2025 to be a year of transformation for retail industry; AI & automation to play a crucial role

New Delhi: With the rapid evolution of channels like quick-commerce and the emergence of ONDC, the Indian retail industry is 'cautiously optimistic' for 2025, in which new-age technologies such as AI and automation will play a crucial role, driving efficiency and personalisation.

The New Year could be a period of transformation for the Indian retail industry, one of the fastest-growing globally, where the contemporary retail landscape is rapidly evolving, influenced by the preferences of digital-first generation Gen Z and retail tech.

Helped by tailwinds such as rising disposable income, rapid urbanisation, the rise of non-metro tier II cities, and growing middle class along with a digitally-savvy consumer base, the organised retail sector is poised to grow expanding its play further with a customer-centric approach.

"FY25 is likely to see continued focus on building supply chain efficiencies, along with upgrades to logistics hubs and tracking systems to meet fast delivery demands. Employment generation in quick commerce, logistics, and related sectors is also expected to continue," said EY India Tax Leader for Retail Practice Paresh Parekh.

Indian consumers, influenced by global exposure and digital technologies, are prioritising higher quality and value for money. This has resulted in a shift in spending from luxuries to essentials or more affordable options.

"Despite these challenges, the outlook for 2025 remains positive, driven by demographic trends, urbanisation, digital growth, and the aspirations of a young, dynamic middle class," he said.

Parekh expects an increase in foreign investments in the retail sector and a continuance of consolidation led by PE firms and strategic acquisitions.

According to the Retailers Association of India (RAI), the Indian retail sector in 2024 has witnessed a mix of challenges and opportunities.

"Growth was subdued in the first half, with marginal consumption increases and cautious consumer spending. Many retailers struggled to achieve like-for-like growth, reflecting shifting consumer priorities," said its CEO Kumar Rajagopalan adding "Despite this, the year also brought innovation and resilience." Retailers have embraced technology to enhance operations and customer experience and initiatives like ONDC are creating exciting new opportunities, particularly in reaching untapped markets.

"Looking ahead, the sector remains cautiously optimistic. The festive and wedding seasons have boosted momentum, and with strategic planning, retailers can sustain growth into 2025," he said.

The Indian retail sector contributes around 10 per cent to its GDP and according to the latest annual report of leading retailer, Reliance it is expected to cross $1.4 trillion by 2027. It is also poised to become the third-largest market by 2030.

Over the emergence of quick commerce, Deloitte India partner, consumer products and retail sector Anand Ramanathan said it is a "viable business model" and it is here to stay.

2024 has been disruptive for the retail sector, which besides the emergence of quick commerce, also saw the revival of mass consumption and the value retail segment for the first time since the pandemic.

"100 million middle-income households will be added this decade to the economy. 2025 will continue to see the impact of this growth in middle-income households with further momentum in mass consumption. This will have a positive impact across sectors including fashion, home and food services," said Ramanathan.

Puneet Mansukhani Sector Head - Retail KPMG said in 2024 retailers faced significant challenges due to inflation impacting profitability and supply chain disruptions.

"These issues required strategic pricing adjustments and innovative solutions to maintain smooth operations. The festive season did see some uptake as compared to the previous year but overall the customer was cautious.

"The ecommerce spend in the tier 2 and 3 cities was stronger than urban and the trend is likely to continue which makes the retailers feel bullish and optimistic in 2025," he said.

Over the outlook for 2025 for the retail industry, he said continued advancements in AI and automation are "expected to drive efficiency and personalisation" in retail, enhancing customer engagement and operational efficiency.

Moreover "increased use of data analytics will enable more personalised shopping experiences, catering to individual consumer preferences," he said.

Retailers will likely focus more on sustainability and transparency in their supply chains, responding to consumer demand for ethical practices.

However, Mansukhani also hinted towards economic uncertainty and said "Inflation and economic volatility may continue to pose challenges, affecting consumer spending patterns."