Article: Wednesday, 24 July 2024
The rapid rise of retailers launching their own advertising platforms – called ‘retail media’ – explains how retailers have extended their traditional low-margin retail operations to high-margin, growth-oriented media ventures. However, this burgeoning retail media landscape brings strategic challenges for retailers and manufacturers. Research has identified three pointers each for manufacturers and retailers for a more dynamic and resilient retail ecosystem that benefits consumers through better-targeted advertising, improved product offerings, and competitive pricing. The research comes from Dr Sebastian Gabel, of Rotterdam School of Management, Erasmus University (RSM), and co-authors Prof. Duncan Simester of MIT Sloan and Dr Artem Timoshenko of Kellogg School of Management, Northwestern University. Their research was published in the Harvard Business Review as How Retailers Became Ad Platforms.
Major retailers like Amazon, Walmart, and Target have developed their own advertising platforms, leading to significant revenue from retail media. For instance, Amazon earned $46.9 billion from advertising in 2023, making it the third-largest advertising platform in the U.S. This trend is expected to continue, with McKinsey estimating retail media will add $1.3 trillion to enterprise values in the U.S. by 2026.
“Our goal was to understand the transformative impact of retail media on retailers and manufacturers. Instead of selling products, retailers are now helping manufacturers to build brands,” said Dr Sebastian Gabel, whose research speciality is deep machine learning and causal inference, with applications in retailing and sustainability.
The researchers’ insights into retail media were based on their interactions with global retailers and manufacturers, and observations and analyses that highlighted strategic challenges such as organisational tensions, transparency issues, and shifts in bargaining power. They analysed the retailers’ development and implementation of retail media platforms, focusing on their strategic approaches and outcomes. They also examined their business models, revenue generation methods, and the resulting organisational changes.
The researchers identified three main types of retail media that are examples of advertising within retailer’s own websites or apps:
Digital coupons through loyalty programmes at high-low pricing retailers
Sponsored search and digital advertising at e-commerce-centric retailers to help customers find products.
Sell advertising on third-party platforms like Facebook and YouTube that extends the retailers’ reach by leveraging their first-party transaction data for better targeting.
Each type has distinct operational models but shares common strategic challenges, explained Dr Gabel. “We found that organisational tensions arise as the scope of the relationship between the retailer and the manufacturer expands beyond traditional trade negotiations. When that relationship starts to include media and advertising, the merchants, media teams, and loyalty programme departments need new internal coordination.
“Transparency is a significant issue. When execution and measurement are handled by the same entity then brands struggle to independently verify the performance of their retail media investments,” said Dr Gabel.
And as the relationship develops and the retail media platforms mature, any bargaining power shifts in favour of retailers. This has the potential to reduce manufacturers' influence, and deters the entry of smaller brands because the threshold is raised.
The research highlights the importance of transparent reporting systems, the need for internal process redesigns at manufacturers, and the important role of increasing how much is spent on sustaining growth in retail media. “Retailers must balance initial collaboration with long-term strategic bargaining to maximise the value created by their media platforms.”
The researchers have suggested ways that business professionals can use the new information from their research:
Establish clear communication and collaboration channels between merchants, media teams, and loyalty programme departments to align goals and maximise retail media revenue.
Implement independent and transparent reporting systems to build trust with brand partners. Accountability can be enhanced by developing capabilities to credibly measure return on ad spending through experimentation.
Initially, focus on collaboration with manufacturers to build a robust media platform. As the platform matures, shift the focus towards strategic bargaining over the value that retail media creates.
Adapt internal structures to manage the expanded scope of retailer relationships, incorporating inputs from sales, media, finance, and marketing teams. Incentive structures should reflect these changes to ensure alignment.
Develop alternative systems to independently assess the performance of investments in retail media. Advocate for industry-standard measurement practices to ensure transparency and accountability.
Prepare for shifts in bargaining power by investing in innovation and creating unique value propositions that differentiate brands from their competitors. Learning from historical responses to disruptions, such as P&G’s strategy against private labels, can suggest a blueprint for success.
“Integrating these strategies can help business professionals to navigate the evolving retail media landscape effectively, ensuring sustained growth and competitive advantage,” says Dr Gabel.
The researchers, as entrepreneurs and consultants, collaborated with several major retailers and manufacturers to help them navigate the complexities of the retail media landscape. They assisted these organisations in building retail media platforms and developing and implementing effective retail media strategies, along with enhancing internal coordination, and establishing transparent reporting systems. Prior to joining RSM, Dr Gabel co-founded a retail-media services company that was sold to the Schwarz global retail group. “These partnerships have allowed us to apply our insights in real-world settings, facilitating the successful launch and growth of retail media platforms. Our ongoing collaborations continue to provide valuable feedback and opportunities to refine our recommendations further.”
Read the full research article in the Harvard Business Review: How Retailers Became Ad Platforms
Kellogg School of Management, Northwestern University
Science Communication and Media Officer
Corporate Communications & PR Manager
Rotterdam School of Management, Erasmus University (RSM) is one of Europe’s top-ranked business schools. RSM provides ground-breaking research and education furthering excellence in all aspects of management and is based in the international port city of Rotterdam – a vital nexus of business, logistics and trade. RSM’s primary focus is on developing business leaders with international careers who can become a force for positive change by carrying their innovative mindset into a sustainable future. Our first-class range of bachelor, master, MBA, PhD and executive programmes encourage them to become to become critical, creative, caring and collaborative thinkers and doers.
