The in-person retail sector is set to experience its largest decline in consumer spending since 2008. In an economic downturn—as in any period of financial strain—business survival is often contingent on remaining competitive; only a small percentile of firms make it through, so being in the upper echelon of competitiveness cannot be overstated. However, this does not mean transitioning to online shopping—it means enhancing the in-person experience.

Most market shifts are won by those who predict them before they happen. Identifying inefficiencies and exploiting them determines who succeeds and who is pushed out.

This paper has three objectives: (1) explain the current retail market, (2) define phygitalization and its future form, (3) explore phygitalization’s outcomes.

The Stage

While digitalization has swept the broader retail market, the premium-goods segment remains in-person. The physical retail market for premium goods has outpaced its online counterpart's growth by 680%. The reason is simple: when customers make significant spending decisions—seeking valuable or self-expressive items rather than everyday appliances—they want to transact with a brand they know they can trust, and the best way to assess a brand is in person. Customers need to know that the pair of $500 Gucci flip-flops is really worth it.

The premium market is unique because it faces competition on multiple fronts. There is both intermarket competition and intramarket competition. Customers can buy their flip-flops from Gucci or from Target (94% of premium shoppers are willing to shop at non-premium counterparts). Thus, in-store retailers must not only be “better than the rest” but also craft an experience that justifies the premium price tag.

Unfortunately, these brands have faced a pretty significant challenge recently.

1. Macroeconomic Trends: Global trends were already moving towards more conservative spending by consumers. The Chinese real-estate crisis nucleating the largest/fastest growing premium consumer population, combined with the global tariff regime means that consumers have rapidly opted out of buying high-quality goods.


2. Personalization Demands: Newer and younger consumers value personalization more than their older counterparts (GenZ values a connection with the brand 30% more than millennials). As a result, their bar for purchasing premium goods has been further raised.

The result is the premium in-person consumer market dropping for the first time since 2008. Not by an insignificant amount either (by 12.5% or 50 million consumers). Since companies cannot do much about the first, they can only reach for improving the second.

First, it’s important to note that the primary mechanism by which customers form these “personalized relationships” with brands isn’t just a fever dream whenever they see a nice logo; it’s through building connections with sales associates. Yet this system is not perfect. Negative interactions with sales associates are perceived as deeply personal—not merely the result of a logistics error or an out-of-stock item, but as one human making another feel unwelcome—and customers then transpose that experience onto the entire brand. 51% of customers who left a premium brand did so due to a poor relationship with a sales associate.

The problems that arise when customers are entirely dependent on sales associates are fairly obvious. First, sales associates… leave. Workers don’t stay with brands forever, and when they do, years of established relationships with customers are wiped out, causing significant personalization drop-offs that can come as a shock to customers.

Second, sales associates are not the brand—they are human and subject to biases. Sometimes two individuals simply don’t get along; other times, these biases can manifest in harmful ways—for example, there are rampant complaints of caste-based discrimination in India. Finally, 35% of premium shopping is done by international tourists, who expect the same level of service from multinational brands abroad as they do at home; however, obviously, Stavros in Greece will not have the same relationship with a brand as Françoise in Paris.

The Phygitalization Solution

Phygitalization (in essence) is the act of combining digital and physical experiences to increase consumer immersion. Phygitialization in practice is the attempt to uplift the relationship customers have with individual sales associates into a true relationship with the brand. There are two types of phygitialization strategies that companies can pursue:

The Customer-Centric Approach: This strategy begins by compiling rich customer profiles—drawing on historical purchase data and voluntarily shared insights—long before shoppers enter the store. When a customer arrives, sales associates receive a wealth of tailored analytics and recommendations, empowering them to engage with precision and anticipate individual needs. By standardizing the information each associate sees, this approach minimizes service variability and unconscious bias, ensuring consistent delivery on customer expectations. Moreover, predictive algorithms enable retailers to proactively offer the right products and curate truly personalized experiences.

The Associate-Centric Approach: Leveraging granular performance data, this strategy builds detailed profiles for each sales associate to pinpoint strengths, uncover areas for improvement, and distinguish the habits of top performers from those who fall short. Armed with these insights, organizations can deliver tailored coaching to bridge performance gaps, reducing inconsistency and elevating the overall customer experience. Moreover, it enables proactive identification of associates whose skills or values diverge from the brand’s standards—allowing timely intervention or reassignment to preserve service quality and protect brand reputation.

The potential issue with both approaches is that they aim for optimization rather than personalization . However, 81% of consumers indicate that what they enjoy the most about in-person shopping is the uniquely human experience of interacting with a sales associate, in which case perfect can be the enemy of the good. The challenge of phygitalization is implementing it a way in which sales associates can provide a greater personalized experience but not devolve into a monochromatic experience (no one wants to talk to a Burberry Robot). Sales associates still need to be human, which means having some interactions with customers that aren't data driven, and maintaining some standards of brand pedigree and identity rather than infinite pandering. Further digitalization can remove the quirks and aspects of the brand that make it unique providing a significant risk to their “core values”.

Another critical challenge is capacity: sales associates aren’t actors. While a few may seamlessly integrate vast streams of data into their customer interactions, most will struggle—resulting in a scripted “uncanny valley” that feels stiff and impersonal. Although a new, tech-savvy generation of associates is emerging (for example, some Kering brands even coach staff on how to hold an iPad and adopt a natural typing posture), the transition will be exceptionally difficult for the vast majority of established retailers.

The Phygitalization Approach

Unfortunately, the ability to develop and integrate phygitalization is incredibly resource dependent, consolidating the premium shopping market back to large and established brands. In the last decade, small-store growth in the premium sector has outperformed large brands by a factor of 600%, as the increased capacity for personalization these stores can provide given the lower number of customers that they have. This has created a highly dynamic and competitive market on the local end (for example, the two luxury conglomerates LVMH and the Kering group only control around 35% of the market, despite owning the vast majority of multinational luxury between them).

However, the capacity to implement phygitalization technology is highly limited, as it requires [1] the creation and investment into large back-office teams, and [2] large amounts of digital data to actively develop predictive models. Even then, large brands like Kering have created exclusive partnership with major companies like Apple to advance its technological development. This then needs to be slowly tested across existing customer groups to make sure it is ready for global deployment. Retailers aren’t traditional technology companies, yet the industry is rapidly becoming tech-driven. Because phygitalization requires building new digital capabilities from the ground up, large retailers—with their deeper pockets and established tech partnerships—can roll out these solutions far more easily than smaller competitors. As a result, even though digital transformation has been consensus described as a “strategic imperative” for in-person retailers to stay profitable, but the “vast majority” of companies will be unable to make the transition. Smaller retailers have two options: First, small retailers can form innovation hubs, pooling resources and data to rival large chains. This collective model leverages shared expertise and scale, but it also requires collaborating with direct competitors—a risk many may deem too great. Second, retailers can contract directly with large technology firms. While this grants immediate access to advanced platforms, it often carries steep fees and demands sharing proprietary customer data. A more balanced alternative is to partner with specialized phygitalization service providers.

Projections show that only the largest retailers will be able to deploy phygitalization technologies—and since personalization has become the ultimate in-store differentiator, this advantage will only deepen their market dominance.

Part IV: Advanced Phygitalization

On the top level, there are two additional phygitalization use cases:

Real Time Product Management: the 81% of customers indicate that their #1 problem with the in-store experience is that oftentimes products on display are not available in their size/specifications or at all. In order to confirm this sales associates must literally rummage through the storeroom to search for the product. Because of this customers spend less than 40% of the time in-store on average with their sales associates. Somehow, 90%+ of retail stores still don’t have real time stock tracking, making this one of the most important phygital implementations.

Boutique Experiences: At high end stores, technological integration can be extreme AND coutique. For example, Yves Saint Laurent debut a 25 minute in-store experience that uses an EEG to detect a user’s emotional profile using brain stimulations, that is then connected to an AI algorithm to predict what scent customers would most likely find pleasing. While of course, this is an obviously extreme example (the olfactory system EEG is unlikely to become commonplace), such services have an insanely high conversion rate.

The lesson here is that all roads lead to Rome: that is to say, there are extremely powerful ancillary benefits outside of the sales associate that phygitalization can offer, but those experiences are still ALL about enhancing personalization and brand connection for the consumer.

The Future

With the luxury market shedding 110 million consumers this year—the steepest contraction in its history—the fight has shifted from growth to survival. Even before the downturn, analysts foresaw just 1 percent expansion over the next three years.

Now, 43 percent of premium shoppers are already hunting for new brands. Stores need to both compete amongs each other, but also compete to keep the customers they already have from exiting the market as a whole. In this high‐stakes environment, phygitalization is a make-or-break lifeline. Retailers who act swiftly to blend digital intelligence with in-store experiences will secure loyalty and market share; those who hesitate risk permanent obsolescence.