AI enters the $1.4 trillion holiday season as a coin flip for retailers. It can help shoppers find perfect gifts, or it can make comparison shopping so easy that margins collapse even further. The same tools that promise to reduce returns and improve personalization can create new friction points during retail's most critical season.

"AI is becoming such a big part in the discovery process that it's gotta be part of your plan. And if it's not part of your plan, then I think you're gonna miss out," said our analyst Arielle Feger on a recent episode of "Reimagining Retail."

US retail sales will surpass $1.4 trillion this holiday season, growing 4% over last year, per EMARKETER. That growth arrives under pressure: tariff refunds that major players like Walmart ($2.7 billion) are using to slash prices, rising consumer costs for gas and travel, and the unpredictable impact of AI on shopping behavior.

Tariff refunds price war

The biggest wildcard for holiday margins emerged in recent retailer earnings calls: massive tariff refunds that companies are pledging to pass on to consumers.

"How much more promotional is this holiday season going to be compared to the last couple of years, which have already been pretty promotional?" said our analyst Sky Canaves. "How strategic are the big retailers going to be about saving some of their tariff refund money to use it where it makes the most sense and where they can drive the most sales from it and steal share from others?"

Major retailers received billions in tariff refunds and have publicly committed to using these funds to lower prices for consumers facing economic stress. Those consumers are already absorbing costs elsewhere. Gas prices jumped more than 10% in days in some markets, and holiday airfares are significantly higher than last year.

Retailers must balance aggressive pricing to capture budget-conscious shoppers against maintaining healthy margins during their most important sales period.

AI gift recommendations

AI now touches every stage of the holiday shopping journey, from gift discovery to returns processing. Execution quality and the underlying data decide whether it helps or hurts.

For gift discovery and recommendations, analysts agreed the outcome is binary: "If it's done well, both [shopper and retailer win]," Feger said. "Done badly, neither."

Retailer-owned assistants are displacing platform-based AI tools like ChatGPT. Claude recently launched a commerce toolkit that it says can help brands and retailers win the holidays and be operational within weeks.

The price of price comparison

AI-powered price comparison represents a clear win for consumers, though some retailers may benefit in the short term.

Amazon recently rolled out an AI-powered price history tool that launches a conversation with Alexa for shopping, complete with prompts like "Find me a better value alternative." Google has long offered similar shopping price graphs.

"For a brand, it's a little rough if a shopper is considering your product, seeing if it might go down in price, and you're prompted to look for an alternative that would be a lot less expensive in some cases," said Canaves.

Large retailers with third-party marketplaces like Amazon and Walmart still win because transactions remain on their platforms, generating data regardless of which product sells.

The fit and sizing challenge

AI tools promise to reduce returns by helping shoppers find better-fitting products, but the barriers are real.

"For it to really work and have that true perfect fit match requires a level of intimacy with the body that is very hard for consumers to share with retailers or AI assistants," Canaves said.

Gift buying makes the fit problem harder, because the buyer isn't the wearer. Retailers can aggregate data about sizing patterns and return rates, but aggregate data doesn't match the accuracy of trying items on in person.

Shipping economics, not fit, may decide where shoppers land. Some 54% of customers say free delivery would influence their choice between two retailers offering the same product, and free shipping was the top preferred deal type for 46% of holiday shoppers, according to impact.com data.

Returns processing

AI could help both retailers and shoppers navigate returns, but the technology hasn't fully matured for post-purchase experiences.

For retailers, AI can flag return fraud, identify serial returners, and authenticate return conditions. More sophisticated uses include personalized return offers tied to loyalty programs: free returns, longer return windows, or the ability to return final sale items.

"Return policies that make shoppers pay when they're not aware of it really upset shoppers and can really turn them off to a brand or retailer for the long term," Canaves said.

AI can speed conversion, but speed doesn't survive a bad return. When conversion happens quickly through AI assistance and returns create friction, customers may abandon brands entirely. The post-purchase experience is where retention is won.

Listen to the full episode.