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Empowering retailers: The rise of in-house retail media

Nikhil Raj

September 13, 2023

As the COVID pandemic accelerated the shift to online shopping, retailers faced increased pressure on their profit margins due to rising last-mile costs. They increasingly turned to amplifying and building upon their retail media offerings because the pandemic accelerated the need and urgency for this line of business.

So, what is retail media? Retail media involves retailers, pure-play eCommerce companies, and marketplaces building advertising businesses. The business is very attractive to retailers because of its high margins compared to trade (75% versus 5%). 

Here’s how the math works out: A retailer with a $10B ecommerce channel and is breaking even could add $200M of profit from an ads business at 2% of ecommerce GMV.

But retail media is a completely different business than traditional retail. It is an enterprise business, with high margins that involves selling complex digital assets to other businesses. On the other hand, retail is a B2C business with easy-to-understand tangible products that are bought by, and not sold to, consumers. 

Due to all these differences, retail media requires a very different set of people, data, tech, and operating model capabilities compared to traditional retail.

Facing pressure to enhance their profit margins, retailers without the inherent capabilities to launch a retail media business had to outsource their entire operation, including relationships with their suppliers, to third parties. Outsourcing disintermediated the coveted and long-standing relationship between retailers and suppliers. It created a challenging operating model where both the retailer buyers and the outsourced retail media vendor were communicating with those suppliers.

I personally know the challenges retailers face when launching the retail media business and the need to outsource to get the business off the ground. When I started the ad business at Walmart (Walmart Exchange or WMX), we did exactly the same thing. We outsourced everything other than the measurement and targeting products built on Walmart’s core asset - the sales data. We outsourced the ad sales and operations team to Triad and the ad serving to DFP and Hooklogic. The only internal capability we built was the WMX measurement and targeting. Doing so enabled us to quickly get the ad business off the ground and scale it with all of these partners. As Adexchanger put it, “American retailers now see themselves as media companies with their own ad impressions, audiences, and valuable data.”

Using third parties to build retail media capabilities was a necessary move in the beginning for most retailers who launched their media business around the start of the pandemic. However, it also drove an unnecessary wedge between those retailers and their suppliers with outsourced ad sales and demand generation.

Why retailers are ready to reclaim this capability

Outsourcing retail media operations and technology should have always been a temporary solution. The reality was that retailers had no time and appetite to do that for many years. Now that the industry has evolved, it is an opportunity to redefine that relationship with suppliers in a new way to combine both the buying for trade and the selling of the media that is now happening across Joint Business Planning (JBPs) and upfronts around the industry. Retailers are beginning to bring ad sales, operations, and technology in-house as recently announced by Kroger, Home Depot, and others.

For the tech, many are wisely choosing white-labeled technology solutions to power everything. Every retailer should invest in retail media, but not everyone can or should build their own technology solution, especially when successful retail media requires leveraging operational Machine Learning (ML) at scale. Only for a few of the largest retailers would it make sense to invest in their own tech infrastructure, machine learning. Some of these companies are exploring partnerships with leading retail media tech providers who can provide real-time inferences, self-learning models with online re-training, recurring technology infrastructure/model updates and enterprise-grade customer service.

This is why companies like Kroger are bringing this tech capability in-house, in addition to hiring advertising sales and operations personnel and building an internal operating model with merchants, category managers, and marketers. It’s not a decision to be taken lightly, as Kroger has added nearly 100 new roles over the past year to support the launch of its Kroger Precision Marketing (KPM) platform, according to AdExchanger.

As retail media becomes more prevalent and powerful (a $125B market, according to GroupM), it makes complete sense that retailers will want to control more of the process. But that only works if the retailer builds the ad business in close collaboration with their suppliers. It is time retailers establish this new ad business by building on the strong relationships they have with their suppliers, which has served them so well in the past.

Nikhil Raj

VP of Business, Retail Media, Moloco

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