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IADS White Paper - Retail Media

Since its inception in 1928, the IADS’ purpose has been to coordinate information between department stores worldwide and research their activities to help them address the many challenges they must face. This translates into many responsibilities carried out by the IADS, all solely intended to provide insights to its members and help them have a broader understanding of the shifting business environment.

Every year since 2020, the IADS has produced a White Paper on a specific topic perceived as important for its members. In 2020 the purpose was to collect the learnings from the management of the pandemic and how to make sure department stores would be prepared for the next crisis. The 2021 White Paper was dedicated to digital transformation and its impact on the organization. In 2022 it was all about the development of sustainability, CSR and ESG in retail businesses. And the 2023 edition is dedicated to the hot topic of retail media.

Why is it so hot? Just for a start, this subject has generated a considerable amount of buzz, conferences and articles over the past three years (as suggested by the lengthy number of sources that the IADS quoted in its White Paper). Also, it was interesting to see that the 2022 edition of the NRF Big Show was all about retail media on stage, but with very few suppliers at the fair, which was the contrary in 2023, with a significant number of suppliers proposing new solutions to deploy retail media.

The other reason why the White Paper this year was dedicated to this technical topic is because we believe at the IADS that retail media could be a profitable route for department stores willing to maximize the value of their real estate. While retail media has expanded thanks to the digitalization of the world, we believe that the amount of in-store interfaces with the customer, coupled with tracking and measurement capabilities in close-loops that are now allowed with the state of technology, could transform department stores into very efficient media companies, maximizing the value of the number of eyeballs visiting not only their e-commerce websites but also their flagship stores. This vision was also confirmed in 2023 during an IADS CEO meeting, during which the Publicis COO suggested that this was starting to happen in a select number of retailers.

The 2023 edition of the White Paper aims to identify where the retail media market stands, spell out the opportunities (and potential traps) for department stores, as well as suggest a few routes of reflection for department store leaders to prepare their organizations for such a shift. Finally, since retail media is seen as a way to generate incremental, high-margin, revenue, we also explore this school of thought and try to understand the cost of such new revenue, not only in financial terms but also in terms of people, organizations and needed adaptations.

Introduction: retail media is less of a revolution than a reinvention

Retail has never been a stranger to advertising. It started as early as the 19th century with many companies, such as Sears, Printemps, Jelmoli and Harrods, starting to issue catalogues where they encouraged brands to advertise. That was the beginning of an awareness from department stores: why pay for brand advertising when they can do it by themselves? After all, the job of department stores was to make sure that their locations were welcoming enough visitors, or, in other words, make sure that their name was advertised enough.

But then, brands were another story (and somebody else’s P&L chart), and instead of bearing the cost of advertising alone, department stores began to sell them advertising space, creating new revenue streams. This period also coincided with the development of the modern advertising industry, which evolved from selling ad spaces in newspapers to offering complete brand solutions. This shift enabled department stores to forge a new kind of relationship with brands, selling them opportunities to stand out through trade marketing cooperation.

As such, the idea of department stores (and retail companies as a whole) selling advertising space is not new. So, how is retail media any different?

From trade marketing to retail media

The eternal challenge in advertising, from the advertiser's point of view (the brand), has always been to make advertising effective and profitable, especially in terms of return-on-investment measurements. Trade marketing was beneficial for brands to increase demand at the department store level, aligning with their brand strategies. However, top-of-the-funnel strategies (i.e. national advertising) were more difficult to evaluate in terms of ROI, while bottom-of-the-funnel ones (i.e. advertising on the POS, trade marketing) were difficult to scale at a national level.

Things became more complicated with the advent of new technologies and media (like radio, TV, electronic commerce, social media, and mobile phones), as the dynamics of customer engagement and advertising significantly evolved and merged the needs for top-of-the-funnel and bottom-of-the-funnel investments. Retailers started incorporating various advertising activities, ranging from in-store displays to online visibility, aiming to increase demand and sales at the Point of Sales (POS) by starting earlier in the funnel. To cope with the lack of visibility of ROI in the upper funnel, brands were sold access to readers or watchers profiled according to an ideal target, a profiling made possible thanks to the navigation history knowledge acquired about said readers or watchers via tracking (cookies). However, the market has become much harder to navigate, as costs of advertising online have been on the rise for the past few years, and third-party cookies are disappearing in the wake of a stronger concern about personal data. There is no real exit door: when it comes to traditional media formats, the scope of these activities is finite, limited by their available space and frequency.

This is why retail media networks (RMNs) represent a new paradigm, offering individualized advertising opportunities to brands within the retailer’s ecosystem, utilizing first-party customer data. RMNs can be defined as a collection of advertising and promotional tools owned by a retailer, utilizing first-party data to target shoppers and prospects effectively. They offer a significant opportunity for revenue generation without cannibalizing traditional trade marketing activities.

This approach emerged in response to the need for more measurable and efficient advertising models and the opportunities presented by digital acceleration during the Covid-19 pandemic. Retailers, in digitizing their operations, realized the potential to monetize their customer data, thereby providing brands with improved ROI on their marketing investments. RMNs aim to not just rebrand traditional trade marketing but to leverage closed-loop knowledge of customers for measurable KPIs.

RMNs are rapidly growing, with the US market alone expected to reach $61.15 billion by 2024. This growth indicates a significant shift in digital ad spending towards retail media, which in turn translates to opportunities for retailers.

Retail media encompasses many different realities today

The growth in advertiser investments in RMNs is driven by an increase in RMN options and new market entrants. Marketing experts categorize marketing tactics into three groups: traditional analog media, onsite digital media, and offsite digital media:

• Traditional analog media includes long-standing retail advertising methods in physical stores.
• Onsite digital media represents the first phase of retail media (Retail Media 1.0), where retailers use their digital platforms (like websites and mobile apps) to monetize customer traffic through onsite advertising.
• Offsite digital media (dubbed “Retail Media 2.0” by some analysts) involves leveraging retailer-collected first-party data to target audiences outside of the retailer's own digital and physical venues (for example: selling advertising space to travel agencies on a retailer luggage e-commerce website or store section).

Onsite Retail Media offers retailers greater control over first-party customer data and targets customers effectively. However, it faces limitations like restricted media inventory and the quality of search interfaces on retailer platforms.

Offsite Retail Media allows retailers to advertise beyond their properties, significantly expanding their reach. This approach offers benefits like efficiency in advertising, omnichannel sales attribution, and transforming physical stores into digital platforms. However, challenges remain, such as the difficulty in targeting the right audience and gathering accurate metrics from third-party platforms.

A significant portion of US advertisers uses multiple RMNs, indicating a trend towards diversifying advertising strategies. However, the decision to use RMNs remains often reactive, driven by current market conditions and the need to drive product sales, rather than strategic brand building.

Why retail media represents an actual opportunity for a great variety of retailers?

Retail Media Networks (RMNs) provide a significant advantage to retailers, focusing on their ability to monetize proprietary shopper data, the resurgence of physical stores in advertising strategies, and the opportunities presented by non-endemic advertising.

Retailers like Kroger utilize their loyalty and POS transaction data to create targeted advertising and measurement tools. This allows for precise campaign planning, personalization, and post-campaign tracking, offering advertisers detailed insights into customer segments and sales uplift. RMNs have shifted the narrative from trade marketing being a "bottom-of-the-funnel" medium to a strategic "top-of-the-funnel" medium, attracting larger marketing budgets and making physical stores valuable again. They provide incremental revenue, which is particularly appealing in the context of shrinking margins in brick-and-mortar and e-commerce channels.

The context matters: despite the growth of e-commerce, 85% of retail sales in the U.S. still occur in physical stores. RMNs enable brands to target customers throughout their entire shopping journey, including in-store interactions. This has led to a renewed interest in physical stores as strategic assets for advertising. Retailers are finding innovative ways to incorporate advertising into the in-store experience, such as digital screens and in-store radio stations. The integration of these technologies transforms stores from mere points of sale to influential advertising platforms.

Also, RMNs provide a valuable channel for non-endemic advertisers (brands that don’t sell directly through the retailer but offer complementary products or services). Retailers' access to first-party data allows these advertisers to target customers with precision and relevance. This is beneficial for retailers as non-endemic brands often have larger media budgets, enhancing RMN revenues without risking cannibalization of existing sales. It also offers single-brand retailers an opportunity to expand their customer experiences. Retailers like Gap Inc. and Macy’s have experimented with targeting both endemic and non-endemic advertisers, although resulting in varying strategies and outcomes.

A tentative panorama of RMNs across the board, beyond FMCGs

Initially, FMCG (fast moving consumer goods) retailers played a central role in the development of RMNs. Facing slow growth and advertising challenges, FMCG retailers saw RMNs as a solution to improve return on advertising spend (ROAS) and forge stronger relationships with brands. The pandemic accelerated online grocery buying, further emphasizing the need for effective digital advertising. Amazon's success in retail media, especially with high margins, set a precedent for other FMCG retailers.

However, RMNs are no longer exclusive to FMCG retailers. Specialty retailers and other retail verticals are also developing their own RMNs to capture a portion of the advertising market. The diversity of RMNs across different retail sectors demonstrates their broad applicability and potential. The landscape of RMNs is dynamic and geographically diverse, with a significant number of players in the US and competitive markets like France.

France, in particular, has seen substantial growth in RMN investment, with a variety of players and tech suppliers entering the space. The formation of alliances and collaborations is more typical in Europe than in the US. These alliances bring together various retailers to pool data and technology resources, such as Unlimitail, which gathers 13 European retailers from various verticals. While this type of alliance should provide its participants a local competitive advantage, and fit in our views of retailers uniting to be stronger together, it should also be seen as a reaction to the lack of scale that US retailers have.

What are the limitations in RMNs that retailers need to be aware of?

First of all, the RMN market is becoming crowded, leading to a potential Darwinian consolidation. Brands are overwhelmed by the plethora of RMNs, leading to the implementation of new selection KPIs, like minimum monthly visitors, which could create a disadvantage for smaller retailers. Despite the success of smaller players like Albertson's, Kroger, and Ahold Delhaize, the largest players dominate the market (Amazon, Walmart). Moreover, the market might face a limit on the number of interested advertisers, potentially capping additional revenue opportunities.

Also, the rise of RMNs has introduced complexity in retailers' relationships with brands:

• Retailers hastily building RMN platforms have led to inconsistencies and data gaps, complicating decision-making for brands. For retailers, RMNs have shifted their role from solely product suppliers to shared responsibility for driving brand demand. This shift demands new competencies and strategies, potentially leading to internal organizational challenges and a need to recalibrate the relationship with brands. Retailers venturing into RMNs faced organizational stress tests, including integrating new competencies and managing cultural shifts.
• Brands heavily rely on RMNs for first-party data as a response to the demise of third-party cookies. However, there is frustration regarding the quality and consistency of data across different RMNs. The disparity in data quality across platforms is a significant concern for brands looking to optimize their investments.

For RMNs to be sustainable, they need to be perceived as strategic brand-building investments, not just tactical sales activation tools. However, many brands currently view RMNs primarily as drivers of sales conversion, indicating that RMNs are not as high in the marketing funnel as desired. This perception could hinder the long-term growth and brand equity building potential of RMNs.

Finally, there is a risk of consumer annoyance due to excessive advertising through RMNs, potentially leading to a negative impact on consumers’ enthusiasm for brands. Retailers and brands must be cautious in their approach to advertising to maintain customer satisfaction and trust.

Moving forward: what does it take to become a media company?

The evolution of RMNs is marked by a shift from onsite to offsite spending. Smaller RMNs tend to focus more on offsite spending, selling data to target customers outside their digital properties. This shift is driven by the potential for higher conversion rates and order values through combined onsite/offsite advertising packages. Retail media is reliant on the value of retailers' first-party data and their ability to collect data across all customer contact points, including physical stores.

Department stores have the potential to offer unique advertising possibilities by leveraging their online and offline footfall. The digitization of stores and the capability to sell first-party information allow for innovative onsite media propositions. This is particularly relevant for department stores due to their significant online and offline traffic.

In particular, physical stores, especially flagship stores, are seen as major untapped channels for advertising. They offer detailed geo-localized data that can inform brands about shopper behaviour in specific areas. This granularity of data is key for advertisers to optimize their marketing and product strategies. Retail media networks enable brands to reach customers close to the point of purchase, making physical stores an integral part of advertising strategies. In that perspective, retailers can use foot traffic data to create hyper-local segmentations and improve advertising efficiency in local markets.

But to successfully transition into a new mass media, retailers need to differentiate their RMN products, address organizational challenges, form strategic partnerships, and make informed technology choices. The landscape is becoming more complex with the emergence of various digital marketing platforms, in-store advertising companies, marketing personalization platforms, retail analytics, experiential technologies, and retail media accelerators.

Conclusion: are RMNs nice to haves, or imperative moves?

Not only do RMNs encapsulate a strong transformative impact and potential, but also complexities and challenges in achieving it.

RMNs mark a paradigm shift in retail advertising, offering precise, data-driven advertising opportunities both inside and outside retailers' own media channels. With projections indicating that RMNs could become a $100+ billion market by 2028, major retailers across various categories are launching their own networks to tap into the burgeoning demand for targeted and measurable advertising.

For them, RMNs present an opportunity to generate new, high-margin revenue streams that can compete with established advertising channels. The integration of brick-and-mortar stores into omnichannel RMN strategies, utilizing location intelligence and digital targeting, further expands the scope and efficacy of these networks.

However, the journey towards fully leveraging RMNs is not without hurdles. Issues such as data transparency, measurement inconsistencies, questions around brand-building value, and organizational preparedness are significant considerations. Overeagerness in RMN adoption without adequate strategy could risk customer trust and devalue retail assets.

To effectively harness the potential of RMNs, retailers need to concentrate on several critical areas:

• Differentiation: Retailers must create a unique RMN proposition, focusing on niche audiences and ensuring data transparency to stand out in an increasingly crowded market.
• Organizational readiness: Implementing RMNs demands robust cross-functional collaboration and new competencies like ad sales and campaign management. This may necessitate structural adjustments within the organization.
• Coordination and standards: The establishment of shared standards for ad formats, metrics, and disclosures is crucial to address current inconsistencies and break down 'walled garden' silos.
• Tech investment: Significant investment in modern ad tech stacks, data clean rooms, edge computing, and in-store technological enhancements are pivotal for executing effective omnichannel RMN strategies.
• Collaboration and exchange: The role of international groups and associations, such as the International Association of Department Stores, in facilitating collaboration and exchange among retailers is vital. Collective action and peer learning can significantly benefit retailers in navigating the RMN landscape more effectively than going it alone.

As RMNs continue to evolve, they hold the potential to redefine marketing dynamics and reshape brand engagement. However, the extent to which this promise is realized depends on retailers' and brands' commitment to carefully navigating the RMN space, investing strategically, and adapting to emerging challenges and opportunities.

Credits: IADS (Selvane Mohandas du Ménil)