Retail Media is now 11% of total ad spend. Here are 5 factors driving that figure | Techy Kings

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A change is underway. Retail media, once Amazon’s domain
AMZN
salesman, taking over the world. At least the advertising world.

A recent report from WPP’s GroupM said retail media already accounts for 10.7% of global ad spend and predicts this figure will grow by 60% by 2027.

GroupM is not alone in its bullish outlook. eMarketer estimates that Amazon alone is the third largest advertising platform in the US, accounting for 13% of digital ad spending in 2021, and expects its share to increase to 15% by 2024. Amazon first began distributing revenue from its advertising division in 2021. As a results, the sheer scale of Amazon’s advertising business came as a surprise to much of the industry.

But pulling back what’s driving retail media growth reveals a number of reasons that aren’t all that surprising. Here are five factors contributing to the past and future growth of retail media.

But first, what exactly is retail media?

Retail media is the digital version of shopper marketing. In past decades, consumer product brands would use a combination of brand advertising (e.g., national television ads) and trade marketing (e.g., manufacturer’s coupons and in-store displays) to build brand awareness and increase product sales.

Today, retail media platforms can perform all of these activities and more on a single platform. The assumption is that due to the ability to closely target specific types of customers who are at specific points in their purchase journey, digital retail media is more efficient and cost-effective than the traditional model.

Retail media can appear at the “point of purchase,” when a customer is actively searching and building their cart on an app like Amazon, Kroger
kr
, or Instacart. Products may appear in search results or on competing product pages. Retail media now also includes media platforms owned by retailers such as Amazon, which include Thursday Night Football, Amazon Fire TV and affiliate TV channels such as Paramount
PAIR
Plus.

Factor 1: target audiences with precision

Amazon spent a staggering $11 billion on the rights to Thursday Night Football. There are three important reasons why:

  1. It was a catalyst for more Prime membership signups (this proved to be the case when Amazon confirmed it was driving more Prime memberships than any Prime Day event)
  2. It expands the ad space. In addition to sponsor product slots on Amazon.com, there are now slots available for advertisers familiar with creating and buying big-budget TV ads. With such a significant audience tuning in, Amazon can charge more for these placements and increase their ad revenue.
  3. It’s a first-party data opportunity. For me, this is the most critical reason. Expanding its pool of first-party data is more valuable as a long-term asset to Amazon than the immediate returns from ad spend. Advertisers stand in line to get in front of very specific audiences.

The ability to target consumers based on actual purchase and consideration activities, in addition to demographic profiles, is very attractive to brand advertisers. A hand soap brand, for example, can target customers in a variety of ways. The easiest and most widely used is to display ads in the retailer’s search results using general keywords such as “antibacterial hand soap”. The brand may also target competitors’ brands, in an attempt to get customers to switch brands. But more sophisticated retail media platforms like Amazon and Walmart
WMT
also offers programmatic ad placement, where a brand can target customers not with keywords but through ad impressions that target users with specific demographic, psychographic or behavioral attributes.

The display-based programmatic advertising is a strong substitute for brand advertising that historically would be spent on television ads. But it has now been upgraded with the ability to hyper-focus on certain shoppers and ultimately track their journey to an actual purchase.

Amazon Marketing Cloud and Walmart Connect are two solutions built by the two largest retailers to track a customer journey from seeing a programmatic display ad, seeing several more pay-per-click ads, and finally making a purchase online or even in-store. The ability to now track the customer journey from start to finish is very compelling for brands looking to optimize their ad spend.

Factor 2: Amazon is “pay-to-play” for most endemic brands

A study conducted by my company Acadia and e-commerce analytics provider Analytic Index found a strong correlation between sponsorship (advertising using Amazon’s pay-per-click advertising solution) and organic search visibility for endemic brands (those brands that sell their product on the platform).

Although it varies by product category, this correlation suggests that most brands selling on Amazon need to front up an ad budget to gain a position on page one of relevant search results.

Brands like Nike
NKE
Crocs
CROSS
and Adidas, which has decades of brand marketing behind it, may rank naturally high as consumers specifically search for these brands. Clothing and shoes also have a relatively low correlation between sponsorship and organic visibility.

In comparison, the electronics category has a very high correlation between sponsorship and organic visibility, suggesting that it is almost a requirement for a brand in that category to advertise on Amazon in order to appear high enough on relevant search results pages to be considered for purchase. .

Doing your own search on Amazon will likely yield similar results. A search for “coffee machine” is likely to produce a variety of banner ads, sponsored product ads, and video ads. The same study shows that the percentage of “real estate” on page one for high-volume keywords again varies by product category, but ranges from 12.9% to 21.6%.

This pay-to-play feature — at least on Amazon — contributes to retail media spending among endemic brands.

Factor 3: The non-endemic possibility

It is a mistake to think of retail media as only suitable for consumer brands that want to get in front of the household member who shops weekly. Insurance companies can target new parents who are finally ready to think about taking out life insurance; an automaker may target baby boomers who bought their last car years ago and are due to upgrade; a lawn care company can target busy executives in the specific geographies the company serves.

The wealth of first-party data, combined with a greater inventory of placement options for brand advertising, makes retail media very compelling for “endemic brands”—those companies that don’t sell physical products on Amazon. This group of advertisers represents a significant amount of potential revenue for retail media – growing far beyond the budget limits of consumer goods companies.

Factor 4: The established companies are suddenly more expensive

While retail media is growing, it’s still a distant relative of the ad platforms owned by Meta and Alphabet.

Although these companies take the lion’s share of the digital ad budget today, they face significant headwinds. Apple’s
AAPL
privacy changes in 2021 significantly increased the cost of advertising for many brand advertisers. DTC consumer brands that averaged a return-on-ad-spend (ROAS) on Facebook may now only be able to secure a 1-2 ROAS.

As a result, we’re seeing brands like Peloton, which historically were heavily DTC-focused, jump into Amazon, where CPC has been more stable.

One argument here is that these brands are simply moving along the well-defined maturity curve. Once the domain of early adopters, Peloton had to move to mainstream distribution channels like Amazon to maintain growth.

While costs have increased on these existing digital platforms, the amount of data delivered to advertisers has decreased due to the same privacy changes. However, Amazon in particular is providing an increasing amount of trend data to brands and even access to shoppers. Some recent examples include Amazon Advertising’s marketing stream and the ability to send emails to Amazon shoppers who may be interested in a brand’s new products.

Factor 5: more retailers launch media platforms

Amazon’s ad platform may be ahead of its time, but that’s not stopping other retailers from launching their own platforms. It seems like a new retailer is announcing a media platform every other week.

Advertising can be a high-margin business for a retailer, a strong contributor to profit margins in an industry that can be volatile and highly seasonal. This makes an advertising business very attractive and worth the effort to stand up.

Nor is it necessary to build a retail media business from scratch. Third-party platforms such as Criteo and Citrus Ad allow retailers to quickly set up a media operation and access a cohort of advertisers who are already using these platforms.

An increasing abundance of advertising options can create uncertainty among advertisers about how to allocate media budgets. But in some cases, they don’t have the luxury of making up their own minds. Some retailers require a certain level of media spend as part of their supplier agreements.

As MediaPost pointed out, retail media’s share of 11% of total advertising dollars may actually be an underestimate, as it does not include traditional trade media spend. In some cases, trade media and shopper marketing budgets will begin to shift into this digital retail media bucket.

There will likely be a large concentration of media spend at the “fat head” of the retailer lineup, and a particularly “long tail” of ad spend with retailers attracting less media dollars. But the growing number of options is also likely to contribute to the overall increase in spending.

But retail media is not a panacea

The persistent problem is tracking customer journeys that span multiple retailers. The case study for advertising and purchasing done entirely within a single retailer ecosystem is almost irresistible. But the journey — and the business sense of more investment — is cut short when a customer sees an ad on Amazon, for example, but ends up buying from their local Costco. Every retailer has an interest in keeping their shopper data in silos.

Still, the ability for brands to reach a retailer’s target audience at various points along the buying journey remains very attractive to advertisers. While Amazon has a strong share of total retail media spending due to its early investment, other retailers are taking note. The playbook for retail media has been written, and it’s one that advertisers are more than willing to invest their marketing dollars into.

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