How the Service Sector Can Find Growth in a Slowing Market

Customer experience is a critical differentiator in the service sector—and the path to growth means that businesses must protect it while also managing costs. That balance is getting trickier: US consumers are reducing discretionary spending, choosing lower-priced goods and eating more meals at home, according to the Federal Reserve’s July 2025 Beige Book. The caution extends to markets around the world; a 2025 BCG survey found that consumers expect economic challenges over the next five years. 

With consumers pulling back, B2C service firms are forced to rethink how and where they allocate every dollar. Those pressures are driving a shift toward automation and AI—technologies that promise to ease labor shortages, help stabilize costs and deliver more seamless customer experiences.

In addition to falling consumer sentiment, service firms are dealing with an array of rising input costs. Unlike manufacturers, which deal in raw materials and machinery, service operators spend most on labor and property. Hourly labor and benefits account for many service firms’ top expenses; in June, the US Bureau of Labor Statistics reported that hourly compensation rose in 28 of 31 service industries measured in 2024.

Real estate costs are high for brick-and-mortar retailers due to strong demand and low vacancy, leading to fierce competition for space, even for smaller stores, according to Bloomberg Intelligence. 

New tariff policy has complicated the equation, raising the prices of everything from uniforms to packaging. Critically, tariffs are increasing retailers’ cost of goods, especially for nonfood retailers that predominantly source from a handful of countries, says Tiffany Yeh, Managing Director and Partner at BCG.

On top of rising costs, forecasting consumer demand has become more difficult. Shoppers are delaying purchases, and carts are smaller. Trading down is common, and seasonal sale discounts matter more. CEOs of restaurants and grocery chains are telling investors that their customers feel more strapped. 

Surveys have shown that consumers anticipate that their spending habits will change as prices continue to increase, says Yeh.

“Between those two forces [rising input costs and uncertain demand], there has to be a lot more focus on how service companies can manage their costs,” she says.

The uncertainty of stop-start tariffs has contributed to rate volatility in marine shipping, trucking, air freight and intermodal goods transportation, Bloomberg analysts have found. This volatility deepens the complexity of forecasting demand, and overcapacity is complicating replenishment for retailers, restaurants and hospitality businesses. For consumers, that may lead to price swings and inconsistent stock, on top of higher price tags.

The retail industry tends to move first when consumer behavior shifts, making it the canary in the coal mine for the economy. According to Bloomberg Intelligence, major retailers have been cutting costs proactively since late 2022, when demand began to drop off—and their tactics could serve as a playbook for the larger B2C industry.

New and premium products are making a difference. Without any more fat to cut, retailers are looking to margin-boosting strategies, such as limited-edition products.

“You have more cost control if it’s your own brand or a private-label brand,” Yeh says. “It also creates more exclusivity that is drawing that consumer to your particular store.”

The other shift is labor. With high turnover rates in hospitality, leisure and retail, industry leaders are pushing routine tasks to automation, freeing up talent for higher-value work. Some companies have improved profitability by employing AI-powered tools that reduce dependence on manual labor—and retail is ahead of most sectors in AI investment, Statista data shows.

Across services, automation is creating value in terms of both cost and customer experience. According to Bloomberg research from July, cost optimization is the most significant driver of technology spending among European insurers, with 41% judging it most important.

AI was a top-mentioned topic by CEOs worldwide (excluding topics related to company actions and financial metrics) on earnings calls in Q2 2025; with AI, their goal is usually not wholesale cuts or mass layoffs, but improved throughput and efficiency. Bloomberg Intelligence’s Generative AI 2025 Outlook reports that major retailers are quickening inventory processing by as much as 75%, and seeing a marked increase in productivity. 

Technology is also enhancing the customer experience. Frictionless payments, online pre-orders and services tied to personalized offers are all playing a role. According to Bloomberg research from December, major grocery retailers have implemented self-checkouts in more than 60% of their stores, and some now see a majority of their transactions flow through those lanes. In the restaurant industry, digital kiosks and menu boards yield better service time, accuracy and guest satisfaction, while freeing up workers to focus on enhancing both customer service and food quality.

Lowe’s, an American retail company specializing in home improvement, offers a visible example of generative AI’s impact: An AI assistant that the company recently implemented gives store associates instant product guidance, while a second AI assistant helps customers with DIY projects—speeding service and providing shoppers with valuable information to further their home improvement goals.

The future of cost management in services shouldn’t be governed by restraint, but by reallocation. Automation and AI free up capital that can be invested into areas with the highest impact: better locations, fresher formats and tools that let employees deliver high-touch experiences for customers. By embracing this shift, leaders can build a sustainable cost advantage and set a new standard for service excellence.