QuickWit Weekly (8/23), Introducing WitsNotes Vol. 1

Commentary

There are 3 constituents of this merchant media shift:

1. Retailers
2. Consumer Goods Companies
3. Media Providers & Agencies

Retailer Impact & Opportunity

As consumers shift on-line, with third party delivery companies and legacy brick-and-mortar retailers seeing the largest percentage increases, the e-commerce retailers are:

• Collecting richer data about their consumer
• Developing new means to reach and interact with that consumer.
• Monetizing that data and consumer traffic to their vendors

“Monetizing consumer traffic is not a new concept for retailers — they have been doing it since the Richard Nixon era when trade budgets first arrived then slotting fees emerged and we believe retail-media is emerging in a similar way for CPG e-commerce.”

There are both tailwinds driving growth of retail media (growth in e-commerce, ability to measure purchase conversion, rise in privacy regulations) but there are also headwinds (profitability, competition and declines in ROI as more companies invest into retail media and push up prices of media inventory)

How will the money be divided?

A number of retailers are vying for their share of the growing retail media pie, as evidenced by the growing number of retail media offerings, we do not believe that the funds will be divided up evenly as a percent of market share.

Typical CPG trade spend rates are required by law (Robinson-Patman Act) to be generally consistent across each retailer as the funds are designed to support their business with that specific retailer and an unbalanced investment level is deemed to provide an unfair competitive advantage or disadvantage.

While some retail-media investment will fall under a similar classification (e.g., product discounts), many of the initiatives are increasingly being considered as broader drivers of awareness and interest in a product. As a result, retail media budgets are increasingly being funded out of a vendor’s national media or shopper marketing budget. Given this, we expect both size of business and the quality and cost of media offerings to dictate where the funds flow.

Who will win?

Generating e-commerce sales does not necessarily mean strong retail media capabilities will follow in kind.  The machine learning skills required to mine the troves of data are substantial, the approach to being a successful purveyor of media is very different than being a successful merchant and the costs to build an efficient retail media platform are meaningful. As CPG companies look to spend their media budget with retailers, we think those retailers that have the strongest ecommerce traffic and the ability to mine data themselves (fueled by ongoing investment) will be the biggest winners.

CPG Impact & Opportunity

The belated push into e-commerce for CPG categories has arrived and they seen a meaningful inflection in the adoption of e-commerce. According to IRI Worldwide, e-commerce sales were up nearly 59% by the end of 2020, driven by 76% growth in Food & Beverage categories and 51% growth in HPC categories. As a result, e-commerce as a percent of sales has gone up significantly. What’s more, e-commerce is also becoming a significant driver for many CPG categories that were once almost exclusively in-store – and we’ve seen a noticeable push toward digital investment from beverage and food companies.

The desire to establish an early share lead motivates investment.

As e-com rises in importance so too does the motivation for companies to ensure that they capture their fair share of their respective category sales. Based on Nielsen panel data, on-line market share lags off-line share for most companies and data suggest the gap builds as e-com scales. We believe this, combined by retailer pressure, will serve as the motivation for further investment in retail media.

Investment meaningfully pressures e-com margins

We believe retail-media will rise to 6-8% of total CPG e-com sales over the next four years. Included in that revenue base are sales of some fresh products and private label, which we expect to contribute little, if any, investment into retail media. We expect brand owners to fund the majority of CPG retail media and believe that their investment is likely to reach low-double digits as a percent of their respective e-com sales by 2023 (we model 11% for scenario analysis)

From what budget?

We believe most companies will argue that retail media investment, at a particular retailer, can influence purchases with any retailer and, therefore, should be seen as a shared national expense. We believe, however, that much, if not all, of the retail media investment should be considered a new and rising cost to compete in an e-com environment, pressuring channel margins as a result. Either way, while order of magnitude can be debated, we believe it is clear that e-com is becoming a less profitable channel for CPG manufacturers given the rising cost to compete there.

How to budget?

While we see retail media as detrimental to e-com channel margins, we do not believe it will be detrimental to every CPG company’s P&L but haves and have-nots will emerge.

• Many will self fund it through reallocation and some may even thrive with a growing share of the revenue pool if they have the flexibility and capability to spend more, or more effectively, than their competitors.
• Those unable to self fund retail media from existing budgets and will have to chose to either not invest (likely ceding sales and market share as a result) or reset margins lower to fund the investment 
• Others may gradually work to bypass retailers altogether (at least at the margin) with investments in DTC options.
  • Though we believe the pursuit of DTC options by most CPG companies is designed to capture data and nurture one-on-one relationships with consumers rather than to develop an economically viable retailing model.

Media Providers & Agencies Impact & Opportunity

The growth of retail media could present both a risk and an opportunity for the large agency holding companies depending on:

• The extent to which retail media budgets will be funded from existing digital media channels as opposed to being funded from trade budgets
• The ability to capture the growing share of clients’ ecommerce spend.

In the near term, we see the shift as a small positive given the large agencies have relatively low exposure to trade budgets and could therefore capture a share of the incremental dollars being spent on retail media as they advise their clients on a more holistic marketing and e-commerce strategy. Longer term, however, we see a potential risk from the shift of existing digital media budgets to the large retail media platforms and the move of certain decisions to in-house shopper marketing functions which could put pressure on agencies’ scope of work and fees, particularly as this becomes part of a more holistic business planning between CPG manufacturers and the large retailers.

Overall, we still believe the ad agencies will retain an important role in an increasingly fragmented and complex media landscape as they help their clients improve their return on investment through a more efficient reallocation of advertising spend, particularly amid proliferation of retail media platforms.

• We note that Google and Facebook are still the largest advertising platforms capturing 43% and 22% of global digital ad spend,
• Agencies have also been strengthening their e-commerce capabilities in recent years as they try to capture the growing client spend on e-commerce,
• Finally, we believe agencies have historically shown their ability to adapt their offering based on client needs even as clients have shifted more budgets toward digital advertising.