Retail used to be a fairly simple proposition where store owners stocked their shelves with merchandise, competed with rivals over price, and tried to entice customers through the doors.
Larger retailers, of course, have always had a pricing advantage because they can make larger orders. A chain like Walmart actually works with its partners to see where they can take cost out of an item or lower the price by placing a larger order.
Retail prices, however, no longer simply depend on what the retailer paid for the item plus its needed markup to cover overhead and deliver a profit. Now, what an item sells for can also be impacted by things like paid memberships and, in the case of Walmart, advertising.
In many ways, Walmart’s business has become more like Costco‘s, where a large percentage (roughly two-thirds in the warehouse club’s case) of its profit comes from areas that are not customers buying items off its shelves.
Walmart has quietly built a $6 billion ad business
As a consumer, you may not even realize Walmart has an ad business. That’s because it’s not just about showing traditional ads, directing customers to products, and using other classic advertising techniques.
To understand how Walmart built a $6 billion ad business, you have to understand its purchase of the television company Vizio about 18 months ago.
Walmart Chief Growth Officer Seth Dallaire explained during the Sixth Annual Evercore Retail and Consumer Conference that the TV hardware business “sits adjacent to the advertising businesses that we run.”
He noted that he’s often asked why Walmart would buy a television manufacturer.
“And the reality is that we sell a lot of TVs at Walmart. And the television business is no longer the domain of the sort of buy it for wholesale, sell it for retail, and keep the margin. The real television business is now post-sale,” he said.
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Selling a customer a Vizio TV creates a long-term opportunity for Walmart to have access to their living room, bedrooms, and other places where people watch TV.
“It’s driven by technology and the operating systems that sit behind the glass on these devices. So that is an area of advertising, connected TV advertising, that complements what we do with advertising products in our e-com businesses and stores,” he added.
Walmart owns the Vizio TV brand. Shutterstock
Walmart makes a lot of money from ads
“For the quarter, our advertising business grew more than 30% for each segment, including 36% for Walmart U.S. Membership fee revenue grew 17% for the enterprise, led by Walmart U.S. Together, these profit streams represented approximately 1/3 of operating income,” CEO John Furner shared during Walmart’s first-quarter earnings call.
Walmart has been on the cutting edge of not just controlling what consumers see at home when watching their Vizio TVs, but also the in-store experience, according to analyst Andrew Lipsman.
“For decades, the store was treated purely as a sales channel,” said at Beet Retreat LA. “But it’s actually a high-quality media environment with massive audiences, contextual relevance and proximity to the point of purchase.”
He said the industry has yet to take full advantage of the creative possibilities inside the physical store. Repurposing TV ads won’t be enough.
“It’s a totally different context,” Lipsman emphasized. “There are three-dimensional creative opportunities we’ve barely begun exploring.”
He noted that the market is controlled by a small number of large players.
Amazon’s expansion from Prime Video ads to partnerships with Netflix, Hulu, NBCUniversal and others gives the company influence over as much as half of the ad-supported streaming market, according to Lipsman. Walmart’s push into CTV via Vizio will accelerate the trend.
“With that much scale enabled by performance data, it puts CTV directly in a CMO’s sights,” he said. “They will get insights they’ve never had before. It’s going to change everything.”
Retail media is in the early stages
Walmart made over $6 billion in advertising revenue over the past year, according to Dallaire.
RTMNexus CEO Dominick Miserandino shared his experience using Walmart’s advertising network for his clients with TheStreet.
“I’ve actually been advising a few retailers on their retail media network strategy. And it is a very interesting shift because retailers have all the data in terms of their customers, allowing for the targeting, but in addition, they own an audience for X period of time, whether they’re in the store or on the site,” he shared via email.
That can lead to bigger sales.
“So certain retailers are realizing that when they own that audience, they can not only use it for targeting, but additionally have other brands who are supplemental and not competing, target the direct audience that they own,” he added.
Walmart posted big gains in advertising and membership revenue in Q1.
Global advertising business up 37%, with strength across segments.
Walmart U.S. advertising up 36%.
Membership fee revenue grew 17.4% globally.
Dallaire sees the advertising business as a helpful tool for customers.
“Advertisements are good for our customers. They’re good for our seller community. They help avail customers and members to new products or things that they didn’t know were available for sale at Walmart, and they have a different margin profile than the traditional retail business, kind of everyone wins in that respect,” he added.
Ad sales revenue, he noted, helps lower the cost of certain items.
“This advertising business and retail media is a critical component to how we serve customers and members and also to the P&L,” he shared.
