What is the investor perspective on Retail Media, asks Colin Lewis? Historically, reading analysts taking about anything to do with marketing, advertising or retail shows a chasm between the reality of operating these businesses and the prism through which financial folks look at them.
The nuances of selling media, stacking shelves or the opaque world of programmatic is not really that important to the CFOs of big retailers or Excel jockeys in Goldman Sachs.
The Goldman Sachs investor report “The Merchant-Media model: A new era for retailers as ad platforms” from 2021 wrote that “For Walmart specifically, we believe this new media income stream from CPG could provide a 6-7% EBIT growth tailwind”.
Deutsche Bank say that “advertising is a significant component” and that the contribution of ad sales to the company’s gross merchandise volume could grow as high as 8 to 10%.
For CFOs and investors, the explosion of retail media is one part of a much larger, transformation of retail from the buying and selling of goods and services to a different model, where the ‘side hustle’s such as advertising or fulfilment services become the ‘main hustle’: you could say, with your tongue firmly in check, say that retailers are advertising business who happen to sell products.
During a Walmart’s earnings call, John Rainey, the Walmart CFO, said specifically that looks at profit margin per incremental new revenue. For every net new digital commerce and advertising dollar, Walmart earns 12.5% – roughly three times its overall margin – and he believes that this will keep on improving as the eCommerce supply chain matures.
This is important as the typical margin for a retailer is 2-4%.
CFO Rainey said: “this is a compelling data point that supports the strategy that we have – and it’s changing the margin profile of our business.”
Of course, Retail Media is not the only driver. Retailers are investing in marketplaces, logistics automation, membership models, AI and analytics, which have better margins than the core retail business.
One important to note is that not all of these initiatives are high margin: ecommerce is hard to turn a profit on— at least in the short-term — thanks to the huge sums needed to expand online.
However, there is a virtuous flywheel, where investments in the likes of marketplaces, membership models, AI, analytics and eCommerce not only improves growth but also increases the quality and quantity of data. More shoppers mean more data you have, the more opportunities to scale the advertising business.
Regardless, the fact that Excel jockeys and analysts are asking questions about retail media – and not about inventory, headcount or operations is a good thing – as it means that it will top of the CFOs agenda for a considerable time.
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