- More shoppers joining reward schemes
- 'Retail media' offers 60-70 per cent margins
A high-street fashion chain has started asking shoppers for their mobile phone numbers at the till. The ostensible reason for this is customer convenience: receipts arrive via text, rather than in paper form, ready to be scrunched up and lost. This logic was thrown into question, however, when one shop assistant refused to process a sale to an IC writer without a phone number, claiming that it was company policy.
This might have been a mix-up. However, the wider strategy is indicative of a shift in the relationship between retailers and consumers. Cash is not the only thing shoppers must provide these days – personal data is also expected.
Nowhere is this clearer than in supermarkets. Supermarket loyalty card take-up has boomed since the pandemic, as supermarkets began offering cheaper in-store prices to card users. According to Morgan Stanley, 92 per cent of UK consumers now have at least one, and they increasingly influence where we shop.
The development has attracted the interest of the Competition and Markets Authority (CMA), which began a review into the sector in January. However, it also spells opportunity for retailers, which have a bountiful additional revenue stream to exploit.
Trolley-loads of data
Tesco (TSCO) and J Sainsbury (SBRY) have the biggest loyalty schemes in the industry, easily outstripping the likes of Marks and Spencer (MKS), Morrisons and the Co-op. These long-established systems, which allow members to accumulate points and enjoy money off, have gained further traction since Covid.
In March 2021, Nectar participation at Sainsbury’s stood at 67 per cent but – following the introduction of ‘Nectar prices’ last April – participation has jumped to over 80 per cent. It’s a similar story at Tesco: Clubcard penetration has climbed from 70 per cent in February 2021 to 82 per cent today.
As the name suggests, retailers use loyalty cards to attract and retain customers. However, they also generate a very valuable asset: data.
Sainsbury’s Nectar360, created in 2019, crunches all the data collected about registered shoppers. It turns this analysis into profit by selling advertising space and promotions to supermarket suppliers. Suppliers are willing to pay a high price because the marketing can be very targeted and, crucially, pops up when customers are already browsing for products, meaning returns are typically good.
Historically, Sainsbury’s has not disclosed how much profit it makes from retail media. This changed last month, however, when it said Nectar360 should deliver an incremental £100mn of profit over the three years to March 2027. This compares with total retail profit of £966mn in FY2024.
Tesco is still coy about how much money Dunnhumby, its own data business, generates. However, emphasis on the division is growing. Last year it formed a team to focus exclusively on retail media, and it has just hired two bigwigs from Amazon (US:AMZN) and Pinterest (US:PINS) to help things along.
Analysts are enthusiastic. “This is something that has become much more important than we thought it would three or four years ago, when Tesco Clubcard prices came in,” says Shore Capital analyst Clive Black.
Analysts are now anticipating more digital screens in shops – Tesco has already installed 2,000 – including screens attached to trolleys, as well as greater use of personalised pricing.
Bags of potential
Retail media is extremely profitable, with operating margins reaching 65-70 per cent within three years of launching, according to a study by McKinsey.
It is also fast-growing: European advertising spend on retail media is expected to double in the next three years to €22bn (£19bn). Changes elsewhere should work in its favour. For example, as Google kills off third-party cookies – which allow advertisers to trace people's movements around the internet – companies that hold swathes of proprietary information should thrive.
Amazon still dominates this world of advertising, but its market share is likely to edge down as more companies join the party. One US business that is making good progress is Walmart (US:WMT).
It grew ad sales by a third in the final quarter of 2023, and by 28 per cent across the whole year to $3.4bn. It has since bought a television company to sell more ads, and analysts at Jefferies think the division could produce $10.3bn in sales and $6.7bn in profits by 2029. This assumes a 25 per cent sales compound annual growth rate and a 65 per cent margin.
The scale of operations in the UK is obviously far smaller, and retailers also have the competition watchdog to contend with. However, Walmart’s progress underlines the potential of retail media – and the importance of looking beyond supermarket shelves.
