Breaking Down the Opportunities and Risks of Virtual Storefronts

Advertising Law

The COVID-19 global pandemic has accelerated the digital transformation of the retail industry as shoppers shift more of their spending online. Global online purchase volume increased 31% from June 2019 to June 2020, with retail seeing a 68% gain (Source). Second-quarter performance reported by major e-commerce companies exceeded expectations: Shopify’s $30 billion in gross merchandise volume surpassed the estimated $20 billion (Source), and Amazon’s $89 billion in revenue beat the expected $81 billion (Source). As brick-and-mortar storefronts slowly reopen, the accelerated shift to online may start to stabilize, but its impact on consumer behaviors and preferences is irreversible.

To stay relevant, retailers and brands must continue to innovate on the digital shopping experience, reimagining the customer journey from brand awareness through the point of purchase. In-store, customers can see, feel and physically interact with products directly and, often, with assistance from store associates who can answer the customers’ questions. While a physical and tactile experience is not possible online, technologies can potentially enable a more personalized and interactive experience while providing more robust customer insights to help the customer make purchase decisions.

Virtual Product Interaction

The many levels of solutions to virtual product interaction vary along dimensions such as complexity, interactivity, immersion and cost. The most basic level is having sufficient content (images, video, text) to help customers evaluate the product. More interactive technologies, such as 3D models, augmented reality (AR) and virtual reality (VR), can be layered on top of the experience. According to Shopify, AR experiences on product pages have increased conversion rates by up to 250% for those products. A recent survey by Nielsen found that 51% of consumers were willing to use AR/VR to evaluate products and services (Source).

Retailers and brands have been offering virtual try-ons and product interaction using AR for years, but the pandemic has accelerated demand for such technologies across the industry, from small independent retailers to retail giants. Zeekit, which licenses its AR technology to major retail brands, plans to launch a “virtual fitting room” that allows a user to upload his or her photo and “try on” clothes from various brands. Obsess creates 3D virtual storefronts that may or may not resemble a company’s physical store and that can be experienced on both 2D screens and VR headsets.

Enhanced Personalized Shopping Assistance

In addition to enabling virtual product interactions, digital technologies can allow companies to offer highly personalized shopping assistance. Tools and features that include recommendation algorithms, enhanced search and conversational agents, such as chatbots or voice assistants like Alexa or Siri, can help customers find products, offer recommendations or answer customer support questions. Last year, Nike introduced a feature in its app called Nike Fit, which lets customers scan their feet with their phone camera to receive “hyper-accurate” recommendations on shoe size. ASOS’ Fit Assistant uses machine learning to recommend sizes based on purchase and return data from thousands of shoppers.

As with virtual product interactions, however, not all approaches to virtual shopping assistance have to be high-tech or custom. There are many off-the-shelf solutions that enable companies to make initial recommendations based on quizzes or questionnaires or to address FAQs via chatbots. Some companies opt for a more human touch, which is especially important for high-value items such as luxury goods. Through Gucci Live, a new virtual shopping service, Gucci staff can offer personalized video consultations to customers either remotely or from a physical store in Florence, Italy, dubbed Gucci 9, that is designed specifically for video-based shopping.

Truth-in-Advertising Laws

Where a virtual shopping experience can be superior to an in-store experience is the convenience of (1) accessing information about the products directly from the source (i.e., the company’s database that store associates themselves have to rely on), rather than having to search for the right products, price and availability, and then (2) purchasing the products on the spot (or saving them in the shopping cart for purchase at another time).

While this convenience factor has been a major driver of e-commerce growth—especially for the majority of this year, when physical retail operations have been severely limited due to the COVID-19 pandemic—it’s important for online retailers to be aware of various consumer protection issues that could subject the retailers to significant legal and regulatory risk based on their advertising and marketing activities online.

Specifically, under Section 5 of the Federal Trade Commission (FTC) Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce,” and various state unfair and deceptive acts or practices (UDAP) laws, the shopping experience online—from product description and images to pricing and delivery information—must be truthful and not misleading or deceptive, and cannot be unfair. This basic truth-in-advertising standard has multiple implications in the retail context, including, first and foremost, making sure that the consumer is not given false or misleading information about a product, and that any material information about the product (i.e., information that a reasonable consumer might find relevant in making a purchase decision) is not withheld from the consumer before the consumer can make a purchase.

When consumers visit an online store, without the ability to actually see and touch the product, they are entirely dependent on the accuracy of the information that is presented to them virtually when making purchasing decisions. It is therefore critical that consumers are provided with all material information necessary to make an informed decision about purchases. Additionally, an online retailer may elect to provide an enhanced digital shopping experience by offering personalized recommendations or a virtual fitting room, or by giving consumers instant access to additional comprehensive product information (e.g., background story about where the product comes from or how it’s made) or consumer reviews; while such enhanced features are not necessary for consumers to make a purchase decision, the online retailer is responsible for making sure that they do not provide false or misleading information about the product.

In addition to complying with the basic truth-in-advertising standard, companies must adhere to specific laws and regulations that address certain aspects of online retail. A prime example is the FTC’s Mail, Internet, or Telephone Order Merchandise Rule, commonly known as the “30-Day Rule.” The 30-Day Rule requires retailers to have a reasonable basis for stating or implying that they can ship within a certain specified time; if a retailer does not make a shipping statement, then it must have a reasonable basis for believing that it can ship within 30 days. If there is a shipping delay after the product has been ordered (i.e., the product cannot be shipped within the stated time, or within 30 days if no specific shipment date was provided), then the retailer must promptly notify the consumer of the delay and offer the consumer a chance to cancel the order and receive a full refund. Notably, the FTC recently filed suit against three online merchandisers for making false promises about quickly shipping face masks and other personal protective equipment, or PPE, related to COVID-19 and for not allowing consumers to receive a full refund when the orders were not delivered by the promised date.

Why It Matters

As decision-makers face tightening budgets and financial uncertainty, identifying and growing revenue-generating opportunities in the near term is critical. Revenue growth will come from new purchases by new customers or from repeat or larger purchases by existing customers. Unfortunately, the pandemic has caused not only financial uncertainty but also an erosion of brand loyalty among consumers: 85% of consumers say brand names don’t matter during a crisis (Source). While pricing and promotion may drive customer acquisition, the overall experience will heavily influence customer retention. Designing and delivering a great digital experience, such as by providing technology-enabled product interactions and shopping assistants to help customers make purchasing decisions remotely, can help drive immediate revenues while positioning retailers and brands for the long term.

Whether an online retailer is allowing customers to try on products virtually or providing customers with virtual shopping assistance, incorporating such enhanced features into the customers’ online shopping journey can create legal and regulatory risk for the retailer if enhanced virtual features provide false or misleading information about the product. For virtual try-on experiences using AR or VR technology, it’s important to ensure that the customer’s virtual experience with the product mirrors the actual experience that the customer would have in person. To the extent that there are any qualifications or limitations inherent to the virtual experience, such qualifications or limitations must be clearly and conspicuously disclosed before the consumer makes a purchase decision.

Additionally, where an online retailer is providing virtual shopping assistance, it’s important to make sure the data that powers such assistance to answer customers’ questions and provide recommendations is up to date and error-free. Because consumers generally expect more accurate, real-time information from computer-generated data than from a store associate, who is subject to human error and may not always have the latest information, online retailers should take special care to ensure that any information about a product is constantly refreshed, and to disclose any limitations on or delays in any portion of the data.

Failure to comply with the basic truth-in-advertising standard and with the specific rules and regulations under the FTC Act and state UDAP laws can result in enforcement actions by the FTC as well as legal actions by state attorneys general and private plaintiffs (including potential class action lawsuits).



pursuant to New York DR 2-101(f)

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