Google, Facebook and Amazon collect more than half of all ad dollars spent in the U.S.
7 min
When the pandemic upended the economy last year, companies took a hard look at their advertising plans.
Oreos maker Mondelez International Inc. shifted money meant for TV commercials during March Madness basketball and the summer Olympics into digital platforms. A hefty chunk went to Alphabet Inc.’s Google, which offered data on what locked-down snack lovers were searching for.
Athleisure company Vuori Inc. more than tripled its spending on Facebook Inc., spotting a chance to juice sales of its sweatpants to people stuck at home. Office-furniture maker Steelcase Inc. built an operation to sell directly to workers and advertised aggressively on Amazon.com Inc.
The Big Three of digital advertising—Google, Facebook and Amazon—already dominated that sector going into 2020. The pandemic pushed them into command of the entire advertising economy. According to a provisional analysis by ad agency GroupM, the three tech titans for the first time collected the majority of all ad spending in the U.S. last year.
Beneath the shift are changes driven by the pandemic: more time spent on computer screens; more e-commerce; a jump in new-business formation, and a steady improvement in tech giants’ ability to demonstrate a return on ad investment.
Success breeds success for what some call the “triopoly.” The increase in shopping and spending on Google, Facebook and Amazon’s platforms is adding to their already voluminous data on users, giving them even more appeal for advertisers that look to target their messages.
“These companies that are data-science-driven get stronger and faster with a tailwind of usage—and Covid was a hurricane,” said ad-industry veteran Tim Armstrong, a former Google executive and AOL CEO who now leads Flowcode, a direct-to-consumer platform company.
Many of the pandemic-driven changes likely are here to stay, say advertisers and ad forecasters. Still, when the pandemic winds down, it’s far from certain the tech giants will continue to increase their market share gains at this rate. With the vaccine rollout and easing of lockdowns, consumers could spend less time and money online and marketers could diversify their spending.
The growth in online advertising last year came as every other kind of ad spending shrank, with double-digit declines in television, newspapers and billboards, according to GroupM. And those online gains flowed heavily to the tech giants rather than to digital media sites and publishers that sell online ads.
The triopoly increased their share of the U.S. digital-ad market from 80% in 2019 to a range approaching 90% in 2020, GroupM estimates. It’s a surge that comes as the three face scrutiny and litigation from various agencies at home and abroad over their dominance.
Google, in announcing plans to tweak its tools that help publishers and advertisers buy and sell ads, is moving away from targeting ads based on individuals’ browsing activity across the web. But that shift might wind up further strengthening Google’s grip on the online-ad industry, some experts and rivals say, because it could boost the value of the data flowing through Google properties such as Search and YouTube.
Amazon this week said it will begin streaming Thursday Night Football by 2023, giving the company a high-profile franchise to take in ad dollars normally spent on TV broadcasters.
The three giants aren’t collecting just the money spent to advertise in the media but also some of the marketing dollars earmarked for coupons, catalogues and in-store promotions.
“They are not media companies anymore, they are marketing mongrels,” said Rishad Tobaccowala, a senior adviser to ad giant Publicis Groupe SA.
New-business applications in the U.S., which slowly climbed from 200,000 a month to 300,000 over a decade, shot up north of 500,000 in July and averaged more than 400,000 a month for the second half of 2020, according to the U.S. Census data. This proved a boon for the biggest tech platforms, which provide the kind of advertising that is often all a startup can afford. Facebook says it had more than 10 million active advertisers in the third quarter, up from 8 million in January.
Meanwhile, many businesses of all sizes pivoted to e-commerce selling—and turned to digital ads to support that effort.
Before the pandemic, a little more than 10% of retail purchases in the U.S.took place online. That jumped to 16% in last year’s second quarter when lockdowns peaked, according to Census data. Though the rate tapered a bit as the year wore on, the trend strongly benefits the tech behemoths.
“The pandemic zapped us two years into the future on the e-commerce side,” said Nicole Perrin, principal analyst at research firm eMarketer.
Mondelez, the Chicago-based maker of Oreo, Ritz and other snacks, in 2020 geared up to promote some of its brands in the marquee television events of the NCAA college basketball tournament and the Summer Olympic Games in Tokyo. When it became clear neither would be held, Mondelez redeployed the money to digital advertising.
It doubled down on Google ads to capitalize on interest in online recipes among those homebound. It used Facebook-owned Instagram to host a Pictionary-like game in which an artist made images out of the cream in the middle of an Oreo cookie. For the first time, Mondelez spent more on digital ads than on TV commercials last year. Google and Facebook were the biggest beneficiaries.
This year, digital advertising is projected to account for more than half the roughly $1.1 billion Mondelez spends on media world-wide. It was only about 30% as recently as 2017. TV’s share of the company’s ad spending continues to decline.
When Mondelez invests in digital advertising, it gets a 25% better return than with TV ads, the company says. It has found that its Google and Facebook ads do especially well, generating 40% higher returns than an average digital ad. The two now account for roughly 60% to 70% of Mondelez’s digital ad spending, up from less than 50% in 2017, the company says.
The tech giants share data that allows Mondelez to understand its customers better, said the snack maker’s chief marketing officer, Martin Renaud. Google data showed Mondelez, for instance, that people tend to search the internet for healthier snacks in the morning and for more-indulgent treats as the day wears on.
When the pandemic struck, Google provided updated data that helped Mondelez craft relevant ads. The company switched from showing college-age consumers an ad about eating lunch in the library to one that read: “Made it through an online class? Treat yourself.”
Mondelez has been working with Google and Target Corp. to figure out how likely someone is to buy Oreos or Ritz crackers from Target stores after being served ads for them on Google’s YouTube.
“I can’t go to CNN or other platforms and be able to get that intelligence,” said Jonathan Halvorson, Mondelez’s global vice president of consumer experience. Big advertisers like Mondelez still spend a lot on TV commercials, and most consider TV the best way to reach a mass audience, rather than any particular segment of consumers.
As it directs more ad money to the tech giants, Mondelez isn’t working with as many digital publishers in the U.S. In 2017, Mondelez worked with about 150; it now works with fewer than 10.
For direct-to-consumer businesses, the pandemic provided an opportunity like no other.
Activewear company Vuori distributes through stores, but its main focus is selling via catalogues and the web. Facebook is a key part of its strategy. Besides enabling Vuori to monitor the performance of its ads, the platform’s tools let Vuori upload lists of its customers and then use Facebook’s algorithm to find look-alike audiences, testing and pivoting in real-time.
When the pandemic arrived, Vuori CEO Joe Kudla noticed something interesting in the data: The prices of Facebook’s ads were dropping at the same time as people were clicking at higher rates on Vuori ads for items like its $80 sweatpants. That combination sent its return on ad spending through the roof.
Vuori stopped traditional marketing such as catalogues and direct mail and shovelled every dollar it could into Facebook. It doubled its April 2020 media spending from what was budgeted and saw sales quadruple. Facebook’s ad prices have since recovered, and Vuori has diversified its ad spending somewhat, but it has continued to increase its use of Facebook ads.
A surfer and yoga practitioner, Mr Kudla seeks to create products for people with the kind of active lifestyle he and his friends in Encinitas, Calif., have. But for finding customers, he says, Facebook beats his instincts.
“We could identify the age, demo and behaviour, but ultimately the algorithm is much more powerful in terms of identifying people who demonstrate certain shopping behaviours,” Mr Kudla said.
Performance-obsessed small advertisers such as Vuori are the reason Facebook revenue never stopped growing last year, despite the pandemic’s hit to the economy and then a summer boycott by some prominent advertisers over the platform’s handling of hate speech and misinformation.
In the three years leading up to the pandemic, Suzy Batiz, founder of the toilet spray company Poo-Pourri, was focused mainly on building out the network of retail stores that carried what it calls a “before-you-go” spritz of essential oils.
Then Covid-19 hit, and one distributor refused to take a multimillion-dollar order already produced. “That was pretty painful,” Ms Batiz said. “But as one of my mentors would say, crisis precedes transformation.” The company shifted focus from driving customers to stores to driving them to its e-commerce site and others’ shopping sites.
That meant cutting all marketing spending that wasn’t digital, such as payment for placement at Bed Bath & Beyond stores or for promotional events. Ms Batiz redirected the money to the web, especially Facebook. Sales on Poo-Pourri’s website surged 300% in the second quarter versus a year earlier and more than doubled for the year.
“This is our future,” Ms Batiz said. “I don’t think we will ever go back.”
Steelcase, which makes desks and other office furniture, spent roughly $1 million on advertising in 2019, primarily for print and digital ads in business publications to target facility managers, architects, developers and company executives. Most of its revenue came in direct sales to corporations or from its dealer network, which has showrooms around the country. Its business of direct selling to consumers was minuscule.
As states’ stay-home orders spurred an exodus from offices last spring, Steelcase’s sales plunged. The Grand Rapids, Mich., company ramped up its small direct-to-consumer business, increasing its staff for that to 25 people from two.
It stopped advertising in business publications and began buying search and social-media ads. Steelcase radically increased its ad budget last year and spent $5 million to $6 million on digital ads targeting people setting up home offices. About half of that went to Amazon search ads.
“Everyone focused on Amazon, whether you needed toilet paper, spices, a Cuisinart mixer or an office chair,” said Allan Smith, the furniture maker’s vice president of global marketing. “We decided to shift there as well, and it paid off.”
For every dollar Steelcase spent on Amazon ads during the holiday season, it made $30 in sales, the company says. Sales for its business aimed at consumers are up 500%.
Steelcase plans to double its Amazon spending this year. Its research indicates the pandemic has changed work-life for good, predicting that about 72% of businesses are likely to take a hybrid approach of working from both home and office. “The hybrid future is here to stay,” Mr Smith said.
Reprinted by permission of WSJ. Magazine. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: March 19, 2021
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What a quarter-million dollars gets you in the western capital.
Alexandre de Betak and his wife are focusing on their most personal project yet.
Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.
4 min
For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.
Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.
Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.
Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.
Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.
Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.
Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”
Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.
For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.
The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.
The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.
Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.
Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.
“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.
Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.
For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.
Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.
Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.
Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.
“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”
Corrections & Amplifications
Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.
