It’s no secret the COVID-19 pandemic accelerated online purchasing around the globe. In South Korea, this dramatic shift in consumer behavior added fuel to an already strong e-commerce sector; in fact, online channels today account for 41 percent of total retail sales in the country, the highest share in the world.1 The problem? For retailers already struggling with profitability, growing online demand is exacerbating an existing problem.
Retail media networks (RMNs) could provide a solution. An RMN is essentially a digital version of a retailer’s offline advertising, appearing on its own website or mobile application. In an environment of rising costs and compressed margins, it can improve e-commerce operations in two ways: by adding new revenue through the sale of advertising and by improving sales through more sophisticated, targeted marketing.
Despite South Korea’s advanced e-commerce market, RMNs currently account for 1 percent of total online sales revenue, estimated to be $2 billion annually.2 We estimate it will grow to about $10 billion within the next three to five years—or around 5 percent of total e-commerce revenue—if it follows the path of other nations active with RMN, notably the United States. But while South Korean companies have a long way to go, those getting it right may secure a sustained competitive advantage.
Consider two scenarios. In the first, a retailer haphazardly targets a consumer with digital advertisements, serving up web advertisements based on general browsing behavior and hoping for a response. In the second, another retailer with a deep understanding of the consumer’s online and offline purchasing behavior and actual purchasing data is able to provide targeted digital advertisements to a consumer on its own website or mobile app.
These scenarios demonstrate the power of RMNs. Just as brands target customers in stores with promotional material and other marketing, RMNs seek to provide the same experience on a retailer’s online channels. RMNs are considered a critical digital-advertising mechanism because of their ability to target consumers in the last mile of their online purchasing journey—that is, just before they make a purchasing decision. By targeting consumers exhibiting clear purchasing intent with RMN advertisements, retailers are more likely to encourage the desired outcome.
So why consider RMNs now? Collecting data other than directly from consumers is becoming more challenging as privacy protection continues to increase. For example, Apple limits the tracking of advertiser identifiers, and Google Chrome does not provide cookie data to third parties. So the ability to access first-party data of retailers is likely to become increasingly important due to privacy concerns. To meet growing demand for online purchasing, retailers are looking to improve profitability to offset the cost of creating and scaling e-commerce operations—especially in low-margin businesses such as grocery, in which retailers also maintain expensive brick-and-mortar physical stores. The ability to sell digital advertising offers a potentially attractive opportunity to enhance profitability (Exhibit 1). For example, Amazon would also record a loss if not for its income from advertising.
Retailers have an inherent competitive edge through RMNs, which use first-party data to provide personalized advertisements based on actual activity. They enable retailers to take advantage of existing marketing technology competencies to create personalized consumer experiences, and brands can pursue personalized marketing by drawing on customer data from digital touch points and offline activity.
In the United States, where RMNs are relatively mature, advertising sales account for 3 to 5 percent of the total e-commerce revenue for retailers (except for Amazon) and are growing at a fast pace annually. RMN revenue is forecast to continue to grow, and more than 25 new companies have entered the market in the past two years.
Amazon is in the process of commercializing all aspects of on-site advertising. It generates advertising revenue today by focusing on using a variety of owned channels such as mobile apps (for example, Twitch and live shopping) and Fire TV. But the commerce media space is also becoming increasingly crowded as cross-category and specialty retailers such as Target and Walgreens launch and scale their own RMNs (Exhibit 2).
Various types of RMNs are being launched, depending on the core business model. Some companies equipped with internal data capabilities are offering small to medium-sized advertisers the ability to target online-centric consumers. Other RMNs are trying to build in-house data capabilities and appeal to large corporate advertisers. To date, the players with scale have been able to combine the technological and capability requirements to enable effective in-house RMNs. We expect smaller and regional players to increasingly use plug-and-play solutions, with third parties providing the same services to vendors and monetizing accordingly.
Despite South Korea’s advanced e-commerce market, RMNs currently account for 1 percent of total online sales revenue, or about $2 billion annually.
South Korea’s RMN opportunity
The RMN market in South Korea is currently worth about $2 billion, or about 1 percent of total e-commerce revenue, and is estimated to grow fivefold in the next few years. Coupang leads the RMN market in South Korea, but its market size is low compared with top global players such as Amazon and Walmart (Exhibit 3).
Coupang’s strategy resembles that of Amazon. Third-party sellers flow in through its “well-made” consumer experience (Rocket delivery).3 As competition between third-party sellers intensifies, Coupang’s consumer data-driven advertising becomes more efficient, maximizing advertising sales and distribution fees.
South Korea’s e-commerce sales are already the highest in the world as a share of the retail market. Embracing the opportunity and potential of RMNs could help the country’s retailers better address growing consumer demand for online channels, improve margins, and offset the cost of investing in technology and distribution infrastructure. Additionally, Korean offline retailers with multiformat businesses from department stores, hypermarts, supermarkets, convenience stores, and shopping malls to multiplex theaters, coffee shops, and restaurants have exceptional opportunities to build an ecosystem RMN play.
Retailers can start by considering five key requirements for an RMN business.
- Product vision: What is the vision of the RMN business?
- Go-to-market strategy and sales: What is the best incentive and sales scheme to effectively motivate the media agencies and brands?
- Operational management: What is the most convenient interface for managing sales, inventory, and consumer conversion?
- Data: How can we build the analytics model to maximize the return?
- IT architecture: What is the most effective IT architecture to ensure real-time advertising, monitoring, and data sharing?
The key is managing the RMN systematically as part of a broader strategy to embrace the omnichannel marketplace. Hence, retailers should develop their overall marketplace strategy build on a successful stand-alone RMN business. They should also keep in mind that the consumer’s experience in the retailer’s channel is critical, meaning advertisements from RMNs should not undermine the overall experience.