Beyond Markups

The New Profit Paradigm for the Retailers of the Future.

Jul 07, 2024

Previously on Giuseppe’s Glimpse: In the last episode, we explored the transformative power of deliberate learning and why you should integrate it into your business culture. If you missed it, catch up here! 💫

Buongiorno everyone! 👋

The retailers of the future won't simply profit from products—they'll profit from people. 🧑‍🤝‍🧑

The idea of making a profit solely from product sales is becoming outdated.

Stores are still brimming with products, but the primary goal isn’t to make a hefty profit from selling them.

Instead, the focus is on harvesting the far more valuable crop of customer data. 📊

Retailers are realising that the true goldmine lies in the data and advertising potential their customer base offers, rather than in the product margins.

This shift can transform a low-growth, low-margin business into a high-growth, high-margin model by leveraging first-party data.

How? 🤔

Think about it.

Retailers own A TON of first-party data.

By analysing both in-store behaviour and digital interactions, they can become business intelligence powerhouses.

This positions them as the best in the market to drive relevant advertising messages and promotions, outpacing brands and third-party platforms. 🏆

A $1.3 trillion opportunity

But how much is the opportunity worth?

Well, a lot! 💰

McKinsey estimates that, by 2026, retail media will add $1.3 trillion to enterprise values in the U.S. alone, with profit margins between 50% and 70%.

For context, Amazon's $46.9 billion in ad revenue in 2023 surpassed Coca-Cola's annual global revenue, making Amazon the third-largest advertising platform after Google and Meta.

It’s not surprising that recently traditional retailers have been trying to grab their share of the pie.

Globally, retailers like Dick’s Sporting Goods, Home Depot, Lowe’s, Macy’s, Ulta, Walgreens, MediaMarkt, Tesco, JD.com, and Rakuten are tapping into this revenue stream with notable success. 📈

In 2023, Walmart earned $3.4 billion from retail advertising, and Target and Instacart both earned more than $1 billion.

Bridging the physical and digital

Under the umbrella of retail media, we can include 2 macro categories.

First, we have FIRST-PARTY DATA MONETISATION across brick-and-mortar stores, digital signage, and both owned and paid digital channels.

For instance, CVS and Tesco use purchase patterns to deliver targeted digital coupons through loyalty programs, increasing conversion rates.

These personalised promotions create a lucrative revenue stream from brands eager to reach specific customer segments. 🎯

Also linking online ads to offline sales, Walmart provides advertisers with unparalleled (anonymised) insights into consumer behaviour, making their ad offerings highly attractive.

Moreover, they’ve challenged Amazon’s competition by venturing into video advertising via smart TVs and streaming services.

And if we move to the other side of the map, things don’t change.

In China, JD.com integrates video ads into product listings and live-streaming events, boosting product visibility and promotional opportunities. 📺

Similarly, the Japanese Rakuten blends shopping and entertainment by live-streaming product demonstrations, allowing direct purchases, and thus offering a unique, engaging shopping experience.

Transforming retail spaces

The other macro category and key revenue stream is IN-STORE ADVERTISING. 🛒

Walmart, for instance, leverages first-party data to display targeted ads on over 170,000 screens in its stores, boosting both advertising revenue and customer engagement.

In Europe, MediaMarkt uses a similar approach, promoting electronics brands on digital screens to enhance the shopping experience. 🛍️

Walgreens has explored this frontier by installing ad-filled digital screens on refrigerator cabinets in stores.

Although initially faced with challenges, this concept highlights the potential of integrating interactive ads into physical retail environments.

This strategy not only generates significant ad revenue but also provides relevant product information and promotions, enriching the in-store experience. ✨

Breaking the culture barrier

If retail media is so profitable, then you might ask yourself why more retailers aren’t exploiting it.

Three reasons: culture, culture, culture.

Many retailers still see themselves primarily as resellers of products for a margin, not as data monetisers. 💹

Their managers lack training to run a media platform, and their internal processes and IT infrastructure aren't equipped for such a transition.

On the other end of the spectrum, the situation is not that simple either.

Internal conflicting priorities must be addressed.

For instance, a major global grocery retailer faced significant resistance from merchants when the retail media department proposed growing media revenue. 🚫

Merchants blocked 75% of brand campaigns in the first year, fearing increased coupon budgets would weaken their bargaining power in trade negotiations.

The truth is, transitioning to this new retail paradigm is far from easy, but resisting it will leave you lagging behind in the retail world of tomorrow (and, let’s be honest, today!). 🚀

The future of retail: challenges and opportunities

This phenomenon shows us that retail’s future is multidimensional, with product sales becoming just one of many revenue streams.

By embracing in-store digital ads, data monetisation, video advertising, and interactive shopping experiences, forward-thinking retailers are not only enhancing their margins but also revolutionising customer engagement. 💫

The retailer-manufacturer relationship is also undergoing significant disruption, offering both growth opportunities and challenges.

To tap into this potential, retailers and manufacturers will have to rethink not only how they collaborate but also their internal structures and strategies. 🔄

These shifts will result in profound changes in the retail sector, providing growth and profitability prospects for businesses that proactively prepare for the retail-media disruption.

Success in this new era demands swift adaptation of strategies.

The retailers of the future will profit from people, through the relationship they create with them and the experience they craft for them. 🧑‍🤝‍🧑

If McLuhan's adage holds true, and the medium is indeed the message, then tomorrow's message will seamlessly integrate into our shopping experiences across digital, physical, and virtual channels.

What do you think? What challenges do you foresee in transitioning to a retail-media-driven strategy? Do you agree with this new frontier of doing retail?

Stay curious! 🙌

-gs

P.S.: For further insights, check out this interesting article with valuable recommendations for retailers and manufacturers. 📚

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