Memo: The Step Function in Retail Media

 

In 2023: TikTok, Microsoft, Amazon, Pinterest, and 7-Eleven have more in common than ever.

With the continued degradation of third-party data, we’re suddenly seeing every platform moving to eat away at Meta and Google’s second wave of digital advertising. Digital is in the midst of the third wave now, one defined by first-party data. To collect that data, it helps to own the checkout process – and this is where media and commerce are converging in 2023. In many ways, it’s linear commerce 2.0.

Retail media networks are digital advertising platforms that allow retailers to monetize their online presence by selling advertising space on their websites and mobile apps to brands and manufacturers. These networks typically use data on consumer browsing and purchasing behavior to target ads to specific audiences, and they may also provide analytics and reporting tools to help retailers and advertisers track the performance of their campaigns. The main purpose of retail media networks is to bridge the gap between brands and consumers by providing retailers with a new way to monetize their digital properties, while also providing brands and manufacturers with a new way to reach consumers.

Rather than driving online transactions with media impressions, retailers are selling media impressions driven by online transactions. It’s a high stakes game; Meta and Google (the one-time duopoly) are due to innovate in one way or another. But for now, their vulnerability seems substantial.

You’re reading about it everywhere. Retail media is the new hot topic, “crashing the duopoly” is the catch phrase of the moment. Here’s how we forecasted today’s retail media ecosystem in 2018:

All roads lead to increased ad spend for retailers with Amazon at the behest of Google and Facebook. Amazon has a distinct advantage in so much that the entire commerce workflow can happen within their walls.

  • Short term: Amazon is introducing higher-potency retargeting ad
  • Long term: Amazon will benefit from the use of less intrusive data
  • Amazon will not rely upon Google’s search data
  • Amazon has access to unique editorial content
  • Amazon has an authentic reason to hit your Inbox
  • Amazon will transcend traditional digital channels

Now, other major retailers want a part of this. And one social media company is investing heavily into building its own eCommerce operation to position itself as another facilitator of third wave advertising.

TikTok is (against the backdrop of a potential ban in the US) building up its eCommerce sales with TikTok Shop, which only recently rolled out in the US but is making big headway elsewhere in the world. Meanwhile, Amazon wants greater reach and it’s doing so by expanding Buy With Prime, the fast-shipping plugin it began testing last year that lets other merchants add Amazon Prime logistics to its checkout pages. Early response has shown impressive results.

Both are exercises in amassing all-important first-party data as the third-party data era sunsets across the internet.

Amazon and TikTok are flexing their commerce muscles while beefing up their advertising operations. Meta, once at the top of the pyramid alongside Google, has seen its advertising business plummet in the wake of a series of crackdowns by Apple on its third-party data tracking, which once was powerful enough to make or break direct-to-consumer businesses. Third-party has given way to first-party, and Meta is struggling there as well. Its Instagram Shop tab shut down as the company’s goal to make Instagram the internet’s shopping mall stuttered and then collapsed.

All eyes instead have been on TikTok. Disregard the privacy concerns and potential congressional action, for now. TikTok’s 1 billion active users are an engaged audience to product reviews and recommendations from its legion of creators, some of which fall under typical influencer-levels of fame and many who don’t. Scroll the app to see just how much commerce is embedded into TikTok’s content. In the comments of a confessional-style video about how one TikToker’s marriage ended, you might find someone sheepishly asking where the person talking bought their sweater, even though it’s far from the point of the video.

The money is flowing in. The Information published new figures on TikTok’s advertising and eCommerce operations, as well as those of Douyin, China’s TikTok, both owned by ByteDance. TikTok Shop is a success in China and Southeast Asia and there are plans in place to expand it in the US. From The Information:

TikTok’s Chinese parent company, ByteDance, is making inroads in e-commerce. Consumers in China last year spent 1.41 trillion yuan, or $208 billion, buying things on ByteDance’s Douyin video app, the Chinese equivalent of TikTok, an increase of 76% from 2021, according to two people with knowledge of the internal data. Meanwhile, shoppers on TikTok in Southeast Asia more than quadrupled their spending, a metric known as gross merchandise volume, to $4.4 billion, the people said.

ByteDance generated about $60 billion in revenue in 2021, mostly from advertising, according to people with knowledge of the matter. Revenue from e-commerce is likely a fraction of ad revenue—possibly several billion dollars in 2022, as ByteDance, like other online marketplaces, gets a cut of a few percentage points of e-commerce transactions done on its apps.

These numbers show that commerce is just an engine for better advertising by way of better targeting. Even if it remains a fraction of a $60 billion advertising business, TikTok Shop is still a multibillion-dollar business. That’s valuable at a time when we’re seeing competitors falter and marketers wonder where to put their ad dollars. TikTok is still a risk in the US, but if that were to fall away, it’s the leader by far in terms of social media toolbelts. And there’s no reason to think that TikTok, with its parent company in China, would have any problems building up a significant operation in other parts of the world outside of Asia. There’s been a run of China-based eCommerce platforms that have been able to sweep other countries by offering low prices and efficient logistics operations, including Temu and Shein, and TikTok Shop is right there with them, according to SCMP.

“Good” and safe data is top of mind for all social media platforms as rules change around them.

At CES, Pinterest announced a “data clean room collaboration” with LiveRamp, a set up that’s becoming more popular for internet advertisers, reports AdAge. The partnership sees LiveRamp acting as a third-party intermediary, sharing safe, Apple-approved data on Pinterest users with external marketing partners – in the case of Pinterest, grocer Albertsons. Albertsons then uses Pinterest’s LiveRamp data to inform its marketing spend as well as its own retail media network. Similarly, Meta is working with data and insights firm IRI, which will work with brands to measure their ad performance on Facebook and Instagram.

Once powerful advertising platforms are now dealing with middlemen just to share information with their valuable advertisers. Pit that against what’s happening at TikTok and Amazon, and you see how the power dynamic has begun to shift. For Amazon, Buy With Prime is the next act to watch.

According to an article in the Seattle Times, Amazon is figuring out how to maintain dominance despite the pandemic-era boom slowing down and stagnation in Prime membership growth. The solution? Acquire more first-party data by lending out one of its most valuable properties – Prime-enabled shipping – to outside parties. It’s a win for both sides, and it seems to be working. Early adopters reported shorter shipping windows and higher checkout rates on their eCommerce sites. Amazon doesn’t have to worry about cannibalization. Now consumers can pseudo-shop with Amazon while shopping other sites; Amazon gets the transactional fees and a clean source of first-party data in response. Native transactions are now an internet-wide possibility for Amazon, giving it endless inroads to new customer acquisition and first-party data.

Where does this all lead? It’s clear who is in a better position for third wave advertising. What this means duopoly remains to be seen but it’s safe to say that the party was finally crashed. In 2018, we concluded our report on Amazon’s advertising ambitions as such:

The data derived from commerce operations is undervalued and it is our belief that data around consumer conversion will become the digital advertising standard. This will be exacerbated by the reduced efficacy of pixel and cookie tracking as privacy protections increase throughout the industry. Amazon is well positioned to disrupt the current duopoly, indirectly driving more vertical brands to do business with Amazon at multiple points of Amazon’s six point funnel.

I could not have foreseen Apple’s iOS impact on this trend, back in 2018. But it became clearer in May of 2021.

By upgrading its privacy practices, Apple will impair large ad networks that have grown with the help of those end users. This could potentially cripple Facebook’s current model with its new privacy demands. Apple has also opened the door to an unintentional adjustment to its privacy mandate. In doing so, the Mark Zuckerberg-led advertising company (and social network) will adopt a new way to accomplish its most critical objectives: revenue growth and user utility. Facebook will become an eCommerce company instead.

Except, Facebook (now Meta) focused on Web3 and the metaverse instead, starving the company of resources that it desperately needed to fortify its Instagram shopping project. Meta gave up on commerce as Amazon began to exploit its advantage in that industry. Now, every enterprise company from Microsoft to 7-Eleven wants in on retail media’s future. But it is TikTok and its linear commerce 1.0 strategy (build an audience and then establish commerce) may become the preeminent version 2.0 of linear commerce strategy (build an audience based on established commerce). It’s building its first-party data operation fast enough to establish itself as a top five advertiser. And two years ago, few of us could have imagined TikTok as an internet retailer.

The lines between media and commerce may be blurred for good. This presents a new era of arbitrage for the retailers and consumer goods willing to test the retail media waters.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy

Issue No. 267: On DNVB Branding

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What’s next in DNVB branding? Every vertical brand story has its beginning. For lifestyle and fashion DNVBs that are fortunate enough to work with the finest branding agencies, this story often begins with its founder’s biography, the problem that product x begins to solve, and proclamations of the brand’s inevitable staying power. It’s a short history, as most are in online-first retail. But it’s also a forward-thinking approach, one designed for: eCommerce, Instagram and Google advertising, and third party delivery. Less “we’ve been” and more “we will be.”

According to the godfather of the term, “DNVBs are maniacally focused on the customer experience and they interact, transact, and story-tell to consumers primarily on the web.” As brands begin to focus on off-line retail, you’ll begin to find that the packaging around the brands will change with that focus. Whereas technology and futurism appealed early on (2010-2014), the brands that succeed over the next ten years will focus on heritage as much as they focus on futurism.

Phase One (2010-2014): Technology

Warby Parker is the best example by a mile. The brand grew by implementing a practice that other direct-to-consumer companies had not. The company worked to eliminate all barriers to purchase by implementing tools designed to facilitate an ingenious customer experience. For this first phase of DNVB marketing, the eCommerce brand’s technology was the draw. The product is nominal and affordable but the access to it became just as much a part of the brand as the eyewear itself. Take this excerpt from a 2013 Wall Street Journal article co-written by Kevin Lavelle and me:

We are now in the age of e-commerce 3.0, where entrepreneurs can launch companies with few barriers to entry. eCommerce 1.0 consisted of crude online shopping in the ’90s offered by a few businesses met with significant consumer skepticism. This evolved into the more sophisticated interactions of e-commerce 2.0 in the mid 2000s, when most companies realized that if they weren’t online, they were endangering their future.

A new time is here — and the power no longer lies in the hands of a few buyers at large stores. Bigger businesses can be upended by an upstart competitor with a superior product. And retail startups no longer have to endure the long, slow road of trade-show hopping to get their product in front of a handful of buyers, or giving away a hefty portion of each sale to distributors.

Phase Two (2014-2018): Comedy

Dollar Shave Club’s 1m33s “Our Blades Are F***ing Great” video was developed to promote the launch of a (since-acquired) brand and has now been viewed over 25 million times. This internet ad is considered one of the premier examples of top funnel marketing and DSC’s brand of humor has since influenced other mens-focused brands to pursue humor as a means of brand differentiation: Chubbies (no. 67), Untuckit (no. 48), Tommy John (no. 54), and Mizzen+Main (no. 86).

Capturing one customer by way of a top funnel direct-to-consumer ad can cost upwards of $20 per click on Facebook. Digital advertising can be costly. To counter these steadily rising costs, brands have been stimulating awareness, interest, and consideration cycles by promoting a viral brand video. It achieves awareness, consideration, and intent.

Most importantly, introducing mainstream users to your brand and getting them to clickthrough for more information allows marketers to use tools like Facebook’s pixel to retarget casual visitors, moving them further down the sales funnel. Appealing to casual customers was an effective way of increasing top funnel traffic.

Phase Three (2018-forward): Heritage

Brands that began as the embodiment of online-first retailers are now expected to rival age-old incumbents, as they grow their annual revenues well beyond nine figures. Incumbent competitors are still around and some are even stronger than they were before the emergence of online rivals. All the while, new brands are beginning to compete on old-aged ground: mall retail, brick and mortar shops, and traditional advertising. The internet was supposed to completely eliminate these channels, instead, it provided cover until online retailers were prepared to go physical.

eCommerce has matured and physical retail has evolved into a more effective channel. As such, we’re beginning to see brands take on the traits of heritage companies. But if you’re eight years old, you won’t have much of a heritage story. For every Abercrombie, Filson, Ralph Lauren, Lily Pulitzer, Ray Ban, and Tag Heuer, there is a digitally vertical brand like Harry’s, Allbirds, and Outdoor Voices hoping to achieve staying power.

Heritage brands work to maintain heritage, while striving for futurism through of product and channel innovation (see Cole Haan). For heritage brands, presenting an aura of staying power means that the products and channels will present as forward-thinking for a millennial-driven, omni-channel age.

Meanwhile, vertical brands work to establish their products as an evolution of heritage products, while maintaining as many of their technological advantages as possible. For digitally vertical brands, longevity is projected by tethering to history and tradition.

The next wave in DNVB branding will be focused on developing history and tradition. Brands will deepen their roots by way of product collaborations, messaging, and unique origin stories of their own.

Look no further than this example of a heritage maker and vertical brand accomplishing both of their messaging objectives with one collaboration.

Messaging: “Legacy brands approve of us, they want us around.”

Web---NB-ReTooled

Long before designer dad sneakers infiltrated fashion hot spots across the globe, the New Balance 574 set the gold standard for what a well-designed, chunky, retro runner should be. It looked great when it launched in 1988, and in 2018 it manages to look stylish on just about anyone who wears it—actual dads included. Over the years, the 574 has become the go-to New Balance model when it comes to collaborations, too, so it’s seen a fair number of upgrades and interactions. But the latest collab—with the high-tech clothing label Ministry of Supply—brings the 574 into the ultra-performance future.  – Tyler Watamanuk, GQ

Messaging: “The finest legacy brands trust our platform.”

This month, Mr. Porter launched a tongue-in-cheek collaboration with Prada. As luxury continues to grow online, Mr. Porter is pushing to become the destination for such wares. This type of heritage nod goes a long way with consumers.

Since the 1990s, the brand has maintained an enviable position firmly at the forefront of fashion, to the extent that it has become a household name, a byword for sleek elegance, forward-looking design and, yes, a lot of fun print shirts. So great is the admiration for the brand’s wares in the MR PORTER office that there was something of a festival atmosphere when, in September 2016, we became the first online store to offer Prada’s much-coveted menswear collection.

Continue reading “Issue No. 267: On DNVB Branding” →

No. 251: Ten thoughts for 2018

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Intro into the New Year. Over the next few months, 2PM will begin testing new content formats as the platform continues to improve. In the meantime, here are some early predictions. Follow @2PMInc for this thread and other updates.

  • Brand: Nike will make small gains against Adidas by copying the German brand’s “creators” playbook (click above) but Adidas will remain the brand for rebels and the message will resonate better in 2018, as consumers shun the status quo.
  • eCommerce: Podcasts will continue to mature their eCommerce operations. There will be more examples of refined stores and high quality brand plays in merchandise.
  • Digital Media: Netflix is on to something and may scare the likes of AMC and Cinemark in 2018. Will Smith scored a big win with 11M week-one views. This is out of the 53 million Netflix subscribers. Expect the streaming service to redefine what Netflix means by building on the critical momentum of “Mudbound” and the viewership success of “Bright.”
  • eCommerce: Amazon will cut its affiliate spending by upwards of 40% in 2018. This will most likely affect independent media groups and some of BuzzFeed’s most recent efforts.
  • Digital Media: 2018 will be the year that Youtube influencers take ownership over their eCommerce presences and flock to white glove services that are fully vertical.
  • DNVB: Walmart will buy 1-2 more digitally vertical native brands in 2018. They will also test a smaller-box urban storefront, by a different name, for their higher end brands.
  • Brand: Brands with evergreen products will reduce Google SEM spend and shift to Amazon search products. Remember, Amazon is now a $1B+ advertising business.
  • eCommerce: Spurred by GGV Capital’s belief in China’s commerce sector, brands will begin spending considerable time working with China’s trove of mobile-first eCommerce platforms to grow through international channels. In 2008, it was SEM. In 2012, it was social. In 2016, it was the Soho pop-up. In 2018, it will be American exports in China.
  • eCommerce: Shopify will develop a ‘featured’ marketplace for its top Shopify and Shopify Plus performers and it will compete against the likes of Wish and others. Expect this to be launched in the form of a mobile app with one-click purchasing. Tobi, Harley, and crew will also launch their first of many private label brands to appear on this marketplace app.

See more of the issue No. 251 here.

Editor’s note. 2PM’s weekly reports and on-site content has come a long way since January 2018, thank you for bearing with us. (2/19/2019)