Retail Media Networks and Slotting Fees

In 2017, Amazon made a fateful decision. It quit being a retailer who happened to sell online and became a retail media network.

Previously, Amazon’s retail model was simple. Users searched for what they were looking for, and its algorithm delivered the relevant results to purchase. The process was fairly neutral—derived from a straightforward algorithm based on customer reviews. A better product and solid merchandising meant more sales.

With retail media networks, it’s different.

Brad Stone explains in his book Amazon Unbound:

Amazon’s search results had evolved from a straightforward, algorithmically ordered taxonomy of products into an over-merchandised display of sponsored ads, Amazon Choice endorsements, editorial recommendations from third-party websites, and the company’s own private brands. In some product categories, only two organic search results appeared on an entire page of results. Since brands and sellers could no longer count on customers finding their products the old-fashioned way, through the site’s search engine, they were even further inclined to open up their wallets and spend money on search ads.

This transition has been incredibly lucrative, and we’ve seen Walmart, Target, Lowe’s, and Dollar General launch their own retail media networks in the last year. According to Forrester Research, the market could be worth $50 billion next year.

What does this mean for CPG companies?

What are Retail Media Networks?

First things first, we need to define what Retail Media is. At its simplest, Retail Media is spending advertising dollars on retailers’ websites. A Retail Media Network is the platform that retailers build to manage that spend. It gets a bit more nuanced as some retailers, like Walmart and Target, have omnichannel capabilities. For example, manufacturers can bid on search results on Walmart.com and purchase in-store video displays through Walmart Connect. In Target’s case, CPG companies can buy advertisements on Target.com, Target in-store, and across NBC Universal media properties.

One way to think about retail media networks are as an evolution of slotting fees.

Traditional brick-and-mortar retailers had limited shelf space. Retailers could only hold so much physical inventory. One way to ensure management optimized revenue/square foot was to charge slotting or pay-to-stay fees. Manufacturers pay slotting fees for the right to be on the shelf. Not all retailers charge slotting fees. EDLP retailers like Costco and Walmart do not–although you could argue they just build it into the price.

Proponents would say that retailers and manufacturers are commerce partners and that the fees offset risk within the system. The reality is retailers charge slotting and pay-to-stay fees because manufacturers have no choice but to pay them. A manufacturer is reliant on the retailer to reach consumers. It makes no money if it can’t reach consumers.

E-commerce is in a similar situation. Online storefronts have unlimited shelf space, but the only real estate that really matters is the first page. Research suggests that first page results command around 91% of search traffic. Enter retail media. This real estate is incredibly valuable, and most retail media networks have some version of “Sponsored Products.” Manufacturers pay-per-click for targeted advertising with a chosen set of keywords.

Slotting Retail Media Network Deal Management Centralized Centralized Planning Level Category Keyword (arguably PPG) Shelf Management Manual – physical store shelf Automated Fee Type Fixed Variable (CPC)

What explains the rise of Retail Media Networks?

It’s easy money for retailers.

Unlike slotting, which is also easy money, individuals don’t have to stock shelves every time a company outbids another. All this income is effectively free profit. Most retail media networks are self-service portals, and the marginal cost of adjusting product search results is effectively zero. Last year, Amazon Advertising reached $7.5 billion in revenue—all profit.

Don’t believe me? Let’s take a look at its impact at Amazon. Here’s an amazing graph that charted Amazon Advertising Revenue and the company’s overall net income. There’s a clear correlation.

Are Retail Media Networks a good investment for CPG Brands?

One of the more interesting aspects of the retail media network debates is this idea, often repeated by the well-intentioned analysts, is that manufacturers are okay with paying these fees because it offers unique targeting. While this may turn out to be true in the long run, it’s certainly not backed by data today.

A recent IAB survey asked CPG companies why they paid for placement in Retail Media Networks; 47% of ‘big brand’ consumer goods companies made the investments because the retailer required the media buy. Just 24% did so because of the strong return on their advertising investment.

This sentiment is strikingly consistent across the e-commerce landscape.

Again, Brad Stone explains:

A bipartisan report by the U.S. House antitrust subcommittee would later disapprovingly conclude that Amazon “may require sellers to purchase their advertising services as a condition of making sales” on the site since consumers only tend to look at the first page of search results.

However, I don’t think that it’s all negative.

From a brand perspective, right now, the major advantage of retail media networks are twofold: First Mover Advantage and that they’re variable costs.

Right now, e-commerce is still the wild-west of consumer goods retail, and due to the reliance on algorithms, e-commerce features an inherent lock-in effect for many consumers. Once a consumer buys something through Walmart.com, the product will be forever attached to the profile—potentially locking in future sales. Since these costs are variable, rather than up-front flat fees like slotting, make it ideal for new product introductions. After all, would you rather pay $200,000 to introduce an SKU in 40 physical locations without any knowledge of its popularity or run a few targeted tests online?

What does this mean?

I think the writing on the wall is pretty clear. Retail media networks aren’t exciting avenues for growth—but rather an electronic extension of slotting fees.

In short, business as usual.