AR Proving Its Worth In Consumer Retail Post-Covid Digitalisation Trends

Fitch Solutions / Information Technology / Global / Thu 05 May, 2022

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Key View

  • The shifts in consumer preferences towards e-commerce as a result of the Covid-19 pandemic will feed into the demand for augmented reality.
  • In addition, there is an increasing demand for digital services in the e-commerce space, well-supported by an increasing global mobile penetration rate and the 5G roll out across markets.
  • As a result, we at Fitch Solutions believe that Snap is well-positioned to benefit from their augmented reality offerings, which continue to be enhanced and upgraded.

Snap is to launch a number of new initiatives leveraging its augmented reality (AR) technology to aid with online shopping. Most notably, the company is introducing a new in-app destination within Snapchat called “Dress Up” that will feature AR fashion and virtual try-on experiences. It is also creating tools that will enable retailers to utilise its AR shopping technology within their own websites and apps. This follows an app update in January 2022, where Snap upgraded its AR shopping experience inside its social app as well as the analytics shared with Snap’s brand and retail partners.

At Fitch Solutions, we believe that this is a positive development for Snap, especially in the aftermath of the Covid-19 pandemic which has shifted consumer preferences towards e-commerce. More broadly, the global shift toward digitalisation will also see AR technology becoming an attractive and crucial tool for an increasingly diverse set of company types across multiple industries to cater to the needs of customers, partners and suppliers, with consumer retail likely to be the biggest and most enthusiastic user.

Proliferation Of E-commerce Due To Covid-19 Pandemic

The Covid-19 pandemic has forced consumers to stay home amid lockdown restrictions, and this has led to a decrease in footfall in physical fashion stores. In response, numerous fashion retail companies have announced plans to reduce their store count and make a shift towards e-commerce platforms instead. During the 18 months to the end of 2021, H&M planned to permanently shut 250 stores as it sought to increase investments in its omnichannel strategy. Similarly, in May 2020, L Brands embarked on a plan to permanently shut about 250 Victoria’s Secret and Pink stores in the US and Canada by the end of the year, representing about a quarter of its total store count in North America.

Our Consumer Retail team notes that increased investments in technology are to be expected from the sector’s principal players as e-commerce becomes vital for fashion companies to generate sales. The development of AR is an example of such a technology, as it can enhance user experiences by giving a more accurate representation of a product than traditional static and out-of-context imagery used on standard online marketplace platforms.

Rising Digitalisation Trends To Support Development Of AR

In recent years, Fitch Solutions analysts across most of the 22 industries we cover have noted a growing trend for countries across the world to advancing towards a digital economy: both developed and developing countries are seeing increases in overall mobile and fixed broadband connectivity, albeit at differing rates and with mobile devices generally preferred for engagement. This means that consumer retail companies seeking to leverage the persuasive power of virtual try-ons powered by AR technology must focus investment on platforms optimised for small-screen devices, such as mobile phones.

The planned rollout of 5G across various countries, coupled with the growth in the data centre industry, will particularly support the uptake of AR technology. Real-time virtualisation is data intensive and the more complex platforms will require both 5G and edge computing resources due to the low latency and high bandwidth that these technologies can deliver. 5G is due to be rolled out to consumers in the top 10 largest fashion markets over the next five years, with rates of subscription stretching from 3.7% of mobile phone users in India to 95.3% in China by 2025.

Growing Adoption Of 5G To Support Use Of AR Technologies

Selected Markets - 5G Subscriptions, % Mobile Phone Subscribers

f = forecast. Source: Fitch Solutions

Snap Well-Positioned To Benefit From Its AR Technology Offering

Snap has already begun offering services that utilise AR technology, indicating its capabilities to sustain its business offerings in this area. In May 2021, Snap updated its AR-focused Lens Studio, enabling its computer vision Scan product to analyse content in a user’s camera feed to bring up relevant recommendations. In January 2022, Snap again updated its offerings, such as the AR Shopping Lenses which allows users to swipe through multiple products and obtain real-time information on product details from the retailer. Snap reported that, after the testing of the new AR Lens with brands including Ulta Beauty and MAC Cosmetics, Ulta reported USD6mn in incremental purchases on Snapchat and over 30mn product try-ons within a two-week time period, while MAC saw 1.3mn try-ons and reported a 17x higher lift in purchases among women.

With Snapchat’s daily active users (DAUs) standing at 332mn in Q122, an increase of 52mn or 18% year-over-year, we believe that Snap will continue to be an attractive company for retailers to work with, as retailers are similarly seeking a large global audience to market their products. The AR improvements could also give Snap an edge to better compete with larger social media companies like Instagram which historically have not have focused on AR-enabled shopping in favour of other experiences, such live sales or influencer marketing powered by brand deals. Advertising revenues can also be generated from their platforms, contributing to a retailer’s revenues.

Snap Remains Steady In Maintaining Its Revenues And User Base

Snap - Key Operating Metrics (2019-2021)

Source: Snap, Fitch Solutions

Risks And Challenges Ahead For Snap

Despite the optimistic view we hold for Snap, we acknowledge that risks and challenges are present for the company as well. For instance, Snap has reported that as it has achieved maximum market penetration rates among younger users in developed markets. As such, the company is dependent on older users in developed markets or the developing market for future growth. This, however, may be difficult to achieve, given that the older population may not be as tech-savvy and developing markets may not have the technological capacities to support AR technologies, at least in the short term.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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