Good morning,
On yesterday’s Sharp Tech we discussed TikTok and the bill moving through Congress. You can add Sharp Tech to your podcast player using the link at the bottom of this email, and also add Sharp China, which I am sure will cover the topic as well.
On to the update:
Walmart Earnings
From Bloomberg, late last month:
Walmart Inc. topped Wall Street’s expectations in the fourth quarter as picky shoppers continued buying — bolstering the company’s view of the US economy. Sales and profit came in higher than analysts’ average estimates, while executives said the retailer is gaining market share, particularly among households earning more than $100,000 a year. E-commerce sales also rose more than expected, and more shoppers are using same-day and express deliveries.
I don’t generally cover Walmart earnings, which gives me latitude to go back to the previous quarter’s earnings call last November. From CEO Doug McMillon’s prepared remarks:
When I look at our P&L, it’s continuing to change shape. Mentally I break it down as a combination of a traditional retail P&L and a newer version that starts with our digital businesses. It flows from first and third-party e-commerce pickup and delivery to businesses like membership, advertising and fulfillment as a service. It includes some faster growing, higher margin components that combined with the more traditional P&L gives us a business model that’s more profitable in percentage terms as it grows. We saw strong growth in all these areas for the quarter. And when you put it together with the supply-chain automation work we’re doing, you get a more sustainable business that can grow more effectively over time and create a better mix along the way.
CFO John David Rainey provided more details about the advertising business specifically:
I’d like to touch on our portfolio of higher growth initiatives. These businesses reinforce our core omni-retail model in our key to driving operating income growth ahead of sales over time. In Q3, this portfolio positively contributed to gross margins. Global advertising grew approximately 20% in Q3 with Sam’s Map growing over 27% and Walmart Connect, up 26%.
As an illustration of the omnichannel benefits of our ad platforms, more than 75% of Sam’s Map active advertisers are investing in search and sponsored ads as in-club sales attribution has improved returns of digital ad spend by over 30%. International’s ad revenue growth was impacted by the timing of Big Billion Days, but we’re on track to deliver strong growth of approximately 45% for the full year.
Rainey added in the question-and-answer section of the call:
We talked about the growth in advertising across all segments quite frankly and international while it was slower in this quarter, we’ll see strong growth for the year. All of these as they become a larger part of our overall business mix, you’re going to have an outsized contribution to our margin performance. So if you go back and you think about what we shared at Investor Day saying that we expect over the next several years to grow sales 4% and operating income greater than 4%, we would expect with each passing year, we’re going to see a greater contribution from these higher margin profit streams, which help us to improve our margin each year.
The total revenue numbers are still small: $3.4 billion in advertising last year, compared to $648.1 billion in revenue for the entire company. That latter number, though, entails actually buying goods to sell, running stores, etc.; it’s inherently low margin. Advertising, on the other hand, is not only very high margin on a per dollar basis but also scalable in a way that retail isn’t: more advertising means more leverage on your mostly fixed costs to provide said advertising.
Walmart Connect and Closing the Loop
Walmart Connect, the company’s Walmart-specific advertising business, is pretty straightforward: you can buy search ads in Walmart’s apps or on its website; you can buy display ads in the apps or on its website, and also have Walmart place them across the web; and you can buy in-store advertising. What is compelling is the fourth offering: Closed-loop Measurement. From the website:
At Walmart, we’ve got brand & product advertising down to a science. With Closed-loop Measurement at a massive scale only we can provide, you can understand why & how customers are finding your products, then adjust your campaign for optimal results.
Using Walmart’s proprietary omnichannel intelligence, Walmart Connect correlates your onsite & offsite campaigns with sales on our digital properties & in our physical stores. When a customer sees an ad online & makes a related purchase at Walmart, our Closed-loop Measurement recognizes & reports it.
This is the gold standard for advertising: actually knowing what advertising works and what doesn’t. This, for a long time, was the key to effective digital advertising on the web generally, and Meta specifically: if you can connect an ad to a conversion than you sell ads with an explicit promise in terms of return on advertising spend (ROAS). This, by extension, means that advertisers are freed from buying ads based on a budget and a prayer; rather, they can determine the lifetime value of a particular sale and then bid on ads that are guaranteed to be profitable; the amount they spend is, in this world, ultimately a function of the inventory available (since more inventory means more supply, which lowers prices into a particular advertisers’ positive ROAS amount).
Unfortunately for much of the digital ad industry, Apple’s App Tracking Transparency (ATT) changes severed the link between ads and conversions. This has driven an untold number of companies out of business completely, massively impaired companies like Snap, and caused a lot of pain at Meta and YouTube; the latter have recovered by heavily investing in probabilistic advertising models that estimate if an ad converted, but their offerings are never going to be quite as good as they once were.
Reciting this history in the context of Walmart made me realize there might have been another casualty to ATT: for a long time both Google and Meta were expending a lot of effort trying to build out advertising offerings that tied together digital ads and offline conversions; while these initiatives were never broken out as distinct products in earnings, I do recall a lot of time being spent on earnings calls discussing the possibilities. Neither company has mentioned these initiatives for a while, though, and I wonder if ATT is a reason why: the challenge with tying together digital ads and offline conversions is that it is a fundamentally probabilistic based exercise, and maybe it’s just too challenging now (or maybe all hands needed to be on deck to fix digital conversions first).
Regardless, Walmart is actually able to tie all of this together with a product like Walmart Connect, thanks to the fact it controls both sides of the equation: it both sells the ad and sells the product, both online and off.
Walmart Acquires Vizio
From the Wall Street Journal, also from late last month:
Walmart said it reached a deal to buy television maker Vizio for $2.3 billion, a major bet by the retail behemoth that it can make advertising revenue a significant part of its future. The deal gives Walmart access to more opportunities to sell advertising through the TVs that Vizio manufactures, as well as create entertainment for shoppers, the retailer said Tuesday…
Buying Vizio provides Walmart with a TV operating system, granting more space to sell ads and viewership data as it works to grow its advertising business. The move aligns with Walmart’s efforts to expand profit streams beyond selling goods in stores and online. Walmart already has a large private-label electronics business through its Onn brand, which offers phone chargers, speakers and televisions. The Onn TVs run on operating systems from Roku.
The deal is a response to both the changing nature of Walmart’s revenue model and the television business, said Seth Dallaire, chief revenue officer for Walmart U.S., who will manage Vizio after the acquisition. Streaming and internet-connected TVs have made the TV business about software, not hardware, he said. Walmart has access to shoppers and data that makes advertising through connected TVs even more appealing to potential advertisers, he said. “As more people come to us through digital channels, it allows us to leverage this advertising capability we have,” said John David Rainey, Walmart’s chief financial officer. “The acquisition of Vizio is very complimentary to that. It’s an accelerant to what we are already doing.”
It absolutely is an accelerant; note what I laid out above: to the extent Walmart can build an effective closed-loop measurement business is the extent to which the growth of its advertising business is gated by inventory. That inventory, though, needs to be owned and operated by Walmart in order to keep the signal between ads and conversion intact. To that end, it absolutely behooves Walmart to expand its inventory, and TVs are the most obvious place to do just that: the company isn’t building a social network (although TikTok might be for sale soon!), and it’s not going to be building a competitive phone. TVs, though, get hours a day of attention, and most customers care first and foremost about price: not only are Vizios relatively cheap, and not only can they be made cheaper if you take out the need for both manufacturer and retailer to make margin, but Walmart could actually subsidize the TVs to expand their inventory that much more aggressively and gain increased scale for their advertising business.
Vizio, meanwhile, doesn’t just make TVs: they have amongst the most advanced operating systems designed to collect data and show ads; they also are leaders in automatic content recognition technology, which tracks what you watch for advertising purposes. Vizio has traditionally sold this data — it’s a bit of an industry standard — but it’s not quite aligned with Walmart’s focus (and is pretty icky); I suspect the fate of that business is TBD.
Advertising, meanwhile, isn’t the only interesting thing about Walmart’s business; I’ve written previously about how Walmart is making groceries work as an e-commerce product, and the company has, after years of trying, started to truly integrate its stores and e-commerce efforts generally. The growing success of its website and app, meanwhile, have led to a growing marketplace business; that itself is a fantastic on-ramp to advertising revenue, as Amazon has shown. More about the company in the coming weeks.
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