In October 2022, supermarket giant Kroger announced its intention to buy Albertsons. On the surface, this was about challenging the leader Walmart. But reading between the lines, analysts could see another driving reason: generating “alternative revenue.”
As the press release put it, “the combined company will be able to reach an expanded national audience of approximately 85 million households nationwide, fueling growth in alternative profit businesses such as Retail Media, Kroger Personal Finance, and Customer Insights.”
The move by Kroger provided an early snapshot of a new world reality for retailers and online marketplaces, one that seeks to bolster revenue and profitability via added services.
The economics of grocery and last-mile costs
To understand why this is happening, you first need to comprehend the economics of running a modern grocery business. Supermarkets have always operated on low margins (1%-3%), but as shoppers have shifted online (now 13.5% of total grocery sales in the US), pressures have become more intense.
Online retail is a costly, CAPEX-heavy model, particularly when it comes to getting shopping bags to the customers’ door. Last-mile fulfillment represents up to 41% of the total logistics cost. When you factor in inflation, it’s a model that is only getting more expensive – Amazon FBA (Fulfillment by Amazon) costs have increased by more than 30% over the last two years.
The search is on for alternative revenue, not just to address these costs, but also to capitalize on income opportunities. For example, as Google phases out third-party cookies, retailers are in the box seat with quality first-party data that can create more personalized and immersive experiences for shoppers and be commercialized.
Amazon setting direction, others follow
The modern master of alternative revenue is Amazon. Way back in 2002, it created AWS (Amazon Web Services), and in 2012 it led the charge in retail media by launching Amazon Advertising. Both are highly profitable vehicles for Amazon and serve to fuel and fund the expansion of the Amazon Prime ecosystem. That, in turn, is part of the Amazon flywheel – Prime shoppers spend 2.3 times as much as non-Prime members.
Other retailers have followed Amazon’s lead. In recent years, the retail media space has vaulted to become the third wave of digital advertising, now projected to be 15.4% of all advertising spend by 2028. And retailers have also built their own ecosystems, since membership results in a higher average spend and larger baskets, which help manage retail viability.
With up to a 90% profit margin, retail media is the proverbial golden goose for the 21st-century retailer. But Amazon sets an example in other ways as well. While it has historically focused on customer-centricity, it is transforming to more of an Alibaba-esque model with a clear directive to increase time and engagement on-site.
There is now a laser focus on new services and experiences. Its TikTok-like campaign, “Amazon Inspire,” was at the forefront of Prime Day engagement. And the behemoth recently launched its first ever third-party travel deals partnership. Like Amazon, expect other retailers to pursue every avenue for alternative revenue.
The good and bad news for brands
If you are a brand, the bad news is that retailers’ drive for alternative revenue can result in more demands in the midst of rising costs of doing business.
The good news, though, is that necessity is the mother of invention. As retailers have been forced to seek out alternative revenue, they have built out ecosystems with more (and smarter) consumer touch points than ever before. And the shopper data available to activate those touch points is also richer than ever.
While retail change can lead to increased budget pressures that can seem daunting, it also brings with it opportunity. The rewards are there for brands that partner and engage with retailers early and often to create truly compelling consumer moments that will serve as the foundation for brand and retail strategy for years to come. Look for how to co-create new media models and new ways of matching your data to theirs to arrive at even better insights and outcomes.
Alternative revenue sources are critical for retailers. If used effectively, they can be transformative for brands.
- James Galland is Global Ecommerce Director at VMLY&R Commerce
Originally published in Ad Exchanger