By Jason Goldberg, Contributor to Forbes
Amazon released its Q4 earnings on February 3, which included the disclosure that Amazon had sold $31.1 billion in ads on its platform in 2021, making Amazon a bigger advertising platform than YouTube. Two weeks later, on February 17, WalmartWMT -1.9% released its Q4 earnings, including a disclosure that it had sold $2.1 billion in ads in 2021, surpassing the $2 billion milestone twice as fast as Twitter did. These rapidly growing retail media networks are a critical part of the future of retail, prompting retailers in every category from KrogerKR -7.3%, Dollar TreeDLTR -0.7%, Kohls, Best BuyBBY +3%, Lowes, and CVS to launch retail media networks. In fact, eMarketer forecasts that US Retail Media Networks will exceed $52 billion in ad sales by 2023.
It’s not difficult to understand why retailers are so enthusiastic about retail media networks. Selling ads is far more profitable than selling goods, and retailers monetizing their audiences with advertisements is nothing new. Since the advent of the wholesale-retail model in the early 20th century, retailers have been sharing advertising costs with their brand partners. The fundamental idea of cooperative advertising (or Co-Op) is that a retailer would buy an ad (such as in a newspaper), and wholesale brands would pay for a portion of the advertisement in exchange for being featured in the ad. This type of co-op arrangement has become a common element of retail marketing budgets, including tactics such as slotting fees, merchandising accrual funds, shop-in-shops, shopper marketing, trade advertising, and now retail media networks. “Retailers and brands have long known how in-store shelf space placement affects purchasing decisions,” said Brad Moran CEO of CitrusAd, a provider of software for retail media networks, “2022 will see them extend this insight to the online brand placement and how it affects not just online purchasing, but also in-store behavior.”
The emergence of retail media networks is timely. As consumers shift more of their spending online, retailers struggle with the lower margins that often accompany digital sales. Incremental revenue from retail media networks is one way for retailers to offset the eroding margins of digital sales.
At the same time, privacy changes at GoogleGOOG +1.2% and AppleAAPL +1.2% have made other forms of digital advertising less effective. Meta estimates that privacy changes may have cost Facebook $10 billion in advertising revenue in 2021 alone. The root of these privacy changes is that it is now more difficult for digital ad platforms to know what actions a consumer takes after seeing an ad. Retail media networks are a notable exception because consumers purchase products directly from the retailer after seeing the retail media network ad, putting retailers in a unique position to offer closed-loop marketing in a way that other digital advertising networks now struggle to do.
Given all this, it’s clear that retail media networks are a significant part of the future of retail and one of the most important retail trends of 2022. However, the relatively rudimentary retail media networks of today will need to evolve in eight key ways to retain their momentum.
1. Improve the shopper experience. The best shopper marketing tactics improve the experience for shoppers. Shoppers benefit from a well-placed end-cap introducing a new product or a stylishly merchandised outfit on a mannequin. However, it’s not a helpful shopping experience to flood shoppers with irrelevant search results that the highest bidding advertiser has purchased. Retail media networks need to balance organic visibility with paid media and ensure that the paid media is highly relevant to the shopper’s current mission.
2. Be more than just a tax. Today, most brands do not get a favorable return on ad spend from retail media networks other than Amazon. Brands are investing because retailers have made it a mandatory part of the business relationship (i.e., a tax), not because it’s a good investment for the brand. If retail media networks are to grow and remain viable, they must become the best place for brand marketers to invest their budgets.
3. Demonstrate favorable return on ad spend (ROAS). Simply looking at how many shoppers see a sponsored ad and then immediately purchase that product from a retailer’s website does not reveal a high rate of return on those ad dollars. Instead, brands need to see the impact of those ads on in-store purchases and across longer decision cycles to truly understand the value of their ads. Retailers are only just starting to build these metrics for advertisers, such as Amazon Marketing Cloud. Very rarely are retailers offering these insights in a timely or automated way. Ultimately, retailers must prove that retail media networks can earn the premium pricing that retailers are seeking.
4. Harness in-store audiences. There are simply not enough ad impressions from sponsored search results on e-commerce sites to achieve retailers’ growth ambitions. Only 13.2% of all retail sales in the US come from e-commerce websites. To scale, retail media networks need to reach the huge numbers of consumers who shop in brick-and-mortar stores. Retail media networks need to sell ad inventory on mobile phones and digital displays inside of stores as well as on e-commerce sites.
5. Reach off-site audiences. In addition to visitors of their website, retailers can use their first-party data to help brands more effectively target digital ads across the web. Offerings such as Walmart Connect’s partnership with Trade Desk is an early example of this. Retailers need to prove this data is more effective than readily available third-party data.
6. Become self-service. Many of the features of retail media networks, such as specific ad formats, audience targeting, and reporting, depend upon working with a human being who works for the retail media network (often under a managed services agreement). For retail media networks to support more SKUs and smaller advertisers at scale, they will need to provide more comprehensive self-service interfaces and APIs for third-party tools.
7. Be more dynamic. Advertisers need to be able to target audiences dynamically but also serve up ads with dynamically-generated content. The very best digital advertising platforms (such as Meta and Google) allow real-time optimization. Artificial intelligence algorithms run thousands of marketing experiments, adjusting creative and audience targeting in real-time to arrive at the most effective advertisement quickly. Retail media networks need to offer a similar level of optimization.
8. Rationalize funding sources. Today brand marketers buy digital ads out of many different budgets for various purposes. A CMO may buy an ad with a brand-building budget to improve brand awareness, while a channel marketer may buy a sponsored search ad to improve e-commerce visibility. Retailers try to take advantage of siloed marketing budgets by offering different advertising vehicles to various stakeholders at the same brand. A retail merchant may try to get co-op dollars, while another retail team tries to sell premium data services to the brand, and a third team tries to sell retail media network placements. During the Covid-19 pandemic, many brands paid for frequently unbudgeted retail media network campaigns with unspent travel and event dollars. As the world emerges from the pandemic, retail media networks will have to earn their place in the brand’s budget. The fragmentation of budgets is not sustainable for brands. Increasingly, the lines blur between brand building, direct response, and trade marketing. If retail media networks are to succeed, they will need to earn dollars from increasingly unified brand marketing budgets.
If retail media networks can successfully evolve in these seven ways, retailers have a genuine opportunity to be the tip of the consumer marketing spear for the foreseeable future. Retail media networks can completely change the unit economics for the retail industry in the US and permanently change the business dynamics between brands and retailers.
Article originally appeared on Forbes.
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