Their allure lies in their local offerings and community roots. 

Given the nature of retail, many consider a multinational presence and high-traffic online store to be the be-all and end-all. However, what qualifies as success looks different depending on size. Small mom-and-pop shops operate at a much smaller scale than major chains, so they do not need to make nearly as much to break even. Long-term value comes from retaining customers.

How AI Levels the Playing Field for Independent Retailers

Balancing brick-and-mortar and online stores can be tricky for smaller retailers. However, it is not a question of whether they should or should not — they have to. Global e-commerce sales exceed around $5.7 trillion annually, demonstrating robust demand.  

Brick-and-mortar retailers are increasingly turning to online ordering and fulfillment in response to the rise of e-commerce. This ship-from-store model is fast and efficient, but risky. The platforms accept orders based on forecasted inventory, not real-time data, resulting in unusually high stockouts. 

In grocery retail — where this model is common — stockouts typically hover around 8% on average. Online fulfillment averages 15%. Harvard Business Review found that this problem turns customers off from reordering. Even if they do, they spend less. Revenue loss totals 12% when accounting for the drop in future spending. 

This is where AI comes in. It can help businesses distinguish between acceptable and unacceptable substitutions, improving customer spend and retention — vital factors for competitiveness and long-term growth. 

Decision-makers can apply this technology to other business aspects to streamline processes and enhance decision-making. It can act autonomously with minimal oversight, so implementation would not significantly impact their day-to-day duties. They may be unable to leverage levers like free delivery or Walmart-level pricing, but they can optimize their processes.

Real-World AI Applications That Lend a Competitive Edge

Small retailers can leverage several AI applications to gain a competitive edge — even against major retail chains. 

Social Media Marketing

AI can personalize marketing messages, categorize demographics, generate cost-effective advertisements and conduct demand forecasts. You can also use it to decide what, where and when to post on social media, improving the omnichannel customer experience.

Research shows a random forest regression model can predict what will go viral with around 85% accuracy by conducting sentiment analyses, image processing, hashtag assessments and user analyses. Instead of limiting yourself to occasional Facebook posts, you can use it to stay on top of — or set — trends. 

Vendor Selection 

You probably use many apps and platforms to handle payroll and online advertising. Vendor selection is a complex, drawn-out process, so you may not search for better offers often. AI could streamline the process by comparing prices and service offerings. After onboarding, it could automate communication, improving operational efficiency. 

Inventory Management

You can use AI to improve ordering, preventing overstocking and stockouts. It can ensure your online and physical stores are aligned. Since carrying costs account for up to 90% of total business expenses, optimization would result in considerable cost savings. 

Administrative Automation

AI can automate administrative tasks like payroll and document management, eliminating human error and reducing overhead costs. Since it can quickly account for numerous variables, it can avoid conflicts when making last-minute schedule adjustments. 

AI Could Help Small Retailers Compete With Large Chains

For major retail chains, revenue and customer retention are number games. As long as their line graph keeps rising each quarter, they do not give a second thought to the people behind the data. Since mom-and-pop shops are plugged into the community, they are uniquely positioned to use AI in a creative, meaningful way that drives value for them and their customers. 

That said, just because AI’s positive effects will be more noticeable does not mean adoption guarantees success. Business owners should practice implementation best practices, including sourcing high-quality data and balancing automation with human oversight. Hiring a dedicated freelancer with AI experience could help streamline the process. 

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