Client Letters: Amazon Earnings, Digital Advertising Trends
As we wrap up the first 6 weeks of 2024 and review earnings releases within our industry, we are seeing a few secular trends worth noting:
Amazon Retail (Vendor Central) CAN make money - Growth at all costs clearly ended in 2023. Every single earnings release is polluted with two keywords: AI and layoffs. Growth has taken the backseat as headlines lead with earnings improvement year over year. In prior years, Amazon Web Services (AWS) profits allowed Amazon to sell retail product at any cost. Then came Amazon Advertising which continued to fuel the market share grab. However, in the latest quarter, Amazon Retail posted a profit. Yes, the continued grooming of the vendor base (61% of units, 69% of sales last quarter were via Seller Central), increased vendor terms, leaner inventories and lower markdowns have made Amazon a profitable RETAILER excluding AWS, Advertising, Subscriptions, etc. We continue to believe having a Vendor Central account is imperative to being successful on Amazon longer term.
Advertising returns continue to decline - The start to the year has brought lower returns on most advertising channels for two reasons: 1) Competition continues to increase as the number of sellers increase; 2) Marketplace fee decreases for referral fees (Clothing & Accessories) and inventory fees have been reinvested in advertising. Although Amazon Advertising remains the best dollar spent in advertising today, the demand for those slots is outpacing the growth in slots available. We believe the strong brands MUST pull back on brand terms and shift dollars into broad, suggestive search terms to conserve those precious dollars.
Meta remains dominant - With scale in the billions of users and daily active users still on the rise, no brand or marketer can avoid shifting more of their advertising budget to Zuck. This reach and rabid use of Meta apps by consumers has no sign of slowing.
With the above trends, we continue to reiterate the need for brands to be: 1) hybrid using 1P and 3P models for all retailers; 2) multi-channel marketers not reliant on just Amazon advertising; 3) thrive on the strength of the brand for consumers already “bought into” your brand, extend the audience to those not aware of your brand.
Enjoy the weekend,
Ryan
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