How the retail media flywheel is crushing big media; How to win the REmade Awards
How the retail media flywheel is crushing big media; How to win the REmade Awards
Welcome to a retail-media focused end-of-week edition of Unmade. Today: We ask our REmade Awards jurors what it takes to win. And we examine why the accelerating flywheel of retail media is hurting big media.
And further down, SCA and Pureprofile surge on the Unmade Index.
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Retail Media is driving the valuation flywheel
Retailers have barely begun to unlock the value from integrating media assets, writes marketer and global retail media specialist Colin Lewis in his regular column for REmade.
Retailer margins and profitability are notoriously low – with grocery being among the worst. And they are not going up. Anything that contributes to a margin increase is always welcome.
In theory, retail media networks should provide high-margin revenues that should be able to contribute to a retailer’s overall profitability – and ultimately share price.
Has this happened? Investment bankers – a crowd not known for their understanding of either retailing or advertising – are quite bullish on the role of retail media in affecting market capitalisations.
Sample retailer margins around the world
Back in 2021, investment bankers, Goldman Sachs wrote an investor report called “The Merchant-Media model: A new era for retailers as ad platforms” about retail media. It was the first investment bank to see the opportunity for retailers of consumer packaged goods in the US.
The quote from Goldman that mattered was: “We believe retailers in the US are positioned to generate $15-$20bn of e-com oriented retail media revenue from CPG manufacturers by 2025; the figure should be substantially larger when we contemplate the potential to tap into media streams from electronic, apparel, sporting goods and other manufacturers for some retailers.
“While AMZN has to date captured a disproportionate share of the income, we believe Walmart, Target and Kroger are brick-and-mortar leaders where the opportunity appears underappreciated. For Walmart specifically, we believe this new media income stream from CPG could provide a 6-7% EBIT (earnings before interest and tax) growth tailwind”.
Walmart has since grown to a $3bn+ retail media business with a very high margin thanks to the percentage of sponsored products. Target is claiming its retail media business, Roundel, was close to $1bn profits in 2023, on the back of $106bn revenues.
The Goldman report was remarkably prescient. At the time, Goldman said it believed Walmart’s growth targets, which many investors viewed with scepticism, were reachable through this lens and gave it a ‘buy’ rating. Walmart's share price has grown 31% year to date, and 86% over the last five years.
The Australian perspective
In December, the Australian Financial Review quoted Morgan Stanley: “The country’s largest media groups will lose $550 million by 2025 – and $1.1 billion by 2027 – in advertising spending to retailers such as Woolworths, Coles and Amazon as the retailers accelerate their growth in the lucrative sector.”
Morgan Stanley downgraded their valuation of five of the largest ASX-listed media stocks – ARN Media, Southern Cross Media, Seven West Media, Ooh Media and Nine – as a result of the “not well understood” threat of retail media.
Since that downgrade, the Unmade Index, which tracks the value of the sector, has fallen by 22%.
Morgan Stanley even quoted some numbers: Woolworths made $550m from Cartology in the past financial year, and Coles360 made $250 million.
The logic for the share price downgrade of the big media stocks was that the “leakage” from brand budgets to retailers was 5% in 2022. It will grow to about 40 per cent by 2027, equating to $1.1 billion lost from traditional media companies.
Which media channel would be hit the hardest? By 2027, Morgan Stanley predicted TV advertising in Australia to lose $450m, radio would lose $150m, and the outdoor and print sectors face a $60m shortfall. Other categories could lose $420m.
Of course, retail media is not the only risk to these media companies’ earnings. “Perpetually falling audiences are a greater risk,” the analysts wrote.
Holdco share prices
What about the big beasts of the media world, the global holdcos? Few have a robust retail media proposition outside of the US.
Indeed, the purchase of Flywheel from Ascential late last year by Omnicom was a tacit admission that there are few retail media assets that can be bought.
Flywheel brings a scaled capability to Omnicom in the fastest-growing part of the industry, which is retail e-commerce and then retail media,” Omnicom chief executive John Wren said at the time. “That’s a capability we have in part, but these are the leaders.”
Wren said the company’s first instinct is typically to build a capability instead of buying it, but that Flywheel had accumulated a significant head start.
“When I sent my three top technology guys down to take a look at (Flywheel), they basically said, ‘You can’t replicate what they’ve done. It will take you as much money and at least five years,’ and that’s if the world sits still, which the world’s not about to do,” Wren said.
The valuation gap between a services-based holdco business, and an adtech business that can scale is startling. For example, demand side platform The trade Desk is valued at US$48bn while market leader Publicis is half that.
Walmart becomes a poster child
There is a new report from Deutsche Bank about Walmart and the impact that retail media could have on its share price. The Deutsche Bank report claims that Walmart is growing due to its alternative value streams, which are boosting revenue and driving profits, which they call “five pools of opportunity within the e-commerce world”:
Walmart Connect, the retail media network
Membership fees
Marketplace transactions
Walmart Fulfillment Services
Data monetisation
“These five value streams are fast growing with high margins, and management emphasized that these categories are key drivers in the underlying transformation of the business,” according to Deutsche Bank.
Walmart has flagged this approach over the years and called it a ‘flywheel’, echoing the Amazon Flywheel that they have been talking about for years. The CEO of Walmart Inc., Doug McMillon describes it like this:
“Our ecosystem is made up of omni-channel capabilities, stores, service offerings, eCommerce and marketplaces as well as our supply chain combined with 2.3m associates. Together, we believe these elements produce a flywheel effect which creates relationships where customers view Walmart as their primary destination.
Our flywheel is accelerating through offerings such as the Walmart Connect advertising business, Walmart Fulfillment Services, Walmart Health, and our financial services business. These offerings represent mutually reinforcing pieces of our flywheel centred around our customers.”
Deutsche Bank says that “advertising is a significant component” of the Walmart share price as it is a $3.4b business growing at 20%-25% annually, with about a 70% contribution to margin. They said they believe that the contribution of ad sales to the company’s gross merchandise volume could grow as high as 8 to 10%, which Deutsche notes is roughly in line with Amazon.
Retail media is not enough on its own
Retail media provides an opportunity for retailers to increase their minuscule margins, but it is insufficient on its own. It is just one part of a wider reinvention of retailing that coalesces around monetising all their potential B2B assets into an overall strategy.
What are the constituent parts of this reinvention?
Walmart is showing the way as they now talk of themselves as more than just a big box retailer: in their 2022 annual report, they make the claim that they are “creating an ecosystem with our omni-channel capabilities, stores, service offerings, eCommerce websites and marketplaces as well as our supply chain. Selling advertising is another important piece of the flywheel because it helps suppliers and Marketplace providers sell more while creating a new profit opportunity for us.
In other words, the combination of a marketplace capability, a delivery and fulfilment network, additional services and retail media can contribute to share price growth.
How should retailers think about retail media and its impact on share price?
Retail media is one of the few businesses within retail that can scale. Most retailers do NOT have marketplaces and have a poor delivery and fulfilment network. The opportunity for retail media, in other words, has barely started – and the impact on share prices has not been felt to date.
The secret of a good REmade Awards entry? Keep it simple
REmade curator Cat McGinn writes:
The REmade Awards 2024 are open - you have until August 23 to get your submissions in (with late entries accepted until September 1.
We asked members of the REmade Awards jury and advisory panel what they’re looking for in an award entry.
Lachlan Brahe, General Manager – Retail Media, Cashrewards:
“Don’t forget an award entry still needs a narrative. I’ve judged too many awards that don’t link chapter to chapter, so to speak. The biggest deficiency is linking results to objectives.
“My advice would be to clearly state the problem you’re trying to solve or the opportunity you’re trying to harness. Describe your process for evaluating possible solutions for it. Demonstrate your solution and why it was picked. Show the expected impact of the solution and how you propose to measure the outcomes.
“Summarise a post analysis that links the measured outcomes to the problem for which you were solving.
“As the meerkats say, simples.”
Juan Mendoza, CEO, The Martech Weekly:
“Every company can talk about effectiveness or return on investment, but ideas that uniquely solve problems in this space are incredibly important because they inspire others in retail media to think differently about their practice.”
Roger Dunn - Global Retail Media Lead, Diageo:
“Scrutinise the category and tailor your entry to ensure you maximise each section of the entry - great campaigns and entries need to ensure they tick every box to win.”
Ben Shepherd, CEO, Schwartz Media:
“A good award entry has a clear articulation of the situation, the complication, the question that underpins the work and why the path chosen was an effective one. This helps me understand the intent of the work and that is the foundation for me when judging.”
Simon Porter, head of retail, Hatched:
“My main piece of advice is to keep it simple. Too often award entries are over-complicated and therefore difficult to judge.”
Hope Williams, head of commerce, Kinesso:
“Use the judging criteria to write your response and prepare for your presentation (if needed). Too often people ignore the judging criteria, and it makes it so much easier for the jury if you have followed clearly what the category is judged upon. Look at the percentage weightings too - this will dictate what to focus more on.”
Entries for the REmade Awards are now open via the REmade website, with an early entry deadline of August 23 and a late entry deadline of September 1.
Winners will be announced at the finale of the REmade conference in Sydney on October 1.
SCA surge beats the market
Tim Burrowes writes:
Southern Cross Austereo defied a falling ASX and grew its share price by nearly 8% on Thursday.
The bump came as the Australian Financial Review reported that SCA has held new talks to sell its fading regional TV licences to Network Ten’s owner Paramount.
While there have been negotiations previously, the AFR reported that rather than a cash price, a deal might instead be based on a future share of revenue. This would be an elegant solution to help Paramount avoid overpaying while also giving SCA schmuck insurance against the government later paying some sort of digital dividend to get its hands on spectrum to auction to telcos via a restack.
Shares in SCA have jumped by 15% in the last two days.
The same AFR article also suggested that regional operator WIN has been having talks with Paramount about selling its Ten-affiliated northern NSW station. That arrangement could leave WIN owner Bruce Gordon free to effectively take control of Nine where he already holds a 25% financial interest, but is limited to 15% voting rights because of the competing Ten link.
Nine’s share price dropped by 1.4%.
SCA also has regional TV interests in Tasmania, where it is affiliated with Seven West Media. SWM shares dropped by nearly 3% yesterday to 16.5c, the lowest point since October 2020.
Meanwhile, research house Pureprofile saw a 15% jump in its price on the release of a sunny set of preliminary numbers, revealing that the company landed its first annual after tax profit.
The Unmade Index lost 1.2% yesterday, to land at 486.4 points.
We talked to Pureprofile’s new chair Michael Anderson in June, shortly after his appointment:
'There doesn't seem to be any let up' former Austereo boss Michael Anderson on the ad market's accelerating decline
Time to leave you to your Friday.
We’ll be back tomorrow with Best of the Week.
Have a great day.
Toodlepip…
Tim Burrowes
Publisher - Unmade
tim@unmade.media