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Nordstrom announced on the 1st of March the launch of their own Retail Media Network (RMN) with the “Nordstrom Media Network” initiative. Trade marketing and side advertising revenues from brands are not new to retailers. So why is this piece of news interesting for department store companies? Let’s look at the US grocery market to draw some learnings.

What are we talking about?

Retail Media Network (RMN) is a vehicle for retailers to market to brands with individualized advertisements to customers at a chosen point of interaction with the retailer’s ecosystem. The concept is not new: “traditional” retail media, which includes product sampling, in-store displays and featured placements in catalogues, initially focused on increasing shopper engagement and sales for the benefit of the retailer, which was often asking brands to pay to have their products shown at or near the point of sales, to increase the likelihood of a sale.

However, the concept significantly evolved in 2021 with the digital acceleration as an answer to some of the challenges created by the Covid-19 pandemic, for the following reasons:

• Brands, when going direct due to the pandemic, realised that their marketing initiatives could lead to a waste of investments: with no option to sell their products (both their wholesale and retail networks were closed) brands had to digitize fast, and quickly realized that they could create a direct relationship with customers without having to rely on retailers. However, they also realized that the advertising and marketing investments needed for such a strategy, especially online, were quite heavy and also posed questions in terms of ROI offered by the existing providers.
• Retailers were in need of compensating the Covid-19-induced margin loss:  they found themselves with traffic-building brands going direct to customers and leaving their premises, while also witnessing their margins shrinking, due to several factors, either structural (cost of free shipping, price-related competition from massive online pure players, investments in sustainability as requested by customers or regulation) or contextual (inflation, rising logistics and raw material costs due to the 2021 supply chain bottleneck, worsened by the 2022 Ukrainian-Russian war). As a consequence, they were eager to create new streams of revenue.
• A natural opportunity arose from this context: Retailers also digitized (or increased their digital competencies) and realized that, with the knowledge of their own customers they were able to amass (shopping habits, buying patterns, all collected from both online and offline points of contact), they could create such new stream by monetizing this first-party data to brands, who in turn saw an opportunity to improve the ROI of their marketing and communication investments.

Why did it start in the US grocery market?

Pre-pandemic, Food & Beverage and Consumer Pre-packaged Goods brands were struggling to grow in a saturated market (grocery brands’ average growth in the US in 2018 was +1.9% and average profit growth was +3.2% p.a. over the last 10 years). In terms of advertising, they were also lacking both connection and understanding of their customers (Dunhumbby evaluates that the top 10 brands spent $800m on advertising in 2021, with a cumulated customer database 90% smaller than their retailers’ ones) leading to a low ROI on advertising and communication investments.

The future was also looking bleak, as Google plans to remove cookies in 2023, which will prevent advertisers to implement audience targeting on 99% of Chrome users (2/3 of worldwide internet users). In a world where it is expected that post-Covid, the shifts in terms of grocery spending might stay, especially in terms of online buying (9% of the total UK grocery market in 2020, +54% in growth in the US the same year), that means that they would have to spend more, for the same result than before.

Benefits for all

In parallel, retailers, looking at the precedent set by Amazon (77% of the US-based CPG brands work advertise on Amazon, generating a total revenue for Amazon of $21.33 bn in 2020 and $31 bn in 2021), saw an 80%-like margin offered by retail media a welcome lifebuoy as their margins, structurally slim, were even weaker due to the massive increase of online sales during the pandemic (coming on top of the pandemic related costs themselves, in terms of payroll, benefits, incentives…).

This was a match! Brands saw in this new proposal the possibility to create highly-specific and objective-based campaigns around real shoppers and not personae, using a variety of touchpoints, and being able to measure the contribution to sales of the marketing investment made. Retailers recognized a possibility at the same time to create a new source of revenue but also a way to improve and reinforce relationships with key brands.

Benefits of Retail Media (Emarketer, Coresight)

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The Retail Media Network market value is estimated by Emarketer at $31.49 bn in the US only, and forecasted at $41.37bn in 2022, $50bn in 2025 (20% of the total digital ad spend). The worldwide market is estimated for 2022 at $50bn by Forrester and $100bn by Boston Consulting Group.

Now, most of the major US grocers (but not only) have or are venturing into Retail Media Networks activities: Albertsons, Best Buy, Carrefour, Dollar Tree, Gopuff, Lowe’s, Kroger, Sainsbury, Target, Tesco, Walgreens or Walmart. They all use the size of their loyalty program membership to push forward opportunities sold to interested advertising brands.

This trend is extending to the department stores world, as Macy’s and Nordstrom now also operate in this field (respectively from 2020 and 2022).

A use case example: Mondelez and Carrefour

Mondelez realized that, while pre-pandemic they were focusing on children and teenager biscuit brands, representing 68% of their online sales, the Covid-19 crisis favored the online emergence of a new category of customers, aged over 55 and sensitive to other products. These new customers represented half of the 2.8bn new households using Carrefour’s drive-thru offering in 2020 (quite an opportunity!).

Mondelez teamed up with Criteo (a Carrefour partner) to ensure the campaign visibility throughout the whole buying process: promotions on e-shelves and dedicated locations, targeting by keywords or context of the aisle visited by the relevant e-shopper (for instance, having their products visible when customers were using ‘coffee’ or ‘hot drinks’ as keywords).

As a result, they had a Return on Ad Spent exceeding 3 (1€ spent led to 3€ earnt in sales), with a 30 to 40% higher visibility when compared to the former target, and a conversion rate 14% higher than for customers who were not exposed to the campaign.

Is that the perfect opportunity for department stores?

When looking at the numbers published by the various players (additional revenue of $1.55b in 2021 for Walmart and $105m for Macy’s) one could conclude that this new business is a silver bullet for department stores looking to generate new streams of revenue.

However, McKinsey identifies 3 main risks with the implementation of a retail media network:

• Brand’s allocations to retail media networks can cannibalize the funds that they would normally allocate to trade marketing, which would in the end go exactly in a reverse direction in terms of the retailer-brand relationship than where a good retail media relationship strategy is supposed to lead./nbsp]
• A shift in the business relationship: retailers become clients to brands, which also would have serious consequences in terms of retailers’ organisation and their team’s self-perception (including the loss of a sense of purpose),
• Lack of core capabilities to properly meet CPG brands’ needs and maximize their spending.

Should all department store companies follow the lead of Nordstrom and launch their own retail media network initiative? While such a venture might be helpful and full of promises, CEOs need to remember that, while many of their companies are already major advertisers, retail media network initiatives require a completely different set of tools and skills to excel at it:

• Ability to provide advertisers access with a clean customer database (size does not matter, but its quality, and the number of active customers do),
• Closed-loop measurement and the ability to fine-tune the offer in real time according to the ever-evolving data privacy regulations are also key for the long-term,
• The behind-the-scene tech is also, of course, crucial, both in terms of reach (operations on multiple locations and channels) and scalability.

In reality, RMNs are a very interesting perk which could contribute to improving companies’ profitability, but such an implementation is neither easy nor painless: just like the topics of digital transformation and sustainability, we are witnessing here an additional layer of (optional) disruption which will require new teams, new systems and additional investments (see Dr Christopher Knee’s comments on how to respond to disruption here) at a moment when CEOs have many other options when it comes to put their organisations’ focus and allocate resources.

Credits: IADS (Selvane Mohandas du Ménil)