Advertisers could soon be targeting hot-dog-combo enthusiasts who purchase toilet paper in bulk.
Costco is developing an ad network based on its extensive loyalty membership data, leveraging the shopping habits and past purchases of its 74.5 million household members to enable targeted advertising both on and off its website.
The wholesale retailer is still in the testing phase and is considering offers from potential ad-tech vendors.
This move suggests that the third-largest retailer in the US might become a significant player in the already highly fragmented retail media space, which is projected to reach $166 billion by 2025 and account for 20% of all digital media spending this year, according to eMarketer.
“Not only will we help you reach a Costco member, but we will also help you reach the right members in the right context based on past behavior,” Mark Williamson, AVP of retail media at Costco, told Marketing Brew.
Williamson, who previously held positions at Sam’s Club and Ahold Delhaize, joined Costco in September to fill a newly created retail media role and is leading the initiative.
The company is currently conducting beta tests using its audience data to target users on other websites, and it will eventually test targeting on its own site.
For instance, a brand that sells baby products would likely prefer to advertise to customers who buy baby products, Williamson said.
Due to the company’s membership cards, which are required for shopping, unlike other major retailers, Costco can link individual purchases to shoppers’ households both in-store and on its e-commerce site.
This capability could help advertisers reach potential customers and inform them if customers saw an ad for a product before making a purchase.
Companies like Target, Walmart, Sam’s Club, Best Buy, and Kroger have all expanded into advertising to capitalize on customer shopping data, which has become even more valuable as state-level privacy laws and walled-garden tech platforms like Google and Apple make ad targeting and measurement across platforms more challenging.
Retailers aren’t the only ones entering the retail media space: Uber, Marriott, and Chase have also established their own ad networks.
Compared to other major retailers, Costco is late to the game. In 2021, Walmart announced an expansion of its advertising ambitions, partnering with The Trade Desk.
Last year, its global advertising business, which includes its retail media network, generated $3.4 billion in revenue, according to the company’s FY23 earnings report.
Meanwhile, Target’s retail media network, Roundel, contributed more than $1.5 billion in “value” for the company, Cara Sylvester, Target’s chief marketing and digital officer, told investors during the company’s most recent earnings call.
“It’s not incorrect to characterize Costco as behind the rest of the industry in retail media,” Williamson said, later adding, “when it became clear to the leadership team here that retail media isn’t just a profit center…When they determined that retail media revenue could directly drive increased value for our members, that’s when they said, ‘Okay, this is something we need to get involved with.’”
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Generally, advertising is a high-margin business for retailers, as it costs relatively little to run ads on websites, and shoppers will visit retailers’ e-commerce sites whether there are ads or not.
In Costco’s case, the profits from its ad business will be reinvested into keeping prices low for consumers, such as offsetting shipping costs or maintaining the chain’s renowned rotisserie chicken price at $4.99, Williamson said.
Costco already has a nascent ads business, generating some advertising revenue through its Costco Connection magazine and “rudimentary” on-site contextual ads, Williamson noted. Ad-tech company Criteo manages a portion of its website monetization, such as sponsored search and product ads, he said.
However, the company has not previously made more aggressive moves into the ad space, which Williamson suggested might be due to its general aversion to advertising and marketing on major platforms like TV, leading to a “lack of expertise in the paid media space.” (And no, Costco is not sending Williamson to Cannes Lions this year.)
While he declined to provide revenue estimates or expectations, he suggested that “it’s entirely possible to quadruple or more the size of our [media] revenue today, just by operating differently, by unlocking the power of the data that we have.”
BMO Capital Markets estimates that the retailer made about $225 million in digital advertising revenue last year, which Kelly Bania, a BMO Capital Markets analyst, described as “really, really, really small compared to their size.” For reference, Kroger brought in about $910 million in the same period, according to BMO.
Mike Feldman, SVP and global head of retail media at VaynerMedia, said the retailer has a significant opportunity.
“I believe they are leaving significant revenue on the table,” Feldman told Marketing Brew in an email. “When you layer on their loyalty-card penetration, Costco could build a significant competitive advantage in the marketplace.”
Costco executives seem to agree. During Costco’s earnings call last week, CEO Ron Vachris said the retailer has “a significant program now with retail media, and we see some great upside potential.”
Some of that upside potential could come from Costco’s membership base, which presents immediate scale, even though the retailer doesn’t keep as many products on its shelves as other big-box stores. This could limit the number of advertisers likely to invest in the platform and represents the “biggest constraint to our business today,” Williamson said.
Costco isn’t yet pitching the offering to media agencies responsible for advertising budgets, but Williamson said the interest is already there.
“I’ve never had as much incoming demand from suppliers, brands, and agencies who have just been champing at the bit and have been so curious, like, ‘What’s taking Costco so long?’” he said.
