Amazon is the latest threat to Facebook as ad targeting suffers

For Matthew Hassett’s smart alarm clock company Loftie, the 2022 holiday shopping peak was the busiest in its five-year history, despite a lackluster U.S. economy and lingering fears of a recession.

Hassett, who lives in New York, explains the benefits of one key decision. He reallocated his marketing budget, cutting spending by Facebook and, for the first time in the holiday season, allocating money to advertising Amazon.

“So many people are starting to shop on Amazon,” Hassett said in an interview. “I personally do most things. So we have to be there.”

Loftie is representative of a broader trend taking place in retail and making serious waves on Madison Avenue and Wall Street. Amazon’s increased ad offerings for the millions of brands that sell on the site, combined with Facebook’s reduced targeting capabilities as a result of Apple’s privacy changes, have led to a major shakeup in the digital advertising market.

As recently as a year ago, Amazon didn’t even disclose the size of its advertising business, leaving analysts and investors to guess how much the company was making by allowing sellers and brands to promote their products on its sites and apps. The company’s advertising division now generates $38 billion a year and last week reported fourth-quarter growth of 19% year-over-year to $11.6 billion.

Facebook-owned Meta, meanwhile, reported a 4% decline in annual revenue for the quarter to $32.2 billion, its third straight period of decline. Google was less affected Apple iOS update, but the advertising business is still suffering from the economic downturn. Mother company Alphabet increased 1% to $76 billion.

According to Insider Intelligence, Amazon catapulted to third place in the global digital advertising market with a share of 7.3%. ​​​​​​​Although it has the share of Google and Facebook, it is still far behind the two market leaders, who control 28.8% and 20.5% of the industry, respectively. Facebook figure includes Instagram.

Loftie continues to spend more money on Facebook than Amazon, but the equation has changed dramatically. In the days surrounding Black Friday in November, it allocated 10% of its marketing budget to Amazon, compared to zero a year earlier. Facebook and Instagram have shrunk to 40% of its budget from 71%. The rest of the money he pulled from Meta went to Google as he increased spending there from 29% during the holidays in 2021 to 50% last year.

Hassett said Facebook ads simply haven’t worked as well since the 2021 iOS update began forcing app developers to ask users if they want to be tracked. As more consumers opt out of app tracking, the pool of potential customers “has been cut off, so we can’t reliably target people anymore,” Hassett said.

“Facebook has to serve an audience of more people to find the same people you were finding before, and it’s just more expensive,” he said. “You have to pay a lot more than you did a year ago, and a lot of that has to do with Apple’s privacy changes.”

Meta CFO Susan Lee told analysts during last week’s earnings call that growth in the company’s biggest verticals, e-commerce and consumer goods, “remained negative” in the quarter. She said the pace of the year-over-year decline in online commerce “slowed down from last quarter,” but she wasn’t sure the sector would recover much anytime soon.

For Loftie, Amazon and Google provide better value because the shopper demonstrates intent by searching for a specific item. Hassett purchased keywords such as “white noise” as well as “Lofty” to ensure that consumers looking to find his products would not be misdirected.

“The work we’re doing with Amazon on advertising is definitely paying dividends for Amazon because people are going there and entering Loftie,” Hassett said, adding that his change in ad spending helped Loftie earn a record profit of $250,000 in four days. holy

Investment bank Cowen noted in a recent survey of ad buyers that “Amazon was the most popular response in the survey when we asked respondents which ad platform outside of GOOG/FB could emerge or is a significant portion of buyers’ digital spending on advertising ahead of TikTok.”

The survey found that there is still “broad interest” among advertisers to increase Amazon budgets in 2023, with 54% of Amazon advertisers surveyed saying they plan to spend more this year than last.

While Facebook remains a major part of the brand’s budget, its influence is waning, and the company’s investment in a product like TikTok Reels will take several years to make a significant financial impact, analysts at Cowen said.

“In the near term, we expect meta ad share to decline further in 2023 given macro headwinds and a shift towards Reels,” they wrote.

A spokesperson for Meta declined to comment for this story, but sent CNBC examples of brands that the company says have increased distribution on Facebook and Instagram and improved performance from ads on the site.

Like Loftie, Robin Golf has also had to move away from Facebook in promoting its catalog of golf clubs and related equipment. CEO Peter Marler said more of that money has gone to Amazon over the past year.

Between July 2021 and the same month a year later, Robin’s cost per acquisition jumped 260% to $180 from $50, according to Marler. He attributed much of the spike in spending to Facebook’s declining targeting capabilities and said Google isn’t doing so well either.

“We started investing more in Amazon,” Marler said. “We switched budget from Facebook, we switched budget from Google and went to Amazon, and our sales on Amazon grew by about 600% in 2022.”

Overall, the value of tracking cookies has diminished as the focus on consumer privacy has re-emerged. Marler said there are very few large online advertising platforms that don’t rely on targeting.

“Changes in the effectiveness of these platforms have really forced us to reevaluate our reliance on them,” he said. “We are actively reducing our budgets and reducing the amount of money we spend with Meta.”

Trusting Amazon has its pitfalls. The company is a dominant force in online retail and can make or break a brand’s success based on its performance on the site. This is particularly risky because Amazon has its own private label business, which regularly releases products that compete with sellers on the platform.

Vitamin company Manna Health is increasing its presence on Amazon, devoting more of its ad budget to the site after the iOS changes, with plans to possibly double its allocation in 2023 from less than 10% now, chief marketing officer Ryan Farmer said.

But he worries about brand loyalty when so many transactions happen on Amazon.

“It’s not our customer, it’s Amazon’s customer,” Farmer said.

Farmer compares Amazon’s online advertising system to Google’s in that companies show ads based on keywords they believe resonate with potential customers who may be searching for specific products. Manna also uses Amazon’s demand-side platform advertising tool, which is useful for placing banner ads that can be seen by people who are “looking for certain things,” Farmer said.

Manna, like Loftie and Robin Golf, maintains a dedicated Amazon homepage that includes graphics, slogans and a list of the company’s various products it sells on Amazon. Still, the system is a “black box,” Famer said, because it doesn’t provide the kind of demographic or other information to help Manna retain and nurture its customers.

Manna doesn’t even get the buyer’s contact information. CEO Jeff Hill said he would like to see Amazon offer “more customer insight, obviously, and the exchange of emails would be minimal” so Manna can build a community and talk to customers.

“Hey, you bought this joint supplement, you know you might also be interested in our new bone supplement,” Hill said, describing a possible follow-up email. “It would help our company and we could buy more on Amazon and it would be mutually beneficial for us to reach the customer and drive more traffic back to Amazon and the products.”

Amazon declined to comment for this story.

Rachel Tipograph, CEO of marketing technology firm MikMak, said there are other unforeseen costs associated with Amazon ads.

Unlike Meta, which only requires logging into Facebook Business Manager to start buying ads, Amazon ads come with a product listing on the platform and a host of other services that brands often buy, including warehouse space. Premium ad placement is the equivalent of paying for placement in retail stores where brands pay for shelf visibility.

Tipograph expects these costs to “swing the pendulum” towards brand promotion, with companies relying more on channels that drive traffic to their own website and give them more control over their spend.

“CFOs want profitable advertising, profitable growth,” Tipograph said, “and they want to know they’re delivering incremental growth.”

Ryan Flanagan, CEO of e-commerce marketing firm Nuanced Media, said that as Amazon’s advertising business grew, so did the competition to provide “premium copy and visuals.”

Companies that don’t invest in Amazon ads “are basically losing market share because they’re not protecting themselves,” Flanagan said.

Amazon still has a lot of work to do to keep its ad offering attractive enough for brands to continue to fork over bigger chunks of their budgets. But for now, companies like Loftie are happy with the profits they’re getting from Amazon, given Facebook’s troubles.

In Hassett’s view, even with rising costs and associated risks, Amazon provides enough value to justify the headache.

“I think you should be there,” he said.

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