Retailers are increasingly creating their own advertising platforms, a trend called retail media. This change is transforming how businesses reach customers and generate revenue. In 2023, Amazon alone made $46.9 billion from advertising, mainly through sponsored ads on its site. This amount is greater than Coca-Cola’s annual global revenue and makes Amazon the third-largest advertising platform in the U.S., only behind Google and Facebook.
A decade ago, few predicted advertising would become so vital for retailers. However, Amazon's success has spurred other big names like Dick’s Sporting Goods, Home Depot, Instacart, Lowe’s, Macy’s, Ulta, and Walmart to start their own retail media platforms. For example, Walmart made $3.4 billion from retail advertising in 2023, and Target and Instacart each earned over $1 billion.
Why are so many retailers jumping into retail media? The answer lies in its enormous growth potential. McKinsey estimates that by 2026, retail media will add $1.3 trillion to the value of companies in the U.S., with $820 billion going to retailers. Profit margins for retail media platforms are expected to range between 50% and 70%, while the Boston Consulting Group predicts even higher margins of 70% to 90%. This high-growth, high-profit business contrasts sharply with the often low-growth, low-margin traditional retail business, prompting many forward-thinking retailers to establish their own retail media platforms.
This article will explore the different types of retail media, discuss the main challenges they bring, and provide tips on how retailers and manufacturers can navigate this new landscape successfully.
What is retail media?
Retail media is a broad term that encompasses three main types of advertising programs:
1. Digital coupons:
This type of retail media is common in stores that frequently offer promotions, such as CVS and Tesco. These retailers focus on delivering digital coupons through their loyalty and rewards programs. These coupons are highly effective because they are accurately targeted and reach customers when they are about to make purchases. In fact, a recent study of a large German supermarket chain found that in-store coupons generated significant sales increases for almost every brand. The success of these programs has prompted retailers like Publix and Lowe's, which historically didn't have loyalty programs, to introduce them.
2. Sponsored search:
Retailers like Walmart and Amazon, which offer fewer price promotions, typically focus on sponsored search and advertising on their e-commerce sites and other digital channels. In this model, the emphasis shifts from helping customers find discounts to helping them discover products. When you search for a product on these platforms, some of the results you see are actually paid advertisements.
3. Extended reach:
In an innovative move, some retailers are now selling advertising on third-party platforms like Facebook, YouTube, and TikTok. This allows them to help manufacturers build their brands earlier in the purchasing process when customers are still identifying brands and forming preferences. Retailers often have an advantage in targeting these ads because they can observe customer responses through their own transaction data. Major players like Amazon Advertising, Kroger's 84.51°, Target's Roundel, and Ulta Beauty are investing heavily in this capability.
Why stores love retail media
The appeal of retail media for stores is multifaceted. First and foremost, it represents a significant new revenue stream with much higher profit margins than traditional retail operations. This is particularly important as stores face increasing competition from online retailers and need to find new ways to boost profitability.
Moreover, retail media allows stores to leverage their most valuable asset: customer data. By analyzing shopping patterns and preferences, stores can offer highly targeted advertising opportunities to brands. This not only makes the advertising more effective but also enhances the shopping experience for customers by showing them more relevant products and offers.
Retail media also strengthens the relationship between stores and brands. As stores become important advertising channels, they become more valuable partners to brands, potentially leading to better terms and more collaborative relationships.
Challenges in the new retail media world
Despite its promise, the rise of retail media brings several challenges:
1. Organizational tensions:
The introduction of retail media complicates the traditional relationship between retailers and manufacturers. In the past, deals were made in annual meetings between a brand's sales team and a retailer's merchants. Now, the process involves many more stakeholders, including the retailer's media team and loyalty program department. This can lead to internal conflicts. For instance, at one major global grocery retailer, 75% of the ad campaigns requested by brands in the first year were blocked by the retailer's own merchants, who feared it would weaken their bargaining power in annual trade negotiations.
2. Lack of transparency:
In retail media platforms, retailers both run the ads and report on their performance. This creates a potential conflict of interest and lack of transparency. Brands often can't see which impressions they're buying, the margins the retailer is earning, or the methods used to measure ad performance. This lack of transparency can erode trust between retailers and brands.
3. Shifting power dynamics:
Initially, retailers need major brands to participate in their media platforms to gain traction. However, as these platforms grow, the balance of power may shift in favor of the retailers. If retail media makes customers more loyal to the store rather than to specific brands, retailers may become less dependent on big brands to attract customers. Additionally, retail media can lower entry barriers for new brands, potentially increasing competition for established brands.
How stores can win in retail media
To succeed in this new landscape, stores should consider the following strategies:
1. Improve internal coordination:
Retailers need to create new touchpoints with manufacturers that extend beyond traditional trade negotiations. This requires better coordination between merchants and retail media teams to align on the goal of extracting value from retail media.
2. Develop transparent reporting systems:
To build trust with brands, retailers should prioritize developing transparent and credible ways to measure ad performance. This may involve building experimentation capabilities into their retail media platforms.
3. Adjust focus over time:
Initially, collaboration with manufacturers will be crucial. However, as platforms mature, retailers should be prepared to shift their focus towards leveraging their increased bargaining power.
How brands can succeed
Brands also need to adapt to succeed in the world of retail media:
1. Reorganize internal structures: Brands need to redesign their internal processes and incentive structures to handle the new, more complex relationship with retailers. This is particularly challenging for manufacturers with large brand portfolios, as each brand will now have multiple touchpoints with the retailer.
2. Develop independent reporting systems: To address the lack of transparency, brands should develop their own systems to independently evaluate the return on their ad spending.
3. Focus on innovation: As retail media potentially lowers entry barriers for new competitors, established brands need to create new sources of differentiation. They can learn from companies like P&G, which responded to the threat of private labels by doubling down on innovation.
The impact on shoppers
For consumers, the rise of retail media means a more personalized shopping experience. You might receive more relevant product recommendations and tailored discounts. However, it also means you'll likely see more ads while shopping, both online and in physical stores.
Some shoppers may appreciate the increased personalization, finding it helpful in discovering products they need or want. Others might feel uncomfortable with the level of data collection and targeting involved. Retailers and brands will need to strike a balance between personalization and privacy concerns to maintain consumer trust.
The future of shopping and advertising
As retail media continues to grow, we can expect to see further changes in the retail landscape:
1. More personalized shopping experiences: Retailers will leverage the data from their media platforms to offer increasingly personalized experiences, from product recommendations to store layouts.
2. Blurring lines between shopping and advertising: The distinction between regular product listings and advertisements may become less clear, requiring consumers to be more discerning.
3. New shopping formats: Retail media might drive the development of new shopping experiences, such as shoppable TV commercials or augmented reality stores with integrated advertising.
4. Increased product variety: As retail media lowers barriers to entry for new brands, consumers might see a wider variety of products available.
5. Evolving privacy regulations: The increased use of customer data for advertising purposes may lead to new privacy regulations and standards in the retail industry.
Conclusion
The relationship between retailers and manufacturers is changing significantly, creating new opportunities for growth but also bringing new challenges. To take advantage of these opportunities, both retailers and manufacturers need to rethink their strategies for working together and how they organize internally. The rise of retail media is set to bring big changes to the retail sector, offering growth and profit opportunities for those who prepare now for this shift. As retailers take on a bigger role in building brands, the retailer-manufacturer relationship is evolving. To succeed in this new landscape, both sides must adapt their strategies quickly and effectively.
