Walmart is engaging in some retail therapy of its own. The retail behemoth revealed last week its intention to acquire smart TV manufacturer Vizio in a hefty $2.3 billion transaction. Should the deal materialize, the discount giant will gain ownership of a consumer electronics firm already well-versed in vending numerous flat-screen TVs and soundbars through Walmart’s online platform and brick-and-mortar outlets.
However, the crux of this acquisition lies in the opportunity to reach millions of viewers as they indulge in their preferred TV programs and movies, while also bridging that leisure time to subsequent Walmart purchases.
“It’s not merely about the televisions,” remarked Jefferies retail analyst Corey Tarlowe. “It’s about advertising.” Here’s an in-depth exploration of the primary motivations driving Walmart’s interest in acquiring Vizio.
Walmart can leverage Vizio’s extensive reach
When consumers think of Vizio, they likely conjure images of expansive store aisles adorned with large TVs. Yet, the burgeoning and increasingly profitable facet of the company’s operations is a bit more nuanced.
Over the past few years, the Irvine, California-based firm has transformed, evolving into more of a software-centric entity. Its televisions are now equipped with the SmartCast operating system, enabling viewers to access and stream content from various apps like Netflix and Hulu without the need for additional devices such as an Amazon Fire TV stick or Apple TV. Additionally, this setup enables Vizio to monetize through advertising.
According to Dan Day, an equity research analyst specializing in digital advertising at B. Riley Securities, Vizio can generate advertising revenue in three primary ways using the SmartCast system. It can sell advertisements on the SmartCast home screen, within WatchFree+, Vizio’s ad-supported streaming app, and through a small inventory of ads as part of agreements with third-party streaming platforms.
Walmart notes that Vizio’s SmartCast system boasts 18 million active accounts.
As the owner of Vizio, Walmart would not only have control over the pricing of Vizio TVs on its platforms but could also broaden the adoption of SmartCast by integrating it into Walmart’s line of televisions, suggests Jefferies’ Tarlowe. While some of Walmart’s competitors such as Amazon, Best Buy, and Target currently carry Vizio TVs and may continue to do so post-acquisition, there are speculations among retail analysts about the potential downplaying of competitor products.
Presently, Walmart’s in-house TV brand, Onn, holds a licensing agreement with smart TV rival Roku. These TVs come equipped with Roku’s operating system, which supports the competitor’s advertising revenue.
Tarlowe and other analysts anticipate that once this contract expires, SmartCast will replace Roku as the operating system on Walmart’s private-label TVs, thereby exposing advertisements to millions more viewers.
Walmart will gain access to Vizio’s data
Vizio possesses insights into viewership habits, while Walmart holds a wealth of information regarding consumer purchasing behavior. Through this acquisition, the two entities can amalgamate their data resources to enhance the personalization and efficacy of advertisements.
Vizio’s TVs are equipped with automatic content recognition technology, enabling the company to discern viewers’ streaming preferences, according to Kirby Grines, founder of 43Twenty, a digital marketing firm specializing in the video domain.
By understanding, for instance, if a viewer spends two hours daily playing Xbox or frequently streams children’s shows, Vizio can tailor advertisements accordingly, whether it’s promoting a particular snack or a brand of diapers.
“You’ll know where to insert advertisements for more reach,” notes Grines.
On the flip side, Walmart possesses comprehensive knowledge of its customers’ in-store and online purchases, augmented by granular data about consumer preferences as it expands Walmart+, its subscription service rivaling Amazon’s Prime.
With the Vizio acquisition, Walmart can leverage its shopping insights to deliver more pertinent advertisements to customers, while also gauging their impact on purchasing behavior, explains Michael Morton, an analyst specializing in Amazon and other internet companies at MoffettNathanson.
He views this capability as the “holy grail” for brands.
“I’m sure you’ve heard that joke: ’50% of my advertising spend is wasted. I just don’t know what 50% it is,’” he quips. “That’s not the case for these retail media networks. The vendors can measure all of it.”
Advertising yields higher profits than basic consumer goods.
Ads hold greater profitability compared to commodities like milk, bread, and socks
In managing a retail operation, Walmart must contend with overhead expenses such as lighting, payroll, and inventory replenishment. Likewise, its online arm necessitates the costs of order fulfillment, including picking, packing, and shipping.
Conversely, advertising comes at a considerably lower expense, notes Morton.
“It’s incredibly profitable,” he asserts, particularly when contrasting the expenses of order fulfillment in e-commerce with the costs associated with placing a product placement ad on a webpage. According to an estimate by Jefferies’ Tarlowe, the operating margin for advertising stands at 65% or higher. This stands in stark contrast to Walmart’s reported operating margin of roughly 4% in the latest fiscal year.
Walmart is strategically aiming to accelerate profit growth outpacing sales expansion by embracing automation and focusing on higher-margin ventures. Tarlowe likens this approach to developing two distinct income streams — one for its traditional retail operations and another for its newer ventures like Walmart+, fulfillment services for its third-party marketplace, among others.
The consolidation of these efforts has propelled Walmart into an overall higher-margin entity. Furthermore, Walmart is eyeing the success of its competitor, Amazon, in the advertising realm and aims to replicate its achievements. Amazon’s advertising segment witnessed a 27% year-over-year sales surge, reaching nearly $15 billion in its most recent fiscal quarter.
The company monetizes its website through ad placements, such as featuring sponsored products prominently in search results. Moreover, in January, Amazon initiated the display of ads within Prime Video content, signaling its recognition of streaming as a lucrative revenue stream.
Advertising is already a fast-growing Walmart business
With Vizio, Walmart could fuel an already fast-growing part of its business.
The retailer has offered more advertising opportunities at its big-box stores. Those include third-party ads on self-checkout lane screens and TVs in store aisles, advertising spots on the store radio, and demo stations where brands can pay to have customers sample their products.
As Walmart expands its third-party marketplace, sellers can buy sponsored ads that put them toward the top of search rankings or promote their product on other parts of Walmart’s homepage.
In the most recent fiscal year, Walmart’s global advertising business grew about 28% to reach $3.4 billion. In the most recent quarter, Walmart Connect, the company’s U.S. ad segment, grew 22% and its global business grew 33%. With ownership of Vizio, Walmart has another type of advertisement that it can sell: TV spots on streaming services, which it can potentially bundle with other types of ads.
It also will collect a “gatekeeper fee,” since many streaming services share a portion of their advertising revenue with the smart TVs or smart devices that they ride on, 43Twenty’s Grines said. Walmart leaders shared a few details on the company’s recent earnings call about its plans for Vizio, saying they will wait for the deal to close.
Yet in a CNBC interview, Walmart CFO John David Rainey described advertising as “a very exciting part of our business” and the acquisition as “a way for us to complement what we’re already doing organically.”
“We think of this as simply an accelerant to what we’re already doing,” he said.
