Retail Media — An Opportunity to Fill the E-commerce Profit Margin Gap?

US retail media networks will bring in $41.4 billion in advertising sales this year and $52.2 billion in 2023, according to eMarketer forecasts. If these predictions are fulfilled, they will account for close to 20% of all digital ad spend. But what is retail media, and why is it growing steadily?

What Is Retail Media?

Retail media positions ads at or near consumers’ point of purchase, or at the point they are required to choose between competing brands or products. For example, a retailer might sell add space on its website, app, or in its physical store locations. Amazon is regarded by many as leading the way in digital retail media. Its Q4 earnings in 2021 show it realized $31.1 billion from the placement of ads on its e-commerce platform. That’s more than YouTube’s advertising revenue.

At its heart, retail media is nothing new. Retailers have been selling advertising to their audiences since the early 1900s, when the wholesaler model first appeared. Splitting marketing costs with brand partners makes sense and cents, too — or rather, dollars, and lots of them.

Better known in those early days as cooperative advertising, common examples included retailers buying ads in newspapers and wholesale brands paying to be featured in them, slotting fees, in-store stores, shopper marketing, trade advertising, coupons, sampling, loyalty cards, and product features in printed catalogs. Now retail media includes digital marketing, too.

Why the Rising Popularity of Retail Media?

COVID-19 undoubtedly contributed to the rise in retail media, since the pandemic increased demand for contactless shopping. As big-box retailers migrated to e-commerce, they looked to Amazon for ideas. Walmart, for example, added 60,000 third-party resellers in 2020 and has integrated with Shopify to increase its marketplace sellers.

Additionally, Walmart plans to seamlessly merge its customers’ in-store and online shopping experience by introducing app enhancements to physical stores. Apps will guide shoppers to their desired products and checkout stands, as well as permit digital access to reviews and ratings of products in stores. And, of course, these features will naturally also act as advertising platforms. Walmart’s efforts have been rewarded in its Q4 earnings results, which included $2.1 billion in ad sales for 2021. It took Twitter twice as long to exceed $2 billion in ad revenue.

Advertising revenue also offers retailers a way to bolster the traditionally lower profit margins on digital sales. As e-commerce makes up an ever-increasing percentage of total sales, ad revenue can help counter the margin gap.

Retail Media Offers Closed-Loop Marketing

However, perhaps the biggest driver of retail media uptake last year (and in the future) is Google and Apple’s privacy changes. For example, Meta estimates Facebook lost about $10 billion in advertising revenue last year as privacy changes reduced ad platforms’ access to customers’ reactions to ads. In contrast, retail media networks offer brands closed-loop marketing because consumers buy products directly from the retailer after seeing their ads.

What Are the Challenges Facing Retail Media?

It’s not all smooth seas for retail media networks, however. Great marketing initiatives improve the shopper experience, but they require shoppers to be provided with relevant search results, not just those of the top-bidding brands. It can be a fine line balancing relevant, organic suggestions versus overwhelming or annoying consumers with irrelevant garbage.

Retailers must also provide brands with favorable, proven returns on their investments and establish their networks as the best place for brands to invest their marketing budgets. Currently, many brands are paying for retail media placement because they’re pressured to do so to maintain the relationship. Amazon is the only major platform that offers brands a favorable return on their investment. And to properly understand the value of their spend, brands need to see metrics on how ads impact in-store revenue — and over more extended periods than an immediate purchase from a digital store.

Only about 13% of total US retail sales are from e-commerce sites. Retail media networks will need to scale significantly to reach in-store shoppers via in-store digital displays and mobile devices. They will need to provide smaller brands with self-service interfaces and APIs to reduce the associated costs of managed services agreements that typically rely on human intervention. And they must find ways to approach the real-time optimization offered by digital marketing platforms like Facebook and Google. These digital ad platforms offer dynamically generated content in real-time using AI algorithms.

Walmart is following Amazon in becoming a technology empire, but these giants have deep pockets. How do smaller retailers who find themselves lagging technology-wise close the gap — especially considering that managing a technology company is very different from being a retailer, even when the budget is available to do both. Do small retailers buy existing technology, take the plunge and try to develop it, or enter strategic partnerships? Time will tell what, if any, of these will help.

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David Geithner

David Geithner

David Geithner is a senior finance executive who draws upon nearly three decades of experience to serve as EVP and COO, IMG Events and On Location.