‘As margin pressure builds, retail media businesses offer chance to drive high returns’

Across Europe, major retailers are gearing up to build media businesses. 

One big driver is that technology platforms have pared back the data they release to advertisers, due to new privacy regulations. 

In a 2022 study, McKinsey and IAB estimated that consumer packaged goods companies alone would need to reallocate nearly €20bn in annual advertising spend as a result of privacy changes globally. 

Retailers, which have access to incredible consumer data from their loyalty programmes, are reacting to the shifting advertising landscape by building retail media networks (RMNs). 

“By leveraging their in-depth knowledge of consumers, retailers can execute highly personalised campaigns and brand experiences”

RMNs extend trade promotion programmes by offering campaigning opportunities to brands through the retailer’s digital channels and physical store locations, as well as syndication on third-party platforms.

By leveraging their in-depth knowledge of consumers, retailers can execute highly personalised campaigns and brand experiences.

The business case for RMNs is compelling. As retailers grapple with pressure on margins, RMNs offer the chance to drive high returns on spend and create a profitable new business.

In the US, retail media was worth more than $40bn in 2022, while UK RMNs are growing by more than 20% a year.  

For many retailers, there is also a strategic aspect to RMN investment. Amazon launched its media and advertising business nearly a decade ago and in 2022 reported nearly $35bn in revenues. 

At scale, RMNs produce EBIT of approximately 60% to 70%, providing powerful fuel to drive innovation. They also support profitability in ecommerce platforms that are often losing money or just about breaking even.

Across major European economies, more than 20 RMNs have been launched since 2020, encompassing verticals including groceries, pet products, consumer electronics, apparel and general merchandise.  

“About 80% of advertisers say that retail media networks are an important part of their efforts and about 70% say that the channel outperforms”

A recent McKinsey survey in the UK, France and Germany shows that advertisers – both general merchandisers and label retailers – no longer consider RMNs to be an experimental media channel. Rather it is something they are starting to expect.

About 80% of advertisers say that RMNs are an important part of their efforts and about 70% say that the channel outperforms.  

The bottom line is that RMNs are one of the fastest-growing media sectors in Europe, accounting for about €8bn to €10bn in annual advertising investment. 

We expect the segment will grow at about 25% a year through 2027. Still, chief executives should beware of challenges around implementation and one of the biggest is cultural, meaning the mindset changes needed to build a media business that has a different operating model, requires different technology and demands different skill sets.

On a positive note, the recent softening of the job market in advertising, tech and publishing offers a chance to pick up highly skilled talent. 

Another big challenge is to design RMN businesses so they complement existing supplier trade promotion programmes. This needs to be carefully coordinated and will evolve as retailers and brands find ways to create truly omnichannel campaigns. 

Meanwhile, retailers must work to ensure the media offering boosts conversion and enhances the wider customer experience.

“There is rising pressure to drive collaboration that would lay the foundations for more consistency across the industry”

The last big challenge is particular to Europe, where there are few standards for measurement, targeting and technology. This puts a significant burden on brands and agencies. 

Indeed, there is rising pressure to drive collaboration that would lay the foundations for more consistency across the industry. This would include a technology and data backbone that would enable scaling and foster more sophistication in reaching consumers.  

As retail chief executives consider their options, they should be in no doubt that RMNs are a significant opportunity.

Already they are moving into the mainstream, with consumers testifying that they provide targeted and relevant advertising, and advertisers reporting increased traffic and ecommerce.

Brands, meanwhile, are leveraging RMNs to fill data gaps and run ad campaigns that are close to transactions – both digitally and in store. 

The onus is on retailers, therefore, to look more closely and make bold decisions on their next steps. 

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