Applications of IoT in retail: use cases, benefits, and challenges

02.10.2018
7 min.

Traditional retail has changed a great deal over the past decade driven by digital technology, such as artificial intelligence, machine learning, big data, and the internet of things. The latter has already been deployed by 50% of global retailers and will continue to penetrate the retail market. The application of IoT allows retailers to raise productivity, improve customer experience, reduce costs, and increase sales. McKinsey estimated that these uses of IoT might have an economic impact of $410 billion to $1.2 trillion per year in 2025.

Reaping the benefits of IoT

Forward-thinking retailers are already reaping the benefits of IoT deployments and realize its positive impact on sales:

  • 89% of early-movers in this sector are gaining increased insight into customer preferences and behavior from IoT.
  • 84% of retailers say that their customers value exchanging information to improve their experience.
  • 77% of retailers say that IoT is creating opportunities to collaborate with new partners in delivering products and services to customers.

Thus, IoT is changing the offline retail forever. Technology that allows retailers to track customer behavior and collect personal data on a daily basis promises to shape the way people do shopping. Sensors gather a significant amount of data that can be very advantageous for retailers. By processing and analyzing this data, retail stores receive new opportunities to improve their strategies and productivity.

Here are a few competitive advantages that stores gain by applying IoT in retail.

Better customer experience

IoT will help enhance the brick-and-mortar experience by gaining insights into customers’ data and acting on them. This is achieved by using data from video surveillance cameras, social media, and mobile devices, which allows retailers to predict consumer behavior and wishes. The value for customers is obvious: they receive only relevant advertising and personalized offers that are not annoying them but bring real savings.

Eight in ten retail organizations noticed IoT has improved the overall customer experience, and for 88% it has boosted business efficiency, according to the international study published by Aruba.

Improved supply chain management

IoT solutions such as RFID tags and GPS sensors can be used by retailers to get a complete picture of the goods movement—from manufacturing to the store’s shelves and then to the customer. The received information, like the amount of time an item spent in transit or the temperature at which it is being stored, is analyzed in real time. This will prove especially useful for the transportation of perishable foods, since real-time tracking allows retailers to act fast upon too high or low temperatures, avoiding food spoilage and substantial losses.

Most retail stores realize the IoT potential to improve their supply chain management, so 72% of retailers plan to modernize it with IoT solutions, including sensors, data analytics, and automation.

The graphic below provides an overview of retailer’s investment plans by 2021.

Smarter inventory management

Inventory management is always a headache for retailers. The lack of accurate inventory tracking may lead to overstock, stockouts, and shrinkage, costing retailers $1.1 trillion a year globally. IoT can tackle these problems by automating inventory visibility. By implementing smart inventory management systems based on RFID tags, store shelf sensors, beacons, digital price tags, and video monitoring coupled with image analysis, retailers enhance procurement planning of the number of goods on shelves and in the backroom. When the product is beginning to run out, the system offers to reorder the necessary amount of items based on analytics made from IoT data.

With IoT, the store shelves will never be empty, so the number of missed sales opportunities and unhappy buyers will be lower. By and large, improved on-shelf availability can raise sales by 11%.

Automated checkout

Checkout is one of the most labor-intensive operations in retail stores and an unpleasant process for customers. When the retail store is overcrowded, many shoppers decide to leave it without purchasing. To stop losing customers, retailers can use IoT solutions to automate checkout. The checkout system will read tags on each item when a customer leaves the store and automatically charge the sale to the customer’s mobile payment app.

This leads to lower costs for the store: McKinsey estimated that automated checkout will save from $150 to $380 billion a year in 2025. Moreover, automated checkout would bring considerable time saving to the customers by reducing the checkout queue times by 40 to 80%.

IoT in retail: use cases

Actionable insights offered by IoT-based solutions enable new business models for retailers and increase their ROI. Moving from words to deeds, let’s take a look at a few examples of how retailers deploy IoT to capture new revenue opportunities.

#1. Smart mirrors in Rebecca Minkoff’s fitting rooms

An industry leader in accessible luxury handbags, accessories, footwear and apparel, Rebecca Minkoff has installed smart mirrors in her domestic retail stores. Located in fitting rooms, smart mirrors read RFID tags on each item of clothing and show what other sizes and colors are available in the store. Moreover, smart mirrors will demonstrate how the item is styled with different looks and suggest other items for a customer to buy based on what they are trying on. Thus, customers can try on different clothes without leaving the fitting room, which is very convenient. Retailers, in their turn, receive data about customer preferences and can use it for later personal promotions.

#2. Beacons for wayfinding and promotions in Auchan hypermarkets

The international retail group Auchan started to leverage beacons in its hypermarkets two years ago and is now bearing fruit: increased frequency and duration of visits, easier in-store navigation, and more personalized offers for shoppers.

Auchan was looking for a solution to better understand how its customers move around its 31,000 m² hypermarkets and help them navigate easier to find the products they need. The hypermarket solved these challenges by using beacons— hardware sensors that track movement in the surroundings and transmit data. With beacons, customers receive notifications for wayfinding on a special map on their mobile devices. Moreover, they get personalized promotions as they move through the store.

#3. Smart shelves in Kroger supermarkets

Kroger, the US largest supermarket chain by revenue, installed 2,200 smart shelves in its supermarkets. Smart shelves look like normal shelves equipped with RFID tags that read items on them and send the information to an IoT platform, where the data can be stored, formatted, and analyzed. The system provides the retailer with information about the products that run short, while the shoppers can receive nutritional info when they touch the shelf below an item.

Top of that, Kroger’s smart shelves are integrated with customer’s digital grocery lists and will light up when the customer is nearby an item on the list. Thus, RFID-equipped smart shelves provide the retailer with various ways of improving their customer service and increasing customer-product interaction.

Challenges and solutions

With so many success stories and benefits offered by IoT in retail, many are still hesitant to invest in connected technology due to some issues of concern and possible challenges that will have to be addressed.

Challenge: Security

One of the key problems associated with any IoT solution is security and privacy concern, which is especially acute with the introduction of the General Data Protection Regulation (GDPR) next year. Access to customers’ data gives retailers all kinds of opportunities and at the same time opens a door for cyberattacks.

Solution: Retailers should work in close collaboration with IoT software developers to ensure that devices and sensors they use are designed with strong security mechanisms in mind: end-to-end encryption, secure passwords, regular software updates, and an IT infrastructure scanning for vulnerabilities.

Challenge: Infrastructure

Most retailers lack infrastructure and network elements to deal with huge volumes of data that IoT generates. To make their stores digital, retail companies need to have a robust network, a data center, cloud solutions, as well as end-user solutions like mPOS, barcode scanners, and tablets—this all requires considerable investments.

Solution: There is no need to put all money into infrastructure at once when it comes to implementing a new technology. Retailers may start with small infrastructure changes, like using IoT to manage air‑conditioning or lighting systems, which will bring a near-term ROI. After that, they can move on with more sophisticated IoT solutions, such as traffic analytics.

Challenge: Data management

Without question, IoT data analysis in a timely and relevant way represents a huge challenge for retailers due to the lack of relevant qualification and expertise. Being good at a commercial business, retail employees don’t possess enough technical and analytical skills to gain valuable insights from a wealth of IoT information.

Solution: Retail companies may hire domain experts or rely on third parties with relevant IoT qualifications, training, and implementation skills, who will take over data management issues.

By anticipating those challenges, retailers get an opportunity to make their IoT journey a profitable investment and gain a competitive advantage over others in their marketplace.