Amazon's advertising network, already worth billions of dollars, is likely to become its next great business. With its current trajectory, Amazon’s ad business is an unbelievable profit generator.

As part of its latest financial results on Thursday, the online retail giant said that its ad business has recorded more than $12 billion in revenue globally during the third quarter, marking a 25% jump year-on-year. In contrast, Google and Meta have registered about 10 and 15 per cent year-on-year growth in advertising revenue for the same quarter.

In 2022, the online retailer earned a whopping $38 billion from ads alone, commanding a nearly 7 per cent share in the digital ad market.

Amazon’s ad business continues to boom even amid growing concerns that the Israel-Hamas war could negatively impact the world economy. Besides, it has been largely unaffected by privacy tweaks made to Apple’s operating system, experts shared.

“Online retail is growing at a stupendous pace, every eCommerce player is looking for that alternate revenue and it does not stop with shopping alone. Travel, airlines, luxury and holidays, all are gunning for that pie and the ones who have a clear AdTech solution are winning. In India, Flipkart and Amazon both have massive traction,” Rammohan Sundaram, President – Integrated Media, DDB Mudra Group, told e4m.

Role of retail media

Retail media has emerged as a strong challenger to the duopoly of Google and Facebook. “Their first-party data on consumer shopping and purchase habits offer them an advantage over the more general online behavioural data that Facebook and Google provide,” says Sajal Gupta, CEO of Kioas Advertising.

Product discovery and product searches have moved from Google to Amazon. Naturally, that dip gave Amazon all the benefits given the availability of more data about shoppers on Amazon than on Google, Sundaram explains.

“While Google is powerful, when it comes to retail and product discovery, Amazon has an edge due to the higher purchase intent. With so much personalized data available on Amazon, I am pretty sure it will end the year with $35-40B in advertising revenues,” Sundaram noted.

Commerce media is poised to grow significantly with the advent of the cookieless world when behavioural data will be more difficult to come by.

Currently, search remains retail media’s major growth driver. However, in the future, in-store media and shoppable video ads may take on a bigger role, industry leaders say.

India may mirror similar trends

Experts believe the Indian market may mirror similar trends wherein search may lose share in the digital ad pie at the cost of eCommerce gaining traction. Trends will be clearer soon when Google India and Amazon India share their FY23 financials.

Amazon's ad revenue in India was Rs 4,170 crore in FY22, about 8.3 per cent of the overall online ad market which is roughly Rs 50,000 crore. Amazon and Flipkart together clocked nearly Rs 6,000 crore of ad revenue last fiscal.

Retail media currently commands about 12 per cent of the total spends in India. It should be double in 2024, experts say.

“At an agency level, we are seeing 20 per cent of our overall digital spends go into online retail and I have no doubt that with the growing market, digital AdEx in India will see anywhere between 25-30 per cent of its contribution going into online retail in 2024.”

“The recent dip in ad revenue growth of Facebook India can be partially attributed to e-commerce advertising and retail marketing, so the share of the ad spend pie for retail media is definitely growing,” says Shradha Agarwal, Co-Founder & CEO, Grapes.

Meta India witnessed a 13 per cent increase in gross advertising revenue to Rs 18,308 crore in FY23, compared to 74 per cent increase in the previous year.

Jio Ads is also making significant inroads into the retail market by not just pulling in data from online transactions but also from its vast network of offline stores, Gupta added.

Key Drivers

The retail media market has come a long way since Amazon first launched its network in 2012. The e-commerce giant hadn’t started breaking out its ads business in its filings until Q4 2021 when it revealed for the first time that ad vertical helped it make $31 billion annually.

It is currently one of the fastest-growing advertising channels globally. As per eMarketer, the US retail media search ad revenues will grow at a rate nearly four times faster than the rest of search advertising this year.

This growth is primarily driven by the expansion of the e-commerce sector, which is expected to grow from $100 billion to $350 billion by 2030, opines Sachin Kumar, Founder of Bottle Openers, citing a RedSeer report.

Siddhartha Sahni, Chief Client, and Strategy Officer, 4AM Worldwide, says, “What started with grocery e-commerce has now moved across categories such as education, gaming, fintech, luxury retail, and D2C being major category growth drivers.”

Advertisers' spend on retail media varies between 5 to 100 per cent, depending upon their category and size, says Sayak Mukherjee, CEO, Brandwizz Communications, adding, “Many fashion, beauty and personal care brands, especially the SMBs, which largely derive their sales through online channels often spend 100 per cent of their marketing budget on e-commerce advertising.”

Underscoring two big trends, Sahni said, “The first is an evolution from just on-site conversions to one that allows better campaign integration allowing brands and publishers to target consumers across the funnel via not just display but, voice search optimisation, social commerce, influencer collaborations, AI, CTV and even digitally in-store ensuring better ROAS and effectiveness,” he noted.

Better measurement?

Retail media ads are believed to offer easy and better measurability, allowing advertisers to gauge the effectiveness of their campaigns. “This level of measurement is essential for fine-tuning advertising strategies and maximising the return on investment. Ecom platforms also desire to standardize the retail media measurements and are collaborating to come up with one,” says Ambika Sharma, Founder & MD, Pulp Strategy.

Online retailers are quickly updating themselves with predictive technologies like AI and machine learning to help serve more personalized and curated ads.

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Nimesh Shah, Head Maven, Windchimes Communications, says, “Marketplace websites are now doubling up as places where the user not only searches for their products but also ‘discovers’ new ones. Instagram is drawing so much advertising revenue because it is a 'community + retail' platform for users to sell their products.”

Better ROI?

A McKinsey research in 2022 revealed that 87% of Consumer Processed Goods (a category that are significant retail media spenders) planned to increase their ad spend in retail media networks in 2023. Interestingly, 70% of the respondents in McKinsey’s survey said that this was because their ad performance in retail media (in driving product sales) is significantly or somewhat better than in other channels.

Google and Meta didn’t respond to e4m queries in this regard. The story will be updated when they reply.

Amazon’s India team shared CEO Andy Jassy’s Letter to shareholders from April, in which he had credited the company's “large investment” in “machine learning” and “measurable solutions” as prime factors leading to ad growth.

“We strive to be the best place for advertisers to build their brands. We have near and long-term opportunities that will help us achieve that mission. We’re continuing to make large investments in machine learning to keep honing our advertising selection algorithms. For the past couple of years, we’ve invested in building comprehensive, flexible, and durable planning and measurement solutions, giving marketers greater insight into advertising effectiveness,” his letter read.