Propped up by industry pundits as the third digital advertising big wave, retail media is the subject of almost every industry conversation these days. And it’s hard to think why not, given the growth potential that the channel commands. According to Statista, digital retail media ad spend is expected to reach $143 billion by 2024 worldwide. To put this figure into perspective, digital media ad spend for the same period is forecasted at $756 billion worldwide. So digital retail media will represent a whopping 18.9% by 2024, almost double the 11% in 2022.
But what actually is retail media? People define retail media differently, but at VML, we define retail media as media that is bought and sold (i.e., activated) at or near the point of sale. This includes onsite activations (onsite display, sponsored search, etc.), offsite activations (leveraging retailers’ data across social, programmatic, broadcasters/CTV channels, etc.), CRM, in-and-out-of-store (digital screens, in-store radio, gondola heads, shelf dividers, etc.), and magazines.
By that definition therefore, retail media as a top-level concept isn’t new. Marketers across the board have been doing this for years through shopper marketing. The novelty, however, comes from the recent move towards an extensive use of data and technology, with retailers worldwide setting up retail media networks (RMNs) to compete with the likes of Amazon, Mercado Livre, Alibaba, etc.
Inevitably, this article will focus on digital retail media, as it’s the area of retail media that is generating much excitement and trepidation. But why the hype, one might wonder? Let’s highlight some of the reasons behind the channel’s attraction:
Data scarcity: With data availability challenges posed by privacy regulations and tech companies’ policies, like Apple and Google, we end up with the paradox of a data-driven world with less quality data opportunities to inform marketing strategies and execution. As such, marketers are on the hunt for partners with deep first-party data to fuel their strategies and guide their investment.
- Insights: One of the channel’s promises to marketers is access to very rich insight to help them better understand their customers based on their buying habits. Not self-declared data or inferred data based on content consumption online, but information derived from what people are actually putting in their shopping baskets. This robust data not only informs planning, targeting and optimisation, but marketers can also leverage retailers’ first-party data to support NPDs or build content that resonates with their audiences.
- Closed-loop measurement: Unlike other digital channels where there’s often debates and assumptions about direct sales attribution, digital retail media hit the nail on the head with its privacy-compliant closed-loop measurement pitch. Enabling marketers to understand how their media investment is performing, thanks to measurement that ties the ad exposure to online and in-store purchases, was bound to capture everyone’s interest.
Ability to activate and measure seamlessly across online and offline: For retailers who also operate brick-and-mortar stores, digital retail media provides the opportunity to offer connected advertising solutions that integrate their online and shopper marketing in a cohesive and frictionless manner. This enables marketers to engage with their audiences throughout the entire customer journey, with a message or retail programme that is appropriate for where customers are on their path to purchase.
Transparency and control: Programmatic has accelerated the appetite for marketers to have more control of and transparency about their digital advertising. It is almost inconceivable today, to operate in a complete black box when it comes to digital activations. Marketers want to be in the driver’s seat, and they want to have first-hand access and visibility into the tools to help them make better decisions. Digital retail media certainly is attempting to rise to the task with retailers investing in data and technology solutions (via acquisition, partnership with tech companies or building in-house) that enable them to offer self-serve capability to advertisers, whilst raising the bar for their managed-service solutions by offering more transparency. Given the amount of money that is expected to flow to the channel, it’s a given that marketers would expect and demand more transparency from their retail partners.
Higher margins for retailers: In 2022, BCG estimated digital retail media margins to be situated around 70% to 90% (McKinsey had a more ‘conservative’ estimate of 50% to 70%). But, whichever way you chose to look at it, digital retail media is a very lucrative deal; especially when compared to retail margins (less than 20%) which are continually squeezed thanks to a blend of supply chain challenges, economic turmoil and a business that is capital-intensive. So, investing in retail media is a decision that is bigger than just retail media, as it also enables retailers to generate capital that can be re-invested in other parts of their business.
New revenue stream for retailers: Digital retail media is already a new revenue stream for retailers, but it’s also the gift that keeps on giving because it opens up new revenue streams within itself. This could take the form of data partnerships with non-endemic advertisers (e.g., a supermarket enabling an electric vehicle brand to leverage its data to understand and reach eco-conscious customers) or opening up their onsite inventory to non-endemic advertisers (e.g., a home & garden retailer allowing an insurance company to place advertising next to large home appliances products).
It’s clear that digital retail media represents an exciting opportunity for retailers and brands, but is it all rosy and plain sailing? The short answer is, absolutely not. However, it’s also fair to keep in mind that the channel in its current iteration is fairly nascent. This means some teething pains are to be expected and there are challenges that need to be addressed if the channel is to scale like its predecessors:
Media Cost inflation: Media in general isn’t immune to economic principles; and increased demand for digital retail media, driven by the channel’s promises to provide deep first-party data and closed-loop measurement (at a time when every ad dollar is being scrutinised), has also led to an inflation in cost. In some instances, digital retail media’s cost inflation has outpaced TV cost inflation. If there is no cooling off in demand or an influx of supply through new advertising opportunities to create some balance, this could become unprofitable for advertisers.
- Tip for marketers: One way to counteract media cost inflation is to adopt an omnichannel strategy, supported by robust insights and measurement to help inform investment decisions across channels in order to deliver healthy ROAS.
Lack of standardization: Due to its relative infancy, digital retail media is still at the stage where each player is busy developing within their ecosystem without necessarily considering the impact on a broader multi-retailer, multi-channel strategy. There is currently no standardization across the board for various elements such as ad formats, naming conventions, or adoption of third-party verification and ad servers. Whilst it’s valid for retailers to build solutions that align with their business and end-customers, they also need to make it easy for brands and agencies to buy them by removing these frictions. If digital retail media is to scale like its predecessors (search, social, programmatic), standardization cannot be ignored.
- Tip for retailers: Given that retailers are no longer ‘just’ retailers but are morphing into media powerhouses too, one crucial step towards standardization is to forge relationships with advertising industry bodies who are a great resource to the advertising community.
Siloes: According to Forrester, 70% to 90% of brands say that their growth depends on retail media. This demonstrates that retail media is a growth driver for brands but also retailers themselves given the potential revenue. However, brands’ and retailers’ siloes can act as a headwind as they engender inefficiencies and blind spots resulting in inefficient budget allocations, broken measurement, and myopic and isolated insight. The beauty of retail media is that it enables brands to reach customers ‘from sofa to store’, as Tesco/Dunnhumby aptly put it, and thus provides great opportunities to deploy truly omnichannel and integrated programmes. But, if for example sales and marketing teams don’t talk to each other, this becomes difficult to achieve.
- Tip for marketers: One of the ways to break siloes is to look into current team structures and ways of working. Does your shopper team sit separately from your eCommerce team for example? Who owns your marketing budget and how is it allocated across channels? How are briefs disseminated across your retail and/or agency partners? These are some of the questions you could ask to start identifying inefficiencies and a step towards deploying and optimizing your marketing investments holistically.
Investment in technology and people: As lucrative as digital retail media can be, it can also be a money pit in the initial phase of deployment as it requires retailers to invest in technology to facilitate access to their data and inventory. And with technology adoption, comes the need for onboarding new processes and hiring people that are well versed in those technologies. This is a hefty investment, but the alternative isn’t an option either. Retailers that aren’t looking into this now, will lag behind their competitors or simply miss the boat entirely. Moreover, given the level of transparency that marketers will demand and expect from retailers, operating in the traditional ways of pre-digital shopper marketing just won’t cut it. So, retailers’ options are investing or investing.
- Tip for retailers: Investing doesn’t mean having to build everything in-house or having to do everything at once. Retailers can either build their own tech, partner with existing tech vendors or acquire a company. Whichever option a retailer chooses one key element to success is to test within a controlled environment first, learn, iterate, scale and then repeat the process. Most retailers start with sponsored search and then grow from there.
Customer experience: As retailers scale their digital proposition, they will need to carefully monitor the dynamic between advertising and customer experience and ensure that advertising is enhancing people’s experiences. Maintaining trust with customers is crucial. Are the ads people seeing relevant to their journey and need or is the retailer now in the service of their ad revenue.
- Tip for retailers: It’s good practice to conduct regular tests and adjust where needed. Keep what works, ditch what doesn’t regardless of the efforts that have gone into it and move onto the next item on the roadmap.
Education: Digital retail media is often wrongly associated with bottom funnel activations only, like sponsored search. But the channel offers many opportunities to deploy full-funnel strategies. Most retailers now offer solutions and ad formats appropriate for upper funnel objectives (onsite branded display, TV/CTV integrations, upper funnel social activations, etc.). So, there clearly is a need for retailers to invest in education strategies geared at brands as well as the agencies that support them.
- Tip for retailers: Leverage your upfronts to reach a wider audience. Organise webinars once a quarter to communicate on your roadmap and new product launches. Invite the agency community to the table. Participate in key events and forums in the advertising industry.
Conclusion
Retail media is here to stay, and digital retail media will continue to grow rapidly thanks to the tailwinds of data privacy regulations, tech companies’ policies and the channel’s promises of closed-loop measurement. It’s a lucrative business for retailers but the cost of entry isn’t to be underestimated either. The channel has the potential to outpace other digital channels’ ad spend provided that key challenges around siloes and standardization (or lack thereof) are tackled head on.
