On Friday, grocery retailers Kroger and Albertsons announced that the two companies have entered into a definitive merger agreement. Kroger will pay a nearly 30% premium on a trailing 30-day volume-adjusted basis to acquire all of the outstanding shares of Albertsons common and preferred stock, creating a combined company that will employ more than 700,000 people and operate almost 5,000 stores.
Critically: the combined company will operate a considerable retail media network, consolidating the Kroger Precision Marketing program with the Albertsons Media Collective. A retail media network is an advertising platform that is empowered by a retail outlet’s first-party customer data: it allows advertisers to utilize a retailer’s data to enrich ad campaigns on retailer-owned, or, in some cases, non-owned channels. An example of the former is sponsored search on Target’s website; an example of the latter is the Walmart DSP, which, through a partnership with The Trade Desk, allows advertisers to target audiences with Walmart’s customer data across third-party sites. Target revealed that its media network, Roundel, generated $1BN in “value” in 2021; Walmart’s media network generated $2.1BN in revenue in 2021, inclusive of a $500MM reduction in advertiser cost of sales.
Facebook and Google collectively captured 89% of all digital advertising revenue growth in the US in 2016. These companies thrived at a time when bigness and momentum bestowed advantage on the hub-and-spoke model of digital advertising: operate what is essentially a data warehouse of behavioral signals, convert that data into targeting parameters, apply those targeting parameters to owned-and-operated ad inventory, and then create a positive feedback loop for advertisers by ingesting all of their relevant engagement data in what I’ve called the events stream. I detail this process here, and while it worked, it worked beautifully.
But it doesn’t work anymore. The policy-based change agents I cite above are undermining digital advertising’s hub-and-spoke model: these changes bestow a privilege upon any form of first-party data that can be used for ad targeting in a native environment.
The grocery category is no different. Albertsons launched the Albertsons Media Collective just under a year ago, in November 2021, whereas Kroger first launched Kroger Precision Marketing in 2017, although it expanded it significantly with a Private Marketplace (PMP) in October 2021. Neither Kroger nor Albertsons reveal line-item revenue from their retail media networks, but the combined company (given FTC approval for the merger) will operate more stores than Walmart and generate almost as much revenue through food sales. Given the existing scale of Kroger’s loyalty program, retail media network, and data analytics agency, 84.51, it seems plausible that immense retail media value can be unlocked in combination with Albertsons’ more nascent offering. From Kroger’s press release announcing the deal (emphasis mine):
The combined company will be able to reach an expanded national audience of approximately 85 million households nationwide, fueling growth in alternative profit businesses such as Retail Media, Kroger Personal Finance, and Customer Insights. With an expanded footprint and the addition of the recently launched Albertsons Cos. Media Collective, Kroger will enhance its services to media clients and provide more targeted, sophisticated solutions. The combined capabilities will accelerate the growth of Kroger’s higher-margin revenue streams by extending the portfolio of solutions and accelerating their respective growth.
The thrust of Everything is an Ad Network may instigate mega-mergers across a range of retail categories simply because the allure of high-margin advertising businesses that activate existing assets — consumer data, especially with loyalty programs — is too enticing to ignore. As the WSJ points out, in Walmart’s most recent earnings call, the company’s CEO stated that he “can’t remember a business with the margin structure of the advertising business here at Walmart.” This will be true for any retail category. Considerable commercial opportunity exists at the intersection of fevered advertiser demand, a high-margin growth engine, and an operating environment that will grant ever more benefit to first-party data over time through increasingly codified digital privacy restrictions.