Costco, the third-largest US retailer, is developing an ad network leveraging its extensive loyalty membership data. With 74.5 million household members, Costco aims to use shopping habits and past purchases to power targeted advertising both on and off its website. Although still in testing and evaluating ad-tech vendors, this move positions Costco as a potential significant player in the retail media space, projected to reach $166 billion by 2025.

Key Developments

• Targeted Advertising: Costco plans to use its membership data to target ads based on past shopping behaviors. This includes both in-store and online purchases.
• Beta Tests: Currently, Costco is conducting beta tests to target users on other websites and will eventually include its own site.
• Membership Data: Unique to Costco, membership cards are required for shopping, allowing the company to link purchases to specific households, enhancing ad targeting precision.

Industry Context

• Retail Media Growth: Retailers like Target, Walmart, Sam’s Club, and Kroger have already expanded into advertising, capitalizing on valuable customer data. Non-retail entities like Uber and Marriott are also entering this space.
• Competitor Benchmarks: Walmart's global advertising business generated $3.4 billion last year, while Target's Roundel network contributed over $1.5 billion in value.

Strategic Insights

• Late Entry: Compared to competitors, Costco is entering the retail media market later but sees significant potential. The leadership recognized retail media as a profit center that could drive member value.
• Revenue Potential: BMO Capital Markets estimates Costco's digital advertising revenue at $225 million last year, with potential for substantial growth. Analysts and industry experts believe Costco could significantly increase this revenue by fully leveraging its data.

Challenges and Opportunities

• Product Range Limitation: Costco's limited product range might constrain the number of advertisers interested in the platform, posing a challenge.
• High Demand: Despite not actively pitching to media agencies, there is strong interest from suppliers, brands, and agencies eager to leverage Costco's advertising capabilities.

Future Prospects

• Revenue Growth: Costco executives, including CEO Ron Vachris, see great upside potential in the retail media program.
• Member Benefits: Profits from the ad business are expected to be reinvested to keep consumer prices low, such as offsetting shipping costs or maintaining the price of popular items like rotisserie chicken.

Costco's venture into the ad business represents a strategic shift, aiming to capitalize on its vast membership data to become a formidable player in the retail media landscape.