American retailers approached the 2021 holiday season in a serious test-and-learn mode.
But that mode is done. The Q4 results are in. Across the board, retailers are investing heavily in first-party data assets (aka their loyalty and membership programs) and in first-party data vehicles like retail media platforms.
For many, these investments are still just that – investments. Best Buy cautioned investors that the gains may not materialize until 2025, for instance.
But the testing has turned into full-on commitments that serious change is underway.
Walmart uses what it calls the “growth algorithm” – taking high-margin revenue from advertising and its third-party seller marketplace and using growth in those businesses to offset profit margin contraction as it simultaneously invests in low-margin businesses (namely, groceries and ecommerce fulfillment). Walmart cited this plan when the company broke out ad revenue and discussed its ad business in depth for the first time last month.
Macy’s is pursuing its Polaris plan, an overhaul built around its new customer lifetime value measurements. The mall-based fashion brand EXPRESS has an EXPRESSway Forward plan.
From established retailers to maturing direct-to-consumer businesses, AdExchanger examined how well-known US retailers across categories have reshaped their businesses in three areas: new marketing models, repositioning of advertising as a revenue source, not as an investment and, finally, their first-party data ambitions.
Allbirds
Allbirds is a go-to example of a mature DTC brand that’s now invested heavily in brick-and-mortar – the mirror image of legacy retailers repositioning their store footprints for ecommerce.
The store presence is important for Allbirds because repeat customers who engage with the brand online and in stores spend 50% more than repeat shoppers who buy either in stores or online, but not both, according to CEO Joey Zwillinger, during the company’s second earnings call since going public in November.
Digital channels remain “far and away” the largest source of new customers, said CFO Mike Bufano. Ecommerce is also still 80% of the company’s overall sales.
But the retail presence improves the overall profit margin. Shoes cost the same wherever, but it’s more profitable for Allbirds to sell a pair at a store rather than ship to someone’s home.
Allbirds is also considering its first major wholesale deals, following two small tests with Nordstrom’s.
Wholesaling is a risk – Allbirds doesn’t own the data or customer relationship, but gains visibility, which Zwillinger said is critical because only 11% of US consumers are familiar with the brand.
It would be “really disappointing” to see a retailer offering big Allbirds sales, he said, since the company historically doesn’t discount – it experimented with discounts for the first time during the Thanksgiving shopping stretch in 2021.
“We had 97% full-price yield for the year last year, which is really high for the industry, and maybe even unhealthily high, frankly,” Zwillinger said. “And we would never enter into a relationship with someone who we thought might degrade that.”
Best Buy
Best Buy is a late-mover to subscription memberships and an ad platform. But it’s investing heavily now and expects to see the benefits by 2025, the company told investors this month.
Totaltech, Best Buy’s $200 membership program, counts 4.6 million members –3.7 million of whom were auto-enrolled from the retailer’s legacy customer service programs.
Then there’s Best Buy Ads, the in-house media business launched in January. For now, advertising shows up in Best Buy’s finances in the form of margin expansion – It’s not a standalone revenue producer, but is recorded as an offset to overall cost of sales, said CFO Matt Bilunas.
(For instance, Best Buy could serve ads to customers rather than offer low-price promotions. If the campaign drives as many sales but to full-priced products, then the ad spend still improved the profit margin. An ad campaign that prompts online shoppers to store pickup rather than home delivery also saves the company money.)
Eventually, businesses will use Best Buy Ads to understand customers more broadly, not just to drive sales in a Best Buy store, as the platform is used today, said CEO Corie Barry. Which kind of customers become power users? Who requires constant customer service visits? What kind of marketers want to reach Best Buy-type customers, even if they don’t sell products in Best Buy stores?
Once Best Buy Ads is used by marketers in a more involved way, Barry said, advertising will form its own revenue line, rather than materializing as a form of margin control.
Express
The mall-based brand Express is on a mission to modernize.
It now reports metrics similar to DTC or ecommerce-native brands, such as online video reach across YouTube, TikTok and Instagram Reels, organic Google brand traffic and monthly app users. “All important indicators of the health and vitality of our brand continue to increase,” CEO Tim Baxter told investors.
These measures are important to Express because, as Baxter said, its app-based shoppers make on average five more store visits and spend over $300 more per year than those who visit only the store or site.
Express is tracking DTC brands in other ways as well. Express’s UpWest brand, an ecommerce-native unit launched in 2019 that positions itself as a “brand with a purpose” to drive sustainability, now has a wholesale business – Express and Allbirds each announced their forays into wholesale on recent earnings reports.
Macy’s
Like other major brick-and-mortar retailers, Macy’s is in the midst of a transformation led by a loyalty program, and sitting atop a new ad platform business.
The name on Macy’s transformation program is Polaris, the name of the north star – and its north star is lifetime customer value, said CEO Jeff Gennette.
“To best realize our strategic goal of building profitable lifetime customer relationships, we successfully built a new enterprise data and analytics organization that is helping us to embed data and analytics into everything we do,” he said.
For instance, by strategically offering personalized discounts rather than storewide sales, Macy’s creates more multi-item online carts, rather than one-off purchases, he said. That means the company spends less on per-hour labor to package and ship that purchase as a percent of the overall cost. Macy’s also now uses personalized pricing to move specific inventory it needs to clear out or consolidate to specific stores, again as a way to preserve its labor hours.
The Macy’s Media Network, as the ad business is called, generated $105 million in revenue last year, according to CFO Adrian Mitchell.
But as with other retailers early in their ad platform development, Macy’s advertising is more about profit margin management than growing one revenue line. As Gennette noted in his examples of personalized pricing benefits, advertising is a way to save labor costs on online orders as much as a revenue generator.
Macy’s tracks ad revenue as part of its Selling, General & Administrative expenses – similar to Best Buy, and in contrast to Walmart and Target breaking out ad revenue.
Target
Target is off to the races in terms of its retail media and first-party data products. Following Amazon and Walmart, Target broke out its ad revenue for the first time this quarter, reporting a cool billion dollars in 2021.
“From its humble beginnings in 2007 with just 5 team members, [then] known as Online Vendor Marketing, Roundel is now a 500-plus person strong fully integrated Target team,” said CEO Brian Cornell.
Roundel and Circle, Target’s 100-million-person loyalty program, are the linchpins of Target’s strategic shift from broad promotional discounts to personalized deals, according to CFO John Mulligan. The company tested storewide price discounts against personalized sales during the holidays last year. Personalized offers converted 70% compared to 40% for mass discounts, and averaged $8 to $10 larger carts at checkout.
“How we are leveraging media to know our guests better and create a more relevant and personalized experience for them is incredibly exciting,” Mulligan said.
And Roundel’s impact extends beyond the $1billion dollars Target reported for the business, he said. “A meaningful portion of Roundel’s income reduces our cost of sales, benefiting our gross margin.”
That’s because the ad unit is tied very closely to store shopping behavior.
“We know the way we run our stores is the secret to growing digital sales,” Mulligan said. More than half of online orders are processed at the store. Orders purchased online and picked up at a store – “the quickest fulfillment at the lowest cost” he said – are the fastest-growing segment of Target’s entire business.
A Retail As Old As Time
Not every retailer has taken the same approach to dipping their toes into advertising or how they’re keeping customers close in a changing landscape.
Both extremes can work: Best Buy is sticking with heavy promotional discounts to move pricy consumer and home electronics, while Macy’s and Target fade the notion of storewide sales. Allbirds is adding mall locations; Macy’s and Express winnow their mall-based footprint.
What these retailers share is a data-driven desire to change to meet new consumer patterns for media and shopping. And they are all building the ability to connect their actions – not to mention new ad platform customer campaigns – to purchase data they own.
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