Retailers have realized that winning in ecommerce is key to remaining relevant. Online food and beverage sales have grown from 3% of retail sales prior to the pandemic to as high as 15% of total retail sales currently. 7 However, few retailers are properly set up to service this ecommerce market. Historically, retailers have had to lose massive amounts of money to win in ecommerce. The largest costs for any ecommerce retailer are customer acquisition and logistics. In order to have an effective business, retailers must pay to drive traffic to their digital properties, then they must often subsidize the pick, pack, and shipping costs of consumer orders in order to deliver products to the consumer at price points competitive with Amazon or Walmart. For example, in 2019 Walmart invested billions of dollars into succeeding in ecommerce. Even though Walmart was able to generate online sales in 2019 of $21B, they still managed to lose over $1B in its ecommerce division8.
The bet that Walmart made was that it was more important for Walmart to capture control of their customer digitally than to optimize for building a sustainable business. Walmart realized that they would need to make massive investments in customer acquisition, fulfillment centers, logistics infrastructure, and technology infrastructure, in order to compete with Amazon’s ecommerce prowess. Walmart realized that the best way for them to offset these costs was to leverage the income from their retail media network to offset these losses.
Retail media networks contributes to the success of the online business in three key ways:
1) Retail Media Attracts Incentive Dollars so Retailers Can Lower Prices
First, when investing in retail media, brands often make additional investments into pricing to offer products to consumers at compelling delivered-to-your door prices. This enables retailers to be more cost competitive with Walmart and Amazon. Walmart realized early on that by enabling brands to participate with sponsored opportunities in their digital ecosystem, brands would end up sharing the cost burden of the last mile logistics. This dramatically reduced the amount of price investment that Walmart would need to make as a retailer to jump start the ecommerce business, and enabled Walmart to offer SKUs for sale online that they otherwise would not have been able to offer because the unit economics would be prohibitively expensive without investment from brands. These initiatives help start the flywheel of orders for an ecommerce retailer.
2) Retail Media Improves the On-Site Experience with Higher Quality Product Data
Second, consumers often go to retailer websites specifically to find content about brands they are considering purchasing. This is why Amazon has garnered such a dominant position in the marketplace—their focus on high quality product reviews; rich, sponsored product pages; and an expansive product catalog with hundreds of millions of SKU’s available. Most consumers start their search for a product on Amazon. 9 This is even more true for grocery, CPG, and household essentials purchases, as these categories often provide instances when consumers do not think to go to the manufacturer’s website but instead go to their preferred retailer’s website. Having this traffic go to a retailer’s website provides that retailer the first bite at the apple to convert that viewer to a buyer—whether that be for an in-store purchase, a delivery order, or a click and collect order. In surveys and reviews, Family Dollar shoppers have called out that they would like to leverage Family Dollar’s digital properties to learn more about the products they buy most. Like many retailers, Family Dollar does not have sufficient breadth and quality of product data to offer a great product discovery and education experience on its web properties. When brands participate on a retail media network, they are incentivized and empowered to dramatically increase the content of product data featured on the retailer’s digital properties.
The media dollars that an advertiser spends to drive traffic to their product pages on the retailer’s digital properties is multiplied if the brand also invests the energy in providing the retailer with the rich and compelling product data that will convince consumers to convert. Because the brand is paying for the placement—they have more skin in the game to ensure that placement converts to a sale.
3) Retail Media Offsets a Retailer’s Customer Acquisition Costs
Finally, one of the largest costs in starting an ecommerce business is customer acquisition. Retailers must spend massive amounts of money on digital advertising in order to acquire traffic to their website. Walmart will spend $3.7B in advertising in 2020; 10 Amazon spent $18.9B in 2019. 11 In contrast, Dollar Tree and Family Dollar spend about $100M. Retailers must advertise and acquire new customers in order to grow. Any retailer that effectively leverages advertising has a competitive advantage over its peers. Retail media enables Retailers to dramatically increase their advertising exposure while passing the cost on to vendors.
Ultimately, retail media enables retailers to garner more customers and win both online and in-store.