What are the AI risks for retailers ahead of Black Friday?

Retail businesses will be busy preparing for Black Friday, a critical date in the industry’s calendar to drive significant sales. As one of the most profitable days for many companies, retailers should also be aware of the risks attracted by the increasing role of Artificial Intelligence (AI). With online shopping more popular than ever, retailers may employ AI on websites, either by using chatbots or for dynamic pricing.

AI risks

1. Algorithmic pricing gone wrong
   AI systems are now widely used to automate pricing strategies, particularly during high-demand periods like Black Friday. While dynamic pricing can maximise sales, poor calibration of AI algorithms may lead to unintended consequences, such as pricing errors or a loss of consumer trust. For example, excessively low pricing due to algorithmic misjudgement could cause significant revenue loss, while disproportionately high pricing may drive customers away or even discriminate against certain consumer groups. Furthermore, advertising standards and consumer laws protect shoppers from misleading pricing and hidden costs – the Competition and Markets Authority, responsible for enforcing consumer law, is currently investigating the fairness of dynamic pricing.

Retailers should carefully monitor and test AI systems if utilising them for algorithmic pricing to prevent inadvertent breaches of advertising, equality, data protection and consumer laws.

1. Fraud and cybersecurity threats
   The rise in AI-powered scams poses a growing threat during Black Friday. Cybercriminals are using sophisticated AI tools to create fake websites, social media pages, ads, phishing scams and even deepfake customer service agents to deceive shoppers. These attacks not only harm consumers but can damage a retailer’s reputation and consumer trust.

Retailers must ensure robust cybersecurity measures are in place, such as AI-driven fraud detection tools and employee training on identifying AI-enabled scams as once the scam has happened, social media sites in particular can be slow to take remediatory action. Some retailers even have a “notify us” button, so customers who spot scams can immediately raise the alarm.

1. AI supply chain risks
   Many retailers rely on AI for supply chain management, using predictive analytics to anticipate demand and optimise stock levels. However, Black Friday’s unpredictable demand spikes may expose weaknesses in these systems. AI miscalculations could result in understocking popular items or overstocking slower-moving goods, leading to financial losses and dissatisfied customers.

To mitigate this risk, retailers should combine AI insights with human oversight and ensure contingency plans are in place for supply chain disruptions.

1. Bias in marketing algorithms
   AI-driven personalisation tools are invaluable for targeting the right customers with the right products. This is becoming increasingly popular on social media platforms. However, poorly designed algorithms may inadvertently exclude certain demographics or reinforce harmful stereotypes. This can lead to reputational damage and potential legal challenges under discrimination laws, such as the Equality Act 2010. In addition, data protection legislation requires careful analysis, justification and disclosure of the use of AI systems that automate decisions like this using customer personal data.

Protecting your retail business from AI risks

Retailers should adopt a proactive approach to managing AI risks. Key steps include:

• Test AI Systems thoroughly: Conduct stress tests and reviews to ensure algorithms perform accurately under peak demand conditions. Add contractual protections when licensing AI technology. Carry out GDPR – specific evaluations for tech that relies on the use of personal data.
• Strengthen cybersecurity: Implement advanced fraud detection systems and educate staff and customers on emerging AI-based threats.
• Combine AI with human expertise: While AI can streamline operations, human oversight is crucial to spot errors or biases that technology might miss.
• Customer transparency: Explain clearly how and why AI is used, the customer benefits and whether personal data is used in the process. AI offers retailers powerful tools to enhance their offering to consumers. However, its risks should not be underestimated. Retailers must take proactive steps to mitigate these tech and legal challenges and maximise their Black Friday success.

If you are a retailer and have questions or concerns about AI, consumer law or data protection, please contact Lucy Blick-Jones.