The high-margin advertising business is an important factor in what Walmart calls its “growth algorithm” – a plan to invest heavily in brick-and-mortar overhauls and fulfillment while maintaining or even growing its overall profit margin.
The two things must go together. Walmart’s margins are under pressure by temporary forces, such as inflation and the current labor and supply-chain crunch, but also by long-term investments in home delivery, new store set-ups to accommodate online pick-up orders and its grocery business. (Groceries are low-margin sales but valuable because the category brings loyal, regular shoppers.)
To balance those investments, Walmart is adding high-margin businesses, such as the third-party seller marketplace and, notably, advertising.
“We continue to make strong progress in some of our newer higher margin initiatives.” Biggs said. “Walmart Connect advertising experienced robust sales growth this year with a strong pipeline of new advertisers and large growth opportunities ahead.”
Third-party sellers have reshaped Walmart’s product assortment and advertising demand. A Walmart supercenter may carry tens of thousands, maybe even in the hundreds of thousands of SKUs (stock-keeping units, the retail term for individual product lines). The number of third-party seller SKUs available online are nearly 170 million.
This massive array of SKUs helps get a “flywheel” moving with advertising, Biggs said. More third-party sellers means more advertiser demand. As with third-party seller SKUs, Walmart can dramatically scale up advertising without taking on burdensome costs.
Half of Walmart Connect’s business in Q4 2021 was automated platform sales, double the rate of programmatic in 2020. That number will continue to spin up, and is an elixir to Walmart’s overall profit margin.
“The margins are helpful,” CEO Doug McMillon responded to one investor who asked about Walmart reporting its advertising revenue. “They help us keep prices low for customers and they help us deliver the operating income number percentage.”
All-in on ecom
Becoming an omni-channel retailer is the name of the game. Advertising is a necessary part of achieving the goal; Ecommerce is the goal.
Walmart’s ecommerce business grew 1% year-over-year in Q4 2021. That sounds unimpressive, but ecommerce was off the chain in 2020 because stores were shut practically everywhere. On a two-year timeline, Walmart ecommerce is up 70%. Ahh, that’s much better.
“Having digital relationships with customers is so important,” said President John Furner.
Stores are becoming fulfillment centers for online orders, not just a place where shoppers walk around. And that helps drive up the total order volume, McMillon said. The total number of orders processed by Walmart stores (so not home delivery, but a store sale or BOPIS) was up 170% last year compared to 2020, which was on top of 500% growth the year before.
Some metrics McMillon is keeping closer to the chest. One investor asked about the Walmart+ subscription service (its would-be rival to Amazon Prime).
“I don’t want to have the company defined by the one metric,” McMillon said. “And with subscriptions being such a topic these days, everybody gets really focused on that.”
It is an important long-term priority, he said. “It helps us grow our ecommerce business, deepen the relationship with customers and have more data. And at some point, we’ll probably talk about that number.”
For now, though, the company is highlighting how advertising will grease the skids for that all-important ecommerce and hybrid retail growth.
“The business model is changing. I think that’s the headline,” McMillon told an investor. “We’ve got a business that’s becoming increasingly digital, the ecommerce business … it gives us the opportunity to grow advertising income.”