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Where Amazon's Next $10 Billion in Ad Revenue Will Come From

By Adam Levy - May 10, 2019 at 9:15AM

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These ad dollars have been slow to follow consumer spending online.

Amazon's ( AMZN -1.53% ) advertising business has quickly grown from relative obscurity to a $10 billion business that's giving Google a run for its money. And while Amazon's early wins may have come at a cost for the Alphabet ( GOOG -2.51% ) ( GOOGL -2.50% ) subsidiary, the online retailer is more likely to take marketing budgets away from its brick-and-mortar peers going forward than Google.

During Amazon's first-quarter earnings call last month, CFO Brian Olsavsky noted the company is increasingly focused on brand advertising with its new suite of ad tools. Additionally, Amazon is investing in new ad inventory opportunities better suited for brand advertising than direct-response campaigns. Those investments could lead Amazon to take a share of the massive $178 billion market for in-store brand promotions and other "shopper marketing," according to Seb Joseph at Digiday.

A sponsored brand banner ad on laptop and mobile.

A sponsored brand banner ad on laptop and mobile. Image source: Amazon

Watch out, Walmart

Those displays at the end of the aisle in your local Walmart ( WMT -1.40% ) or grocery store aren't free. Consumer packaged-goods (CPG) companies pay a price for that premium real estate placement with the expectation that they'll see a commensurate boost in sales.

But as more sales happen online, marketers haven't kept up with the shift in consumer spending. Amazon now offers them an opportunity to put up a virtual display at the end of their digital aisles, so to speak.

For CPG companies that rely on retailers like Walmart, Amazon, or Target ( TGT -2.13% ) for the bulk of their sales instead of offering them directly to consumers, Amazon's advertising products and tools are an incredible offer.

Unlike Google, Amazon can directly drive sales of whatever product a company is promoting. Google can only provide additional information about the brand. That's why Amazon has been able to steal ad dollars from Google so easily. Amazon is more like the in-store display than the promoted website at the top of Google's search results.

But it's an in-store display with much more accurate and real-time measurement capabilities, so marketers can see just how much their ad spend is driving sales over their baseline. As such, marketers should be willing to spend up to the point where they no longer see a marginal return on their investment. And those ad dollars are going to come from a similar category of spending like real in-store displays.

Walmart and Target are fighting back

Earlier this year, Walmart moved its digital advertising business in-house and integrated it with its in-store advertising business. Walmart is taking steps to offer CPG companies better access to shopper data and inventory across both digital and physical properties. And as Walmart's online sales continue to grow rapidly, it's seeing a lot more digital advertising opportunities.

Walmart is also leveraging its Vudu property to create more digital ad inventory. The company unveiled the Vudu Ad Network earlier this month, which will show video ads in ad-supported Vudu content (including the slate of originals Walmart is producing).

Meanwhile, Target revamped its Target Media Network business, which helps brands craft messages and ad campaigns using Target's shopping data. The new platform is called Roundel, and it offers ad placements beyond at other "brand-safe" channels. It's more of an agency business than a demand-side platform for buying digital ads.

Target hasn't gotten to the point where it's able to integrate its in-store promotions with Roundel, but that's probably in the cards.

For all the focus on Amazon's growing ad business, investors haven't paid much attention to advertising at Walmart or Target. Amazon's growth is forcing the issue, and if ad budgets continue to shift from store marketing to Amazon, it'll become a much bigger focus for Walmart, Target, and other brick-and-mortar retailers that are seeing a profit center disappear.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$3,507.07 (-1.53%) $-54.50
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,837.95 (-2.50%) $-72.66
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$140.63 (-1.40%) $-2.00
Target Corporation Stock Quote
Target Corporation
$243.84 (-2.13%) $-5.32
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,849.04 (-2.51%) $-73.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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