How Retail Media Will Scale the Garden Walls

Retail media represents a red-hot growth category within the advertising landscape. eMarketer is expecting U.S. retail media spending to top $45 billion this year. In terms of the impact of retail media networks (RMNs) and the evolution of the business models that drive them, we’re just getting started. Ultimately, we’re going to see a major transformation in the space, particularly in terms of how these networks operate outside of their own walls. Here’s why.

RMN Growth Drives Traction and Scale for Audience Extension

In the coming years, retail media will drive tremendous traction for audience extension — i.e., the concept of allowing advertisers to target a site’s audiences off-site, thereby creating a new revenue stream. This is an option that’s been available to publishers for some time now, but it’s the emergence of retail media that’s going to drive true scale in the audience extension space. There are a few reasons:

• Data quality: Retail media offers some of the most sought-after data in market, and it’s all first party. No other data assets offer the quality and scale that we’re seeing with retail media data, and that makes the opportunity to extend its power immensely valuable.
• Inventory scarcity: Most RMNs don't have significant on-site inventory beyond sponsored product listings. They will, therefore, need to reach consumers offsite to maximize revenue. Reaching users offsite also preserves their experience onsite, ensuring that the retailer’s core business is protected.
• The flywheel effect: Reaching consumers offsite will create an immediate ad revenue opportunity. But perhaps more importantly, it will also drive consumers back to the retail media property to transact, therefore becoming a key customer acquisition opportunity.
• Complementary financial models: Publisher-managed audience extension requires publishers to buy inventory on third-party sites, a model they're not accustomed to in terms of both buying expertise and cost of goods. This isn’t the case with retailers, which are well-suited to inventory sourcing and the relationships required.

The very nature of RMNs lends them to audience extension beyond their own sites, and such extensions promise to unlock a significant amount of revenue for these businesses. In doing so, audience extension will also start to influence how these companies think about the thickness of their walls and the gardens they protect.

RMN Proliferation Prompts Need for Model Evolution

In looking to the future of retail media, we need to consider the number of RMN businesses in operation. Right now, we’re witnessing an explosion in the number of retailers that are launching media businesses. Given where they’ve witnessed success with RMNs to date, most are focusing on walled-garden models that keep complete control in the hands of the retailer, both in terms of buying access and data.

This proliferation of walled-garden RMNs means that media buyers and brands will have to do business with a growing number of individual players, and that has implications for how the space will evolve. Key questions that will arise include the following:

• How efficient can media buyers be when dealing with a growing number of RMNs?
• How will reach and frequency be managed across these networks?
• Will there become a limit to how many RMNs a buyer will engage, based on either scale or category relevance?
• What will happen to those RMNs that do not make the cut on buyers’ curated RMN plans?

The final question points to a need for our industry to evolve in order to accommodate the influx of RMNs, all of which bring valuable data assets (albeit of varying sizes) to the table. In all likelihood, we’re going to see RMNs become more amenable to network and consortium models as a means of acknowledging buyer unwillingness to manage a growing number of direct relationships with RMNs. We’ll also likely see the proliferation of RMNs influence the tech stacks that these companies employ, particularly if they decide to start running parallel auctions or employ header bidding-style functionality to manage access to inventory.

While today’s retail media sector is largely characterized by walled-garden approaches and insular data practices, these networks will continue to wield greater influence over the larger media landscape. As these networks proliferate and the individual players look to maximize the revenue opportunity inherent in their data assets, we’re going to see some necessary evolution within this sector. Now is the time for marketers and publishers to pay attention, as the business pivots of today will influence the advertising opportunities of tomorrow.

Peter Barry is vice president, addressability at PubMatic, an independent technology company delivering digital advertising’s supply chain of the future.