Walmart had a mixed day with investors following its earnings call.
Sales growth plateaued last year while Walmart’s investments in store associate raises, technology and a new system of fulfillment centers are still going up.
But the Walmart Connect advertising business was a bright spot, execs told investors in the retailer’s earnings report on Tuesday, with growth of 30% YoY to $.7 billion in 2022. In the US, Walmart Connect’s Q4 ad revenue increased 41% from 2021.
Walmart’s ad revenue gains are important because they offset costly new fulfillment and distribution centers and an expansion in the grocery category, said CEO Doug McMillon. Though grocery is a low-margin business, it is also an important ingredient for generating customer loyalty and increasing the average overall cart size.
Adding up ads
Walmart’s technology investments, like a third-party marketplace for online sellers and its “rapidly growing ad platform,” mean merchants sell more effectively, said CFO John Rainey.
More importantly from the retailer’s point of view, Walmart gets a larger cut of the total sale when purchases are driven by the Connect ad platform and take advantage of Walmart’s fulfillment services.
This dynamic can be seen in Walmart’s financials. The company reports ad revenue once per year (during the year-end filing), and it includes the caveat: “Our global advertising business is recorded either in net sales or as a reduction to cost of sales, depending on the nature of the advertising arrangement.”
In other words, Walmart Connect’s ad revenue can come from straightforward search and sponsored product listing campaigns. But sometimes Walmart Connect revenue comes from a price reduction in what it pays the brand for the product.
Rainey said that the profit margin advantages on business like advertising and the third-party marketplace mean that even if overall sales growth remains stubbornly in the low single-digit range, Walmart’s operating income and profit could tick up at a higher rate.
Plus the Plus
AdExchanger Daily
Get our editors’ roundup delivered to your inbox every weekday.
Daily Roundup
Walmart Plus, the company’s $13-per-month membership program (à la Amazon Prime), is another “mutually reinforcing” part of the new sales and profit margin growth plan, McMillon said. Walmart Plus and its accompanying Paramount+ subscription serve as a media hub, for one, providing a logged-in group of customers that power its data and advertising business.
Walmart won’t disclose its subscriber count yet, alleging it’s due to investors being “overly focused on that metric,” McMillon said. “(We’ve) seen people use that as a shorthand to value the company.”
The overall subscriber gains are also especially valuable because they tend to lead to more net new business for the company, skewing toward younger and higher income customers.
For newer and more tech-savvy customers, McMillon said “Walmart Plus with free delivery and other businesses like advertising, marketplace and fulfillment services add up to a better proposition.”
