Amazon’s advertising revenues now exceed 5% of its retail sales, making it the third player in digital advertising behind Google and Facebook. However, most retailers’ advertising sales are far behind Amazon – what are the challenges, and how can they close the gap?
Amazon’s advertising revenues now exceed an incredible USD 5 billion a quarter – or over 5% of its total retail revenues. The company’s sizeable media income makes it the third player in digital advertising, behind only Google and Facebook, demonstrating the massive potential opportunity for retailers to capitalise on their close relationships with end consumers.
Retailers have the opportunity to sell advertising because they have access to their “audience” close to the point of purchase – quite literally at the shelf-edge. That gives retailers an advantage over both traditional media and digital media such as Google or Facebook. These alternatives typically provide access to audiences at earlier stages of the purchase process. Retailers also have access to first-party data about individual consumers and can monetise that asset with advertisers. dunnhumby pioneered this model in the 1990s by selling access to Tesco Clubcard data; most retailers have since followed Tesco’s example, especially those with access to individual customer data through a loyalty program.
The sale of advertising and data insights to brand partners is highly profitable for retailers, delivering more than 50% margin. Such numbers could transform the profitability of many retailers, given their low overall margins. A recent report published in the UK estimated that an increase in advertising sales to just 1% of revenues could lift grocers’ profitability by over 30%. And that commercial opportunity is set to get even bigger when Google starts blocking third-party cookies. That will create new challenges for brands looking to connect with end consumers and new opportunities for retailers who already have a direct connection.
Recently we have seen some omnichannel retailers make investments in the digital advertising opportunity, both in Australia and overseas. Doug McMillion, CEO of Walmart, has publicly revealed its ambitions in this area, “Our data has never been monetized, and we have a tiny ad business. It could be bigger.”
Walmart recently re-launched its advertising business, now called Walmart Connect, and has committed to becoming one of the top ten advertising platforms in the US over the next five years.
In Australia, grocers are leading the way with Coles (Synergy) and Woolworths (Cartology) establishing media businesses and recruiting to grow their teams. Coles announced it would stop putting paper catalogues of weekly specials in the nation’s mailboxes and shift focus to its coles&co website, another significant move reflecting the long-term shift to a digital model in retail.
Despite all the attention on the advertising opportunity, most omnichannel retailers have advertising sales far below a benchmark of 1% of sales proposed by dunnhumby. In fact, most promotional expenditure by brands is still on traditional non-digital store-wide promotions.
The growing role of digital
Why has an e-commerce retailer like Amazon capitalised on the media opportunity faster than traditional omnichannel retailers? Two factors place Amazon in a strong position to sell advertising:
- Amazon already has a digital connection to 100% of its customers at the point of purchase, i.e., when they are about to buy a product on its website
- Amazon has access to customer-level data for 100% of its customers
These two factors are the critical ingredients for retailers who want to capitalise on the digital media opportunity.
The matrix below highlights where different types of retailers sit relative to Amazon:
In the bottom left quadrant sit “Every Day Low Price” retailers without a loyalty program. These retailers have limited ability to connect digitally with their customers since there is no incentive for the customer to identify themselves at the point of purchase. Walmart, the world’s largest retailer, faces exactly this challenge – with few tools available to connect digitally with its customers, it has a limited ability to target individual consumers with offers unless they shop online at Walmart.com. Aldi’s situation is even more challenging – without a loyalty program or online channel, Aldi has almost no opportunities to create digital connections to its customers.
The importance of digital customer connections
Retailers with a traditional loyalty program, such as Tesco, Coles and Woolworths, are in a much stronger position. They possess a connection with many of their customers, through the loyalty program, and have analytics teams who can provide advertisers with insights. However, most omnichannel retailers are held back from capitalising on the digital advertising opportunity because of their legacy systems. Traditional POS technology, in particular, is usually a bottleneck to delivering personalised offers to the millions of customers who shop in physical stores. For that reason, most omnichannel grocery retailers still rely on old-school store-wide promotions as their primary trade-driving tool. That will eventually change as grocers start capitalising on cloud-based platforms that enable personalised offers in-store as well as online.
Some pioneering retailers are combining an advanced data analytics capability with a real-time promotions platform to deliver personalised offers to customers shopping online and in-store. Those digitally enabled retailers are currently leading the way globally in omnichannel personalisation, and able to send every customer a weekly personalised digital catalogue in which both products and promotions are informed by data. That’s a radically different approach to the conventional grocery model of targeting customers with recommendations drawn from the subset of products on store-wide promotion. A personalised digital catalogue leads to more relevant customer recommendations and a more attractive advertising proposition for FMCG brands since they can target individual consumers with truly personalised offers.
In my view, we’ll likely see a significant gap open up between those retailers and FMCG brands who can spot the opportunity to lead the market and capitalise on it versus those who cling to their old ways, hold back and miss out.
Jonathan Reeve is general manager for Asia Pacific at Eagle Eye.