- 'Big bang' for retail media
- Merchandise sales are surging
It is a truth universally acknowledged that advertising budgets are the first thing to be cut in a recession. It explains why investors are so nervous about media stocks such as ITV (ITV) and Future (FUTR), and why many tech giants are under pressure. Snap (US:SNAP) has warned that revenue could fall by as much as 10 per cent in the first quarter of 2023, while advertising sales at Alphabet’s (US:GOOGL) Google dipped by 4 per cent in the final quarter of last year. YouTube’s performance was particularly disappointing
Yet received wisdom does not always withstand closer scrutiny, and amid the economic gloom demand for certain types of advertising is still strong – as long as you know where to look.
New route for retailers
The struggles of tech titans have been well documented over the last 12 months, and commentators often cite advertising woes. It is important to remember, though, that the likes of Snap and Meta (US:META) are facing a very specific problem: Apple’s privacy policy. Introduced in 2023, the policy insists that apps ask users for permission before they track their behaviour to serve them personalised ads.
“Apple has pulled a masterstroke with its app tracking transparency policy, ” said Nick Waters, chief executive of media analytics group Ebiquity. “It has really dented Facebook’s efficacy – which is particularly evident for small- and medium-sized enterprises, which are not seeing the same returns as they did before.”
Things are expected to get even trickier when Google's Chrome browser phases out third-party cookies next year, which will further limit the ability of companies to track our movements around the web.
However, the plight of social media giants has ushered in a new media superpower: online retailers. “Retail media has been described as the third wave of advertising in the US, after search and social,” said Carina Perkins, a senior analyst at Insider Intelligence.
The premise is simple. Retailers promote certain products at the top of their websites in exchange for money from brands. In many ways, it isn’t a new concept at all. Supermarkets have always charged more for premium shelf space, with businesses battling for eye-level positions and end-of-aisle spots. In the case of ecommerce, retailers can draw on the data they gather about customers from loyalty cards to serve up personalised ads.
“Our forecasts are that US retail media spend will reach over $60bn (£50bn) by 2024,” said Perkins. “To put that in context, our forecasts for search ad spend in 2024 are around $120bn and social ad spending is around $79bn.” That retail spend would equate to a 50 per cent rise on 2022 levels, compared with increases of around 20 per cent for search and social spend.
Amazon (US:AMZN) is a clear frontrunner. Advertising services revenue grew by 19 per cent in the fourth quarter of 2022 to $11.6bn, defying the general tech trend of flatlining or falling ad sales.
Other US retailers are starting to cotton on, and Walmart (US:WMT), eBay (US:EBAY), Instacart and Etsy (US:ETSY) have all launched “retail media networks”.
In contrast, UK grocers have been dragging their heels, barely mentioning ad revenue in their annual reports.
This is starting to change. In August, Tesco (TSCO) launched a ‘media and insights’ platform with its data science company Dunnhumby to create the UK’s “largest closed-loop grocery media and insight platform”. J Sainsbury’s (SBRY) data arm Nectar 360 announced an ‘insight platform’ the same month. Meanwhile, both supermarkets are making headway with TV ads, forging partnerships with ITVX and Channel 4.
This could prove to be extremely lucrative. According to Perkins, companies are enjoying profit margins of 60-80 per cent from retail media, compared with 5-7 per cent from core trading. “It’s a very attractive form of advertising as you’re reaching customers right at the point of purchase. It’s much easier to sway a decision at the point of purchase.” It also avoids the issue of third-party cookies, as retailers collect their own data from customers, and know exactly what they buy.
“On the other side of the Atlantic there has been a big bang in the last 12 to 18 months, but here it’s still very much in its infancy," said Ebiquity’s Waters. "It’s probably one of those cases where things happen very quickly [in the US] and then roll over here."
A masterclass in merchandise
Digital developments are not the only thing to keep an eye on.
4imprint (FOUR) is one of the wonders of the FTSE 250. Week after week its shares have hit new highs and it has achieved a total return of 70 per cent over the last year. It is increasingly popular with fund managers, and it’s easy to see why: the group upgraded its earnings guidance three times over the past nine months.
4imprint has not stumbled across a new lithium mine, or made a breakthrough in quantum computing. Instead it sells t-shirts, tote bags, hoodies and wristbands, emblazoned with company logos, to American businesses.
“I think the thing that people got wrong about 4imprint last year was that they saw it as a Covid recovery play, and that’s all they read into it,” said Abby Glennie, deputy head of smaller companies at Abrdn. “They thought this thing was just going to have a bounce, as you generally give merchandise out at face-to-face interactions.”
However, Glennie said important structural changes had been made at the group – particularly around its own advertising strategy. “This company had never really invested in marketing. This was a business – and I’m not talking 50 years ago, but in 2018 – that sent out a box of free promotional stuff to show companies examples of what they could have. And sales used to be driven by catalogues.”
In 2018, the group stepped up its marketing investment and focused more on TV and radio. This meant that its products reached more people, and allowed management to be more flexible with pricing (once a price is printed in a catalogue, it’s very hard to fiddle with). It has clearly started to pay off, with revenue per dollar spent on marketing shooting up in the first half of last year.
4imprint’s ‘drop shipping’ model has also saved it from the worst of the pandemic disruption. For the most part, it doesn’t touch the products it sells – it simply connects buyers and sellers, and creams a little off the top. It has one distribution centre in Wisconsin and does some of its own embroidery but does not get much involved beyond that.
Underpinning all of this is America's love of merchandise. Earlier this month, the Advertising Specialty Institute published data on the North American promotional products industry, and found that sales across the industry increased by 11.4 per cent to $25.8bn in 2022 – the same level as in 2019. Companies with more than $5mn of sales grew even faster, at 12.5 per cent.
With the benefit of hindsight, we were too hasty putting 4imprint on a ‘sell’ in March 2022. The allure of branded pens and water bottles has proved more powerful than we thought, and orders are still flooding in.
Cross-road for ad agencies
The success of 4imprint is at odds with wider industry trends. Most companies have been moving away from traditional forms of marketing and are keen to show off their digital prowess. This is certainly the case for advertising agencies, which are warily eyeing a possible UK recession – WPP (WPP) was forced to cut over 7,000 jobs in 2009 after the financial crisis crushed ad spending.
Their newly diversified business models should protect agencies from the worst. However, some businesses look significantly better positioned than others. Aim-traded Next Fifteen Communications (NFC) has more in common with IT consultancies than with traditional ad agencies. The more traditional side of its business accounts for less than half of group revenue, and ‘business transformation’ is now its second-biggest division, having grown organic net sales by 157 per cent in the first half of 2022.
In contrast, stock market stalwarts such as WPP are reporting more sluggish organic growth – and some investors are worried that they are being outmanoeuvred by younger rivals. A particular concern about WPP is its data strategy. Competitors such as Publicis (FR:PUB) and IPG (US:IPG) made big acquisitions in recent years to boost their analytical capabilities but WPP has avoided such moves. Rather than gathering large pools of internally-owned data profiles, it has focused more on contextual targeting.
On the one hand, this should mean that WPP stays on the right side of data privacy rules. But it does risk sacrificing its competitive advantage in the meantime.
“The optimistic take is that, by developing areas of targeting and campaign optimisation that aren’t reliant on individual profiling, WPP is going where the market is going, because of privacy concerns and the phasing out of third-party cookies,” said Bernstein analyst Matti Littunen. “The question is whether WPP has competitive data in this area. Everyone has access to this data. I remain to be convinced it’s a genuine differentiator.”
Investors are still split on the subject. One thing feels certain, though: advertising can be a strange and unpredictable industry, and there are plenty of opportunities amid the gloom.
