Commentary

Navigating Retail Media Networks' Growing Pains


Forrester says Walmart is the second-largest retail ad network

While marketers are still stampeding into retail media networks, with ad sales expected to reach $85 billion by 2026, the category is still confusing and chaotic. With new networks constantly emerging and more than 150 worldwide, comparing rates and effectiveness is a swampy mess. Worst of all, advertisers are increasingly aware that ads on these networks, if not well managed, are more likely to degrade consumers’ experiences than increase sales. Nikhil Lai, senior analyst at Forrester, outlines the struggles.

Retail Insider: Your new report analyzes 29 of the biggest retail media networks, a market now predicted to reach $85 billion by 2026. It’s huge, with 150 networks. What are the main takeaways for retailers?

Nikhil Lai: The market is now moving beyond just retailers, with first-party and data-rich intermediaries like Drizly and DoorDash jumping in and hospitality chains like Marriott. From my perspective, the big story is that the retail media market is extremely top-heavy. And very few have enough traffic to actually build ad businesses. The biggest networks, like Amazon, Albertsons, Kroger, Walmart and Target, have enough traffic on their owned-and-operated properties to justify brands spending ad dollars. But the rest are going to have to cooperate to aggregate supply. They’re not going to survive as a standalone network.

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Retail Insider: Who are retailers hiring to run these networks?

Lai: They are poaching young people from ad agencies, which are notoriously toxic workplaces and don't pay very well. There are many recent MBAs with a background in strategy consulting but not much media savvy.

Retail Insider: At what point will we start to see a shakeout?

Lai: We've already seen Gap say it will pause. By this time next year, we will have had a reckoning among the mid-tier networks. They will have tried selling onsite ads, they will try offsite, and they will try it in-store. And they’ll say, "Maybe our best bet is to cooperate with other retailers." They’ll begin pooling data and extending audiences across the internet rather than trying to increase their ecommerce traffic.

Retail Insider: There seems to be a growing perception that the consumer experience of these ads isn’t always great, creating an increasing brand risk for the retailer. How is that being addressed?

Lai: Home Depot, for example, is analyzing clickstream data to figure out the right frequency of advertising. Other retailers use some of the income from advertising to fund brand marketing campaigns and amortize costs. We're going to see more collaboration between those two teams.

Retail Insider: How are retailers trying to survive the shakeout?

Lai: A new development is the commoditization on the sell side. RMNs are supported by a few critical vendors, including CitrusAd, powered by Epsilon; Criteo; Koddi; and PromoteIQ. Buyers of retail media lean on vendors like Skai, Pacvue, CommerceIQ, and Circana (formerly IRI and NPD) to automate and optimize campaigns. Now, we're seeing many retailers, led by Kroger, wanting to bring technology in-house.

Another trend I'm interested in is the shakeout in in-store advertising opportunities. People have been talking about that for a long time, and it's becoming clear that in-store ads will only work for specialty retailers like Best Buy, with high-consideration purchases. That in-store opportunity has been wildly exaggerated for food, drug and mass categories. Shoppers are on autopilot and aren’t going to like any advertiser interrupting them. I’m also eager to see who will aggregate and standardize the long-tail environment.

Retail Insider: Explain the current problem.

Lai: I recently spoke to the head of retail media at Sanofi. She said she can't decide whether to spend the next dollar with Walgreens or CVS because they have different attribution windows and match rates. We’ve all been talking about the problems caused by this lack of standardization for years, but they are coming home to roost. Maybe Google, Criteo, or someone like Instacart, which has worked with many grocers, will solve the problem. Perhaps it will be the IAB or Amazon.

But it's becoming mathematically obvious that effectively buying ads on these networks is too complex. I don't know how much you can expect a client marketing team to do before they just throw up their hands and say, "This is too complicated, and I'm not going to participate." I recently spoke to someone at Dentsu who had a client come to her with a small budget and asked her to spread it among the 72 merchants it supplies. Can we realistically expect her to log into 72 different portals and compare performance across them?

These are fundamental structural problems that are limiting the space.

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