Retail Media Networks: Driving the Third Wave in Digital Advertising
This article discusses the rise of Retail Media Network, a key driver of significant changes in the digital advertising industry in recent years, exploring the opportunities and challenges RMN faces.
When we walk into large retail stores like Carrefour, we're no stranger to various promotional catalogs. Traditional methods include offering coupons, displaying promotional product information on in-store screens, or arranging goods on shelves in a certain way, all aimed at catching the eye of passersby. For brands, securing the most visible spot in a promotional catalog can positively impact sales for specific periods. The appeal for brands lies in the large stores' ability to attract crowds, especially during specific holidays.
If we translate these familiar tactics to the digital environment, it mirrors what we often experience on e-commerce websites. For example, seeing sponsored product information upon entering a site or encountering sponsored ads in search results. The biggest draw for brands still lies in large e-commerce sites' ability to gather traffic. If everyone thinks of Amazon when considering online shopping, then brands will opt to advertise on Amazon to capture consumer attention.
Retail Media Network (RMN) allows brands to advertise to retail customers in a programmatic way through channels owned by retailers or e-commerce operators. RMN is touted as the next growth driver in the advertising industry, characterized by:
Utilizing first-party consumer data owned by retailers.
Providing advertising information in inventories owned and operated by retailers or on other third-party platforms.
Offering end-to-end data tracking, from ad displays and user interactions to final product purchases and subsequent repurchases, enabling data analysis and optimization.
For retailers, the Retail Media Network represents a new business model that monetizes first-party customer data through advertising, offering a new revenue stream. At the same time, it provides customers with personalized experiences, further enhancing member loyalty.
Three Types of Advertising in Retail Media Network
The advertising formats available within the Retail Media Network primarily fall into three categories, each explained below:
1. On-site Advertising
On-site advertising refers to ad placements available on the retail’s e-commerce website. Common spots for these ads include the brand's storefront, sponsored products on the homepage or sponsored brands, product category pages, sponsored products in search result pages, and promotions for live events, among others. These ads may be presented as static product images or video ads.
The advantage of on-site advertising is its ability to maximize the use of first-party customer data owned by retailers. This could be based on past purchase history, product searches on the site, or web browsing records. Users conducting searches on the website often indicate a high level of purchase intent, which is why on-site advertising is so appealing to brands.
Brands and advertisers typically opt for flexible pricing models like CPM (cost per thousand impressions) or CPC (cost per click), with optimization parameters including audience precision and size, purchase intent, user journey, and the format and copy of the materials.
For example, a brand selling golf shoes might target audiences who have previously purchased golf equipment or apparel, displaying video ads when these users search for golf-related keywords, featuring popular golf stars to attract attention and highlight features like improved swing stability. Similarly, a mass consumer goods brand like Unilever might target mothers who have purchased diapers with ads for baby formula on product pages. These are common types of on-site advertising.
2. Off-site Advertising
While still using the first-party customer data owned by retailers, off-site ads are placed on third-party platforms. Common channels include third-party websites or apps, social media platforms, in-game advertising, connected TV, programmatically purchased screens, and outdoor billboards.
An example is an ad for Chobani, America's largest yogurt brand, displayed on the connected TV platform Roku. Retailers combine their first-party data with Roku's user and viewership data to identify potential audiences interested in yogurt.
Key points for off-site advertising purchases include integrating off-site ads into the overall retail media advertising strategy to enhance brand awareness, typically priced on a CPM basis, leveraging third-party data to target competitors' markets, and diversifying media mix based on consumer attention at different times to reach a wider target audience and measure retail platform conversion results.
Retailers operating RMNs also advise brands to consider off-site advertising options based on their goals, audience size, ad display timing, and the need for testing audience match rates with third-party platforms before launching ads.
3. In-store Advertising
Retailers generally attract more audience in their physical stores than online. Statistics from several large U.S. retailers show that in-store channels can reach an audience about 70% larger than online channels. In-store advertising targets customers visiting physical stores and may include digital billboards, audio, interactive machines, digital shopping carts, or refrigerators with display screens.
An example is Cooler Screens, a company that places digital screen ads on refrigerators in retail stores, allowing for real-time product ad placements for consumers standing in front of the fridge. This technology is being introduced in large retailers like Walgreens and Kroger in the U.S. In-store advertising is still exploring and innovating within the realm of technology.
Market Opportunities in Retail Media Network
Under the leadership of America's largest e-commerce site, Amazon, the market for on-site advertising has seen rapid growth, skyrocketing from $1 billion to $30 billion in just five years. This growth rate is more than double that of the previous two generations led by Google's keyword advertising and Meta's social media advertising, reaching this milestone at a much faster pace. By 2024, the market size is expected to exceed $45 billion.
A comparison of the growth in advertising budgets for retail media advertising versus non-retail media advertising in the U.S. from 2020 to 2027 shows that retail media advertising has been growing by about 20% each year and is expected to continue at least until 2027. In contrast, the growth of non-retail media advertising peaked at 16.1% in 2022 and is projected to decline to around 3.6% by 2027. This indicates that retail media advertising will continue to see strong growth in the future.
It's also interesting to compare the advertising revenue growth of different tech giants. In 2023, the digital advertising revenue growth rates for the duopoly of Meta and Google were only 5% and 3%, respectively. Other large tech companies like Apple and Microsoft, with Apple's digital ad revenue coming from Apple Search Ads and Microsoft's from LinkedIn ads, saw revenue growth of 26% and 10%, respectively. Among them, companies in the retail media advertising category, such as Amazon, Walmart, and Instacart, experienced the fastest growth rates at 19%, 42%, and 41%, respectively, demonstrating very strong growth momentum.
The vast market opportunities and rapid growth rates explain why many large retailers are also entering the retail media network, becoming media companies. This trend is not limited to the U.S. retail industry; Taiwanese retailers are also venturing into the retail media market. For instance, e-commerce leader Momo announced last year its development of retail media advertising business. At the same time, Shin Kong Mitsukoshi, in its digital transformation phase, announced the development of an external member points ecosystem and investment in RMN retail media advertising. Delivery platform Uber has also ventured into developing RMN video advertising last year, and Foodpanda announced its investment in Panda Ads in Taiwan.
In addition to retailers, companies that have been deeply involved in the advertising industry have also entered the retail media network industry. The Trade Desk is one of the pioneers in this field, having established partnerships with numerous retailers, including Walmart. Retail media advertising revenue is a fast-growing segment of their business. Moreover, The Trade Desk is actively expanding into international markets by collaborating with retailers in different countries. Criteo is considered one of the companies most focused on retail media technology in the advertising industry, with its retail media revenue expected to see significant growth. Last year, Criteo launched their retail media DSP platform, Commerce Max, allowing all advertisers and agencies to use it directly. This platform aims to solve the fragmentation issue arising from the rapid emergence of retail media advertising platforms, offering a one-stop platform for purchasing retail media ad spaces across websites. Advertisers can view the performance of all platforms on Commerce Max.
Retail Media Network 2.0
The foundation of retail media lies in the mastery of first-party customer data. If we dissect the key to Amazon's advertising success, it can primarily be broken down into four aspects:
Massive Website Traffic and First-Party Customer Data: Amazon's website traffic reaches 2.7 billion visits per month, making it one of the top ten global websites in terms of traffic. Access to such a vast audience, coupled with data on product browsing, searching, and purchasing, is highly attractive to brands.
Comprehensive and Structured Product Data: Amazon's data science team has created what's known as the Product Graph, which helps consumers more easily find the products they're looking for. Other derived product structures and technologies also aid in the subsequent product recommendation algorithms.
Advanced Product Recommendation Algorithms: Amazon was among the first companies to invest in developing product recommendation algorithms. They published their classic collaborative filtering algorithm as early as 2003. Over the following 20 years, their product recommendation models have continuously evolved, keeping them at the forefront of data science teams in product recommendations.
Programmatic Advertising Platform: Building the underlying technology for an advertising platform has a high technical barrier, including webpage layout planning, traffic inventory management, ad material uploads, bidding mechanism design, ad attribution, and performance reporting, among others. Creating an advertising platform that marketers and advertising agencies trust and use requires strong technical and product development capabilities.
By combining these four dimensions, Amazon has created a killer application: "on-site search advertising." With on-site search advertising, Amazon has propelled the market value of retail media advertising from $1 billion to $30 billion in just five years, growing much faster than keyword and social media advertising. This mechanism established by "on-site search advertising" is also referred to as Retail Media 1.0.
However, e-commerce sites with traffic volumes as large as Amazon's are few and far between globally. The next growth momentum for retail media advertising will come from off-site advertising. Peter Moustakerski introduced the concept of Retail Media 2.0 in 2021. According to eMarketer, the proportion of off-site advertising in all retail media advertising revenue is steadily growing. In 2023, it reached $65.352 billion, growing by 37.7%, and accounted for 14.5% of all retail media network revenue. Although the proportion is still not very high, for retailers, combining first-party data with third-party data and traffic from external websites will offer more developmental possibilities in the future.
In the era of Retail Media 2.0, advertising placements will become increasingly diversified, including integration with Connected TV (CTV) audiences, which is considered to have great developmental potential. This signifies that the retail media network will gradually transition from the 1.0 era, which focused on user conversion and advertising ROAS as the main indicators, to the 2.0 era, featuring a variety of advertising types and ads aimed at increasing brand awareness. This could potentially take a bite out of the budget traditionally allocated to brand marketing on conventional TV advertising. Video-type advertisements are also gradually becoming the new favorite in retail advertising media.
Video Advertising Becomes the New Favorite in the RMN 2.0 Era
On January 29, 2024, Amazon began pushing ads to its Amazon Prime Video subscribers in the United States, requiring members to pay an additional $2.99 per month or else watch ads. Setting aside the fact that various streaming platforms have started offering ad-based plans to increase revenue, incorporating video advertising into Prime Video is indeed a logical application scenario. It represents the next piece in Amazon's transition into the Retail Media 2.0 era for several reasons:
Combining Retail Data with Streaming Video Ads to Expand Amazon's Off-site Advertising Scenarios: It's expected that a significant source of revenue for Amazon Prime's video ads will come from brand advertisers on the Amazon Ads platform. For example, the American frozen pizza brand DiGiorno could increase brand awareness by placing ads on Prime Video, and even directly lead viewers to place orders on Amazon.
Advertising Effectiveness Covers the Complete User Journey: As in the DiGiorno example, from brand awareness ads on Prime Video Ads to on-site search ads on the Amazon platform, followed by the subsequent purchase actions, all occur within Amazon's ecosystem. This allows brands to perform more complete performance tracking at every touchpoint of the user journey. It also gives brands more reason to allocate both brand awareness and performance advertising budgets to Amazon's advertising platform.
Retail Data Creates More Precise Target Audiences: For DiGiorno, even though they are also focusing on brand awareness, compared to traditional TV ads or even their video ads on YouTube, they can target customers on Prime Video who have purchased specific products on Amazon. This level of data precision is something traditional TV ads, YouTube, or even other streaming platforms like Netflix and Disney+ cannot match.
No Audience Matching Rate Issues Common with Other Off-site Ads: As mentioned earlier when introducing off-site advertising, audience matching rates can be a significant problem. However, because the audience for Prime Video Ads and the Amazon e-commerce platform are within the same ecosystem, there are no matching rate issues. Brands can effectively find more potential customers without the limitations encountered in traditional off-site advertising.
Challenges in Retail Media Network
While this article has highlighted the significant market size and growth opportunities for retail media advertising, in reality, there are several factors that could potentially slow down its development.
Limitations of E-commerce Site Traffic Volume: A substantial part of Amazon's success in Retail Media 1.0 can be attributed to its massive traffic. Most retailers do not command traffic volumes on a scale similar to Amazon's, making it challenging to attract brand advertisers to invest their advertising budgets in these retail media.
Unified Standards and Data Transparency: The rapid growth of retail media advertising has led to the issue of fragmented traffic. Furthermore, with off-site advertising expected to be the next growth driver, this complicates the attribution and measurement of advertising effectiveness, making cross-platform data tracking and the establishment of a unified standard difficult.
Brands' Control Over Data: Amazon's revenue share from sellers on its platform has already exceeded 50%, and when you add transaction fees, logistics and storage fees, and adjustments to advertising costs, brands are increasingly recognizing the importance of controlling their sales channels, gradually moving towards a D2C (Direct-to-Consumer) model. Using first-party data and amplifying it through lookalike audiences on social platforms for lead generation can be much more cost-effective in terms of CPM compared to retail media networks. Moreover, the behavioral data from these leads can gradually become an asset owned by the brands themselves.
Conclusion
Retail media advertising and connected TV are considered to be two of the most significant drivers for the development of digital advertising in the coming years. This article has attempted to introduce the context of retail media advertising, its market opportunities, and potential future developments. It is a rapidly evolving industry with a diverse range of initiatives, and we hope to continue providing new industry insights for mutual growth.