How retailers are reshaping the advertising industry

Online shoppers hunting for televisions from the British retailer Argos this week will be inundated with Black Friday offers. Yet among the hundreds of options, an ultra high definition model from Toshiba stands out.

That is because the Japanese electronics maker has paid a premium for prominent positioning. Argos will use the data it collects about purchasers to better target future adverts during shopping sessions.

The arrangements that underpin such promotions have a relatively low profile — in some cases consumers are barely aware they exist — yet they are beginning to upend the global advertising industry.

J Sainsbury, owner of Argos, is among dozens of retailers trying to emulate Amazon’s success in building a marketing business on the back of a sales platform. They are effectively creating a new form of mass media in direct competition with traditional publishers and Big Tech.

As part of their broader shift away from bricks and mortar, large retailers have developed increasingly influential digital advertising arms that give consumer brands powerful new ways to reach shoppers.

From Woolworths Group in Australia to Canada’s Loblaws, retailers in a range of global markets are with varying degrees of success positioning themselves as compelling ad venues for the world’s biggest consumer brands.

Amir Rasekh, director of Nectar360, J Sainsbury’s loyalty scheme and marketing services arm, says: “Brands have woken up to the fact that as a retailer . . . you have the ability to understand customer behaviour and personalise advertising based on that.”

The expansion is particularly aggressive in the US, where eMarketer estimates advertisers are on track to spend more than $37bn on “retail media networks” this year, an increase of about a fifth from 2021.

While social media currently attracts more ad dollars, with a forecast annual haul of $65bn, retail media is set to grow more than five times faster in 2022.

Retailers’ ad revenues are already almost twice as large as radio and print combined, and the gap with television, which is forecast to generate $68bn in ad sales this year, is also closing swiftly, according to eMarketer.

But the industry’s media ventures threaten to exacerbate tensions with suppliers over how products are promoted, at a time when inflationary pressures are already leading to sometimes fraught negotiations over pricing.

More sophisticated customer profiling has meanwhile invited scrutiny from data privacy campaigners. And while the ability to reach a wide audience through advertising is helping Amazon and other large retailers withstand pressure on sales during the cost of living squeeze, the expense and logistics required to build digital media businesses risk leaving smaller chains even further behind.

The momentum behind so-called retail media is nevertheless so great that it has the potential to usher in a new era of digital advertising, says Brian Gleason, chief revenue officer at Paris-based Criteo, which has developed media technology for retailers including Carrefour of France and Britain’s Asda.

First came search, he says, “which changed the way we interact with consumers”. Then came social media, which brought target audiences into clearer focus. Retail media is the “third wave”, says Gleason, a former executive at advertising group WPP. “The largest retailers in the world are becoming media companies in many ways.”

Big retailers, big ad revenues

Last month, Amazon threw a three-day event at one of Manhattan’s largest convention centres for a group of valuable customers. US Olympian Allyson Felix hosted a fireside chat and after-hours entertainment was provided by American rock band The Killers.

The clients were not TV critics or cloud computing users but advertisers, who added $9.5bn to Amazon’s global revenue in the third quarter.

As the largest online retailer, Amazon is the most obvious beneficiary of a shift in advertising markets as a decade-long boom for social media deflates. Ad revenues at Meta, owner of Facebook and Instagram, fell 3.7 per cent over the same period to $27.2bn.

“Many of our clients are shifting ad dollars to retailers that they had been spending with Facebook and other online media platforms,” says Ethan Goodman of The Mars Agency, a retail advertising specialist.

Amazon’s earnings report showed that its revenue from advertising was higher than fees from its Amazon Prime membership scheme, audiobooks and digital music combined, as well as more than twice the sales from its physical stores, including the Whole Foods grocery chain.

Although their numbers are much smaller, several of Amazon’s biggest rivals are also making considerable inroads into advertising, especially since the surge in online shopping during the pandemic brought millions more eyeballs to their websites and mobile apps.

Retailers have realised “‘we now have a certain scale of digital attention that allows us to monetise data in a whole new way”, says Lauren Walker, head of data and analytics at Accenture Song, the consulting group’s marketing business.

The world’s largest retailer overall, Walmart, said last week that its ad revenues surged 30 per cent in the most recent quarter thanks to expansion of its media business in the US, known as Connect, and in India through Flipkart Ads.

The company is on track to generate $2.2bn in revenues from advertising in the US this year, eMarketer estimates. On a call with analysts, Walmart’s chief financial officer John Rainey noted that advertising was not only faster-growing than its main retail business, it also had higher margins.

‘Treasure troves’ of data

Despite its scale, retail media tends to be lower key than commercials on TV, outdoor billboards or indeed other forms of digital advertising.

Online, the ads take two main forms: promotions on homepages and product pages, and search results, akin to those on Google.

Unlike the banner ads and embedded videos that are plastered across the wider web, the commercials are typically integrated seamlessly into the retailers’ web design.

Although in many cases promoted products are clearly marked as “sponsored” — as they are at Argos, for example — it might not always be obvious to shoppers that suppliers have paid the retailer for the positioning.

In the physical world too, retailers are finding ever more creative ways to turn more of their properties into space they can sell to marketers, from ad-supported in-store radio stations to video displays on shopping trolleys that promote particular products based on the weather and time of day.

Tesco, for instance, has installed 500 “smart screens” at entrances to its connected stores through a partnership with JCDecaux.

Amazon and Walmart
Advertising is helping Amazon and other large retailers, such as Walmart, withstand pressure on sales during the cost of living crisis

What makes such media so compelling to suppliers is the data, which in theory should allow them both to target particular demographics and to measure the effectiveness of their marketing efforts far more efficiently.

“Many of these retailers are sitting on real exciting treasure troves,” says Marc Brodherson, senior partner for marketing at McKinsey.

The expanding dossiers on consumer behaviour now held by retailers have become more valuable since online privacy controls have hurt rival digital media owners, especially social networking apps.

Apple’s updates to its iOS operating system have restricted the ability of apps to follow users around the web and gather information about them. Google meanwhile has said it will begin phasing out types of cookies — or bits of data that identify a user’s device — that are used to track browsing on its Chrome browser from 2024.

The changes have had less impact on retailers — along with hoteliers, food delivery companies and other owners of so-called first-party data — since they do not need to collect information from users on other websites.

Consumers are frequently logged in using their personal credentials when they shop online, allowing retailers to collate particulars about shopper interests without running into the restrictions.

“You had a whole industry that was predicated on behavioural targeting and measurement, and it’s been kneecapped,” adds Andrew Lipsman, ecommerce analyst at eMarketer. “Especially in these inflationary times, ad budgets are going to go where they have more certainty about return. Increasingly, that is retail media.”

The information that retailers can glean about users is “much more valuable” to marketers than other forms of digital ads, says Matt Krepsik, chief executive of Quotient, which has helped build media networks for companies including Dollar General, Rite Aid and AutoZone. “It’s a level up from the social platforms.”

Advertisers on social media generally need to use personal data collected about users as a proxy for the types of products that they might be interested in, albeit through increasingly sophisticated algorithms. Retailers, in contrast, have assembled databases on actual transactions.

Brandon Flowers of The Killers performs onstage
Last month Amazon threw a three-day event, which included a performance by The Killers, for its advertisers, who added $9.5bn to the group’s revenue…

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2022-11-22 21:00:50

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