Amazon (AMZN 0.83%) will take a whopping 40% of online retail sales in the U.S. this year, but it's punching above its massive weight in another aspect of e-commerce. Advertising on Amazon's U.S. marketplace will generate over $18 billion this year, representing about 80% of marketers' spend on U.S. e-commerce sites, according to an estimate from eMarketer.

Amazon's dominant position in e-commerce channel advertising is bad news for Walmart (WMT 0.26%), Target (TGT 1.55%), and other brick-and-mortar stores who rely on in-store promotions and advertising revenue as more shopping shifts online.

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It's not all about online sales

Amazon has seen its retail sales growth accelerate since the start of the pandemic last year, which forced many shoppers to buy more online instead of in stores. After 40% growth in online store revenue for 2020, the company grew sales another 44% in the first quarter.

Walmart and Target grew online sales even faster. Walmart's net sales attributable to e-commerce grew 78% year over year in fiscal 2021. Target's sales through digital channels increased 145% last year.

While Walmart and Target's online sales grew extremely quickly, their digital advertising sales didn't quite keep pace. eMarketer estimates Walmart grew its online ad sales 73.4% last year, and Target's ad sales grew slower than that despite nearly twice the sales growth.

Amazon, despite its already dominant position in e-commerce channel advertising, grew its overall ad business about 52% in 2020 -- faster than its online sales growth. In the first quarter, Amazon's Other sales, which mostly encompasses advertising, grew a whopping 77%.

Digital advertising sales have substantial profit margin compared to online retail sales. Analyst Benedict Evans suggested Amazon's ad business may have contributed as much operating profit as the rest of Amazon's retail business in 2020. So, advertising revenue growth is just as valuable, if not more so, as online retail sales growth. And that goes for Walmart and Target as well.

Amazon's advertising dominance is particularly bad for Walmart and Target

Amazon's advertising sales growth isn't necessarily coming at the expense of other digital advertisers. More likely, much of the incremental ad spend on Amazon is the result of advertisers following shoppers from physical stores to online. 

Marketers spent an estimated $178 billion on in-store promotions in the U.S. in 2019. That number likely fell precipitously in 2020 amid the pandemic, leading to strong growth in e-commerce channel advertising.

While Walmart or Target might be growing their digital ad sales quickly, they're cannibalizing their in-store promotions. Meanwhile, Amazon's ad sales are practically entirely incremental, as it has a relatively small physical retail presence.

As Amazon's ad sales growth accelerates in 2021, investors should keep in mind that it's not just a great source of profit growth for the e-commerce giant. It's also likely impacting the bottom lines of its competitors with the majority of their sales coming from physical stores.