Our favourite names for retail media upside potential are Amazon and Instacart, both rated Overweight, due to Amazon’s scale and granular consumer data, and Instacart’s position in a growing online market with a large-scale offering for CPG advertisers.
The rise of retail media digital advertising has been impressive in the past five years, namely on the back of Amazon’s significant build-out. This trend should be sustained as retail media solves a lot of problems facing digital advertising in an era of heightened consumer privacy. Signal leakage across the system post IDFA and eventually post 3P cookies should make targeted advertising more challenging and make first-party (1P) shopping data more valuable. This signal loss in open web should move ad budgets away from impacted channels and towards retail media. Scale is often a limiting factor, so while we are very bullish that smaller players like Instacart and Etsy will continue to gain share, they are ultimately limited by available inventory. On the flip side, Amazon, which has granular shopping data on hundreds of millions of customers in dozens of western countries and is onboarding more strategies including different inventory and content types, seems very well positioned vs. the field, in our view.
We screen the retail media names in our US internet coverage universe on scale/penetration, formats, targeting and overall go-to-market. Not surprisingly, Amazon is the 800lb gorilla in the space, but we also see interesting players like Instacart gaining traction and well positioned.
This trend is also meaningful for stock prices as retail media is a significant margin driver for the names below, unlike what we see for transaction names that don’t enjoy the fruits of the digital advertising space. It’s no secret that Amazon’s 1P retail business never earned a profit (ex-ads, 3P, etc.) nor has anyone in the space consistently outside of a few niche apparel e-commerce players. Retail media could add significantly to margins and overall reported OI for the names below over the next three years as more digital ad spend flows to this space. Below we show estimated EBITDA upside potential based on our bull case scenarios.
Comparing Amazon’s advertising revenue with their total GMV shows that they have continually managed to extract more advertising dollars for a given sale as take rates have gone from 3.9% in 2020 to 6.4% in 2023.
