Walmart reported a weaker-than-expected second quarter with lower gross margins. Investors questioned Walmart's premium valuation versus other retailers. Walmart's advertising, third-party marketplace, and membership subscription businesses provided 50% of incremental profit. Those online, data-driven lines remain much smaller in sales than physical-store merchandise but account for half of profit growth. Executives described Walmart as more than a standard brick-and-mortar retailer, citing diversified, higher-growth, higher-margin profit streams as justification for its multiple. Rising cost-per-click, cluttered search results, and Amazon's pullback from Google Shopping complicate digital ad dynamics for brands.
Still, investors pressed executives on the call as to whether Walmart merits its unusually high multiple compared to other retailers - and Walmart execs pointed right back to its ads business as a critical component of its unique value prop. CFO John David Rainey, for example, noted that Walmart's advertising, third-party marketplace and membership subscription businesses contributed 50% of incremental profit.
Although, of course, AI Overviews don't help. So what's a brand to do? According to Rachel Klein, SVP of owned-and-earned media at Wpromote, succeeding in the AI search market requires brands to develop new strategies that "focus on building authority, not exchanging organic tactics for paid." So far, spend on paid search has remained steady as have conversion rates. All hope is not lost (yet).
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