Kroger and Albertsons are merging because Everything is an Ad Network

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.

These numbers compare diminutively with Amazon’s advertising revenue, which it revealed for the first time in its full-year 2021 results: $31.2BN. The impressive scale of these advertising businesses across big box and digital retailers is encapsulated in a slogan I coined in November of last year: Everything is an Ad Network. The thesis of Everything is an Ad Network is that Apple’s App Tracking Transparency (ATT) privacy policy, and the general direction of impending digital privacy legislation and regulation, confers a premium on first-party data for the purposes of advertising. Prior to ATT, the unrestricted flow of data between advertisers and ad platforms allowed for user-specific behavioral profiles to be aggregated through what I’ve termed the hub-and-spoke model of digital advertising. With ATT and other privacy restrictions, that flow of data is obstructed, and the first-party data owned by retailers assumes newfound value. From the piece:

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.

To reinforce the idea: prior to ATT, if a cosmetics company wanted to reach potential customers with digital ads, its first stop was most likely Meta (née Facebook), which possessed user-level cosmetics product purchase histories and could use that knowledge to target cosmetics ads to relevant users. But that’s no longer the case: Meta can no longer aggregate this data for individual users on iOS as a result of Apple’s ATT privacy policy. And so a scaled cosmetics retailer like Ulta, with loyalty program data on 37MM customers, can launch a retail media network (as it did just five months ago) that allows other cosmetics companies to advertise to those relevant consumers on the Ulta website and on various offsite channels. Similarly, home improvement retailers can advertise through the Lowe’s retail media network, which was launched one year ago. And electronics retailers can advertise through Best Buy’s retail media network, which was launched in January. And so on: see the chart below from Tinuiti.

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.