Retail Media Is Now 11% Of Total Ad Spend. Here Are 5 Factors Driving That Figure

A change is afoot. Retail media, once the domain of AmazonAMZN
sellers, is taking over the world. The advertising world at least.

A recent report by WPP’s GroupM said that retail media already represents 10.7% of global ad spending, and forecasts that this figure will grow 60% by 2027.

GroupM isn’t alone in its bullish view. eMarketer estimates that Amazon alone is the third-largest advertising platform in the US, accounting for 13% of digital ad spend in 2021, and expects its share to rise to 15% by 2024. Amazon only started splitting out revenue figures from its advertising division in 2021. As a result, the sheer scale of Amazon’s ad business came as a surprise to much of the industry.

But peeling back what’s driving retail media growth shows a number of reasons that aren’t so surprising. Here are five factors that are contributing to the past and future growth of retail media.

But first, what exactly is retail media?

Retail media is the digital version of shopper marketing. In decades past, consumer product brands would use a combination of brand advertising (e.g. national TV ads) and trade marketing (e.g. manufacturer’s coupons and in-store displays) to build brand awareness and drive product sales.

Today, retail media platforms can perform all of those activities and more, on a single platform. The assumption is that because of the ability to closely target specific types of customers who are at specific points in their buying journey, that digital retail media is more efficient and cost-effective than the traditional model.

Retail media can display at the “point of purchase,” when a customer is actively searching and building their cart on an app like Amazon, KrogerKR
, or Instacart. Products can display within search results, or on competing product pages. Retail media also now includes media platforms owned by retailers like Amazon, which include Thursday Night Football, Amazon Fire TV, and connected TV channels like ParamountPARA
Plus.

Factor 1: targeting audiences with precision

Amazon spent a mind-boggling $11BN on the rights to Thursday Night Football. There are three key reasons why:

1. It was a catalyst for more Prime member signups (this proved to be the case when Amazon confirmed that it drove more Prime memberships than any Prime Day event)
2. It expands ad inventory. Beyond sponsor product slots on Amazon.com, there are now slots available for advertisers who are familiar with creating and buying big-budget TV ads. With such a significant audience tuning in, Amazon can charge more for these placements and boost their advertising revenue.
3. It is a first-party data opportunity. To me, this is the most critical reason. Growing its pool of first party data is more valuable as a long-term asset to Amazon than the immediate returns from ad spend. Advertisers are queuing up to get in front of highly specific audiences.

The ability to target consumers based on actual purchase and consideration activity, in addition to demographic profiles, is very attractive to brand advertisers. A hand-soap brand, for example, can target shoppers in a variety of ways. The simplest and most widely used is to run ads within the retailer’s search results using general keywords like “antibacterial hand-soap.” The brand could also target competitors’ brand names too, in a bid to get customers to switch brands. But more sophisticated retail media platforms like Amazon and WalmartWMT
also offer programmatic advertising placements, whereby a brand can target shoppers not by keywords but through ad impressions targeting users with specific demographic, psychographic, or behavioral attributes.

The impression-based programmatic advertising is a strong substitute for brand advertising that would be historically spent on TV ads. But it has now been upgraded with the ability to hyper-focus on certain shoppers, and ultimately track their journey to an actual purchase.

Amazon Marketing Cloud and Walmart Luminate are two solutions built by the two largest retailers to track a customer journey from seeing a programmatic display ad, seeing several more pay-per-click ads, and finally making a purchase online or even in-store. The ability to now track the customer journey from inception to completion is highly compelling to brands looking to optimize their ad spend.

Factor 2: Amazon is ‘pay-to-play’ for most endemic brands

A study conducted by my firm Acadia and eCommerce analytics provider Analytic Index found a strong correlation between sponsorship (advertising using Amazon’s pay-per-click ad solution) and organic search visibility for endemic brands (those brands who sell their product on the platform).

While it varies by product category, this correlation suggests that most brands selling on Amazon need to front up with an ad budget in order to get a position on page one of relevant search results.

Brands like NikeNKE
, CrocsCROX
and Adidas who have decades of brand marketing behind them, may rank naturally high as consumers search specifically for those brands. Apparel and footwear also have a relatively low correlation between sponsorship and organic visibility.

By comparison, the electronics category has a very high correlation between sponsorship and organic visibility, suggesting that its almost a requirement for a brand in that category to be advertising on Amazon in order to show high enough in relevant search results pages to be considered for purchase.

Doing a search of your own on Amazon is likely to yield similar results. A search for “coffee machine” is likely to produce an array of banner ads, sponsored product ads, and video ads. The same study shows that the percentage of “real estate” on page one for high-volume keywords varies again by product category, but ranges from 12.9% to 21.6%.

This pay-to-play characteristic – on Amazon at least – is a contributor to retail media spend among endemic brands.

Factor 3: The non-endemic opportunity

It is a mistake to think of retail media as only being suitable for consumer brands wanting to get in front of the household member who does the weekly shop. Insurance companies can target new parents who are finally ready to think about taking out a life insurance policy; a car manufacturer can target baby boomers who bought their last car several years ago and are due for an upgrade; a lawn care company can target busy executives in the specific geographies that the company services.

The mass of first-party data, combined with a larger inventory of brand advertising placement options, make retail media very compelling for ‘endemic brands’ – those companies who don’t sell physical products on Amazon. This group of advertisers represent a significant amount of potential revenue for retail media – growing far outside the budgetary bounds of consumer goods companies.

Factor 4: Incumbents are suddenly more expensive

While retail media is growing, it is still in a distant place compared to the advertising platforms owned by Meta and Alphabet.

While these companies take the lion’s share of digital ad budget today, they are facing significant headwinds. Apple’sAAPL
privacy changes in 2021 significantly raised the cost of advertising for many brand advertisers. DTC consumer brands who were averaging a ROAS (return-on-ad-spend) on Facebook may now only be able to secure a 1-2 ROAS.

As a result we’re seeing brands like Peloton, who were historically staunchly DTC-focused, jump onto Amazon, where cost-per-click rates have been more stable.

One argument here is that these brands are simply moving along the well-defined maturity curve. Once the domain of early adopters, Peloton needs to move onto mainstream distribution channels like Amazon in order to maintain growth.

While costs have risen on these incumbent digital platforms, the amount of data supplied to advertisers has decreased due to these same privacy changes. By contrast, Amazon in particular is providing an increasing quantity of trend data to brands, and even access to shoppers. Some recent examples include Amazon Advertising’s marketing stream, and the ability to send emails to Amazon shoppers who might be interested in a brand’s new products.

Factor 5: more retailers are launching media platforms

Amazon’s ad platform might be ahead of its time, but that’s not stopping other retailers from launching their own platforms. It seems that a new retailer is announcing a media platform every other week.

Advertising can be a high-margin business for a retailer, a strong contributor to profit margins in an industry that can be fickle and highly seasonal. This makes an ad business highly attractive and worth the effort to stand up.

It’s also not necessary to build a retail media business from scratch. Third party platforms like Criteo and Citrus Ad allow retailers to stand up a media business quickly and access a cohort of advertisers already using those platforms.

An increasing abundance of advertising options can create uncertainty among advertisers about how to allocate media budgets. But in some cases, they don’t have the luxury of deciding. Some retailers are requiring a certain level of media spend as part of their vendor agreements.

As MediaPost pointed out, retail media’s 11% share of total advertising dollars may actually be under-stated, as it does not include traditional trade media spend. In some cases, trade media and shopper marketing budgets will start to shift into this digital retail media bucket.

There’s likely to be a heavy concentration of media spend at the “fat head” of the assortment of retailers, and a particularly “long tail” of ad spend with retailers attracting less media dollars. But the growing number of options is also likely to contribute to the overall increase in spend.

But retail media is not a panacea

The persistent problem is with tracking customer journeys that span multiple retailers. The case study for advertising and purchases that are made completely within a single retailer ecosystem is almost irresistible. But the journey – and the business case for more investment – is interrupted when a customer sees an ad on Amazon, for example, but ends up purchasing from their local Costco. Each retailer has an interest in keeping their shopper data siloed.

Still, the ability for brands to reach a retailer’s audience at various points of the buying journey remains very attractive for advertisers. While Amazon commands a strong share of total retail media spend due to its early investment, other retailers are taking note. The retail media playbook has been written, and it’s one that advertisers are more than willing to invest their marketing dollars into.