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This study examines how Artificial Intelligence (AI) adoption in digital marketing enhances the competitiveness of small retail businesses (SRBs) in Cape Town, South Africa. Guided by an integrated Technology–Organisation–Environment (TOE) and Unified Theory of Acceptance and Use of Technology (UTAUT) framework, a systematic review following PRISMA 2020 guidelines was conducted across eight databases, resulting in the inclusion of 37 empirical and conceptual studies published between 2015 and 2025. Findings show that AI adoption remains modest, with only 39% of small businesses planning to develop internal AI capabilities by 2025. The most common entry points are ChatGPT, text-to-image generators, predictive analytics systems, and WhatsApp-based chatbots. Businesses using these tools reported an average 11% increase in sales and a 28% reduction in marketing costs within six months. However, adoption is constrained by infrastructure challenges (patchy broadband, power cuts, high cloud costs), organisational limitations (low digital literacy, managerial scepticism, fear of automation), and socio-cultural barriers (language diversity and customer mistrust of chatbots). This study provides the first Cape Town-focused synthesis linking AI adoption to SME competitiveness through the TOE–UTAUT framework. It recommends policy measures to improve digital infrastructure and data governance, practical initiatives to strengthen AI literacy and ethical awareness, and theoretical extensions to contextualise socio-cultural dimensions of AI use. Collectively, these insights contribute to advancing inclusive, trust-based digital transformation in Cape Town’s small business ecosystem.