Article

Are You Ready for the Retail Media Revolution?

The next big thing in retail has the potential to be a key source of growth, but it requires strategy, expertise, and a suite of new capabilities.

By Nikhil Raj, Christian Fenner, Anastassia Dobrinevskaia, and Stephen Mewborn

min read


Amazon paved the way. Walmart and Target followed suit, evolving into true omnichannel players. Now Macy’s and Tesco have joined the growing number of retailers leveraging their digital platforms to generate advertising revenue. By building their own digital advertising businesses, these retail leaders are tackling limited growth at low margins with a new revenue source that promises steep growth rates and a new way to collaborate with suppliers to grow the joint profit pool. Welcome to the retail media revolution. Retail media is expected to be a $61 billion business by 2024—double its 2021 numbers (see Figure 1). In 2019, about 50% of ad spending went to digital campaigns, and by the close of 2021, about two-thirds of US advertising was digital. That meteoric rise should come as no surprise. E-commerce was already growing steadily before Covid-19 lockdowns pushed it into high gear. With consumers increasingly forgoing stores for browsers and apps, supplier budgets have shifted accordingly—from in-store promotions, catalog placements, and TV commercials to retailers’ own digital platforms. At the same time, omnichannel players were seeking new margin pools, as e-commerce margins had become dilutive to overall profit and loss. As these forces collided, retail media soared. Figure 1 US digital retail media ad spending, 2019-24 A radical mindset shift Retail media is an attractive proposition for all players. With an upfront tech investment, retailers see profitability margins to the tune of over 50%—significantly higher than classical retail. A retail media business also gives retailers and suppliers access to something potentially more valuable: the real-time insights about consumer preferences that help them deepen their connection to customers, shape their strategy, and effectively close the loop from advertising impression to sale. As third-party tracking of digital consumer journeys is phased out, the demand for this quality first-party data is only expected to rise. Classical retail players are realizing the limits of their traditional business models and eyeing the success of early adopters. German e-commerce giants Otto and Zalando entered the retail media space roughly five years ago and now show impressive overall results and growth rates. But as more players get on board, today’s retailers face an imperative decision: disrupt or be disrupted. Competition with pure e-commerce players for supplier funding is heating up, making speed to market and measurability of impact critical. Taking the plunge, however, is not as simple as designing some ad units and hitting publish. Retail media represents the union of two radically different businesses. Retail is a low-margin, asset-intensive B2C business wherein nonexpiring inventory is sold to consumers without a sales force. Digital media is exactly the opposite in almost all aspects—high-margin, asset-light, with instantly expiring ad inventory sold to the same brands and vendors through a complicated direct selling motion. Moreover, the retail media model introduces an inherent complexity: selling ads to the very suppliers from which retailers buy. Getting the strategy right so it all works harmoniously requires a mindset shift, followed by concrete guidance on offering, organizational alignment, and technology. We help clients build this new muscle, leveraging our industry-leading retail practice along with best-in-class media expertise and digital capabilities. Beyond our bona fides, we’ve helped leading retailers across the globe establish retail media networks that drive site traffic and unlock new revenue. We’ve identified a pragmatic, proven approach that facilitates the initial setup of a retail media business—and helps shape long-term success. Our framework is built on three pillars: offering, organization, and technology (see interactive). 1. Nail the strategic offering The retail media ecosystem encompasses a wide range of ad units designed to reach customers at different stages of their journey. Core offerings include sponsored product ads, sponsored brand ads, and display ads. Off-site products, like paid search and display ads, also play an important role. Because of the high degree of standardization and ease of performance-based investment adjustment, these core products are easy to use and scale. The higher the demand for ad units and services a retailer offers, the stronger the multiplier effect on traffic, conversions, return on ad spend (ROAS), and revenues. We help clients determine an ideal product mix, ensuring that the output is measurable, targeted, and real-time. Additionally, because advertisers vary by size, level of sophistication, needs, and buying behaviors, we help retailers segment the universe of potential advertisers and customize the offering and commercial approach for each segment. For one US mass merchant, we conducted an objective assessment of media capabilities and opportunities. This helped us craft a winning strategy to grow the media business, including defining the positioning, unique value proposition, target customers, and target channels. Ultimately, retail media should function like a well-oiled machine. Digital ads capture which customers see a placement, when and where they encounter it, and how they react to it. This granular view of customer behavior in turn allows suppliers and retailers to allocate their funding efficiently, prioritizing platforms, channels, and products to maximize return on investment. And investment can be dynamically tweaked and steered on self-service platforms. With a wealth of data in hand, suppliers can continually adjust funding in response to shifting customer preferences or market developments. 2. Organize for success Starting a retail media business demands a change in focus—from selling products to leveraging customer insights to identify the most relevant offerings and service. A successful transformation ultimately hinges on people. We help clients build the case to secure full buy-in from leadership. Then, understanding that this new model requires completely different skill sets, we pinpoint the requirements for new talent and help develop a strategy for hiring and integrating the right team to deliver results. When two distinct groups—buyers and ad sales reps—interact regularly with suppliers, overlaps are inevitable. Ultimately, retail media needs to work seamlessly with the traditional business. This means retailers need to clearly define roles and responsibilities to minimize friction. For one European consumer electronics retailer that had dabbled in retail media, we developed a new organizational structure, addressing teaming, governance, and collaboration models. By building a more robust and systematic framework, we helped take their business to the next level. Our focus on organization extends to incrementality. This new business model poses two challenges: First, suppliers’ budgets might shift from the traditional trade marketing funding to the new business, without retail media generating incremental revenues. Second, if a supplier decreases overall funding, a lack of separation between the two business units would make this difficult to spot. To ensure that retail media generates incremental revenues, we help retailers establish structural interfaces between the two business units. 3. Launch tech and data With people and process squared away, we help retailers tackle the critical questions surrounding retail media’s technical setup. What capabilities does the retailer have? What skills do they need to acquire? And when it comes to creating the data-capture engine, should they build or buy? We help retailers evaluate the factors that shape the answers, like the level of customization required for their products and the portfolio’s overall degree of specialization. Software-as-a-service solutions can be convenient, saving money and allowing the business to go live quickly, but retailers must ensure that they maintain customer relationships throughout the process. Hiring new talent to build the platform is time consuming—but necessary when starting from scratch. Regardless of the retailer’s path, we help craft the short-term roadmap to launch and longer-term path to sustainable results. Products—with a side of consumer insights Retailers that build a compelling profit pool from this highly attractive business segment can invest in core retail and e-commerce operations. This is how tech giants leveraged insights about their user base to grow traffic, increase relevance, and build advertising businesses. When retailers ensure that suppliers can target customers along their entire shopping journey, they attract not only classical trade and shopper funding but also brand marketing budgets. Integrating a completely new, dramatically different business into an existing one is undoubtedly a heavy lift. The pressure to not be left behind is growing, underscored by the impressive revenue reports from early adopters. While rapidly building capabilities is key to getting in the game, it can’t be at the expense of attention to detail. Methodically working through a framework that holistically considers the who, what, and how of retail media can remove much of the guesswork and ensure both a strong first step and sustainable future path.

Amazon paved the way. Walmart and Target followed suit, evolving into true omnichannel players. Now Macy’s and Tesco have joined the growing number of retailers leveraging their digital platforms to generate advertising revenue. By building their own digital advertising businesses, these retail leaders are tackling limited growth at low margins with a new revenue source that promises steep growth rates and a new way to collaborate with suppliers to grow the joint profit pool. Welcome to the retail media revolution.

Retail media is expected to be a $61 billion business by 2024—double its 2021 numbers (see Figure 1). In 2019, about 50% of ad spending went to digital campaigns, and by the close of 2021, about two-thirds of US advertising was digital. That meteoric rise should come as no surprise. E-commerce was already growing steadily before Covid-19 lockdowns pushed it into high gear. With consumers increasingly forgoing stores for browsers and apps, supplier budgets have shifted accordingly—from in-store promotions, catalog placements, and TV commercials to retailers’ own digital platforms. At the same time, omnichannel players were seeking new margin pools, as e-commerce margins had become dilutive to overall profit and loss. As these forces collided, retail media soared.

US digital retail media ad spending, 2019-24

A radical mindset shift

Retail media is an attractive proposition for all players. With an upfront tech investment, retailers see profitability margins to the tune of over 50%—significantly higher than classical retail. A retail media business also gives retailers and suppliers access to something potentially more valuable: the real-time insights about consumer preferences that help them deepen their connection to customers, shape their strategy, and effectively close the loop from advertising impression to sale. As third-party tracking of digital consumer journeys is phased out, the demand for this quality first-party data is only expected to rise.

Classical retail players are realizing the limits of their traditional business models and eyeing the success of early adopters. German e-commerce giants Otto and Zalando entered the retail media space roughly five years ago and now show impressive overall results and growth rates. But as more players get on board, today’s retailers face an imperative decision: disrupt or be disrupted. Competition with pure e-commerce players for supplier funding is heating up, making speed to market and measurability of impact critical.

Taking the plunge, however, is not as simple as designing some ad units and hitting publish. Retail media represents the union of two radically different businesses. Retail is a low-margin, asset-intensive B2C business wherein nonexpiring inventory is sold to consumers without a sales force. Digital media is exactly the opposite in almost all aspects—high-margin, asset-light, with instantly expiring ad inventory sold to the same brands and vendors through a complicated direct selling motion. Moreover, the retail media model introduces an inherent complexity: selling ads to the very suppliers from which retailers buy. Getting the strategy right so it all works harmoniously requires a mindset shift, followed by concrete guidance on offering, organizational alignment, and technology.

We help clients build this new muscle, leveraging our industry-leading retail practice along with best-in-class media expertise and digital capabilities. Beyond our bona fides, we’ve helped leading retailers across the globe establish retail media networks that drive site traffic and unlock new revenue. We’ve identified a pragmatic, proven approach that facilitates the initial setup of a retail media business—and helps shape long-term success. Our framework is built on three pillars: offering, organization, and technology (see interactive).

1. Nail the strategic offering

The retail media ecosystem encompasses a wide range of ad units designed to reach customers at different stages of their journey. Core offerings include sponsored product ads, sponsored brand ads, and display ads. Off-site products, like paid search and display ads, also play an important role. Because of the high degree of standardization and ease of performance-based investment adjustment, these core products are easy to use and scale. The higher the demand for ad units and services a retailer offers, the stronger the multiplier effect on traffic, conversions, return on ad spend (ROAS), and revenues.

We help clients determine an ideal product mix, ensuring that the output is measurable, targeted, and real-time. Additionally, because advertisers vary by size, level of sophistication, needs, and buying behaviors, we help retailers segment the universe of potential advertisers and customize the offering and commercial approach for each segment. For one US mass merchant, we conducted an objective assessment of media capabilities and opportunities. This helped us craft a winning strategy to grow the media business, including defining the positioning, unique value proposition, target customers, and target channels.

Ultimately, retail media should function like a well-oiled machine. Digital ads capture which customers see a placement, when and where they encounter it, and how they react to it. This granular view of customer behavior in turn allows suppliers and retailers to allocate their funding efficiently, prioritizing platforms, channels, and products to maximize return on investment. And investment can be dynamically tweaked and steered on self-service platforms. With a wealth of data in hand, suppliers can continually adjust funding in response to shifting customer preferences or market developments.

2. Organize for success

Starting a retail media business demands a change in focus—from selling products to leveraging customer insights to identify the most relevant offerings and service. A successful transformation ultimately hinges on people. We help clients build the case to secure full buy-in from leadership. Then, understanding that this new model requires completely different skill sets, we pinpoint the requirements for new talent and help develop a strategy for hiring and integrating the right team to deliver results.

When two distinct groups—buyers and ad sales reps—interact regularly with suppliers, overlaps are inevitable. Ultimately, retail media needs to work seamlessly with the traditional business. This means retailers need to clearly define roles and responsibilities to minimize friction. For one European consumer electronics retailer that had dabbled in retail media, we developed a new organizational structure, addressing teaming, governance, and collaboration models. By building a more robust and systematic framework, we helped take their business to the next level.

Our focus on organization extends to incrementality. This new business model poses two challenges: First, suppliers’ budgets might shift from the traditional trade marketing funding to the new business, without retail media generating incremental revenues. Second, if a supplier decreases overall funding, a lack of separation between the two business units would make this difficult to spot. To ensure that retail media generates incremental revenues, we help retailers establish structural interfaces between the two business units.

3. Launch tech and data

With people and process squared away, we help retailers tackle the critical questions surrounding retail media’s technical setup. What capabilities does the retailer have? What skills do they need to acquire? And when it comes to creating the data-capture engine, should they build or buy? We help retailers evaluate the factors that shape the answers, like the level of customization required for their products and the portfolio’s overall degree of specialization.

Software-as-a-service solutions can be convenient, saving money and allowing the business to go live quickly, but retailers must ensure that they maintain customer relationships throughout the process. Hiring new talent to build the platform is time consuming—but necessary when starting from scratch. Regardless of the retailer’s path, we help craft the short-term roadmap to launch and longer-term path to sustainable results.

Products—with a side of consumer insights

Retailers that build a compelling profit pool from this highly attractive business segment can invest in core retail and e-commerce operations. This is how tech giants leveraged insights about their user base to grow traffic, increase relevance, and build advertising businesses. When retailers ensure that suppliers can target customers along their entire shopping journey, they attract not only classical trade and shopper funding but also brand marketing budgets.

Integrating a completely new, dramatically different business into an existing one is undoubtedly a heavy lift. The pressure to not be left behind is growing, underscored by the impressive revenue reports from early adopters. While rapidly building capabilities is key to getting in the game, it can’t be at the expense of attention to detail. Methodically working through a framework that holistically considers the who, what, and how of retail media can remove much of the guesswork and ensure both a strong first step and sustainable future path.