Intro/Outro:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Tom Fitzgerald:
Hi, welcome back to the TD Cowen Insights series. I'm Tom Fitzgerald and I'm joined today by Oliver Chen on a crossover episode of the Wheels Up and Retail Visionary podcast. Today we'll be discussing our recent ahead of the curve on the opportunity for airlines and commerce media, which built upon Oliver's earlier ahead of the curve on retail media networks. Oliver, thanks so much for being here today. Let's start simple and level set for the audience, how do you define retail media networks and how are retailers monetizing their own channels?
Oliver Chen:
Hey, Tom, it's a pleasure and it's been great to partner and collaborate with you on this. What is retail media? It's when retailers are monetizing their most valuable asset, customer relationships and first party data. How are they doing this with retail media? They're selling advertising and promotional opportunities to brands inside their own retail ecosystem. As we dive into this topic, Tom, retail media can appear onsite or offsite. Sponsored search results, promoted product titles, featured brands, offsite retailer data from Walmart, Macy's or others used to target ads on Google, Meta, TikTok, and others. What about in-store? Retail media can also be in-store, think about digital screens, end caps with measurement. And then it can also be utilized post-purchase, email, app push, loyalty, personalization.
So when you think about retail media, think about digital advertising, think about advertising that retailers are using in their stores, offsite, in-store, those are many ways it can be used. And as we think more broadly, Tom, we're looking for new revenue streams. Retail has had a really tough time with margins, and our call here a couple years ago is what we call the nexus, meaning retailers in this ecosystem should pursue retail media or digital advertising. Second, they should think about marketplace models. And third, they should think about AI.
Tom Fitzgerald:
Yeah. And what makes it so, I mean that's all pretty exciting stuff, Oliver, what makes RMM so compelling for advertisers on the other side?
Oliver Chen:
What's great about leveraging retail is that retail media at heritage old school meets new school retail brings in the whole closed loop, meaning bricks plus clicks, meaning the suppliers or the buyers of retail media that could be CPG companies, this is actually where they sell the majority of their product at a Walmart, or a grocery store, or a Macy's. So they're integrating physical and digital. It's also this blend of using first party data and then rethinking how they market in many different ways, so those are all big positives. Tom, it's been wonderful to hear about your research, what are you seeing in airlines? What sets airlines apart and what have been your key learning from your ahead of the curve?
Tom Fitzgerald:
Yeah, we're increasingly seeing non-retailers apply that same playbook that you just discussed, and airlines are a part of that, that commerce media as it broadens out. And we believe that airline advertising is undergoing an evolution from static ads sold via third party vendors towards targeted personalized ads managed in-house. Airlines have an enormous amount of high fidelity first party data, as well as numerous high value moments of customer engagement along the traveler journey. So media might be served to traveler during customer booking, during their journey when they're onboard the aircraft, or prior to the journey via email or mobile app. Similar to your point on the importance of improving the profitability for the business, we view commerce media as offering an asset light, high growth, high margin revenue stream that leverages these intangible assets of high fidelity first party data and high value attention moments.
Oliver Chen:
Tom, how do we think about who is better positioned to do this versus less well positioned? And what are we going to see earlier versus later for innovation within airlines and retail media?
Tom Fitzgerald:
Yeah, we think the big thing is those attention moments I talked about and high quality data. I think some of the most exciting use cases are going to be on longer haul flights that touch the biggest premium markets. So think New York to Los Angeles, San Francisco to Singapore. I think customers who are, people might be traveling for business or for work so I think you could think about, our research has indicated there's use cases for targeted B2B advertising from a software company, or also targeted advertising from luxury consumer brands. We could see more everyday type of media engagement, so for not just the people sitting in the front of the cabin. So that might be people like, you could be getting served ride share opportunities during your flight to order before you even hit the ground, if you're traveling to a vacation rental you could get opportunities to order grocery deliveries there.
There's a lot of opportunities in the experience economy, which has been a nice flywheel for travel. We saw that with Taylor Swift last year, depending where she was she was boosting the airfare demand in that city that weekend. We've already seen airlines partner with different online ticket platforms, I think there's a lot of compelling opportunities where you could see that pushing excess seat inventory or getting the most relevant offer to the most relevant consumer at any given point in time. So I think there's a lot of white space, it's another area that diversifies the broader revenue stream. It's high growth, or fast growth asset light, so it checks off a lot of appealing boxes.
Oliver Chen:
Yeah, we quantify the margin profile here being 60 to 80% plus. So what's stopping people, Tom, from doing this faster? Why wasn't this done? We wrote this AOTC two years ago, and I was talking about this maybe three to five years ago.
Tom Fitzgerald:
Yeah. On the airline side I think the WiFi evolution's been a big gating factor, and we're seeing a lot of exciting innovations with the LEO satellites, the low Earth orbiting satellite networks, Starlink's a famous one, Amazon's also getting into that space as well. But that enables just such better connectivity, that low level of latency they're able to serve a much more high quality, just better types of media more consistently. But that takes time, we're just starting to see some airlines make those installations into their fleet. So we expect they're still early days thus far, but that will get rolled out over the next two to three years we think some of the early leaders in this space, and then the fast followers probably beyond that. So this is something that's going to be a big theme or an increasing theme in the second half of this decade.
Oliver Chen:
Yeah. Tom, in terms of what we're seeing, Walmart's digital media business was over $4 billion, and we think it could grow in the 40s to 50s, particularly because they acquired a company called Vizio. As we look at Target, it generated about $2 billion in value last year. And then as we look outside of our sectors, obviously the real learning is from some of the OGs of digital advertising, Amazon $70 billion plus and Google hundreds of billions. So big opportunity there as we see it.
Tom Fitzgerald:
Yeah. Would you agree that there's a surprise and delight opportunity here where it's not just it's good for the business but it seems like there's a lot of ways to make the customer experience better as well?
Oliver Chen:
Yeah. I'm a professor at Columbia Business School, so some of the research we've done there indicates that customers can really like retail media if done in the right way. So there's a few key points. One, authenticity matters in terms of being authentic to the brand. And that relates to point two, which is trust. Meaning is Walmart a trusted destination and/or does the page have so much advertising that Tom's not sure what's advertising versus not? So thinking about page loads and the customer experience and trust are certainly things.
And that actually ties into the marketplace models where how fast should a retailer grow a marketplace, and what does that mean in terms of the brands on the marketplace and how trusted are they with these third party sellers? The reason that's important to this whole discussion is that part of what drives retail media as well as classical CPG companies is the marketplace participants advertising too for preferred spots, and the marketplace third party sellers using fulfilled by Walmart solutions as well as we think more broadly about this monetization effort. But it's always a balance in terms of trust versus profits and greed and speed.
Tom Fitzgerald:
Yeah, no, I absolutely agree there. I think a big, airlines are always just trying to make customers want to increase that customer stickiness, and there's a lot of stuff that just goes in the nuts and bolts of running an airline and on time operation, high-touch customer service. But I think this is another way if you start to, as we see just kind of the arms raised in premium service among the airlines, I think this will be another way to, as people think about, wow, I did all this stuff in the flight, this level of productivity or things I was going to purchase anyway, was able to do it all in one, it just enriches the experience. I think at the margin makes them less likely to pivot to another airline depending on how fast some of the followers are.
Oliver Chen:
Yeah, that's a good question. It's like what is loyalty, and also how do you not be creepy? Because you want to surprise and delight and you don't want to be creepy, you want to be helpful. So can personalization enhance your trust and loyalty or degrade it? And there's many use cases where both can happen. Ideally, it's a win-win. What about you, Tom, what was most surprising and seductive about your AOTC?
Tom Fitzgerald:
I think just a lot of the points we just discussed, just ways for, we talk a lot about the aircraft or the loyalty program, the [inaudible 00:10:03] and credit card programs being obviously one of a real asset, the other intangible asset. But being these high value things that airlines can borrow against in times of stress, not that you could borrow against these other intangible assets, but there are ways to leverage them and further enhance the business. And the assets I mean are just the high fidelity data and the high value attention moments. And I think that dwell time, especially in-flight, is pretty compelling what you can do.
And I do think there's a thin red line of you don't want to go too creepy, you don't want to overdo it and have a deluge of media just overwhelming the customer, but just ways to just further enrich it, just make it more seamless, reduce stress, reduce points of friction on their whole journey. I think it's really compelling and I think just further another way for them to boost NPS scores and just become less just part of that cyclical leisure ticket and just more part of everyday consumption. It gets me very excited and I think it's just going to be an exciting space to watch for the industry in the coming years.
Oliver Chen:
Yeah. I'm flying today so can you ask your companies to check out Cartier or Gucci, and then maybe what they could do is provide an experience for me while I'm in the flight to look at different options.
Tom Fitzgerald:
I like the way you're thinking, Oliver. I don't know if we can get that today, I think 2028, 2030 I think that starts to become more in play, things like that. So stay tuned.
Oliver Chen:
And Tom, what are you watching for? What do you think is underappreciated from your audience and/or investors or companies?
Tom Fitzgerald:
I think that just that airlines have a right to play in this and it's not just, sometimes there's things where it's like, well maybe it sounds nice but it's a small opportunity. I think historically it has been an immaterial financial opportunity in-flight advertising, in-flight media, but I think it's increasingly going to become material. I mean we think it could be in the hundreds of millions of dollars of revenue for some of the leading airlines by the end of the decade and then grows off of that. But I think there's syndication opportunities as well. So I think it's something that's maybe underappreciated right now, but I think in 12 to 18 months I think it'll probably be more commonly known, at least among investors.
Oliver Chen:
Yeah, I think there's analogies here as we look at it, Tom, in terms of the credit card income that retailers are making as well. And that's an important part of the story too. And then it's very small for us, so less than 1%, but there's no reason this can't double, triple. And then the margins. Unfortunately, in my sector some of the retailers are struggling to make low to mid single digit margins, that's three to 5% with traffic. And we're not as captive in retail as you are on a flight, meaning you vote with your feet and traffic's been an issue, but you contrast that with these 60% plus margins. But you would never have a media network without the frequency need of the customer and without the core business as well, right? So there's a core business and this all can work together in an ecosystem.
Tom Fitzgerald:
Yeah, I think that's great way to end it. I think pretty robust conversation today, Oliver. I look forward to partnering with you on the broader commerce media, retail media network space in the years to come, and excited for the opportunities in our respective sectors.
Oliver Chen:
Yeah, it's all about experiential. This is one piece of the puzzle, but doing well, doing good, and making margins, it's a win-win. And it'll be really fun to see the evolution and also the connections your companies will make as retail media partners to each other too. Thank you, thanks for hosting me, Tom.
Tom Fitzgerald:
Yeah, thanks so much everybody. Stay tuned for the next episodes on the TD Cowen Insights series.
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