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Marketing
28 April 2022
The rise of retail media networks brings advertising opportunities
With big audiences and key data, retailers are making more room for ads in their marketplaces.
Retail media networks are adding advertising to ecommerce marketplaces.
(Public domain illustration)
Grow an audience, and an advertising business can follow.
From apps to social media networks, this has long been a tenet for web-based businesses. Now, as retailers are growing ecommerce capabilities, digital marketplaces are emerging as the next space where ads are converting to sales, and businesses with big margins.
Like Google and the social media giants before them, retailers are recognizing that attracting big audiences that are interested in shopping brings additional revenue opportunities through advertising. To capitalize, they’re setting up retail media networks. Recent earnings calls to recap 2021 offered a look at a recent spike in growth.
In the move that grabbed the biggest headlines, Amazon revealed the numbers behind its ad business for the first time. Advertising brought in $31 billion in revenue in 2021, and grew 32% in the fourth quarter alone. Taken together, it means Amazon has the third-largest digital ad business behind longtime leaders Google and Facebook, and has an ad business equal to the size of YouTube, Reuters reported.
Grocery delivery service Instacart sees advertising as key to its future growth, both through ads that appear on its marketplace, and a service that it will provide to other grocers as part of a digital enablement platform.
“It’s by far the fastest growing part of our business,” CEO Fidji Simo said of advertising at the ShopTalk conference, where she predicted it would make up a majority of the company’s revenue in the future.
Just as interesting was the growth of retail media among retailers that grew up attracting audiences to brick-and-mortar stores.
Walmart Connect, the advertising arm of Walmart’s ecommerce business, earned $2.1 billion in 2021, and active advertisers on the platform grew more than 130% year-over-year, the company said. This came in the quarter immediately after the company rolled out a demand side platform that helped extend its offerings beyond the Walmart website.
“We've got a business that's becoming increasingly digital,” Walmart CEO C. Douglas McMillon told analysts on the company’s February earnings call, underscoring how ecommerce and advertising are intertwined: “The ecommerce business, first-party, third-party is growing. It gives us the opportunity to grow advertising income."
Meanwhile, Target’s retail media network, called Roundel, drove more than $1 billion in value in 2021, the company said. It expects that number to grow to over $2 billion in the next few years.
Nordstrom launched a retail media network of its own as it saw an ecommerce business that was keeping pace with in-person stores. The Nordstrom Media Network had initial revenue of $40 million, and the company is planning to expand capabilities in the coming months.
Arts and crafts retailer Michaels is weaving together a retail media network through a newly-announced partnership with adtech company Criteo. It is looking to bolster discovery of relevant products, sponsored products, display and off-site advertising.
Others are expanding to scale. Consumer electronics store Best Buy now has an in-house network called Best Buy Ads, building on a previously announced partnership with Criteo.
Advertising shift
This growth comes as many brands and consumer goods companies are seeking new avenues for advertising following the privacy-oriented changes that came with Apple’s iOS 14.5 update in 2021, which made advertising on platforms like Facebook less of a sure bet.
With less third-party data now available, advertisers prize first-party data collected directly from a customer to reach them. Through data collected via purchases, loyalty cards, website registrations, browsing behavior and items added to a cart, retailers have lots of it.
“That’s pretty powerful because it’s indicative of what each of their shoppers are currently interested in buying, and that could provide some insights into life stages, personal interests, and even perhaps details around potential household income and family demographics,” said Angelina Eng, VP of Attribution & Measurement and the Programmatic+Data Center at the Interactive Advertising Bureau (IAB).
This data is key in the digital advertising work of segmenting audiences, and sending ads that fit with what those shoppers are most likely to buy.
The first-party data isn’t only powerful for CPG brands. Retail media networks are offering advertising for companies that sell goods that wouldn’t necessarily appear at the retailer. Even though a car company doesn’t have an item on the digital shelf, it might still be interested in reaching an audience that is well-understood, and may be in a buying mood.
When tying info from online advertising exposure to conversion data, there is even more power.
“Publishers are not only targeting within their own properties both digitally and physically, but they’re also leveraging that first party data in partnership with other publishers,” Eng said.
Brands are taking notice of these capabilities. As they seek alternatives in the post-iOS 14.5 landscape, they’re directing dollars that were once put toward converting on social media platforms toward retail sites.
“As more CPG brands, quasi-endemic and non-endemic brands look to retailers to buy media, you’re seeing that the overall budgets for media and marketing aren’t changing,” Eng said. Rather, “it’s shifting within the different channels, where retailers are seeing a bigger portion of those buys year-over-year.”
A complex landscape
Retail media offers a way for these brands to elevate their standing within a marketplace. They’re not only presented in more prominent ways, but can offer additional messaging, imagery and even storytelling.
Yet it is a complex environment, Eng said. Retail media networks aren’t all created the same, and brands entering the space must find the right person to talk to and understand the right inventory to offer, while also deciding how many different networks they should work with.
It’s a business that companies who make moving goods their primary profit center aren’t traditionally built to be in. To stand up their own media networks, retailers must draw on technical and advertising expertise. They must find a balance between selling products and display ads in a finite amount of space on a marketplace. With more retail media networks forming, it’s also an increasingly competitive space. Pricing will have a big impact, and brands will seek out self service tools to move quickly as they seek to stand out.
It’s not a landscape that retailers are navigating alone. To stand these networks up, they are bringing together in-house talent, outside agencies and partnering together to stand up efforts.
It also helps to share best practices with others building in this area. That's why IAB is convening a committee of leaders from both the buy side and sell side. This includes participants from adtech companies, retail media networks, agencies, advertisers and publishers. It is working to develop a marketplace guide to provide further transparency in the space.
With recent growth, there is promise that retail media is powerful new tool. Amazon is likely to be a leading indicator. But it's important to remember that this remains an emerging area. Strategies are still evolving. Constant learning is necessary. Given the recent activity, the opportunities to reach shoppers only seem likely to grow in the near future.
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Can Amazon grow and cut at the same time?
The company is pulling back after breakneck pandemic expansion. Will it sacrifice the shopping experience along the way?
Amazon is in a period of rebalancing.
The company has long scaled at a relentless pace as it sought to not only provide a marketplace for commerce, but the infrastructure that enabled it, as well. Amazon found another level of overdrive over the last two years, as demand spiked to unseen heights during the pandemic and the company tried to build to keep up.
This wasn’t necessarily a period that saw the kind of invention that Jeff Bezos made an existential tenet of the company, but it nonetheless seems to be shaking out as a cycle that included risk and fallout.
In this case, the risk was not a new device like a smartphone or a move to bend the future to Amazon's will like drone delivery. Rather, it was an expansion that took its already-vast operations to new heights.
Nowhere was this more evident than the company’s logistics network. As CEO Andy Jassy described it to analysts Thursday on an earnings call, the company doubled the size of a fulfillment network it took a quarter-century to build in two years. It also built out a last-mile delivery network that was the size of UPS, which is one of the top two carriers in the U.S.
In 2022, all of that expansion ran into 40-year-high inflation, war in Ukraine and a pullback in demand for goods amid reopening. The company first admitted the problem: It had overbuilt.
But the solution is not to tear down. It had to keep expanding as only Amazon does, while still cutting back in a period of “belt-tightening,” as executives have put it.
That’s evident in watching developments out of the logistics network alone. Amazon pulled out of some areas, and canceled plans to expand into some new warehouses. Yet, as Business Insider reported, it still added 79 million square feet – a footprint that is equal to half of next-closest competitor Walmart’s entire distribution network. It is also expanding Buy with Prime, a new program that will allow direct-to-consumer brands to offer Prime benefits, and, by extension, access to Amazon’s logistics network. Another service, called Amazon Warehousing and Delivery, is designed for upstream storage, necessitating more space to be made available in the network.
At the same time, it will seek to keep doing more for consumers.
Jassy indicated as much when he was prompted to outline his priority areas. Beyond cost-cutting, he said speed is the second highest priority for Amazon. As if to conform this, he said later in the call that one-day shipping is getting off the ground in North America.
Selection is another priority area. At Amazon, that phrase translates to a few things, but top of mind is “expanding the third-party seller marketplace.” Third-party sellers accounted for 59% of sales in Q4. Beyond sales, Amazon’s work with the sellers who post their products on the marketplace is also lucrative for the company. Amazon allows these sellers to tap its logistics network to offer Prime through the Fulfillment by Amazon program. Its business segment called third-party seller services grew 20% year-over-year in the fourth quarter, right in line with the massively profitable cloud computing division Amazon Web Services.
Price, Jassy said, is another area of importance, especially with the consumer pullback on discretionary purchases being observed amid inflation.
“I think pricing being sharp is always important,” Jassy said. “But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw.”
Finally, Jassy cited a priority of improving the customer experience. He said Buy with Prime would give subscribers the ability to use their benefits across the web, and noted that virtual try-on for shoes brings change to the shopping experience.
But it’s in this area that the tradeoffs that may be happening under the surface may rear their head again. GlobalData Managing Director Neil Saunders noted that online shopping generally is becoming “more difficult" on Amazon.
“While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through,” Saunders wrote in note released at the time of the earnings call. “The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline.”
Taking a rhetorical step further, the journalist John Hermann wrote this week that a “junkification” of Amazon is taking place, while arguing that “everything is going according to plan" for the company.
He placed the growth of the third-party seller marketplace at the center of this trend. But it also comes as Amazon grows its advertising business, with many taking note of a growing number of ads on the platform. The company also wants to keep growing Prime, and is now using content such as Lord of the Rings and NFL’s Thursday Night Football as key acquisition channels. Both had “record” signups of new Prime members, CFO Brian Olsavsky said.
“We see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website,” he said.
It will have to do each of these things at once, while entering a period that will require it to be “more targeted with its growth ambitions,” as Saunders put it.
"Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn," Saunders said. "That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging."
Jassy said the changes of the pandemic made its logistics a "different network." That may be true of the whole company. Rather than an isolated cycle of overbuilding and pulling back, this may prove to be a period that changes Amazon altogether. The bets will still be there, but the risk will be magnified with fewer dollars that don't pay off to go around. As hinted by the logistics buildout of the pandemic and even Buy with Prime, they also may look more operational.
Less delivery robot, more delivery optimization.
As Jassy put it: “We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.”
The recipients of those investments will say a lot about where it wants to head in this next year.
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