Etude

No More Easy Money on the Side: Retail Media Enters the Performance Era

Ad sales have given retailers a welcome boost, but advertisers’ needs are changing.

Par Stephen Mewborn, Jackelyn Livesey, Ruth Zöhrer, et Naomi Alford

First published on décembre 13, 2023
min


En Bref Retail media should continue to offer retailers a fast-growing and high-margin profit stream to offset core business pressure. However, competition for ad revenues is poised to intensify, as advertisers consolidate their spending with fewer retail media networks and demand more for their money. Focusing on three areas—segmented go-to-market strategy, operating model integration with the core retail business, and performance measurement—will help give retail media networks an edge. Selling ad space on websites and apps has become a profitable side hustle for many retailers. The first retail media network was created a decade ago; now, there are more than 150 globally. Most, if not all, have enjoyed at least some success, partly by piggybacking on retailers’ existing relationships with consumer brands. These brands have been willing to spread their retail media spending across an array of networks—upward of 20 to 30, in some cases. That’s not the only thing that has helped a long tail of networks gain traction. Advertisers have often bought retail media in a siloed and fragmented way, as it was too new and small to be coordinated with other marketing investments. In addition, a broad range of retail media players were aided by the boom in e-commerce and dip in trade promotion triggered by the Covid-19 pandemic. These unusually favorable conditions are now poised to change. Over the next few years, competition in retail media is set to intensify, even as the market continues to grow. Existing players will have to cope with an influx of new networks launched by the likes of value and specialty retailers. Ad inventory is also likely to grow faster than demand, as retailers offer more advertising opportunities outside of their own websites and apps (in physical stores or on third-party platforms, for instance). Most important, retail media networks will have to adjust to a fundamental shift in the way advertisers behave. Put simply, having reached more than $90 billion in annual sales globally and having started to draw spending away from more established digital advertising platforms, retail media is now too big and important to be treated as an experimental channel by brands. Instead, advertisers will become more strategic in the way they work with retail media networks. One consequence is that media spending is likely to become more consolidated overall. For instance, in a Bain & Company survey of hundreds of advertising decision makers, 50% of the US advertisers we talked to said they expected to consolidate their spending with a select few retail media networks; on average, they said they would not want to work directly with more than six at a time. Crucially, all advertisers—even those that choose to continue working with 10 or more networks—will set a higher bar for performance, in line with the channel’s growing maturity. Early signs of that performance push are already visible. Advertisers are investing heavily in their retail media function, adapting operating models to centralize retail media planning and capabilities, while improving their ability to evaluate outcomes. The dawning of the performance era will create clear winners and losers in retail media. Advertisers won’t feel obliged to stay with a network just because they also have a longstanding supplier relationship with the retailer that owns it. Neither will they favor retailers that persist in seeing them only as a vendor. What they will do is ruthlessly prioritize those networks that generate the most attractive return on their ad spending, increase sales, and work best for them overall as a customer. Some leading retail media networks have already started to capitalize on this shift. It’s not too late for others to grasp the opportunity and maximize their growth as retail media moves from sideline to prime time. No one is nailing it yet The good news is that retail media should still post very attractive growth over the next few years. We forecast that the market will swell by 12% annually to about $140 billion in 2026, picking up share from other digital advertising channels in the process. The trend should be even stronger in the US, where retail media spending is forecast to grow by 16% annually between 2022 and 2026. That projected revenue growth, coupled with attractive profit margins, is set to make retail media central to a structural shift in retail. Our analysis suggests that, between now and 2030, retailers will see only modest profit growth from traditional trade (meaning retail activities centered on the simple sale of goods procured from suppliers). Instead, the lion’s share of profit growth is likely to come from activity that reaches beyond trade, with retail media being one of the most promising ways to branch out (see the Bain Briefs “The Future of Retail: The Age of Convergence” and “How Engine 2 Expansion Can Power the Future of Retail”). Consumer packaged goods (CPG) brands are already sold on the concept of retail media, in theory. They recognize its differentiated ability to target relevant audiences in the right environments—and then connect that ad spending with actual sales through closed-loop attribution. In our survey, 53% of CPG advertisers said retail media offered unique marketing opportunities, while 77% said its ability to reach relevant audiences was one of the main benefits. The appeal of retail media is only likely to strengthen: 56% of CPG advertisers believe that retail media will become more important due to changing data privacy regulations—and 73% said it will also become more compelling when bundled with customer data and insights. Yet, for all their enthusiasm about retail media, advertisers often feel their needs are not being met when they buy it, leading to a low Net Promoter Score^SM for most retail media networks (see Figure 1). Figure 1 So far, few retail media networks inspire much customer advocacy There are four key challenges that networks must resolve. The first is the rapidity of change and increasing complexity in the market. Products are quickly moving beyond sponsored search to offsite formats (third-party display, social media, etc.) and other innovations, which makes long-term planning for tech investment even harder. The second challenge is the need to develop a new go-to-market playbook. Selling advertising solutions is inherently different from running a retail business, involving a new set of customers and stakeholders, such as agencies and brand managers. Traditionally, most retailers have managed relationships with CPGs through their merchandising/trading organizations. But retail media is unlikely to reach its full potential if it relies on those existing points of interface. To engage with and sell to advertisers effectively, retail media networks need new capabilities and meaningful talent investments. Smaller networks must also figure out when and how to shift from relying on third-party retail media specialists to developing their own in-house capabilities. The third challenge consists of the difficult design choices that retailers must make, both in terms of their organizational structure and their day-to-day processes. How should they integrate retail media into their core marketing and merchandising functions? What’s the best way of designing processes, decision rights, and incentives across stakeholder groups? What are the right trade-offs to embed change while minimizing friction? What are the right tools to orchestrate these processes between teams? The final challenge centers on performance and measurement. Some networks aren’t yet able to make nimble adjustments to ad campaigns as they are underway, which compromises effectiveness. Nor do they always have the shopper data that can tie purchases to advertising, particularly when those purchases happen in-store. That closed-loop attribution is even harder when a retailer’s loyalty scheme is underpowered, when the retailer has not invested adequately in its own first-party data infrastructure, or when a retailer relies on third parties to enter retail media. Finally, there’s a mindset issue at some networks: They’re still viewing CPGs only as suppliers rather than customers that need to see granular performance data to be comfortable with increasing their spending. Adapting to the new landscape As retail media matures, advertisers will increasingly compare outcomes and returns on retail media networks with other digital advertising channels, instead of viewing retail media as a niche solution. Amid today’s macroeconomic turbulence, advertisers are under pressure to maximize the return from their marketing budget. Right now, they feel they get more bang for their buck elsewhere. The US CPG advertisers we surveyed were twice as likely to say that search and email advertising offered a high return on ad spend than they were with retail media (see Figure 2). Social media was also slightly ahead of retail media in terms of perceived return. Figure 2 Advertisers think retail media is lagging more mature channels on the key measure of return on ad spend (ROAS) On an operational level, CPGs are integrating retail media more with the broader, multichannel marketing team to coordinate messaging and create a more seamless experience for consumers across channels. More sophisticated brands are shifting to a “total commercial investment approach” that compares growth levers across marketing and trade. Advertisers are also entrusting cross-campaign decisions (including those concerning retail media) to a smaller number of senior marketing leaders, while dialing down the involvement of sales/trade teams that often took the lead when budgets were smaller. How should retail media networks respond to this changing and more integrated landscape? Focusing on three areas—segmented go-to-market strategy, operating model integration with the core business, and performance measurement—can help them scale their advertising businesses and become invaluable guides to advertisers as they seek to reach their target audience. Segmented go-to-market strategy. As we mentioned previously, selling advertising solutions is inherently different from running a retail business, requiring a new go-to-market playbook in areas such as advertiser segmentation, account prioritization, partnership model, sales cadence, marketing, and pricing. For instance, there’s the need to take a more hands-on approach with key accounts: Most retail media networks will need a tiered account model that allows them to differentially support both strategic partners and more sophisticated (and demanding) advertisers, while providing light-touch support and self-service solutions to smaller and less strategic advertisers. Retailers often underestimate the investment required to build a strong retail media function to fulfill their go-to-market ambitions, especially in areas such as talent recruitment. It can make sense to bring in outsiders with deep media expertise, not least due to the mounting complexity of the products that networks are selling and the sophistication of the brand marketer audience they are increasingly targeting. Furthermore, retailers with still-immature technology platforms often need more, not less, advertiser-facing headcount to fill the gaps in the offering as the platform matures. Operating model integration with the core retail business. Despite its specialized demands, retail media still needs to draw on the strengths of the core retail business to truly excel. A successful retail media network cannot be built on an island. For one thing, many relationships with advertisers are led by merchandisers who work with them as vendors. But integration with the retail core can vary according to a series of operating model design decisions. Should merchandisers be a formal part of the retail media selling effort? If so, how should they be trained and incentivized? Conversely, should retail media teams sit in on merchandisers’ vendor negotiations? These are just a few of the key operating model questions to resolve. Some networks might want to emphasize their sales and account management prowess, for instance, which would suggest looser process integration. Others might want to skew to media planning—and tighter integration. Either way, getting the operating model right will require retailers to fully embrace the dual role brands now play, as suppliers and customers. Performance measurement. Advertisers don’t think retail media does a good job of measuring returns and outcomes today—only 6% fully trust retailers’ reported media metrics (see the infographic “How Retail Media Networks Can Win with Advertisers”). For advertisers to keep increasing their retail media spending, that must change. For instance, retailers need to give a clearer picture of how online ads translate into sales in brick-and-mortar stores, not just e-commerce. They must also utilize more “clean rooms” to share anonymized purchase data with advertisers without breaching privacy rules. Crucially, better measurement will lead to more test-and-learn efforts as brands learn how to maximize the performance of this new channel. Winning retail media networks will create processes and teams to enable test-and-learn programs at scale, partnering with advertisers to develop new techniques for measuring campaigns in real time—techniques that leverage first-party customer data to get at insights beyond what has been available in traditional media mix modeling. Shaking off a false sense of security As retail media quietly grew into a $90 billion-a-year market over the past decade, some retailers might have been lulled into a false sense of security. However, the pace of change and sophistication are increasing in retail media. This promising profit stream—which will be so crucial to retailers as their core profit growth comes under further pressure—isn’t going to reach its full potential unless a network can meet the rising demands of its advertisers. That evolution needs to start soon if it hasn’t already. Retailers probably have one to three years in which they can reposition themselves for the next chapter in the growth of the channel. While there’s no one-size-fits-all plan for getting that done, there will be some common themes emerging across retail media success stories, including better collaboration, even more test-and-learn experimentation, a sharper commercial function, and a realization that not everything has to be polished to a shine. It’ll be a demanding transition for most retailers. But the promise of continued high-margin growth is real.

En Bref

Retail media should continue to offer retailers a fast-growing and high-margin profit stream to offset core business pressure.
However, competition for ad revenues is poised to intensify, as advertisers consolidate their spending with fewer retail media networks and demand more for their money.
Focusing on three areas—segmented go-to-market strategy, operating model integration with the core retail business, and performance measurement—will help give retail media networks an edge.

Selling ad space on websites and apps has become a profitable side hustle for many retailers. The first retail media network was created a decade ago; now, there are more than 150 globally. Most, if not all, have enjoyed at least some success, partly by piggybacking on retailers’ existing relationships with consumer brands. These brands have been willing to spread their retail media spending across an array of networks—upward of 20 to 30, in some cases. That’s not the only thing that has helped a long tail of networks gain traction. Advertisers have often bought retail media in a siloed and fragmented way, as it was too new and small to be coordinated with other marketing investments. In addition, a broad range of retail media players were aided by the boom in e-commerce and dip in trade promotion triggered by the Covid-19 pandemic.

These unusually favorable conditions are now poised to change.

Over the next few years, competition in retail media is set to intensify, even as the market continues to grow. Existing players will have to cope with an influx of new networks launched by the likes of value and specialty retailers. Ad inventory is also likely to grow faster than demand, as retailers offer more advertising opportunities outside of their own websites and apps (in physical stores or on third-party platforms, for instance). Most important, retail media networks will have to adjust to a fundamental shift in the way advertisers behave. Put simply, having reached more than $90 billion in annual sales globally and having started to draw spending away from more established digital advertising platforms, retail media is now too big and important to be treated as an experimental channel by brands.

Instead, advertisers will become more strategic in the way they work with retail media networks. One consequence is that media spending is likely to become more consolidated overall. For instance, in a Bain & Company survey of hundreds of advertising decision makers, 50% of the US advertisers we talked to said they expected to consolidate their spending with a select few retail media networks; on average, they said they would not want to work directly with more than six at a time. Crucially, all advertisers—even those that choose to continue working with 10 or more networks—will set a higher bar for performance, in line with the channel’s growing maturity. Early signs of that performance push are already visible. Advertisers are investing heavily in their retail media function, adapting operating models to centralize retail media planning and capabilities, while improving their ability to evaluate outcomes.

The dawning of the performance era will create clear winners and losers in retail media. Advertisers won’t feel obliged to stay with a network just because they also have a longstanding supplier relationship with the retailer that owns it. Neither will they favor retailers that persist in seeing them only as a vendor. What they will do is ruthlessly prioritize those networks that generate the most attractive return on their ad spending, increase sales, and work best for them overall as a customer. Some leading retail media networks have already started to capitalize on this shift. It’s not too late for others to grasp the opportunity and maximize their growth as retail media moves from sideline to prime time.

No one is nailing it yet

The good news is that retail media should still post very attractive growth over the next few years. We forecast that the market will swell by 12% annually to about $140 billion in 2026, picking up share from other digital advertising channels in the process. The trend should be even stronger in the US, where retail media spending is forecast to grow by 16% annually between 2022 and 2026.

That projected revenue growth, coupled with attractive profit margins, is set to make retail media central to a structural shift in retail. Our analysis suggests that, between now and 2030, retailers will see only modest profit growth from traditional trade (meaning retail activities centered on the simple sale of goods procured from suppliers). Instead, the lion’s share of profit growth is likely to come from activity that reaches beyond trade, with retail media being one of the most promising ways to branch out (see the Bain Briefs “The Future of Retail: The Age of Convergence” and “How Engine 2 Expansion Can Power the Future of Retail”).

Consumer packaged goods (CPG) brands are already sold on the concept of retail media, in theory. They recognize its differentiated ability to target relevant audiences in the right environments—and then connect that ad spending with actual sales through closed-loop attribution. In our survey, 53% of CPG advertisers said retail media offered unique marketing opportunities, while 77% said its ability to reach relevant audiences was one of the main benefits. The appeal of retail media is only likely to strengthen: 56% of CPG advertisers believe that retail media will become more important due to changing data privacy regulations—and 73% said it will also become more compelling when bundled with customer data and insights.

Yet, for all their enthusiasm about retail media, advertisers often feel their needs are not being met when they buy it, leading to a low Net Promoter Score^SM for most retail media networks (see Figure 1).

So far, few retail media networks inspire much customer advocacy

There are four key challenges that networks must resolve. The first is the rapidity of change and increasing complexity in the market. Products are quickly moving beyond sponsored search to offsite formats (third-party display, social media, etc.) and other innovations, which makes long-term planning for tech investment even harder.

The second challenge is the need to develop a new go-to-market playbook. Selling advertising solutions is inherently different from running a retail business, involving a new set of customers and stakeholders, such as agencies and brand managers. Traditionally, most retailers have managed relationships with CPGs through their merchandising/trading organizations. But retail media is unlikely to reach its full potential if it relies on those existing points of interface. To engage with and sell to advertisers effectively, retail media networks need new capabilities and meaningful talent investments. Smaller networks must also figure out when and how to shift from relying on third-party retail media specialists to developing their own in-house capabilities.

The third challenge consists of the difficult design choices that retailers must make, both in terms of their organizational structure and their day-to-day processes. How should they integrate retail media into their core marketing and merchandising functions? What’s the best way of designing processes, decision rights, and incentives across stakeholder groups? What are the right trade-offs to embed change while minimizing friction? What are the right tools to orchestrate these processes between teams?

The final challenge centers on performance and measurement. Some networks aren’t yet able to make nimble adjustments to ad campaigns as they are underway, which compromises effectiveness. Nor do they always have the shopper data that can tie purchases to advertising, particularly when those purchases happen in-store. That closed-loop attribution is even harder when a retailer’s loyalty scheme is underpowered, when the retailer has not invested adequately in its own first-party data infrastructure, or when a retailer relies on third parties to enter retail media. Finally, there’s a mindset issue at some networks: They’re still viewing CPGs only as suppliers rather than customers that need to see granular performance data to be comfortable with increasing their spending.

Adapting to the new landscape

As retail media matures, advertisers will increasingly compare outcomes and returns on retail media networks with other digital advertising channels, instead of viewing retail media as a niche solution. Amid today’s macroeconomic turbulence, advertisers are under pressure to maximize the return from their marketing budget. Right now, they feel they get more bang for their buck elsewhere. The US CPG advertisers we surveyed were twice as likely to say that search and email advertising offered a high return on ad spend than they were with retail media (see Figure 2). Social media was also slightly ahead of retail media in terms of perceived return.

Advertisers think retail media is lagging more mature channels on the key measure of return on ad spend (ROAS)

On an operational level, CPGs are integrating retail media more with the broader, multichannel marketing team to coordinate messaging and create a more seamless experience for consumers across channels. More sophisticated brands are shifting to a “total commercial investment approach” that compares growth levers across marketing and trade. Advertisers are also entrusting cross-campaign decisions (including those concerning retail media) to a smaller number of senior marketing leaders, while dialing down the involvement of sales/trade teams that often took the lead when budgets were smaller.

How should retail media networks respond to this changing and more integrated landscape? Focusing on three areas—segmented go-to-market strategy, operating model integration with the core business, and performance measurement—can help them scale their advertising businesses and become invaluable guides to advertisers as they seek to reach their target audience.

Segmented go-to-market strategy. As we mentioned previously, selling advertising solutions is inherently different from running a retail business, requiring a new go-to-market playbook in areas such as advertiser segmentation, account prioritization, partnership model, sales cadence, marketing, and pricing. For instance, there’s the need to take a more hands-on approach with key accounts: Most retail media networks will need a tiered account model that allows them to differentially support both strategic partners and more sophisticated (and demanding) advertisers, while providing light-touch support and self-service solutions to smaller and less strategic advertisers. Retailers often underestimate the investment required to build a strong retail media function to fulfill their go-to-market ambitions, especially in areas such as talent recruitment. It can make sense to bring in outsiders with deep media expertise, not least due to the mounting complexity of the products that networks are selling and the sophistication of the brand marketer audience they are increasingly targeting. Furthermore, retailers with still-immature technology platforms often need more, not less, advertiser-facing headcount to fill the gaps in the offering as the platform matures.

Operating model integration with the core retail business. Despite its specialized demands, retail media still needs to draw on the strengths of the core retail business to truly excel. A successful retail media network cannot be built on an island. For one thing, many relationships with advertisers are led by merchandisers who work with them as vendors. But integration with the retail core can vary according to a series of operating model design decisions. Should merchandisers be a formal part of the retail media selling effort? If so, how should they be trained and incentivized? Conversely, should retail media teams sit in on merchandisers’ vendor negotiations? These are just a few of the key operating model questions to resolve. Some networks might want to emphasize their sales and account management prowess, for instance, which would suggest looser process integration. Others might want to skew to media planning—and tighter integration. Either way, getting the operating model right will require retailers to fully embrace the dual role brands now play, as suppliers and customers.

Performance measurement. Advertisers don’t think retail media does a good job of measuring returns and outcomes today—only 6% fully trust retailers’ reported media metrics (see the infographic “How Retail Media Networks Can Win with Advertisers”). For advertisers to keep increasing their retail media spending, that must change. For instance, retailers need to give a clearer picture of how online ads translate into sales in brick-and-mortar stores, not just e-commerce. They must also utilize more “clean rooms” to share anonymized purchase data with advertisers without breaching privacy rules. Crucially, better measurement will lead to more test-and-learn efforts as brands learn how to maximize the performance of this new channel. Winning retail media networks will create processes and teams to enable test-and-learn programs at scale, partnering with advertisers to develop new techniques for measuring campaigns in real time—techniques that leverage first-party customer data to get at insights beyond what has been available in traditional media mix modeling.

Shaking off a false sense of security

As retail media quietly grew into a $90 billion-a-year market over the past decade, some retailers might have been lulled into a false sense of security. However, the pace of change and sophistication are increasing in retail media. This promising profit stream—which will be so crucial to retailers as their core profit growth comes under further pressure—isn’t going to reach its full potential unless a network can meet the rising demands of its advertisers.

That evolution needs to start soon if it hasn’t already. Retailers probably have one to three years in which they can reposition themselves for the next chapter in the growth of the channel. While there’s no one-size-fits-all plan for getting that done, there will be some common themes emerging across retail media success stories, including better collaboration, even more test-and-learn experimentation, a sharper commercial function, and a realization that not everything has to be polished to a shine. It’ll be a demanding transition for most retailers. But the promise of continued high-margin growth is real.