How Walmart & Amazon are Counting on Advertising for Billions in Profits
Facing narrow margins in their core business retailers like Walmart, Target and Amazon are looking outside of their retail operations to drive profitability. Within the last few years advertising revenues have surfaced as a bright spot for retailers. Amazon’s “other” category which is primarily compromised of advertising revenues passed the $10 billion mark in 2018. US retailers are actually playing catch up in this area as Chinese eCommerce giant Alibaba generates more than 60% of its revenue from advertising.
Advertising overall is a big business with total ad revenues reaching $208 billion in the US in 2018. Digital advertising continues to grow with revenues generated online surpassing 50% of total ad revenues for the first-time last year. Most of the digital revenues go to Google (38.2%) and Facebook (21.8%) but retailers are trying to change this. Retailers argue that “Facebook might know what your customers like, and Google might know what they want, but only we know what they actually buy.” Take Walmart, for example, 90% of the US population shopped at a Walmart last year giving it a treasure trove of data that Facebook and Google do not have. Brands are starting to see the value of spending their advertising dollars with retailers that have actual customer spending data. Three retailers that are making moves in the digital advertising space are Walmart, Target and Amazon. This trend is indicative of the fact that the future of retail may lie in non-retail businesses driving a meaningful amount of profitability for retailers.
1. It is estimated that Walmart.com with 140 million monthly visitors has the second highest number of monthly unique visitors for a retail website behind Amazon at 200 million. Despite having such a high volume of online visitors Walmart is only now starting to take advantage of this traffic to drive advertising revenue. Speaking to analysts last October, Walmart CEO Doug McMillon said: “we have a tiny ad business. It could be bigger.”
In order to give its advertising business a boost, Walmart recently purchased advertising technology start-up Polymorph Labs with the goal of helping Walmart to compete better in the digital advertising space. The start-up’s custom developed technology platform including its high-speed ad sever will allow companies wishing to advertise on Walmart.com to better target visitors based on their actual shopping patterns.
Speaking about Walmart’s push into advertising, Stefanie Jay, Vice President and General Manager of Walmart Media Group, commented: "we can help brands understand if someone saw their ad on Walmart's platform or across the internet, and then purchased the product in-store or online. No one else can do this at scale like Walmart." Working with Walmart, an advertiser might be able to identify cat food buyers versus dog food buyers, and then measure if an ad influenced a sale of cat food.
In another move that signals Walmart’s focus on this area, the retailer consolidated its advertising sales for its website and stores into a single group so that advertisers have a single point of contact when dealing with Walmart. Walmart also moved its advertising operations in house.
2. Not to be left out, Target is also focusing on generating more advertising revenue. Target recently rebranded its in-house media team which was previously called Target Media Network. The team is now called Roundel and one of the reasons behind the rebrand is to let advertisers know that Target will work with clients on campaigns for ads that will be placed on sites outside of target.com. Working with Roundel, clients will be able to place ads on over 150 “brand-safe” channels including Pinterest, PopSugar and NBC Universal.” Target’s pitch to advertisers is that it has the shopper data needed to better understand customers and thus create more effective campaigns. Since Target’s launch of its media group in 2016 it has seen growth in the double digits within the unit. The rebranding to Roundel occurred one month after Walmart’s purchase of Polymorph Labs demonstrating that retailers are anxious for new sources of profits and believe that advertising is a path to get there.
3. With growth slowing in its core retail business, sponsored products which include banner, display and keyword search-driven ads have become a great source of additional revenue and profits for Amazon. It is estimated that Amazon’s advertising profit margins could be as large as 75% and is one of the key drivers behind Amazon’s record profit of $10.1 billion in 2018.
Consumers are primed to shop while they are on Amazon with 46.7% of product searches that start on Amazon vs. 34.6% that start on Google. Additionally, since nearly 50% of eCommerce sales take place on Amazon, Amazon, similar to Walmart also has a wealth of customer shopping data.
There is also a significant amount of upside for Amazon in this market segment as a study conducted by Catalyst found that only 15% of 250 marketers surveyed believed they were taking full advantage of advertising on Amazon. According to eMarketer Amazon is expected to grow its ad business by 50% in 2019 and its estimated share of digital advertising sales is expected to increase from 6.8% in 2018 to 9% by the end of this year.