A Blog by Jonathan Low

 

Nov 16, 2020

Retailers Use Pandemic Ecommerce Success To Challenge Amazon On Digital Ads

Amazon and the other big tech ad giants have built their dominance through the ruthless exploitation of customer data. Now major retailers, buoyed by their pandemic-driven ecommerce success, are planning on grabbing market share by using the same sort of information in the same way. JL

Jinjoo Lee reports in the Wall Street Journal:

Major retailers like Walmart, Kroger and Target had been eyeing online advertising as a future profit driver. Those plans got a boost from the pandemic, which has accelerated the e-commerce transition by years, giving retailers a windfall of online traffic and consumer data. A retailer can earn advertising dollars off this trend by selling advertising to its suppliers. But they are also able to gather a lot of data on where individual consumers’ dollars go, giving them insights that they can then sell to others.

Retail giants have seen a surge in online traffic this year. That will help juice their profits over the long run, in more ways than one.

Even before this year’s leap in online shopping, major retailers like Walmart, WMT 1.26% Kroger and Target had been eyeing online advertising as a future profit driver. Those plans got a boost from the pandemic, which has accelerated the e-commerce transition by years, giving well-placed retailers a sudden windfall of online traffic and consumer data.

Target, for instance, saw digital sales nearly triple in its most recent quarter compared with a year earlier, while Kroger and Walmart U.S. saw surges of 127% and 97%, respectively. Online sales haven’t slowed even after initial Covid lockdowns eased, suggesting much of the shift will prove permanent. In particular, curbside pickups, which require customers to order online, are proving quite popular and could easily become part of the new norm.

A retailer can earn advertising dollars off this trend in a couple of ways. The most obvious is by selling advertising space to its suppliers, including targeted coupons, sponsored results or even a landing page dedicated to the brand. But they are also able to gather a lot of data on where individual consumers’ dollars go, giving them insights that they can then sell to others. Having a robust third-party marketplace, as Amazon does, helps a lot, because it broadens the number of potential clients. Both Walmart and Kroger have made big steps in that direction: Walmart has increased sales on its e-commerce marketplace by triple digits in the last reported quarter, while Kroger opened its website to third-party vendors for the first time this year.

Advertisers are on board. They are finding that it is much easier to measure their returns on ad dollars spent on sites such as Walmart as opposed to podcasts, YouTube, social media influencers and the like, according to an April 2020 report compiled by marketing agency Catalyst and market-research company Kantar.

A quick look at Amazon’s model shows just how rapidly the advertising business could grow. In its third quarter, Amazon’s “other” revenue, which now primarily comprises advertising, grew roughly 51% from a year earlier to $5.4 billion, a much faster pace than the rest of the business.

In 2015, the “other” category, which included advertising and co-branded credit cards, pulled in roughly $1.7 billion. Since then, the segment’s revenue has grown almost 70% a year on average, snowballing to $14 billion in 2019. Since 2018, the “other” segment has primarily comprised advertising revenue, according to Amazon’s filings.

Walmart’s e-commerce advertising revenue is still a fraction of Amazon’s, but it is growing fast. Market research firm eMarketer estimates it will grow 73% this year to $849.4 million. The firm also estimates Walmart will command 7% of total U.S. e-commerce ad spending by 2022, a share worth roughly $2 billion. That would be a drop in Walmart’s ocean of revenue, expected to reach $364 billion in the U.S. alone this year, but would be equivalent to roughly 10% of the company’s anticipated 2020 domestic operating income.

Although it is difficult to parse out the costs involved in scaling up an advertising and consumer-insights business, Evercore analyst Michael Montani notes that such an operation is an “intelligence-based, asset-light and high margin” business. That makes it a welcome addition to traditionally low margin, volume-driven retail.

Kroger has indicated that revenue for its advertising and consumer-insights platform is set to more than double this year, though it hasn’t provided specific numbers. In a detailed presentation in 2019—before the pandemic sped up e-commerce adoption—Kroger projected that alternative profit streams, including advertising and gift cards, could bring in up to $150 million of incremental operating profit this fiscal year. That would represent just under 4% of projected fiscal 2020 operating income, not a small share.

Though Amazon is clearly ahead of the pack, advertisers seem keen on opening their wallets to budding players. An April survey by Kantar found that roughly 67% of brands that advertise via Walmart Media Group plan to increase their spending on the platform, the same share as Amazon advertisers. For Kroger, that share was 50%. Granted, it won’t be easy to grab ad dollars from the reigning Amazon, but keep in mind that the overall pie is growing. By 2023, ad spending on e-commerce channels is projected to double from this year’s levels, according to eMarketer. That looks like a great bandwagon to jump on.

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