Published on March 19, 2020 by Manish Jha
The retail sector continues to be disrupted by technological advancements. Augmented reality (AR) is one such advancement that expands the physical world by complementing the real environment with digital information without replacing it (as virtual reality does). The degree of demand patterns envisaged by the modern-day customers have become demanding and sophisticated with the growth in production market.
AR technology is intended to make the customer experience simpler and more fun, and for many retailers, can become a substantial source of revenue. It has already gained significant interest from both retailers and consumers and is likely to continue to be developed and gain popularity with time.
AR making innovative retail possible
AR in retail helps the retailer achieve better customer engagement and retention, create brand awareness and report more sales. Some features – such as the provision of product data with 3D models of any size or colour – may also help customers make wiser and better purchases. In fact, a HubSpot report suggests that 75% of consumers now expect retailers to offer an AR experience.
Figure 1: AR can go a long way in addressing new customer demand patterns
AR has the potential to create multiple benefits for the retail channel:
demonstrate effectiveness in turning pre-purchase buyer dissonance into impulse purchases and in reducing the time taken in-store for quick purchases
create personalised experiences, to formulate customised products
It extends the time a customer spends with a product, minimising the likelihood of the customer returning the item, leading to higher revenue
Figure 2: Outstanding AR experiences in the retail sector
Source: Hacker Noon
Rising cost of returns
Retail companies have been plagued by the rising cost of returns due to customer versatility, with customers now knowing how to derive the maximum possible from their shopping experience, and online shopping experience that squeeze margins for retail companies. It is estimated that in the UK only, customers buy and return an average of three items month, resulting in high cost of returns for retailers (c.GBP60bn a year).
Figure 3: Rising cost of returns –the biggest challenge facing online retailers
Source: Engine Creative
The try-now-pay-later options allows customers to order items, get them delivered, and return if they feel the items do not suit them – all at no cost to themselves. High growth and medium-size retailers are the most exposed to this trend and, therefore, the most affected.
AR can help online retailers significantly reduce cost of returns
The ‘try-before-you-buy’ format gives shoppers an opportunity to experience full 3D visualisations to see how products would look in a particular place before going ahead with the purchase. Experiencing the products in-situ reduces the urge to order multiple items to be tried first, in turn reducing the likelihood of returning the items after delivery.
Figure 4: Try-before-you-buy digital experience can reduce the cost of returns for online retailers
Source: Engine Creative
Research reports suggest that c.76% of customers would “maybe” or “definitely” purchase more items with the try-before-you-buy option.
Smartphones: The best channel to bring AR to customers
Mobile AR is expected to have the single largest share (c.GBP110bn) of the overall AR market by 2021. Mobile devices, more than other devices, are likely to become the most appropriate means for pushing the mass adoption of AR, for two reasons: (1) because the devices are already at hand and (2) they have the necessary hardware to support the technology.
Figure 5: Integrating the AR shopping experience into mobile apps is a substantial win-win
Source: Engine Creative & Digi-Capital
AR in mobile devices is expected to grow by c.70% from 2018 to 2021
Mobile AR is expected to be the single largest contributor
In a nutshell, we believe it is high time companies adopt strategies to mitigate the challenges they know they are likely to face – strategies that not only engage customers, but also lower costs for the company.
At Acuity Knowledge Partners, our Investment Research team helps financial services clients stay up-to-date about new investment frontiers, industry trends and evolving business models. This includes deep-dive analyses, thematic research, competitive landscape analyses and coverage of companies. Our team of fundamental research experts and data experts can provide optimal solutions by combining alternative data and technology expertise to provide differentiated research insights.
1. Augmented reality shopping and the future of retail, Engine Creative
2. The Plague of Ecommerce Return Rates and How to Maintain Profitability, Shopify Plus
3. Customer experience: New capabilities, new audiences, new opportunities, McKinsey
4. Shopify Returns: 7 Best Practices to Reduce Your Return Rate, returnlogic .com
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About the Author
Manish Jha is a part of Investment Research team at Acuity Knowledge Partners. He has around seven years of work experience supporting global sell-side clients on Equity Research including building financial models, initiating coverage reports, thematic reports, ad-hoc data research, and earnings review. Manish holds Post Graduate Diploma in Management with specialization in Finance from IIIT, Pune.
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