Retailers Bet on AI and Cost Cuts as 96% Expect Growth Despite Consumer Spending Squeeze

The retail industry is entering 2026 with a striking contradiction: near-universal optimism among executives colliding with mounting evidence that consumers are pulling back. According to a Deloitte survey of 330 global retail executives, 96% expect industry revenues to grow this year, while 81% foresee margin expansion. Yet consumer confidence in the UK dropped to -19 in February, down three points from January, according to the GfK Consumer Confidence Index, and US retailers are navigating what Deloitte describes as "a further squeeze in consumer spending power."

The gap between boardroom confidence and Main Street reality isn't naïveté—it's a calculated bet. Retailers are banking on artificial intelligence, ruthless cost discipline, and the enduring power of value-seeking shoppers to deliver growth even as macroeconomic headwinds intensify. Whether that gamble pays off will define the year ahead.

The value proposition has become the industry's North Star. Ross Stores delivered a stunning 9.0% same-store sales increase in Q4 2025, more than doubling its 4.0% forecast, according to LSEG's retail scorecard. The off-price retailer's stock hit a 52-week high as management noted that early spring assortments are "off to a very strong start." Five Below is tracking toward a 12.9% same-store sales gain for the quarter, while Bath & Body Works handily beat earnings and revenue expectations by capitalizing on demand for antibacterial products and gift-ready personal care—affordable luxuries in an inflation-pressured environment.

Meanwhile, premium players are struggling. Abercrombie & Fitch posted solid earnings beats but delivered softer-than-expected same-store sales, with both its flagship brand and Hollister division missing forecasts. The contrast is stark: American Eagle, positioned more aggressively on value, is poised for an 8.9% comparable gain in Q4 2025. The message from consumers is unambiguous—they're spending, but only when the price is right.

This value obsession isn't a temporary blip. Deloitte characterizes it as "a lasting, foundational shift," one that's reshaping everything from merchandising strategies to channel partnerships. Bath & Body Works' decision to begin selling on Amazon's marketplace is emblematic—even established specialty retailers are chasing convenience and price-conscious shoppers wherever they congregate. The days of brand cachet alone driving foot traffic are over.

Enter artificial intelligence, which Deloitte positions as the industry's defining disruptor. Executives are moving AI "from experimentation to execution," deploying it across commerce, marketing, customer experience, and supply chain operations. The technology promises to do what retailers desperately need: deliver personalized experiences at scale while slashing operational costs. It's the rare lever that can simultaneously boost revenue and protect margins in a low-growth environment.

But AI adoption is happening against a backdrop of profound economic uncertainty. Deloitte's chief global economist Ira Kalish warns that "a modest slowdown in global economic growth is likely in 2026," driven by trade disruptions, tariff-induced inflation, and immigration policy headwinds in the US. Tariffs will "likely boost inflation in 2026, thereby reducing consumer purchasing power," Kalish notes, while labor shortages in key industries could constrain operations. Some companies have already postponed supply chain investments in response to the uncertainty.

The US economy presents a particularly bifurcated picture. Upper-income households, buoyed by technology stock gains and AI-related wealth creation, continue spending robustly. But "low- and middle-income households face increasing financial stress," according to Deloitte's forecast. This income polarization explains why Ross Stores and Five Below are thriving while traditional mid-market players struggle—the consumer base is splitting into haves and have-nots, with little middle ground.

China's challenges add another layer of complexity. The collapse of the residential property market has triggered "a sharp decline in property investment and resulted in a loss of household wealth, leading consumers to save more and spend less," Deloitte reports. For global retailers with significant China exposure, this represents a meaningful drag on growth prospects.

UK indicators are equally concerning. The ONS Business Insights and Conditions Survey found that in the two weeks ending February 15, 2026, only 23.2% of businesses thought performance would increase over the next 12 months, while 14.0% expected it to decline. The CBI Industrial Trends Survey showed manufacturers anticipating output decreases, with a net -12% expecting lower production over the next three months.

So how are executives so confident? The answer lies in operational transformation. Deloitte identifies "financial fortitude" and "margin management and cost discipline" as critical dynamics for 2026. Retailers are leveraging AI not just for customer-facing applications but to fundamentally rewire supply chains, optimize inventory, and automate labor-intensive processes. The goal is to extract growth from efficiency gains even if top-line revenue growth proves modest.

Supply chain resilience has become an obsession. Deloitte describes retailers "building resilience amid unreliability," a recognition that geopolitical tensions, trade policy volatility, and climate-related disruptions have made the old just-in-time models untenable. Companies are diversifying suppliers, regionalizing production, and using AI-powered forecasting to anticipate disruptions before they cascade through operations.

The early Q4 2025 results offer a mixed verdict on these strategies. Of the 159 companies in LSEG's Retail/Restaurant Index that have reported, 61% beat earnings expectations—a decent hit rate, but not overwhelming. Revenue performance was stronger, with 67% exceeding forecasts. The blended earnings growth estimate stands at just 2.5%, while revenue growth is tracking at 5.2%. These are respectable but hardly explosive numbers, suggesting the industry is grinding out gains rather than experiencing a boom.

The real test will come in the quarters ahead. Retailers are essentially making two simultaneous bets: that AI and operational excellence can offset macroeconomic headwinds, and that value-seeking consumers will continue spending on the right products at the right prices. If tariffs drive inflation higher and squeeze purchasing power further, even off-price retailers may struggle. If AI investments fail to deliver promised efficiencies quickly enough, margin expansion could evaporate.

What's striking is the industry's willingness to embrace this uncertainty with such confidence. The 96% revenue growth expectation isn't hedged or cautious—it's a collective statement that retail has figured out how to navigate the new normal. Whether that confidence is justified or represents a dangerous consensus trade will become clear by year-end. For now, retailers are charging ahead, armed with algorithms, cost discipline, and an unwavering focus on value. The consumer, as always, will have the final word.