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One of the ironies of the pricing storm around UK supermarkets this year is that if the grocers were “greedflating” the nation’s food they were doing it remarkably badly.
The competition watchdog in July concluded that weak competition wasn’t the cause of soaring food prices: operating profits in retail grocery had fallen by 42 per cent in the 2022-23 financial year.
The supermarkets are generally looking for profitable ventures, like selling fuel, to stay competitive on food. The latest involves your eyeballs — and your data.
The idea of “retail media” is an old one. Supermarkets always used promotions, banners or tannoy announcements to boost sales of certain products — often funded by the manufacturer in question. There has long been talk about the opportunity presented by the growth in ecommerce, combined with supermarkets’ customer data particularly from loyalty programmes. The idea is to sell ads, either in-store or online, to consumer goods companies desperate for targeted marketing and measurable returns.
In one sense, this is the Amazonisation of retail: the US tech company’s flogging of sponsored products accounted for two-thirds of US retail media in 2021, according to Boston Consulting Group.
As others now get in on the act, this type of advertising is forecast by media buyer GroupM to buck a slowing digital market, surpassing television ad revenues by 2028. The phasing out of cross-website cookies that track users’ browsing make the walled garden of retailers’ sites and loyalty programmes more valuable.
Consumer groups are moving their money. Nestlé has highlighted a forecast that a fifth of industry media spend would be through e-retail by 2025, note analysts at Exane, while Unilever’s retail media spending has tripled in the past three years and could reach a quarter of its total budget.
One retailer told me it has doubled its online ad inventory over the past year, while in-store space has increased tenfold. In-store screens can quickly be changed according to the time of day or the weather; personalisation online can effectively boost advertising space further.
Compared to the grunt work of shifting food, this is lucrative stuff. BCG puts gross margins for retail media at about 80 per cent, compared with grocery retail at 20 per cent; the disparity is probably even greater at the operating level where big supermarket margins are 3-4 per cent.
Tesco and Sainsbury, with well-established loyalty schemes and data analytics operations, are coy on how big this is or could be. Sainsbury’s has said that the Nectar360 loyalty and marketing business could add an additional £90mn in profit (on an unspecified base) over five years to March 2026. Tesco’s boss Ken Murphy commented that retail media could be a “meaningful contributor to profit” within three years, which Clive Black at Shore Capital interprets as perhaps £200-300m in the 2027 financial year, or 8-12 per cent of last year’s operating profits.
It would be easy to start pencilling in bigger sums. In the more developed US market, Walmart has mentioned an aspiration of roughly 6 per cent of sales, compared to less than 1 per cent last year. Kroger’s media income sits within “alternate profit streams”, which includes other businesses like financial services. It accounted for a quarter of operating profit last year.
But there are reasons for caution. Supermarkets need to tread carefully in using customer data, even when they have permission via loyalty schemes, as retail media expands its horizons. Supermarkets already offer “off site” advertising on the wider web to brands. The next frontier, something Ocado is exploring, is so-called non-endemic advertising, where supermarkets’ rich data sets are used to advertise products not sold by the grocers, such as cars, holidays or credit cards.
One question for investors is how much media profit is simply reinvested into competing on food. Another is how this affects supermarkets’ crucial (and sometimes fraught) relationships with suppliers. The line between traditional trade budgets, for product promotions, and newfangled retail media campaigns is currently murky.
But the biggest test may be whether retailers can resist the temptation of high-margin advertising sales in the name of preventing food customers’ from feeling overwhelmed by marketing, either in-store or online. The success of retail media will rest on whether grocers can use customer data to sell advertising without making shoppers feel like a piece of meat.
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