What: Retailers are moving beyond traditional cost-cutting to rebuild their operating models, deploying AI across pricing, labour, and procurement to expand margins and fund future investment.

Why is it important: With operating margin correlating more strongly with long-term shareholder returns than revenue growth, retailers that expand it gain the financial room to sustain investment, absorb cost shocks, and compete on the AI capabilities that will define the next cycle.

Across 55 North American retailers, operating margin fell from 6.7% in 2021 to 5.9% over the last twelve months. The causes are structural, not cyclical: product, labour, and operational costs continue to climb while traditional levers, including supplier price pressure and headcount reduction, have largely been exhausted.The industry's response is to rebuild cost ownership at the operating model level: renegotiating supplier relationships across assortment and pricing simultaneously, redesigning workflows around AI-enabled processes, and distributing margin accountability beyond the finance department. BCG's analysis found that three- and four-year total shareholder returns correlate twice as strongly with operating margin expansion as with revenue growth, placing cost discipline at the centre of investor value creation.Retailers are also deploying AI across pricing, labour scheduling, and demand forecasting to generate efficiency gains that manual processes cannot replicate at pace. These investments require near-term capital at the moment margins are most compressed. Expanding operating margins is not preparation for future investment: it is the mechanism that makes it possible.

IADS notes: Recent industry analyses confirm the direction: reliance on technology and operational simplicity to achieve cost efficiency without sacrificing revenue momentum has replaced blunt cost-cutting as the primary margin lever (Journal du Net, January 2026). Evidence is accumulating that operational discipline, not revenue scale, is the more reliable driver of shareholder returns (Harvard Business Review, January 2026). That matters acutely now: retail CEOs are maintaining or increasing AI investment commitments even as full-scale returns remain elusive for most (The Wall Street Journal, December 2025). Project-driven, cross-functional structures are enabling organisations to rotate talent and priorities faster than traditional hierarchy allows, which is the organisational condition that sustained margin improvement requires (Harvard Business Review, January 2026). Retailers moving fastest on AI are already reporting gains in markdown reduction, scheduling efficiency, and procurement cost, powered by domain-specific models built for retail operations rather than general-purpose tools (Forbes, January 2026).

How retailers can improve operating margins to drive shareholder returns