Walmart’s 30% ad growth contrasts with cooling consumer environment

At a time of squeezed margins, the companies transitioning from the slim profits of food retail to the big profits promised by advertising are beginning to bear fruit – Walmart’s full-year results offer some hints at this new state of affairs.

Why it matters

Walmart remains in a strong position, even if there are warning signs flashing in the FY/Q4 22 results of a company that is often seen as a barometer of US (and increasingly global) consumption. But the key here is how advertising is growing way ahead of the rate of revenues – even if it remains a drop in the ocean compared to the total business.

Ad growth analysed

Walmart, the biggest retailer in the US by value, and with significant interests around the world, posted strong growth in its advertising business over the course of the year: 30% globally to reach $2.7bn. This is thanks to Walmart Connect in the US and Flipkart ads in India– way ahead of currency-adjusted full-year sales growth of 6.7%.

The devil, however, is in the detail. More profitable discretionary spending has softened, and while less profitable food sales grew, overall margins have diminished.

Warning signs of what’s to come

The signs for the year ahead, even beyond the company’s own muted forecasts, aren’t good: at least half of market share gains in grocery are a result of higher-income buyers trading down in their food shopping, CFO John David Rainey told investors.

Meanwhile, brands and retailers alike are reaching the limits of their upwards pricing power, and private label penetration continues to grow.

Advertising offers a new way through in two ways, according to the company’s earnings release: it either makes straight sales, or some of its revenue gains manifest as reductions to Walmart’s cost of sales, thereby improving its profit margins.

Retail media in focus

Prospects for long-term growth in retail media – like Walmart and Flipkart’s advertising capabilities – are strong. Retail media accounts for over a fifth of the online ad market in 2022, and 14% of all advertising spend. In Walmart’s increasingly key food segment, CPG brands are big spenders, according to a major new report into retail media.

Flipkart earlier this month noted its ambition for ad revenue growth in India, a market that has become worth more than a billion dollars. Retail media across the globe is set to grow 10.1%, per GroupM/WARC figures, to reach a total of $122bn.

Sourced from Walmart, Seeking Alpha, WARC, Investopedia