Next year's retail media ask is already decided

Kroger has been direct with investors about how the pieces of its business fit together. The stores generate traffic and data, that supports a high-margin media business, and the profit flows back into the stores, about $1.5 billion last year. Similarly, Walmart credits advertising and membership with diversifying where its profit comes from, and its global ad business is now around $6.4 billion. Target’s operating income fell 8% last year, and advertising (which grew from $163 million to $246 million YoY) is one of two things the company names for why the drop wasn't worse. And then there’s the elephant in the room. Amazon’s ad business grew 26% last quarter, while all of North America retail earned $9.1 billion on $116 billion of sales.

None of this is a secret or a scandal (in fact, it makes a great business school case study). Thin-margin retailers found a high-margin business sitting inside their own operations and built it properly.

Here's the part worth sitting with: if media profit is part of what makes the retail P&L work, then the growth target on that line isn't discretionary. It has to go up, and it has to go up faster when the store business is soft.

Target is the clearest illustration. Merchandise margins are under pressure and operating income is falling, and advertising is one of the things keeping that from being worse. The weaker the retail line gets, the more the media line has to carry. That relationship holds across the group.

Which means the size of next year's ask is set by the retailer's plan, not by how an ad program performed. The JBP number arrives already decided.

Joint business planning isn't new, and neither is retail media's place in it. Unlike every other channel, the media budget gets negotiated with the partner you're spending it on, as part of the same annual plan that covers everything else. Deloitte describes JBP as nearly universal, rated by both sides as the most impactful area of collaboration, and in practice mostly a reinforcement of how everyone already works.

What's changed is the size of the number and which direction it moves. Brands told Digiday last year that a commitment can go from $10 million to $13 or $14 million in a single cycle, and that arguing is difficult when a large share of volume sits behind that retailer. A few walked away from the table. At some retailers the commercial team and the media team negotiate separate plans, so brands are being negotiated with twice by an organization that can see both conversations while the brand staffs them from different departments.

Facing an ask that goes up regardless of results may seem unfair. To help even the scales, a brand should try to answer two things:
1. Where should this money come from?
2. What is it actually buying

The first one gets most of the attention. There's a public version of it running right now: Mark Ritson argued in Adweek that retail media is slotting fees with "a fancy name and a dashboard" and that funding it from brand budgets is a mistake. Andrew Lipsman made the case in response that it does build brands, in ways some other channels can't. Both are worth reading. Both are arguing about which budget this should come out of.

That's a fair question if the money comes from one pocket. But mostly it doesn't. Forrester puts roughly 36% of US retail media spend as coming out of trade marketing budgets and another 26% out of shopper marketing, with the rest from marketing teams. The dollars move between those buckets depending on who's asking and what counted as retail media that year (aka, a digital coupon supporting a banner sometimes comes out of trade and never touches the media commitment). Ecommerce teams asking for more end up drawing on trade funds that weren’t ever approved for that purpose. One CPG marketer put the split to Digiday plainly: retail budgets tend to sit with sales, national budgets with marketing, "and that is the tension."

Rarely is anyone reconciling the total. When the retailer comes back and asks for more, nobody on the brand side can say with confidence what the last commitment cost or where it came from.

But the budget question can't really be settled on its own, because the right answer depends entirely on the second question. How much of this spend is buying demand the brand didn't already have, and how much is the cost of doing business well with an important partner?

Both are legitimate.Plenty of brands would pay for the second one happily if they knew that's what they were paying for. If the spend is mostly generating demand, it's a media budget and it should be argued for on media terms. If it's mostly securing the relationship, it's trade, and it belongs in the trade conversation with the people who negotiate everything else.

What makes this hard is that the reporting brands get doesn't separate the two. Attributed revenue tells a brand what happened after an ad ran, not what the ad caused. Answer the causation question and the budget question mostly answers itself. The issue is that money drawn from different budgets tend to get measured different ways. Volume, share, ROAS, etc. The same dollar gets a different verdict based on which pocket it came out of, and none of those verdicts can be compared with each other.

What closes the gap is a single causal standard applied to every dollar going to that retailer, whatever budget it came from and wherever in the funnel it lands. The same question asked of the trade dollar and the streaming dollar: what happened because of this, and what would have happened anyway?