The Supermarket Discovered It Was an Advertising Company
Retailers began selling advertising placed against their own purchase data, on their sites and in their stores. The margins are far higher than retail and the revenue lands almost entirely in profit.
Why a Retailer Has Something Advertisers Want
Digital advertising has always struggled with attribution. An advertiser knows an advertisement was shown and generally does not know whether it led to a purchase, particularly a purchase in a physical shop.
A retailer has the missing piece. It knows what its customers searched for, what they put in a basket, and what they actually bought, linked to an identity through a loyalty programme or an account.
That means it can show an advertisement and then observe whether the product was purchased, which is a closed loop the open internet cannot offer.
Regulatory and browser changes restricting third party tracking made that advantage considerably more valuable, because first party purchase data became one of the few reliable targeting and measurement signals remaining.
What Actually Gets Sold
| Inventory | Where It Appears |
|---|---|
| Sponsored product placements | Search results and category pages on the retailer site |
| Display advertising | Retailer site and application |
| Offsite audience targeting | Other websites, using retailer purchase data |
| In store digital screens | Physical shops |
| Connected television | Streaming inventory targeted with retail data |
Sponsored search placement is the largest category and the most valuable, because it reaches a customer who has already expressed intent by typing a product name. That is the same mechanism that made search advertising the dominant digital format, applied at the point where the transaction actually occurs.
A customer searching for a product on a retailer site is further down the funnel than any other advertising audience. They are not browsing, they are shopping, and the advertisement is placed between them and the purchase.
The Margin Arithmetic
The reason this changed retailer strategy is what it does to the income statement.
Grocery retail operates on net margins in the low single digits. Advertising revenue carries incremental margins that can exceed seventy percent, because the inventory is the retailer own website and the data is already collected.
The consequence is that a relatively modest advertising revenue line can contribute a disproportionate share of operating profit. Several large retailers now disclose advertising revenue separately for this reason, and analysts value it at multiples closer to media businesses than to retail.
That valuation gap is the strategic prize, and it explains why nearly every large retailer launched a network within a few years of the first ones succeeding.
Where the Money Comes From
An uncomfortable question is whether this is new revenue or a repackaging of money the retailer already received.
Consumer goods manufacturers have long paid retailers through trade promotion budgets: slotting allowances, cooperative advertising, display fees, and promotional funding. Those payments are large and negotiated annually.
Much of retail media spend has come out of the same manufacturer budgets. From the retailer perspective the revenue is more attractive, since it is recurring, measurable, and reported as advertising rather than as a deduction from cost of goods.
From the manufacturer perspective it is a reallocation of money already being paid, now with better measurement and, in several cases, a higher total ask.
The Conflicts
Two structural problems have emerged and neither is resolved.
Search result integrity. A retailer selling placement in its own search results is deciding what customers see based on payment rather than on relevance or price. Where sponsored results dominate the first screen, the customer experience degrades, and the retailer is trading long term shopper trust for short term advertising revenue.
Private label competition. A retailer selling advertising to a manufacturer while competing with that manufacturer through its own brand holds both the auction and a position in it, which is the same conflict identified in other advertising markets and is beginning to attract regulatory attention.
Measurement and the Incrementality Question
The advantage of retail media is measurement, and the measurement has a well known weakness.
Attributing a sale to an advertisement shown to a customer who searched for that product overstates the effect, because many of those customers would have bought anyway. The relevant question is incrementality: how many additional sales occurred that would not have.
Retailers control the measurement and report the attribution, which is the same conflict that has existed in every advertising platform reporting on its own performance. Sophisticated advertisers run holdout tests to measure incrementality independently, and the results are frequently substantially below reported attribution.
The Bottom Line
Retail media networks monetise data the retailer already had against inventory it already owned, at margins that transform the economics of a low margin business. Much of the money has been reallocated from trade promotion budgets rather than newly created, which means the manufacturer is paying for measurement it did not previously have. The unresolved tensions are that the retailer is selling positions in its own search results and reporting on its own advertising effectiveness, both of which have gone badly in every other market where they occurred.