Retail Media Networks, Part 2: Why the Hype?

This article is Part 2 of a 4-part series on retail media networks (RMNs), and covers the fundamental reasons that, in my view, underlie all the excitement about – and investment in – RMNs launched by major retailers.

In Part 1 of this 4-part series, I covered the origins and definition of RMNs; in Part 3, I will paint a picture of where different retailers stand in their journey of launching their respective RMNs; and in Part 4, I will offer my hypotheses on what needs to happen in the retail media space for RMNs to live up to their widely publicized potential.

How does one assess the attractiveness of an advertising medium or a media vehicle?

Whether you are an advertiser looking to put your marketing budget to work, an investor looking to deploy capital in the media space, or the owner of a physical or digital asset looking to monetize it as media, I believe you should evaluate three principal factors:

1. Market Size: How much money in aggregate are marketers willing to invest to advertise or promote their product via this medium?
2. Media Potential: How powerful, unique, effective, or efficient is the media channel or media vehicle?
3. Returns Incrementality: Is the medium capable of delivering meaningful incremental return on ad spend (ROAS) above and beyond other mass media?

When examined through the above lens, retail media has the potential to be extremely attractive – especially if all the hopes and assumptions of how this medium advances from here actually bear out.

Market Size

Amazon launched its advertising business around 10 years ago, and by 2019, it had syphoned more than $10B in ad spend away from the online digital media duopoly that was Google and Facebook. That business has been on a tear ever since, and eMarketer now forecasts that Amazon ad revenues will top $30B by 2023. This runaway success story is probably singlehandedly responsible for the exploding interest and investment in retail media networks.

So how much money is there for RMNs to capture?

$100-300 billion in marketing spend in the U.S. is addressable by RMNs

Let’s start with a narrower view of demand by first focusing on consumer-packaged goods (CPG) marketers and the size of their advertising and marketing budgets. Data from Cadent Consulting research are a widely quoted source on the subject and provide the foundation for my analysis of the target addressable market (TAM) that RMNs can go after (see Figure 1). Given the array of advertising and promotional vehicles offered by RMNs, which I described in Part 1 of this series, nearly half of the $225B CPG companies spend on marketing is addressable by retail media. That’s over $100B in marketing spend by CPG advertisers alone.

Figure 1. 2020 CPG Annual Marketing Spend in the U.S. (Source: Cadent Consulting)

If we broaden the scope to capture all advertisers across industry verticals, including big-spender brands in financial services, automotive, telecom, and entertainment, the RMN TAM more than triples. Data by Winterberry Group estimates the total advertising and marketing spend in the U.S. to be over $400B, and three-quarters of that is addressable by retail media.

Furthermore, these numbers only count what advertisers are spending on RMN-addressable tactics today – not accounting for any major future shifts away from traditional marketing channels (e.g., TV, radio, print) and into RMN vehicles. Trends over the past decade have shown significant budget movements away from traditional media and into digital and retailer-owned channels. According to Cadent data, traditional advertising spend has shrunk from $55B in 2013 to just over $28B in 2020, while digital has exploded from under $5B to more than $50B in the same period.

Media Potential

Assessing the intrinsic value of an advertising medium is far from simple, and the process is not always entirely objective. Marketers evaluate many quantitative and qualitative factors that affect the attractiveness or effectiveness of an advertising medium, leaning heavily on past performance, but also looking at where technology and consumer behaviors are headed in the future. Often, personal biases, top-down directives from superiors, and even pure marketplace hype enter into the equation and sway marketers’ decision of where to invest their budgets.

My framework for assessing the potential value of a media channel or vehicle (shown in Figure 2) is certainly a simplification of this complex and constantly changing equation, but it covers the six attributes that, in my experience, are most important to the real and perceived intrinsic value potential of any media channel. Many of these (e.g. reach, frequency, and recency) are well-established industry metrics for assessing media channels, and some of them (e.g., attention and relevance) are just emerging and starting to be embraced by marketers.

Figure 2. The Media Potential framework – intrinsic value attributes of media vehicles

• Reach

The number-one priority for any marketer when assessing a media tool is “scale,” and the one metric essentially synonymous with scale is audience reach. The number of consumers who have the opportunity to see a brand’s message is critical to planning and managing marketing campaigns. Retailers with the most advanced RMNs have certainly caught on to that. Amazon’s Prime membership of over 200M subscribers worldwide is the envy of the industry. Walmart touts the 150M weekly visitors to its physical and digital properties and the fact that “90% of Americans shopped at Walmart in the past year.” And Kroger boasts 60M loyalty members, 9M daily shoppers, and 2.8B annual visits – all metrics prominently advertised on its RMN website.

• Frequency

Marketing is about influencing customers’ decision whether to buy or what to buy. The more frequently a product is purchased the more opportunities marketers have to impact behaviors. That is largely why CPG marketing budgets account for more than half of all marketing spend across industries. There aren’t many things we buy more frequently than groceries, personal care items, and home consumables. “High” frequency is not in itself the objective. But because fast-moving consumer goods (FMCG) retailers attract their loyal shoppers at least once a week, they can offer marketers the opportunity to activate sophisticated, high-precision campaigns that have a natural “frequency cap” and thus reach target audiences at significant scale while minimizing wasteful ad spend.

• Attention

Just because a medium can reach millions of people with great frequency, doesn’t mean that they all are actually seeing the message, let alone paying attention to it. The concept of “viewability” emerged in digital media over the past decade, as marketers looked to ensure that their ads were not merely served up on a web page visited by their target audience but were actually displayed in the visible space of the in-focus tab of the browser for at least a second. Online display and video ads’ viewability rates are generally in the 50-70% range, with YouTube ads topping the charts at 90%+ viewability.

More sophisticated measures of media exposure quality are now emerging, such as the “attention” metrics based on factors such as coverage, clutter, duration, and position of ad placements. Retail media, especially inside the physical store, has the potential to command almost undivided attention from grocery shoppers – a performance level traditional broadcast and digital media channels would have a hard time delivering.

• Relevance

The context within which an ad is presented can have a tremendous impact on the outcomes it generates. Catching the target audience in the right moment, in the right state of mind, when they are most likely to notice and be receptive to the advertising message, is of critical importance. Seeing an add for an online investing platform (e.g., E-Trade or Schwab) while browsing, say, the Yahoo Finance page would be a lot more effective than seeing the same add while checking NBA game scores and commentary on the ESPN website. The main reason Google Search brings in over $100B in ad revenue is the ability to target ads based on keywords in the user’s search terms, making them highly relevant to whatever the user is exploring or planning in that moment. For deep-pocketed CPG marketers, the best moment to influence their target shoppers is when they are planning meals or shopping for groceries. When it comes to offering the best contextual relevance for CPG advertisements, it’s hard to beat retail media, both online and in-store.

• Recency

Erwin Ephron, the late advertising guru, who is considered “the father of modern media planning” and “the inventor of ‘recency,’” famously wrote: “A single exposure can work … because it is the last of series of brand messages consumers see. It is effective this time because that consumer is now in the market.”

The “last-click attribution” model, which gives all the credit for a conversion event (e.g., online purchase) to the last ad the buyer clicked on before making the purchase, is a prominent application of Ephron’s “recency theory.” It is a widely used model in online media, and another reason why paid search has seen such remarkable influx of advertising budgets, though most experts agree that attributing 100% of the conversion effect to the last ad seen is not reflective of reality.

Regardless of how much weight one believes should be assigned to recency, there’s little doubt of its importance to the business results marketing delivers. For CPG advertisers looking to apply recency models to optimize their marketing spend, digital and analog media vehicles offered by FMCG retailers are extremely attractive. As the oft-quoted 2014 study by POPAI shows, grocery shoppers make 76% of their purchase decisions in-store.

• Data

Understanding the factors that impact the relative effectiveness of their marketing investments is not just of academic interest to marketers, it is of vital importance for having the budgets allocated to them in the first place. Doing so with deterministic (not modelled) data, at scale, and in as close to real time as possible is the holy grail of marketing. Before the internet, measuring mass media generally relied on sampling a panel of consumers and extrapolating from that limited sample. With the advent of online advertising and other digital media channels, it became possible to digitally record almost every step the consumer takes along the marketing funnel – from the opportunity to see an ad to hovering their mouse pointer over the ad to clicking on it to clipping a digital coupon or discount code to searching for a product to ultimately buying it on an e-commerce website. All that is made possible by the individual-user data captured by internet browsers.

In the physical world, that kind of “data trail” is generally not available to marketers. But out-of-home, place-based, and in-store digital solutions are beginning to weave the data fabric necessary to measure traffic, attention, interest, and interaction with ads and merchandise inside brick-and-mortar stores. Add to that the vast first-party shopper audiences within retailers’ loyalty databases and the SKU-level purchasing data their checkout systems capture daily, and RMNs promise the most valuable collection of data sources for marketers to track omnichannel ad exposure and consumer actions at the individual (or household) level.

Returns Incrementality

Let’s first agree on what the term “mass media network” means. My practical definition of what it takes to be a “mass media network” is rooted in four necessary characteristics:

1. Massive Reach: This is the “mass” part. For any media network to be considered “mass” in the U.S., in my view, it should be capable of reaching at least ~50M households or ~100M individuals with a frequency of at least once per week.
2. Universal Coverage: This is the “network” part. As massive as Walmart’s reach is, a single retailer by itself does not make a network – it is the equivalent of a local affiliate station in TV. To have a mass media network, you need universal nationwide coverage of the outlets where your target audiences are.
3. Efficient Transactions: Mass media requires efficient, low-friction, and transparent transaction mechanisms. That means easy-to-access marketplaces that can transact across the entire network, agencies and/or exchanges that aggregate supply and demand, and established processes to set prices and clear transactions.
4. Common Currency: Mass media networks also require common standards (e.g., ad unit form factors) and universally accepted performance measurement KPIs. Each of the four established mass media have well-understood and time-honored “currency” metrics (e.g., GRPs and TRPs for TV or CTR for online ads) to plan, measure and optimize campaigns and establish a clear ROAS.

That brings us to the concepts of “saturation” and “incrementality” in media.

To give credit where credit’s due, much of the thinking, knowledge and concepts in this section I have learned from or developed thanks to my former colleague and prominent media measurement and marketing insights expert, Ethan Rapp.

What is the marginal value of the next dollar of ad spend in a given mass media channel? If TV or paid online search have proven to deliver excellent returns for a brand marketer, does that mean they should continue to invest additional funds in those two channels? Does incremental investment result in proportionately incremental return on ad spend (ROAS)?

The short answer is no. The relationship between ad spend and ROAS (which is generally calculated as the new revenue generated by a marketing campaign divided by the cost of the campaign) is not linear. ROAS in any media channel follows a concave or S-shaped response curve that flattens out (or even begins to dip down) beyond a certain level of spend – a point of diminishing (or even negative) returns. The fundamental reason for this phenomenon is the fact that, for any media channel, there is a natural audience saturation point, beyond which any new impressions an advertiser pays for no longer reach new audiences but rather end up hitting the same people, who are not going to buy more just because they saw the same ad again and again.

To combat this effect, marketers invest in a mix of mass media channels that are complementary and produce a meaningful incremental return. The goal is to invest in any one channel up to the point of audience saturation and then layer on the next mass medium (see Figure 3) to reach new audiences or catch existing audiences in a different context or moment, resulting in incremental returns.

The challenge marketers have is that there are really only four mass media in existence today to layer and achieve the above ROAS incrementality and maximization:

• Broadcast, including TV and radio,
• Print, including newspapers and magazines,
• Digital, including web, mobile, social, and email,
• Out of Home (OOH), including outdoor, transit, and place-based media.

Leading RMNs are certainly “mass enough” based on their audience reach, frequency and coverage. They generate an abundance of valuable data that can be used to plan, target, activate, measure and optimize media campaigns in ways superior even to established mass media. But most importantly, they promise incrementality of ROAS above and beyond the established four mass media. Retail could become the fifth mass medium.

Figure 3. Media Saturation and Incrementality model (special thanks to Ethan Rapp)

The big promise of RMNs: Retail could become the fifth mass medium.

What is the basis for this belief? First, RMNs are likely reaching at least some people who are not being exposed or paying enough attention to other mass media, thus unlocking returns from incremental audiences. Second, even audiences that may have been saturated by other mass media but didn’t make a purchase, are potentially being converted by RMNs because retailers are reaching them in a different and highly relevant context – in the middle of their shopping trip, rather than, say, at home or during their commute.

This promise of becoming the next mass medium and delivering meaningful ROAS incrementality is the main reason why RMNs are attracting so much attention and excitement.

Whether RMNs will live up to that promise remains to be seen. What is required for that to happen, as well as where individual retailers stand today, are the topics of the next two articles of this 4-part series.