Retail, Consumer U.S. Hardlines & Grocery Retail: Retail Media Profits

Until recently, retail media networks (RMNs) were in the background of the investment debate. Now, this topic is gaining a greater degree of attention. We believe the attention is rightfully warranted. These platforms not only carry outsized profitability, but they are bridging the gap between customers and vendors. Retailers are leveraging first-party data to offer tailored advertising solutions to their vendor partners. These solutions are then trickling down to the customer in the form of more relevant advertising content. Retail companies offer a unique perspective within advertising given their proximity to the entire purchasing cycle from point-of-interest to point-of-sale. Vendors can more precisely allocate their advertising dollars and ultimately achieve higher ROIs. Demand for retail media is growing rapidly and many retailers are now operating RMNs at scale. This dimension will add another layer to the constructive case on many of these stocks.

RMNs provide an opportunity for companies to tap into a rapidly growing profit pool. The retail media industry is estimated to grow to $122B globally ($60B ex-China), or over 20% of global digital advertising, this year, according to GroupM. We estimate that the profit pool for retail media was approximately $66B in '22 (assuming just over a 50% contribution margin). In contrast, the profit pool for selling goods in subsectors like Auto Parts & Consumer Electronics ranged from $20-$60B last year. RMNs can offer incremental profitability to support a retailer's underlying business. Plus, these platforms can grow to scale with reasonable up-front costs allowing retailers to realize high contribution margins sooner. We think retailers, especially those in smaller profit pools, have an opportunity to tap into retail advertising as a way to support their margin profiles.

The discussion around RMNs has grown louder as of late. Retailers are providing more detailed updates on these alternative businesses. In CY'23, we estimate that many retailers are positioned to achieve 50% contribution margins from RMNs. Our base case assumption is for retailers to reinvest ad profits to support other areas of the business or offset profitability headwinds this year.