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Why augmented reality will be the next revolution in retail

The Pokémon Go craze may have faded, but it provides clues for retailers using technology to engage consumers.

A version of this article appeared in the Summer 2017 issue of strategy+business.

In the summer of 2016, pedestrians on New York’s Fifth Avenue encountered crowds of (mostly young) people, hastily running into Central Park, smartphones in hand, shouting out Pokémon character names and cross-street locations. Within days of its release on July 6, 2016, Pokémon Go, an app that brought the 1990s gaming craze to virtual life, became a phenomenon. Its 40 million daily active users (at its peak) surpassed those of Tinder, Snapchat, and Twitter and created a level of in-app engagement that Facebook could only envy. It took complete control of the commutes, lunch breaks, and social gatherings of legions of people around the world. Intent on “catching” Pokémon in the wild, gamers thronged into museums, streets, even Arlington National Cemetery.

Although the Pokémon Go fad now has predictably faded, it holds important lessons for companies intent on reaching and engaging consumers where they are, especially retailers: The game, the first truly social augmented reality (AR) experience, enthralled a new breed of omniconnected consumers as nothing else had done previously. Players not only shared an insider world where they could fight each other, but they also walked together and gathered at PokeStops in the middle of the night. The people who embraced the augmented reality of Pokémon Go live in a world where the line between real and digital is so blurred that they essentially became one and the same — constantly augmented and improved by invisible technologies. And they are hungry for better, more personalized experiences.

AR, which has been around since the late 1960s, has long lived in the shadow of virtual reality (VR). Major technology companies have been making significant investments in VR — consider Facebook’s acquisition of Oculus Rift, or Sony’s PlayStation VR launch. On paper, however, AR should be inherently better. Whereas VR wants to transport us to a new virtual world that provides unique immersive experiences, AR brings these experiences to the world we already inhabit. But to date, the early ambitions of AR have not borne much commercial fruit. Lego’s AR Digital Box in-store kiosk allows customers to “see” finished products by holding the product box close to a screen (they can watch on the screen as a digital constructed Lego truck seems to spring out of the box it comes in, for example), and IKEA’s app allows shoppers to place digital furniture and other products from the catalog in pictures of their rooms at home. But AR features have generally lived inside retailers’ stand-alone apps that consumers didn’t want to download. Google Glass, which was perceived as socially awkward, failed miserably. The AR ecosystem has lacked a shared platform with mass acceptance that, like Google’s ad network, allows brands to simply plug in and thus removes the consumer friction of downloading individual apps. And there was no “killer” use case to make AR popular and, more important, social — until Pokémon Go.

The Pokémon Go craze has opened consumers’ minds to similar experiences and fed their imagination with glimpses of an even more connected future. In addition, it packed the potential to transform consumer experiences in the physical world. Brands, local retail stores, and marketers quickly realized the opportunity inherent in the success of the game. It’s not a big leap to imagine people chasing expiring deals and coupons, trading and buying goods in the virtual world with virtual currencies, watching digital billboards, and interacting with brands. In fact, augmented reality may offer physical retailers a competitive advantage against online-only competitors.

The New Table Stakes

E-commerce has been steadily gaining a share of sales at the expense of local stores because online shopping is cheaper, is more convenient, and allows for easy in-depth research and comparison of products. However, physical stores still possess one major advantage: the ability to let customers see, try, smell, or taste the product live. For many digital-native brands, such as eyewear retailer Warby Parker, stores have evolved into “showrooms.” Augmented reality allows brick-and-mortar retailers to take these showroom experiences to the next level, creating unique experiences that blend digital and physical shopping. The virtual layer can provide a platform that allows improved communication, deeper engagement, and better personalization. As a result, brands deploying AR effectively will be able to provide differentiated interactions with physical products and customer experiences that seem richer than the ones provided by their online competitors.

Today, a few farsighted retailers are in the first, introductory phase of applying AR to the shopping experience. On a range of independent platforms, these companies are experimenting, trying to understand their audiences and grasp how their brands fit into this new environment. As the field enters its growth phase in the next two to three years, it will consolidate into a few dominant players, and companies must figure out what distinctive offerings they can produce and how to integrate them into omnichannel strategies. Once the medium matures in four to five years, AR will become table stakes for retailers and brand marketers, and companies will have to figure out how they can curate bespoke content and create unique experiences in this new medium. Over the long term, it is clear companies must use AR to lead customers through four stages: creating awareness; increasing consideration; converting consideration to action at key decision and purchase points; and building enduring loyalty. As retailers move through these important steps in the coming years, they must experiment with key tactics and strategies.

Creating awareness. The essential effort of creating consumer awareness about brands and products often devours the majority of a retailer’s marketing budget, and much of it is wasted by reaching non-target consumers. AR represents a singular opportunity to adjust what is presented to a shopper based on demographic profiles and past in-store behavior, and allows companies to link typical awareness-raising efforts to a live recommendation engine. For example, for Tom, who typically buys a US$4.99 gel laundry detergent, Target could display an AR ad on his phone of a new, more powerful $5.99 gel, instead of posting a generic static endcap display in-store for a laundry powder. The result is a more refined level of targeting that presents a benefit to retailers, brands, and consumers.

In four to five years, AR will become table stakes for retailers and brand marketers.

Brands are already partnering with AR platforms to create interactive retail experiences for their customers. As early as 2013, IBM launched an AR shopping app that provided shoppers instant product details and comparison when they pointed their smartphone at the shelf, allowing them to sort the products there by nutritional value, highlight gluten-free or organic options, and display currently available coupons. Retailers can use the same app for shelf stacking. In 2014, Tesco employees tested IBM’s AR app to report out-of-stock products and instances when conditions on shelves didn’t comply with display plans.

As AR becomes more powerful, we are likely to see a higher degree of personalization of in-store product recommendations. Perhaps pointing your smartphone toward a shelf in a clothing store will not only provide information about the origins of the wool in the cashmere sweater, but also reveal special deals that are tailored to your profile — such as a discount in advance of the ski season.

Ultimately, we are likely to see integration between AR, big data, and machine learning. The final result will be an intelligent personal shopper that can provide consumers with information, recommend products, and even look for special bundle deals and coupons, depending on the shopper’s preferences and behaviors.

Increasing consideration. Retailers keep shoppers engaged — continuously excited about their experience with the brand or product — by creating carefully thought out, memorable interactions at every touch point. Doing so is vital to both retailers’ and brands’ customer conversion rate and customers’ future loyalty. Consumers, driven by their online shopping experiences, already expect a high level of engagement. In years to come, these expectations will only grow, pushing physical retailers to deliver powerful multidimensional experiences to shoppers.

Virtual “try-on” experiences are the first step that brands have taken toward using AR to raise customer engagement. In 2014, L’Oréal released its Makeup Genius app, which allows shoppers to virtually try on different shades of blush and mascara before making a purchase decision. Once the makeup is “applied” on the face through the smartphone camera, the L’Oréal facial recognition system follows face movement and angles, showing what the makeup would look like from different perspectives. By early 2016, Makeup Genius had been downloaded more than 20 million times. And it has inspired similar efforts from innovators such as Meitu, a Chinese company that built a range of try-on apps for makeup, hair, and fashion; the app has been installed on more than 1 billion unique smartphones and valued at an estimated $5 billion.

Creating memorable in-store experiences is the lowest-hanging fruit at this stage of AR’s development. By using AR to give shoppers access to experiences such as product showcases, fashion shows, celebrity endorsements, and music/video content, brands can improve the shopping experience and begin to compete with their online-only competitors. In 2014, Topshop used Oculus Rift’s VR glasses to offer a virtual experience of the catwalk show during London Fashion Week to five competition winners.

As AR matures, we will start to see applications that combine the online and offline environments. Ultimately, retailers will have to think hard about what the ideal shopping experience is like, regardless of the medium. People could experience various Nespresso machines in-store, surrounded by the aroma of freshly brewed coffee, and then, using an AR app and photos of their kitchen at home, they could see what the machines would look like on their countertop, customizing colors to see which best matches the backsplash. Finally, the customer would be able to order it with one-click checkout and a linked credit card or Apple Pay and immediately subscribe to monthly shipments of assorted coffee pods. In the app, users would also be able to report technical issues and request warranty support six months later, thus having a seamless shopping, paying, and post-purchase support experience.

Converting consideration to action. Every stage of the purchase funnel is important. But effectively motivating customers to make the jump from consideration to purchase is the holy grail. Although Pokémon Go proved that it was possible to use AR to drive significant foot traffic, AR has yet to prove its mettle in conversion optimization.

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Brands are already using AR to increase conversion. For example, China’s largest online grocery store, Yihaodian, created more than 1,000 virtual shops in public places. Shoppers can use the company’s AR app to browse products and make purchases that are then delivered to their homes. Similarly, Nike is using AR and image recognition to connect print advertising with its online store. Upon pointing a smartphone at a Nike ad in Runner’s World, a user can jump to the shopping cart on Nike’s website. Similarly, British online fashion retailer ASOS uses mobile technology to make its magazine ads instantly shoppable.

As the technology evolves and combines with other technologies such as beacons — Bluetooth-enabled devices that communicate with nearby shoppers’ smartphones, collecting information about their movement patterns or sending ads or coupons — we are likely to see localized deals and offers within the premises of a particular store and its immediate surroundings (i.e., “geo-fencing”). These offerings can be personalized using historical purchase behavior and augmented with recommendations based on predictions of future behavior. Brands can also display online reviews on products, integrate them with social media purchase buttons, and upsell related products. Much of what has been successful in e-commerce will probably be tested in AR, although it is unclear which tactics will actually increase conversions.

The ultimate goal in conversion optimization will likely be an omnichannel CRM system with fully automated and personalized one-to-one marketing that seamlessly tracks shoppers between real-world and digital shopping. Let’s take Tom the Target shopper as an example. During his weekly grocery shopping trip on Monday, Tom stops at the Scotch aisle, browses for a minute or two, but doesn’t pick up anything. On Tuesday, he sees an ad for Lagavulin displayed next to a Google search conducted on his laptop. He clicks on it and adds a bottle to his cart, but abandons the purchase. On Wednesday, Tom could receive an email discount coupon or in-store offer for $5 off Lagavulin or Macallan, or recommendations of similar products, to trigger the conversion. From the retailer’s perspective, shoppers can then become leads to be nurtured along sales funnels toward all their possible product purchases.

Building enduring loyalty. Customer loyalty is a powerful tool in retail — from both a brand and a store perspective. The more adept a company is at creating loyalty, the more sustainable its marketing efforts are in the long term, and the higher an ROI it can ultimately achieve. Further, repeat customers tend to spend 60 percent more per transaction than first-time customers. AR affords opportunities for loyalty programs that are otherwise unattainable.

The current generation of AR apps allow stores to integrate AR into existing programs, bridging the gap between the online and in-person experiences of shoppers. For example, Walgreens’ Aisle411 app allows shoppers to discover products and deals in-store as well to collect loyalty points by exploring the store’s aisles.

As shoppers become more acclimated to the idea that AR can improve their shopping experience, we will likely start to see greater integration between the digital and face-to-face experiences. This, in turn, will allow brands and retailers to create customized loyalty programs that correspond to a shopper’s exact interests as well as their online and offline behaviors. Imagine heading into a supermarket and having an application on your phone that suggests products based on your past purchases, one that can also seek out the best deals based on how often you’ve purchased that brand before.

As AR and other technologies mature, stores will gain a much better idea of shoppers’ behaviors. This will allow them to use loyalty programs in a far more targeted manner, encouraging the exact behaviors that lead a specific shopper to the counter. A future standard application might be a virtual shopping assistant that helps you make purchases from retailers both online and offline and that can advise you on the best way to take advantage of loyalty programs. A thrifty consumer might enable a setting allowing the shopping assistant to lead him or her through specific aisles of a supermarket that have been incentivized by a brand (because they are predictors of ultimate conversions for customers with this profile). A shopper who values speed, on the other hand, might use the shopping assistant to remove as much friction as possible from the purchase process, reducing decision fatigue; this use also lends itself easily to loyalty programs.

In retail, trends and fashion come and go quickly. But it is clear that regardless of what is selling today, the ways in which products will be sold are evolving rapidly. Augmented reality clearly has the power to transform retail. However, it will pay dividends only if stores and brands learn how to translate foot traffic into desired action and become seamlessly integrated into the experience. And although Pokémon Go itself may have been a fad, it probably will not take long for another (better and more ambitious) platform to emerge and fill the social AR space. Ultimately, the first platform that successfully hosts large shared augmented experiences will be a significant winner.

To be sure, some skepticism is warranted. But in the 21st century, paradigm shifts that used to take years now routinely happen in months. Just as retailers came to rue not investing earlier in e-commerce, or a Facebook presence, or mobile purchase apps, they may regret not investigating the potential of AR more aggressively.

Reprint No. 17201

Author profiles:

  • Kamil Klamann advises retailing and consumer brand companies on growth and innovation strategies for Strategy&, PwC’s strategy consulting business. Based in New York, he is a senior associate with PwC US.
  • Sekoul Krastev is vice president of product management at iGotcha AR/VR, an interactive agency based in Montreal focused on creating immersive experiences and engagement strategies for Fortune 500 brands.
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