Brand Advertising in Programmatic Era Fattens Margins for Big E-tailers

Margins on E-commerce Ad Sales Can Be as High as 70%, Said Triad's Brian Quinn

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Retail data helps Hasbro target toys like Pie Face and FurReal Friends StarLilly My Magical Unicorn.
Retail data helps Hasbro target toys like Pie Face and FurReal Friends StarLilly My Magical Unicorn. Credit: Courtesy Hasbro

Publishers that rely on advertising have been getting pummeled lately by ad fraud, ad blocking and a storm of competition for marketers' budgets. But there's one growing area of the web finding a big upside in ads: e-commerce sites.

Retailers selling products online are increasingly turning to advertising as an additional revenue stream that can offset the heavy costs associated with their core business -- think free shipping. Proprietary programmatic exchanges are making it simpler for retailers to scale their ad business and attract more money from product marketers with the lure of retailers' first-party data.

"Our big [retail] partners in this have evolved their e-commerce ad operations dramatically," said Ginny McCormick, VP-media and promotions at Hasbro. "It's definitely something we're investing in more."

Rakuten, an online market for everything from clothes to home appliances, has been selling more and more ads in recent years. "We have relatively thin margins, so we look for ways to augment that and ads are almost pure margin," said David Pourjahan, director-strategic sales and partnerships.

Others have made similar calculations. "Over the last couple years, all competitors that were traditionally just purely focused on retail revenue have come into the ad game," Mr. Pourjahan said.

"Margins on e-commerce sites are 3% or less," said Brian Quinn, chief revenue and innovation officer at Triad, a firm that helps retailers monetize and manage content for their e-commerce ad businesses. Advertising margins on e-commerce platforms, however, can be as high as 70%, making advertising "exponentially the highest-margin thing" retailers sell.

EMarketer expects sales from U.S. retail e-commerce to grow 14.2% this year. With that growth comes costs unique to e-commerce, such as free shipping, return shipping and higher credit card fees due to higher potential for fraud, said Jason Goldberg, senior VP-commerce and content at Razorfish. Advertising revenue can offset some of those costs.

For many e-commerce sites, that begins with providing discovery for products that they sell. But some, like Amazon, have experimented with running ads for products that are and aren't sold on its site. (Amazon recently discontinued that option.) Some, like Walmart and Target, have their own private ad exchanges, making them look more like digital publishers. Or Google. "Search ads, by volume, are the biggest chunk of the monetization for retailers," Mr. Goldberg said.

Amazon, for the nine months ended in 2015, reported an 18.4% increase in North American sales from its nonproduct sales businesses, including advertising and cobranded credit card revenue. For the e-commerce giant, it was an increase to $579 million from $489 million.

"This is getting bigger," said Jared Belsky, president of 360i. "Amazon has the power to be an absolutely large competitor to Google in vertical search and retail search. Almost 40% of retail searches start at Amazon, not Google."

For Target, the digital ad business is more than a growing, alternative stream of revenue. It's also a means to a sale. "We think there is tremendous opportunity to bring together Target and our vendor partners to deliver engaging content, which is why we built Target Guest Axis," said Kristi Argyilan, senior VP-marketing at Target overseeing media and measurement. Target Guest Axis is the company's private exchange, which sells ad inventory to targeted audiences on and off its site based largely on its first-party data. "This will ultimately help us deliver a more relevant experience to our guests, as well as understand how our media actions are influencing guests from the first time they see an ad all the way through to purchase," Ms. Argyilan said.

Hasbro's advertising with e-commerce operators makes up less than 20% of its ad focus in the U.S., but its share of Hasbro's total media mix has risen by double digits in the past year, according to Ms. McCormick.

The growth is being fueled by the improving data that some retailers are now making available to advertisers. "There's data that these partners can provide that other media networks cannot," Ms. McCormick said. "It's insight into the purchase path and consideration, down to return on ad spend. It's not a traditional media model on impressions or performance. They're talking about how this will drive sales."

For example, Hasbro can find active shoppers who love to play board games with their families and then serve them ads that introduce new games such as Pie Face, in which players compete to avoid a faceful of whipped cream.

E-tailer search data is also available to advertisers. When an adult searches for toys with a filter of 5-to-7-year-olds, Hasbro now has data and technology to instantly serve an ad to that adult for an appropriate toy, such as FurReal Friends StarLily My Magical Unicorn.

Although ads tied to the sale of specific products are probably coming out of sales team budgets rather than corporate marketing budgets, Mr. Goldberg said he's starting to see more marketing dollars spent on display ads on large e-commerce sites like Walmart.com. In the past, when large retailers sold ad space to its product manufacturers, it was categorized as co-op marketing. "If you wanted to play ball with Home Depot or Walmart, you had to pony up a few dollars of co-op marketing. In the old days, it was print ads and circulars," an industry expert said.

A few years ago, that business shifted to display ads on e-commerce sites, which is more targeted. Now retailer ad revenue is accelerating on "thoughtful one-to-one delivery of ads to consumers," 360i's Mr. Belsky said.

Rakuten's Mr. Pourjahan said his ad sales team once typically sold "broad ad programs." Now, he said, his team has seen "more response on the programmatic side over the last year."

Supporting that programmatic ad business for retailers like Rakuten is the growing presence of third-party firms that aggregate media impressions from multiple e-commerce websites, meaning the ad may show up on multiple e-commerce sites.

Rakuten works closely with HookLogic for access to a broad range of manufacturer vendor dollars. For HookLogic, the trends add up to around $100 million in billings for its three-year-old retail business, as well as growing spending from brands, said Jonathan Opdyke, CEO and co-founder.

"It's taken retailers a while to get to the point where they look at platform as more than point of sale," Mr. Opdyke added. Now, "it's a significant revenue stream."

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