Why are Media Networks the future for Retailers?

Since I led the global launch and growth of Collaborative Ads for the last 5 years, and co-led the product strategy for retail solutions of Meta last year, I have gotten particularly deep on my understanding of the relationship and partnership between retailers and brands. In the recent years, Retail Media Networks was the trending topic and a major part of this partnership. But, before we go in any further detail with Retail Media Networks, lets first start with defining ‘retailers’ and ‘brands’ in this context, so that we are all on the same page.

Retailers sell products to the end consumers and are usually large, traditional companies with high coverage of brick-and-mortar stores in their respective markets, such as Walmart, Target, Tesco, Carrefour, GAP, IKEA, Nike etc.

There are different segmentations of retailers but I will keep it simple and divide the retailers into two:

1. Multi-brand retailers: These retailers sell products from different brands, even though they might also have their own white label brands¹. Mostly, grocery retailers, big box retailers, convenience stores, department stores belong to this category². The third party brands could be Consumer Packaged Goods (P&G, Unilever, L’Oreal etc), Consumer Electronics products (Samsung, HP, Microsoft, Lenovo etc), Apparel brands (Nike, Adidas, Tommy Hilfiger, Polo Ralph Lauren etc) and so on. These retailers’ business model is based on margins per item sold, and it is usually thin.

“The average net profit margin for the ten largest retailers is 3.2%. The net profit margin for Wal-Mart is 2.9%, Costco is 2.0%, Kroger is 1.7% (Grocery Stores as an industry: 2.3%), Walgreens is 3.6%, Amazon is 1.7%, Home Depot is 8.4%, CVS is 3.0%.”³

However, as an example, the third party brands whose products they sell, also known as the producers, make between 20-40% profit margins depending on the category⁴. Beyond the exact figures, which vary across industries within each segment, the main takeaway is that retailers work with much lower profit margins compared to the producers of the products they sell.

2. Single-brand retailers: These companies both produce and sell their own products. Some of these retailers choose to work with multi-brand retailers as a sales channel (e.g Apple selling products in Apple Stores and on Best Buy or Vodafone), some not (e.g Ikea). We can argue that these are more brands than retailers who choose to have direct to consumer channel to sell their products, but I wanted to crystallise the difference between single-brand and multi-brand retailers, particularly in the context of media networks, as Retail Media Networks are not relevant for single-brand retailers.

Now that we have a baseline alignment on the definitions, lets define what a ‘Retail Media Network’ is:

“A retail media network is an advertising infrastructure that comprises a collection of digital channels (e.g., websites, apps) that are offered by a retail company to third-party brands for their various advertising purposes.”⁵

While there are a lot of definitions out there, it’s interesting to see that one of the first search results to the Retail Media Networks definition on Google is from Amazon Ads, a Retail Media Network itself.

However, Amazon is not really a retail as we traditionally know it. It is more of an online retailer and marketplace, and have massive market share globally, but it has importance distinctions compared to traditional retailers, the most important of which is that they are almost 100% digital (vs majority of the sales happen in brick-and-mortar stores for retailers). Parking it here for now, we will talk about online marketplaces and Amazon separately in a different post.

Using Amazon’s definition above, as accurate as it is, it does not truly provide the full context and power of Retail Media Networks (as referred to RMNs moving forward). Let me elaborate.

CPG’s need for performance marketing

One of the biggest ‘third party brand’ verticals is Consumer Packaged Goods (CPGs). They produce the most essential products for us humans, and have been out there for as long as capitalism existed. An important nuance with CPG brands is their heavy dependency on retailers, in comparison with other verticals such as Consumer Electronics, Apparel etc. You could choose to go to Samsung Store, Sony Center, Nike showroom etc to buy their products, rather than Best Buy, Media Markt, Currys but there is no Coca Cola, Tide, L’Oreal stores; for a good reason. Consumers prefer to buy these products in grocery retailers.

Therefore, CPG has the highest dependency on retailers among all similar verticals. This means CPG brands have to work closely with their retailer partners to market their products, measure the effectiveness of their marketing efforts to drive business outcomes. All these collaborated marketing efforts are traditionally called Shopper Marketing (also known as Trade Marketing), as part of which the retailer and the brand agree on how to promote the brand’s products in the retailer’s brick-and-mortar stores as well as digital presence and other digital channels.

We all know that CPG brands are masters of brand building. They know how to build a strong brand resonance through usually large-scale marketing and advertising campaigns (e.g Super Bowl ads, sponsorships, celebrity endorsements etc). However, with the rapid rise of digital advertising in the last 5-10 years, they have always been interested in shifting dollars to performance marketing. So, the problem? They could not, because they did not have access to the real-time sales and customer data, which belong to the retailers.

Retailers’ motivation to create value added services with high profit margin

Retailers, on the other hand, have been eager to build new high margin revenue streams. While Shopper Marketing has been one of them, it was not scalable due to the limitations of their stores, which was the primary channel where they were executing the shopper marketing efforts with their brand partners (price reductions, in-store displays, circulars etc). The rise of e-commerce, and digital advertising opened up a massive opportunity for retailers to monetize their uniquely valuable audience and sales data through value added marketing services for their brand partners, such as;

1. Monetization of the advertising inventory on their website or app: Incredibly valuable advertising space on the retailer’s website and app for the brands to promote their products, right at the point of the consumers purchasing products online
2. Closed loop measurement: Providing accurate and omnichannel (both the stores and digital presence – web & app) reporting on the brands’ advertising investments through the retailer
3. Audience monetization: Ability for brands to target the retailer’s audiences in digital channels (e.g Meta, Google, Tiktok etc)

All of these offerings are highly attractive for the brands, and lucrative business opportunities for the retailers. Important to note that, such marketing services from the retailers to the brands means that the more these efforts scale, the more digital or foot traffic they will drive to their online and brick-and-mortar stores through the brand’s investment, and the less they will need to spend their own marketing dollars for growth. Therefore, while retailers are creating a high profit revenue channel, they also have the chance to decrease marketing costs, doubling the total value of these efforts for their businesses.

To sum up, RMNs build a strong bridge between the retailer’s desire to increase profitability through value added services, thanks to their unique assets, and brand’s desire to step into the performance marketing beyond their brand building efforts. This is where RMNs sit, and that’s why RMNs are the future for Retailers.

In the following posts, I plan to share more background on the shopper marketing efforts (and its legacy challenges), provide further data points of the size of the ecosystem in the near future, how big the top players are, and what trends we should expect to see in the next 5-10 years.