What is retail media and what is driving its growth?

The retail media market has come a long way since Amazon first launched its network in 2012. Since those early days, a broad range of retailers and other businesses have established their own retail media networks, from Walmart to Kroger, Tesco, Best Buy, Instacart and even Marriott.

This has catalysed growth which is set to continue for the foreseeable future. GroupM has forecasted that retail media will reach $160bn in spend by 2027.

In a changing and competitive market, and as the twilight of the third-party cookie looms, brands are seizing the growing opportunity offered by retail media.

This abridged excerpt from the opening chapter of Econsultancy’s Retail Media Best Practice Guide, offers a definition of retail media, and reasons for its rapid growth.

What is retail media?

In its broadest sense, retail media relates to any promotional marketing placed by brands at or near the point of sale, whether that is in a physical store environment or on a retailer or ecommerce website.

Technology and advertising business Criteo defines retail media as“…ads placed on a retailer’s ecommerce site or app by a brand in order to influence the customer at the point of purchase. Retail media enables brands to boost their visibility on the ‘digital shelf’, similar to an endcap or special in-aisle feature in a physical store.”

Retail media is most often bought by brands that are already selling goods on the retailer’s ecommerce site and may be looking to drive awareness and consideration but most notably to improve sales of their products. However, it may also be bought by other advertisers that are looking to reach certain types of consumers and that are using retail sites in much the same way as they would other types of media outlet. Research from Merkle found that 63% of retailers have non-seller brands that are actively using their media network.

A good definition of retail media… reflects the fact that it sits alongside other aspects of shopper marketing, and also enables advertising both on and off retailer sites.

Retail media networks (RMNs) are the advertising platforms created by retailers that give brands access to promotional inventory across owned retailer channels. These platforms enable retailers to manage the placement of promotional formats on their owned media and may also facilitate advertisers making use of the retailer’s first-party data to target shoppers with relevant advertisements both on the retailer’s media and across the open web. Networks typically provide a range of formats, tools and methods to enable the placement of ads, and campaign reporting.

A good definition of retail media, therefore, reflects the fact that it sits alongside other aspects of shopper marketing, and also enables advertising both on and off retailer sites.

Philippa Snare, SVP, EMEA, of The Trade Desk, explains retail media in the following terms:

“We think of ‘shopper marketing’ as an umbrella term covering the broader opportunity in retail, from physical in-store ads to product suggestions on online stores. Sitting underneath this is ‘on-site retail media’, which is any advertising taking place on the retailer’s own site. The final layer is arguably the most exciting offering, which is ‘off-site retail data’, where data is decoupled from the retailer’s own websites and apps to power and optimise advertising campaigns across the open internet.”

Marketing technology business Epsilon describes how using retailer first-party data can reach in-market buyers at the point of purchase, and how a successful retail media network “is one that can effectively monetize all addressable channels in a brand-safe, privacy-compliant environment – all the way through to the end consumer.”

As retail media continues to grow, FMCGs need to break down their silos and upskill their teams to take advantage

What is driving retail media growth?

McKinsey research has revealed that 87% of CPGs (a category that are significant retail media spenders) planned to increase their ad spend in retail media networks in 2023. Interestingly, 70% of the respondents in McKinsey’s survey said that this was because their ad performance in retail media (in driving product sales) is significantly or somewhat better than in other channels.

Research by The Trade Desk demonstrated that 74% of brands now have dedicated budgets for retail media networks, and IAB Europe data indicates that 92% of advertisers are actively partnering with retailers to reach consumers through retail media.

Growth in retail media has been supercharged by the convergence of several key drivers that have combined in a perfect storm:

1. Pressure on retailers to derive new sources of revenue and improve margins.
2. The ongoing challenge for brands to drive increasing sales in low-growth and ever-more competitive markets.
3. The demise of third-party cookies and the need for brands to evolve their approaches to targeting consumers.
4. Evolving consumer online behaviour which is impacting how shoppers are making product decisions.

1. Pressure on retailers

According to research by analyst firm Alvarez & Marsal, European retail market profitability has been under particular pressure since 2015, with pre-tax profit margins falling from 6.4% in 2015/16 to 4.5% in 2019/20. The research further notes that the shift towards online shopping is a ‘significant contributing factor to dwindling profit margins’, with a correlation between rising proportion of sales from online channels and falling profit margins. This pattern is echoed in the US, where the Salesforce Shopping Index (based on shopping data from over a billion consumers worldwide) indicated that rising costs during the 2022 holiday shopping season was putting 10% of retailer profits at risk.

This pressure on margins has intensified more recently as retailers face into the headwinds of high inflation and rising interest rates. In a number of markets this has been compounded by weak consumer demand and increased competition from low-margin, low-cost retailers (including Amazon and agile ecommerce retailers such as Shein as well as grocery businesses such as Lidl and Aldi).

For a retailer running their core business on a 2-4% margin, the prospect of setting up a retail media business that could run at [a] 40% margin is pretty appealing. – Julie Jeancolas, Dunnhumby

The squeeze on margins has given impetus to retailers looking for new sources of revenue, and retail media is seen as an opportunity to drive both incremental revenue and to improve margins.

In a VideoWeek podcast, report interviewee Julie Jeancolas, Global Head of Product, Strategy and Partnerships, Retail Media and Personalisation, at Dunnhumby, highlighted the attractiveness of higher margin retail media: “For a retailer running their core business on a 2 to 4% margin, the prospect of setting up a retail media business that could run at [a] 40% margin is pretty appealing.”

2. The search for brand growth

Many brands operating in low-growth markets are facing a heightened challenge, which has placed more focus on developing new sources for driving sales. This growth challenge has been compounded by a higher level of competition in many categories, and more recently from weakening demand due to the high cost of living and inflation. PwC’s 2023 Global Consumer Insights Pulse Survey, for example, found that 96% of respondents intended to adopt cost-saving behaviours over the next six months, and that 69% of consumers had changed non-essential spending in the past six months.

These headwinds have perhaps been felt more keenly in the CPG category. McKinsey research found that between 2009 and 2019, for the top 30 CPGs, margin expansion contributed twice as much value as growth (50% versus 26%).

Growth for larger CPG brands has been particularly challenging, with the McKinsey research showing that from 2017–2019, 90% of overall value growth for the top CPG companies came from their small and medium-sized brands. In this low-growth environment, the opportunity is for brands to drive incremental sales by partnering with retailers in new ways to capitalise on the emerging retail media market.

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3. Evolution in ad targeting

The decline in the value and use of third-party cookies in consumer targeting and advertising is also acting as a catalyst for retail media growth and the data-rich targeting opportunity that it provides.

The ability to use retailer first-party transactional and behavioural data is a significant opportunity for advertisers and brands that are looking to engage consumers in the most relevant way to drive conversion. Retail media also provides a form of data targeting that is far less reliant on mechanics that have been at the centre of privacy concerns such as cookies. As the demise of cookies gains momentum, this will place even greater emphasis on the value of retail media targeting opportunities.

4. Consumer behaviour

In consumer research into how people decide what to buy, Google has described the ‘messy middle’ that happens between trigger and purchase, and which is the space in which brands win or lose.

Noting how digital touchpoints have become critical as sources of expertise, information and recommendation to inform purchases within a category, Google outlines how this messy middle is dominated by two mental modes: exploration, which is an expansive mode related to seeking out options and information, and evaluation, which is a reductive activity in which people narrow their choices.

The messy middle frames a context in which brands need to promote mental availability across digital and non-digital touchpoints and ensure the brand is front of mind while consumers explore but also that the gap between trigger and purchase is kept as close as possible to lessen consumer exposure to competitor brands or propositions. Retail media is playing an increasingly important role in achieving these objectives for brands.

At the same time, as customer journeys become more complex, the sources of recommendation and discovery for products that may fulfil consumer needs are evolving as well. An important shift in consumer behaviour here is the growing significance of online retailers as destinations for consumers to conduct their product searches, as opposed to Google and other search engines.

According to 2020 research undertaken by Criteo in the US, two thirds of online product searches start on retailer sites. This behaviour is also reflected in research conducted by software business InRiver (based on a survey of 6,000 adults in the US, UK and Germany), which found that 44% of product searches begin on marketplaces such as Amazon. This compares to 19% that start on a search engine and only 9% that begin on a brand’s own website. These shifts in behaviour are generating more opportunities for brands to reach consumers in compelling ways through emerging retail media channels.