Retail Media will add Fuel to the Fire for M&A in AdTech

If you think those “sponsored” products on Amazon are an innocuous little niche of advertising, think again. Those sponsored positions are what are now known as retail media, which has become the third-largest U.S. digital advertising channel after paid search and paid social campaigns. Even more impressive, eMarketer expects it to nearly double, from $31 billion in 2021 to more than $61 billion by the end of 2024, when it will account for almost 20% of digital advertising spend. The question to ponder is how other marketplaces will compete with Amazon in particular as retail media becomes increasingly competitive.

Currently, Amazon dominates the space with almost 78% of retail media ad revenue in 2021, trailed by Walmart at a significantly lower rate of 5.4%. Consulting firm BCG estimates that in 2021, 68% of Amazon’s overall profits came from advertising with related operating margins of 75%.    

The brick-and-mortar stalwarts of Target, Kroger and DICK’S Sporting Goods have all piled into retail media, as have digital-only players such as Instacart, Wayfair and Gopuff. COVID-19 has only improved the business case. U.S. consumers spent $1.7 trillion online during the first two years of the pandemic — $609 billion more than in the previous two years — driving spend into retail media.

Thus, retail media is poised to become the newest competitive battleground in digital advertising. But what, exactly, is the playing field? What capabilities do retailers need? Will this landscape accelerate mergers and acquisitions, and what should we expect in such regard?  


1. The playing field.

The digital advertising industry had a history of putting ads where people least wanted to see them. Banners, pop-ups, search ads, social ads and retargeting ads are inherently annoying and are renowned for being tuned out (e.g., “banner blindness,” coined in 1998, has been a driving force in causing such low overall conversion rates). Then in 2012, Amazon decided to place ads in ecommerce search results — a click or two away from the purchase button and closer to the “purchase intent” than the highly successful affiliate links — resolving the conflict between experience and ROI. Thus, modern-day retail media was born.

Retail media is a subset of commerce media, a category that includes affiliate marketing, shoppable ads, shoppable TV, in-store retail media and the metaverse. Retail media ads are served in real time across search, display and product pages within a retailer’s site.

As I touched upon above, when you search “toothpaste” on Amazon, retail media ads are the “sponsored” products in the results. When you click “Colgate Optic White” and scroll down, the items listed under “Products related to this item” are also ads. The ads are therefore low in the funnel, inherently private, non-intrusive and easily linked to transactions. Amazon and its competitors operate their own Retail Media Networks (RMNs), which enable advertisers to programmatically bid on keywords, product numbers, close matches and related direct identifiers.

2. What it takes to compete.

When advertisers choose RMNs, they consider the scale and quality of traffic and the platform experience. They also consider targeting, measurement and first-party data, which are often weak spots for smaller retailers.

First-party data is the information retailers collect directly from shoppers — email address, purchase history, browsing history and so forth. Ever since the large platforms (notably Apple and, imminently, Google) turned against third-party cookies (the tracking codes that enabled ad targeting on platforms like Meta/Facebook), first-party data has become highly coveted. There is no significant, unadulterated or accessible repository of this data outside ecommerce platforms.

Having the data is one thing; using it to target ads, provide ad analytics and demonstrate a return on ad spend (ROAS) is another. Amazon already does all that. Brands of course direct spend to RMNs where they can show the strongest return on investment — hence, Amazon’s dominance. To compete with Amazon, retailers need ad technologies that shore up their data capabilities and its ultimate usability.

3. M&A, past and future.

For online retailers, the question is whether to own or rent retail media technology. Amazon developed its own demand side platform (DSP) and supply side platform (SSP) for serving ads. Walmart uses The Trade Desk as its DSP and acquired two companies — Polymorph Labs in 2019 and Thunder in 2021 — for the supply side.

So far, the ad industry is betting that online retailers will rent. In July 2022, Publicis Groupe acquired CitrusAd, a self-serve retail media platform that connects 4,000 brands and 70 retailers, and it remains active in overall M&A pursuits as they broaden their data and technology capabilities. To gain an edge in retail media and first-party data targeting, Criteo spent $250M to acquire IPONWEB, a platform focused on media trading, completing the transaction in August 2022.

Among tech giants, Alphabet should be the most nervous about RMNs now that 63% of consumers start their search on Amazon when shopping online. Alphabet collects first-party data through Google Pay and Buy on Google (its checkout experience) but not through Google Shopping, which refers shoppers to retailers. eMarketer’s forecast suggests that Google could ultimately lose 5% of U.S. digital media revenue to Amazon between 2019 and 2023. Might Alphabet make an ecommerce acquisition shortly in response? 

Ads First, Ecommerce Second 

A decade ago, Amazon was an ecommerce platform with advertising. Arguably, it is becoming an advertising platform that uses ecommerce to gather eyeballs and first-party data, and it is working hard to bring more sellers onto the Amazon marketplace. Logically, with more products to be found there are more eyeballs to monetize. Will other retailers become more aggressive in trying to follow suit? Will Walmart and others take significant market share by developing their own retail media spins or simply become the “Bings of Retail Media,” just a little too late to the party?

Let’s hope the space becomes more competitive. Retail media now stands to represent digital advertising at its very best.

Tim Harned is Managing Director at Progress Partners. With a distinguished M&A and capital-raising career spanning more than three decades, he led strategic transactions for both Fortune 500 and early-stage, high-growth enterprises on an international scale. He brings a unique global perspective to his work, leading both cross-border transactions as well as complex U.S.-based situations. Early in his career, Harned spent 15 years in M&A and capital advisory at Lehman Brothers, Banc of America Securities and Morgan Stanley. He transitioned to work with tech-focused boutique advisory firms for over a decade before founding his own firm, 8Nineteen Advisory, which he sold to Progress Partners in May 2021.

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