Promotional expenditure accounts for a sizeable 20% of costs in the grocery value chain[1]. Despite much hype, most of this spend remains untouched by digital technology, especially the widespread use of store-wide promotions funded by FMCG brands.
However, recent events indicate that we are at the beginning of a transformation as retailers shift to communicating with consumers through their own digital channels, at the expense of both traditional media, such as TV, and third-party digital channels such as Google and Facebook. Some examples include:
Coles announced it will stop putting catalogues of weekly specials in the nation’s mailboxes and shift focus to its coles&co website
Amazon's advertising revenue reached 5% of its retail sales, placing it third in digital advertising sales behind Google and Facebook
Google announced a 10% drop in search revenues in its latest results and Facebook saw a 20% decline in July ad revenues, driven by an advertiser boycott
In this article, I offer a way to make sense of these changes by putting forward a model to explain the long-term trend.
The advertising opportunity in retail media
The sale of advertising and data insights to brand partners is highly profitable for retailers, delivering in excess of 50% margin. Such numbers could transform the profitability of grocery retailers, given their low overall margins. A report in the UK estimated that an increase in advertising sales to 1% of revenues could lift grocers’ profitability by over 30%[2].
With Amazon leading the way, the last few years has seen increasing attention on retailers’ advertising opportunity, both in Australia and the rest of the world. Coles (Synergy) and Woolworths (Cartology) have established media businesses and are recruiting to grow their teams. Similar moves to increase advertising are underway in other leading global retailers. Doug McMillion the CEO of Walmart has publicly said,
“Our data has never been monetized, and we have a tiny ad business. It could be bigger.”
Retailers have a big opportunity to sell advertising because they have access to their “audience” close to the point of purchase - literally at the shelf-edge. This gives retailers an advantage over both traditional media and digital media such as Google or Facebook. These alternatives typically give access to audiences at earlier stages of the purchase process. Retailers also have access to first-party data about individual consumers and can monetise this asset with advertisers. dunnhumby pioneered this model in the 1990s by selling access to Tesco Clubcard data and most retailers have since followed Tesco’s example, especially those with access to individual customer data through a loyalty program.
The growing role of digital
The rise of digital technology is now transforming the role of advertising in retail. Advertising accounts for over 5% of Amazon’s retail income, making it the third player in digital advertising behind Google and Facebook.
Why has Amazon capitalised on the media opportunity faster than traditional omni-channel retailers, who on average take less than 1% of revenues from advertising? There are two factors that 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 wish to capitalise on the digital media opportunity.
The matrix below highlights where different types of retailer 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.
Retailers with a traditional loyalty program, such as Tesco, Coles and Woolworths, are in a stronger position. They possess a digital connection with many of their customers and also have analytics teams who can provide insights to advertisers. However, most omni-channel retailers are held back from capitalising on the digital advertising opportunity by legacy systems. In particular, traditional POS technology is usually a bottleneck to delivering personalised offers to the millions of customers who shop in physical stores. For this reason, most omnichannel grocery retailers still rely on old-school store-wide promotions as their main trade-driving tool. This will change as grocers start capitalising on cloud-based platforms that enable personalised offers in store as well as online.
A few pioneering retailers combine an advanced data analytics capability with a real-time promotions platform to deliver personalised offers to customers shopping both online and in store. Loblaws in Canada is currently leading the way globally in omnichannel personalisation, sending each customer a weekly personalised digital catalogue in which both the product and the promotion are driven by the data. This is 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 recommendations for the customer and a more attractive advertising proposition for FMCG brands, since they can target individual consumers with truly personalised offers.
So, exciting times ahead. In my view it’s likely we’ll see a significant gap open up between those retailers and FMCG brands who are able to spot the opportunity to lead the market and capitalise on it vs. those who hold back and miss out.
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Jonathan Reeve is General Manager APAC for Eagle Eye, a Software as a Service personalised digital loyalty and promotions platform.
[1] Grant Saligari and Annabelle Diamond, Credit Suisse Australian Food Retail Sector Review, 28th May 2019
[2] Sreedhar Mahamkali, UBS Pan Euro Food Retailers Report, 12th May 2020