The difference between winning retailers and everyone else will come down to one thing ... the strength of their brand.

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If you want to win in the future of retail you must have a strong brand

The need for a retailer to have a strong brand is not a new concept, but as ecommerce grows in volume and importance the requirement for a strong brand is more important than it has ever been for two relatively new reasons.

1.?????The need to minimise the ratio of spend allocated to paid forms demand routing channels, such as search, in order to keep pricing competitive

2.?????The need to create incremental revenue via a retail media proposition, driven by high levels of front door and organic visitation.

Area 1 is right now the difference between retailers with strong and sustained profits, and those with inconsistent low/no profit (and in some cases sustained losses). Area 2 is a critical lever for the same outcome in the future. Those who can crack retail media in a meaningful way could see profit margin increase by 20-30%, driven by incremental high margin advertising revenue that comes from a large volume of brand loyal customers.

Both outcomes come down to brand. Sustained consumer demand cannot be arbitraged or rented, and if you choose this path it will generally create unprofitable growth and as a kicker, a future where you’re hooked on the demand arbitrage steroid and unable to stop using it. ??

There is a marked difference between the strong and weak retail brands when it comes to digital consumption.

The below looks 8 notable Australian retailers. The list doesn’t include any supermarkets (Coles, Woolworths or Aldi) or discount stores (i.e. Target, Big W, Kmart). It does feature retailers that play in big box/everything store, electronics, fashion and beauty. They operate as marked – either ecom pureplay or hybrid physical plus ecom. Data is from March 2023 taken from SimilarWeb.

What do we see? We start to see a difference in two areas – traffic origin (i.e. where their web traffic comes from) as well as whether their search traffic is brand related or category/non brand related.

There are a few areas to look at. First is the paid search column – this is the ratio of total visits that come from paying to access a term on search. We can see a big difference in strong bands (<15%) and weaker brands (20-30%+). The next is the column around brand/non brand search. ‘Brand’ means basically the search term has the brand name or a combination in it. Non brand means a term with no retailer brand in it. Stronger brands are generally <60%, weaker brands are >60%

You can see here a difference in terms of competitors in category. For example, ‘big box ecom pureplay 1 ‘has high traffic, relatively low levels of paid search, and relative low levels of non-brand search type. ‘Big box ecom pureplay 2’ has lower traffic, 2.5x the reliance on paid search and 26 percentage points less branded search ratio. We see a similar trend for the beauty retailers and the electronic pureplay versus the electronic physical plus digital.

The below for these 8 retailers shows the reliance on paid search and the strength of their overall brand search volume. The relationship is clear – weak in one area, weak in another, and vice versa.

Strong brands own their competitive advantage, weak brands rent it

Strong brands use paid search as a way of augmenting holes or weak points in their overall customer acquisition. You can see below ‘big box ecom pureplay 1’ is generating 13.31% of its traffic from paid search. ‘Beauty digital plus physical’ only 7.69% and ‘electronics digital + physical 2’ just 6.2%.

This means it is not renting a material amount of its customers from Google and it has ways to access its customers without paying an intermediary. It is also not as reliant on search terms that do not include its brand – terms that are generally inclusive of consumer products brands (think Nike, Samsung, Aesop, The Ordinary) and subject to huge amounts of auction competition.

The weaker brands below have a high ratio of paid traffic (+29%) – meaning there is a higher cost to maintain this stream of customers, and a much lower rate of branded search traffic (meaning its reliant on consumer brand names and category terms) placing it at high exposure to auction dynamics.

A strong brand allows you to elevate from the frantic auctions of search and use the funds you save (which are significant and outlined later on) on building a strong brand and customer proposition (or even lowering prices as your marketing expense is lower)

What we also see is there’s a strong correlation between a retailers ratio of paid search traffic and its ratio of non brand search traffic. i.e. the more reliant you are on paid search, the higher the ratio of non branded traffic is. Another double hit – more search expense, and lower brand search volume creating a reliance on expensive and cluttered category and supplier brand terms.

Another challenge here with the emergence of retail media is it’s difficult for retailers to monetise traffic it is incurring paid search costs to acquire. This is basically an arbitrage play and difficult to operate profitably due to the costs involved. It will also be impossible for the retailer to charge for SKU level terms at a lower cost than Google if it’s reliant on Google for the source traffic. A strong brand with significant front door and branded traffic is mandatory for a retail media offering.

Weaker brands rely on the strength of supplier brands and category terms to drive volume, but compete in a cluttered ‘zero sum’ space where the traffic volume depends heavily on the appetite to bid more than your competitors.

For the 3 retailers with the highest paid search reliance (who also have low levels of branded search volume) we looked at 5 key non-branded (i.e. retailer branded) search terms to look at total search volume, total volume the retailer won in March and the amount of competitors bidding on these terms. (the terms aren’t listed, but are referenced as numbers 1 to 5)

What we see for each of the three retailers is a similar story. Relatively low levels of winning bids, and significant (in most cases 10-18) competitors bidding. For example. For term 5 used by ‘big box ecom pureplay’ there are 80,390 total searches. The retailer wins 511 of these. And it competes with 18 other brands. If any of these 18 decide to increase their bid meaningfully, it will affect the auction dynamics. But as the overall battle is zero-sum, any new traffic to the high bidder will just come from someone else.

In most instances the search terms for each of these retailers is the brand name of one of their suppliers, or a brand name plus product sku combo. And in 90% of examples the original manufacturer/supplier is also bidding too as they are selling directly as well.

For any retailer (pureplay or hybrid) you want a large volume of SKU and supplier brand terms on your internal on-site search and as little reliance as possible on Google sourced shopping search traffic (both for profitability and retail media inventory)

Strong brands are enjoying huge cost savings as a result of their brand building

There is a significant difference between stronger and weaker brands that has huge costs impacts on traffic origin.

The first 3 retail brands are the weaker brands. They are generating between 50-60% of their total traffic from direct traffic and search with their brand included in the term.

The next 3 are the stronger brands. They are generating between 67-80% of traffic from direct or brand inclusive search terms. The stronger brands win in either direct traffic and/or branded search (organic and paid).

Based on my calculations, the value of the brand asset for the stronger brands is significant in terms of the value it brings in traffic that doesn’t require intermediary payment.

If ‘Big Box ecom pureplay 1’ had the same ratio of front door plus branded traffic for its visits, it would need to spend approximately $150 million a year on traffic acquisition to compensate for this difference.

For ‘beauty digital plus physical’, if it had the same traffic ratio as ‘beauty ecom pureplay’, it would need to spend $8.07 million a year in traffic acquisition to make up the shortfall.

And ‘electronics digital plus physical 2’ would need to outlay an additional $46 million a year based on the benefits its brand brings in terms of traffic.

On the other hand, the weaker brands would be significantly more profitable and operate at more ‘normal’ retail margins if they had brands that delivered the same benefits as the stronger branded retailers. In my calculations it would improve their profit margin by 4 to 6 points across each of these three businesses just in terms of core operations (excluding any retail media benefit)

The takeout – you just can’t win in a profitable and sustainable way in retail without a strong, salient brand.

The stronger brands here are by no means generations old incumbents. One emerged physically in the 90’s and has really expanded over the past 20 years. Another emerged at the advent of social media and has continued to grow both online and physically; and another began with the modern consumer internet in the 90’s. Their marketing approaches are different but they employ a diverse range of tactics and channels to reach category buyers frequently and have very strong brand links to the key purchase criteria in?the categories they operate. They are not reliant on any one (or two) marketing channels.

Of the weaker brands, all are 10 years old or under and follow similar approaches to marketing. They market differently to the stronger brands and are disproportionately exposed investment wise in one or two channels.

The reality is you can’t simply ‘buy’ a strong brand. It’s a muscle built over time, and something that if maintained continues to grow in strength. The stronger brands can continue doing what they are doing and maintain.

For the weaker brands, hope isn’t lost. They can also grow a stronger brand but the investment to do so will be incremental and significant. They are in a position they can’t reallocate funds from existing channels as they’re highly reliant on these to maintain the status quo, so any brand activity needs to be on top of this. The two challenges here are having the free cash flow to invest in brand, and the skill needed to build a strong brand within a culture where brand has been a secondary priority.

But to win in the new retail landscape, where cost management is critical and retail media is needed to supercharge margin, a truly strong brand is the cost of entry.