Walmart’s ad business: A thin slice with fat margins

Walmart makes money selling a dizzying array of products and services. The company operates 10,500 stores in 19 countries. 240 million customers shop its physical stores and websites. It collects fees from over 100,000 third-party sellers on its website (which happens to be the second largest e-commerce site in the US behind Amazon). It also sells $98 per year memberships to an estimated tens of millions of shoppers through the Walmart+ loyalty program. 

But one of the most interesting areas of growth that the company is betting on is advertising. Like other big retailers, Walmart finds itself sitting on a massive trove of first-party shopper data from loyalty card programs and e-commerce. Walmart is the gatekeeper who can charge advertisers to precisely target its own customers in many different ways. 

Walmart Connect, the retail advertising unit, makes sure that consumer packaged goods brands get in front of Walmart shoppers wherever they are: on screens and radios in its stores, on its website, and even when they are watching TV. Walmart's $2.3 billion purchase of TV manufacturer Vizio opened up a new front for data collection and ad personalization for the advertising business. 

Looking at the total business, the advertising slice of Walmart's overall revenue might seem pretty small, with the company reporting $3.4 billion from ads globally for all of 2023 — only 0.52% of total revenue. For comparison, Amazon is the current juggernaut of retail advertising, raking in $46.9 billion from ads in 2023.

And this thin slice of ad revenue has been growing. Walmart’s Global ad revenue grew 28% from 2022-2023 and Walmart just announced that its global ad business grew 26% for the latest quarter.

But the big reason why Walmart executives are betting on this stream of revenue? Profit margins. For all sales, Walmart reported a 24% gross profit rate for its FY25 Q1 earnings. But ads have a much higher profit margin. In March 2023, Walmart's CFO John David Rainey told an investor conference, "Advertising margins typically range in the 70% to 80% range, I think for a lot of companies. And so, this is the faster growing part of our business with a higher margin, which changes the composition of our P&L over time." 

Compare that to the wafer-thin 1.6% margins for the overall grocery industry for 2023, according to a report from The Food Industry Association. As Walmart continues its reign as the top seller of groceries in the US, its looking to find higher margin businesses to sustain its growth.