7 things we’ve learned from Loblaw’s rewards-based digital ad service

Loblaw Companies Limited (LCL) is turning the customer data produced by its PC Optimum program into a new revenue stream—selling highly-targeted advertising to its customers. It’s a business that could generate a lot of cabbage for the country’s biggest grocer.

The new advertising sales strategy mimics an approach used by Amazon and, more recently, traditional brick-and-mortar retailers including Walmart, Target and Kroger—all of which have built nascent advertising businesses using their data.

Amazon made $3.4 billion from selling ads last quarter and Walmart is also pushing hard to increase its sales business. While Loblaw isn’t in the same league, it is about one-third the size of Kroger—which generates approximately $120 billion in revenue and boasts a loyalty program reaching 60 million people (Loblaw generated $47 billion in revenue in 2018, and has 18 million PC Optimum members).

It has been reported that Kroger aims to pull in US$400 million in ad revenue by 2020. But last month, in an AdAge article about Walmart’s growing ad sales business, Michael Stich, chief business officer of WPP’s VMLY&R, estimated that Kroger’s online ad sales might already be a $1 billion business.

“This is a definite move [by Loblaw] to monetize the data it has created through its program,” says Sarah Thompson, chief strategy officer for Mindshare Canada. “The size of the revenue stream is to be determined and that determination is set by the customers. The value needs to be proven to advertisers and customers alike.”

Loblaw’s new service rewards members of its popular PC Optimum loyalty program for viewing what it describes as “more relevant” online ads. Ads will eventually include a mark identifying them as coming through the program. The company plans to trial the service with what it describes as a “select group” of  its PC Optimum members.

Participants who view ads from Loblaw and its vendor partners will receive PC Optimum rewards points, which can be redeemed across Loblaw banners including Loblaws and Shoppers Drug Mart.

First party data is companies’ “most valuable asset,” says Mindshare’s Thompson, but the challenge for Loblaw will be converting what is essentially anonymized data—”meaning that you are still guessing at who wants, and is doing, what” she says—into perfectly targeted ads. “There isn’t perfect targeting in that scenario,” says Thompson. “The data is hashed and therefore you are matching for similarities not accuracy.”

She describes it as a new application of “rewarded advertising”—in which customers are compensated for consuming ads—a model that has been employed by businesses ranging from gaming to media.

Uwe Stueckmann, Loblaw’s senior vice-president of marketing, says the company will use PC Optimum members’ purchase history to help it deliver more relevant ads for its vendor partners, while also being able to track the ads’ efficiency through subsequent purchases.

The Message spoke with Stueckmann at length about the program: Its genesis, its value proposition, and why Loblaw’s emergence as a media channel really isn’t that new of a concept. Here’s what we learned:

1. It’s based on actual cookies, not virtual cookies

Stueckmann says that the “vast majority” of purchases in its core verticals of food, health and beauty are still made at brick-and-mortar locations, providing a distinct advantage for Loblaw.

“We’ve been able to connect the PC Optimum in-store and digital behaviours to actual people buying real things in real stores, rather than looking at a website or showing intent through search or a like on a social media platform,” he says. “In our business, what you bought yesterday is the best predictor of what you’re going to buy tomorrow.”

The PC Optimum card also provides Loblaw with what Stueckmann describes as “fresh, clean data” that is replenished every day.

He calls it “a closed loop solution” that enables Loblaw to take, for example, a segment of 100,000 customers and determine what impact its advertising had on their purchase behaviour. “This isn’t about how many people clicked on something or watched a video—we can tell you how many people bought it in the store.”

2. It’s not a reward, it’s a ‘data dividend’ 

Stueckmann won’t disclose how many points PC Optimum members will receive for viewing ads, but says the company has created a tiered structure that assigns different points values for the type of ad they see (such as a banner, pre-roll video, etc.).

“This is not going to be a life-changing amount of points that we’ll give people for the passive consumption of advertising,” he says.

Stueckmann says it’s wrong to describe this as a “rewards program,” instead calling it a “data dividend” for consumers who have entrusted the company with their data.

The idea, he says, is that if Loblaw discovers a new use for their data it hadn’t previously contemplated, its customers should benefit in some way. “It’s not so much about paying people [to view] the ad, it’s paying people for the fact we’ve leveraged their data to create a targeted ad for them”

3. Customers will be willing to try it

Loblaw conducted what Stueckmann describes as “extensive research” on the program among its PC Optimum members, and believes that buy-in is almost assured. “I’m not just sitting in my car with crossed fingers,” he says.

Not only are the ads coming from mainstream brands, but Loblaw knows its customers are predisposed to the product they’re seeing an ad for because they’ve already bought it (or something like it). Plus, he says, customers are able to amass free PC Optimum points with practically zero effort, with an easy opt-out.

“From a consumer perspective, there’s literally nothing they have do,” he says.

4. Not more ads, better ads

“We’re not going to [publish] any more ads, but the fraction of the ads that come through our stack, customers are going to get rewarded on,” says Stueckmann.

“Our challenge to the industry is what if everybody gave [consumers] a penny every time they get served an ad that’s based on their data? That would add up to something meaningful. We really want to make sure that people think about the value of their data and how their data is used.”

5. First party data is a powerful asset

Stueckmann describes the program as a natural extension of the company’s ongoing efforts to build its own first-party data management platform, with an eye towards delivering more targeted advertising.

“Thinking about products that not everybody buys, in the past we would have had to find some second or third-party data that gave us some indication of whether customers were a fragrance user, or they bought dog food, or whatever it is,” he says. “Now we can create audiences or real people that have bought stuff in real stores. It’s a capability that unlocks completely different marketing processes.”

Stueckmann says the wealth of first-party data will allow brands to segment their advertising towards specific sub-sections within a given consumer  group—those people who might be  “dabbling” with a brand, for example, versus very heavy users.

“It just unlocks a plethora of opportunities for us to be far more intelligent and far more efficient and measured in how we go to market.”

6. It can be beneficial for smaller brands 

Stueckmann says that preliminary testing of the service using in-house brands found that it offers a “really powerful proposition” for non-mainstream products.

“It’s actually taken our internal marketing process and flipped it upside down, creating an audience-first approach to marketing,” he adds. “You think about who you’re going to talk to not in an abstract way, but in a very concrete way.

“[It’s determining] who is the actual audience you want to talk to, and building the message for them, rather than building a message for [for example] an 18-49 demographic. It’s unlocked a lot of capabilities.”

7. Loblaw Companies Limited: Media vendor

The program also takes LCL down the path towards becoming a fully-fledged media vendor, although Stueckmann says it’s not a completely unexpected development. “We’ve been a media vendor for many years,” he says, citing in-store programs like shelf talkers, in-store sampling and flyers.

“Our stores are a medium,” he says, noting that more than 19 million Canadians pass through Loblaw-owned stores in a single week.

Several other prominent retailers have already awakened to the potential of their business to become a media channel. According to a recent Bloomberg report, U.S. grocery chain Kroger is expecting a portion of the additional US$400 million in profit it hopes to generate by 2020 to come via a new marketing unit selling ads to CPG companies.

Target also has an in-house media network with “hundreds” of clients, while Walmart has tapped former broadcast executives to help built its internal ad business.

Like its U.S. peers, Loblaw hopes to be able to capitalize with its long-standing relationships with top-tier marketers.

A Bloomberg article earlier this year quoted David Tiltman, head of content at advertising analysis firm WARC, as saying these retailers have a “nice story” to tell advertisers. And as Amazon continue to steal away their business, they’re increasingly eager to tell it.

—With files from David Brown

Chris Powell