#2: Sizing retail media opportunity: Part 1

Top-down sizing: The eight factors that business leaders should consider

Photo by Jorge Salvador on Unsplash

Introduction

Retail media leaders can set their business size aspiration using top-down and bottom-up approaches. Top-down sizing involves using industry benchmarks, while bottom-up sizing requires estimating individual metrics (e.g., impressions, utilisation) and incorporating them into a model. Top-down sizing is quick, and when used properly, it can offer comparable prediction accuracy as bottom-up sizing. This article focusses on top-down sizing, and explains eight key factors to consider.

Top-down sizing requires industry benchmarks. However, most industry reports analyse the overall size of retail media industry¹ or the absolute revenues of retail media leaders², both of which are unsuitable as benchmarks. In recent years, a few industry reports have started tracking the metric of retail media revenues as percent of retail sales. For example, a Goldman Sachs report from 2021³ estimated that retail media revenues in the US could be 4-5% of gross merchandise value (GMV)⁴ in 2021 and could increase up to 6-8% by 2024. This metric is more useful as it takes into account the GMV of a retailer⁵, a significant driver of retail media revenues.

Increasingly more retailers are using the above 5% benchmark in setting their retail media aspirations. Some are realising that this benchmark is too high for them. I argue that while retail media revenues as percent of GMV is a useful starting point, it needs significant calibration to its underlying factors to be useful.⁶

Eight key factors driving the 5% benchmark

Six demand-side factors

1. Geography: Retail media is more mature in the US than other geographies. The estimates from the Goldman Sachs report is for the US (although it suggests a similar figure may be plausible for Europe) . For retailers outside the US, this benchmark is likely to be a lot lower.

2. Online vs. in-store: Retail media revenue as percent of GMV is a lot higher for online than in-store media as online media allows better audience targeting and measurement. The 5% benchmark is for online businesses. The equivalent benchmark for in-store could be less than 1-2% .⁷

3. Online business model: Marketplace models generate more advertising revenues as percent of GMV than e-commerce models. This is because marketplaces have multiple suppliers selling the same product, leading to more advertisers and more competition for the same ad inventory. The 5% benchmark is largely driven by Amazon, which has a bigger marketplace than e-commerce business.⁸

4. Retail sales composition: There are two key dimensions to retail sales composition. First, retailers that sell higher proportion of private label products versus branded products see lower ad revenues as there is almost no advertising associated with private label. Second, retailers that sell a larger proportion of fresh food (vegetables, fruits etc) see lower ad revenues as fresh food suppliers advertise less. Retailers should compare their sales composition with Amazon, and calibrate the 5% benchmark accordingly.

5. Account segment: Retailers that are either growth accounts or large accounts for brands get more attention and higher advertising revenues relative to GMV. Amazon is a growth account and/or large account for many brands.

6. Macro: Marketing budgets are sensitive to the macro-economic cycles. The 5% benchmark has been calculated during a period of growth environment. This could be lower during a recessionary environment.

Two supply-side factors

1. Strength of onsite proposition: Business leaders aspiring to achieve the 5% benchmark need to provide the corresponding quality of ad solutions. A key part of this is providing sufficient good quality inventory onsite, where most retailers lag Amazon. For example, a search for water on Amazon UK results in more than 10 advertisements, with some being cross-sell. Compare this to traditional UK grocers (see Tesco, for example) who typically have less than 3 advertisements on a search page, with no cross-sell . This is not to say that other retailers should follow Amazon’s approach, as placing many advertisements affects customer experience. But business leaders should be consistent between their aspiration and the quantity of high-performance onsite inventory they are willing to provide.

2. Strength of offsite proposition: This depends on two factors. First, does the retailer own any digital inventory where it does not sell products? For example, Amazon owns digital inventory like Twitch and Prime Video, which do not contribute to its retail GMV but generate ad revenues. This leads to higher ad revenues as percent of GMV. Second, can the retailer provide unique audiences to target outside of its owned digital inventory and accompany it with measurement data? The 5% benchmark, derived significantly from Amazon, assumes retailers can satisfy both factors listed above. Amongst mature retail media businesses in US, offsite media could be 20-40% of the total media revenues.

Closing thoughts

Retail media revenues as a percent of GMV is a useful metric for top-down sizing of retail media opportunity. However, the 5% benchmark is high for most retailers. Business leaders should calibrate this benchmark to the eight factors described above.

1. For example, see this article.

2. See this for example.

3. “The Merchant-Media model: A new era for retailers as ad platforms”, February 2021.

4. This is same as total retail sales for a retailer. GMV captures total sales for both retailers and marketplaces.

5. While I use retailers throughout this article, the thoughts are valid for marketplaces as well.

6. The eight underlying factors are split into demand-side and supply-side factors. Demand side factors are factors affecting demand for media (largely advertiser driven) while supply-side factors are factors affecting supply of media (largely retailer driven).

7. Based on conversations with leaders operating in-store media businesses.

8. According to this article, 60% of Amazon’s total GMV comes from marketplace, albeit the figure could vary for their US business).