Amazon is the latest threat to Facebook as ad targeting suffers

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

Hassett, who’s based in New York, attributes the boon to one key decision. He reallocated his marketing budget, decreasing spending on Facebook and, for the first time during a holiday season, committing ad dollars to Amazon.

“So many people start their shopping on Amazon,” Hassett said in an interview. “I do personally for most things. So, we have to be there.”

Loftie is representative of a larger trend taking place in retail that’s having major ripples on Madison Avenue and Wall Street. Amazon’s increased advertising offerings for the millions of brands that sell on the site coupled with Facebook’s diminished targeting capabilities that resulted from Apple’s privacy changes have produced a significant realignment in the digital ad market.

Until 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 in allowing sellers and brands to promote their wares on the site and apps. Now, the company’s ad division is a $38 billion annual business, and last week reported 19% year-over-year growth in the fourth quarter to $11.6 billion.

Facebook parent Meta, meanwhile reported a 4% annual decline in revenue for the quarter to $32.2 billion, shrinking for a third consecutive period. Google has been less impacted by Apple’s iOS update, but the ad business is still being hit by the economic slowdown. Parent company Alphabet posted revenue growth of 1% to $76 billion.

Amazon has catapulted to third in the global digital ad market, with 7.3% share, according to Insider Intelligence. Even as it takes share from Google and Facebook, it’s still well behind the two market leaders, which control 28.8% and 20.5%, respectively, of the industry. The 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, he allocated 10% of his marketing budget to Amazon, up from zero the year before. Facebook and Instagram fell to 40% of his budget from 71%. The rest of the money he pulled out of Meta went to Google, as he increased spending there from 29% over the holidays in 2021 to 50% last year.

Hassett said Facebook ads simply don’t work as well anymore, after the iOS update in 2021 began forcing app developers to ask users if they wanted to be tracked. With more consumers opting out of app tracking, the pool of potential customers has been “hollowed out and so we can no longer reliably target people,” Hassett said.

“Facebook has to serve the audience to a bigger pool of people in order to find the same people you’re finding before, and that’s just more expensive,” he said. “You have to pay a lot more than you did a year ago, and a lot of that is due to Apple’s privacy changes.”

Meta’s finance chief, Susan Li, told analysts on last week’s earnings call that growth in the company’s biggest verticals, online commerce and consumer packaged goods, “remained negative” in the quarter. She said the pace of the year-to-year decline in “online commerce has slowed compared to last quarter,” but was uncertain if the sector will significantly rebound anytime soon.

For Loftie, Amazon and Google provide better value because a shopper is showing intent by searching for a particular item. Hassett purchased keywords like “white noise” as well as “Loftie” to make sure that consumers who wanted to find his products weren’t misdirected.

“The work we do off of Amazon on advertising definitely pays dividends on Amazon because people are going there and typing in Loftie,” Hassett said, adding that his shift in ad spending helped Loftie generate a record $250,000 in revenue over a four-day stretch during the holidays.

Investment bank Cowen noted in a recent survey of ad buyers that “Amazon was the most popular survey response when we asked respondents which ad platform outside of GOOG / FB properties could emerge or is emerging as a meaningful part of buyers’ Digital ad spend, ahead of TikTok.”

The survey indicated that there continues to be “broad interest among advertisers” to grow their Amazon budgets in 2023, with 54% of surveyed Amazon advertisers saying they are planning to spend more this year than last.

While Facebook remains a core piece of a brand’s budget, its influence is diminishing, and the company’s investment in its TikTok-like Reels product will take a few years to make a significant financial impact, the Cowen analysts said.

“In the near term, we expect Meta ad share to decline further in ’23 given macro headwinds and the pivot to Reels,” they wrote.

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

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

Between July 2021 and the same month a year later, Robin’s cost to acquire a customer jumped 260% to $180 from $50, Marler said. He attributed most of the surge in costs to Facebook’s reduced targeting abilities, and said Google also wasn’t performing as well.

“We started investing more heavily in Amazon,” Marler said. “We shifted budget away from Facebook, we shifted budget away from Google, and we shifted to Amazon, and our Amazon sales have shot up by about 600% in 2022.”

Overall, the value of the tracking cookie has withered because of a renewed emphasis on consumer privacy. There are very few major online ad platforms that don’t rely on targeting, Marler said.

“Changes in the efficacy of those platforms really have forced us to reexamine our reliance on them,” he said. “We are actively moving our budgets away and decreasing the amount of money that we are spending with Meta.”

Reliance on Amazon has its own 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. That’s particularly risky because Amazon has its own ballooning private-label business, which regularly rolls out products that compete with sellers on the platform.

Vitamin company Manna Health has been increasing its presence on Amazon, committing more of its ad budget to the site since the iOS changes, with plans to possibly double its allocation in 2023 from less than 10% currently, said marketing chief Ryan Farmer.

But he worries about brand loyalty, when so many transactions take place on Amazon.

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

Farmer likens Amazon’s online ad system to Google’s in that companies run ads based on keywords that they think resonate with potential customers who may be searching for certain products. Manna also uses Amazon’s demand-side platform advertising tool, which is helpful for placement in banner ads that can be seen by people “searching for certain things,” Farmer said.

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

Manna doesn’t even get contact information for the buyer. CEO Jeff Hill said he wished that Amazon offered “more insight into the customer, obviously, and sharing emails would be a bare minimum” so Manna could build a community and talk to clients.

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

Amazon declined to provide a comment for this story.

Rachel Tipograph, CEO of marketing technology firm MikMak, said there are other unforeseen costs tied to Amazon advertising.

Unlike Meta, which just requires you to log in to Facebook’s business manager to start buying ads, advertising on Amazon comes alongside listing products on the platform and a host of other services that brands are often buying, including warehouse space. Premium ad placement is the equivalent of slotting fees in retail stores, where brands pay for shelf visibility.

Tipograph expects these costs will “cause the pendulum to swing back” toward brand promotion, and companies will rely more on channels that direct traffic to their own website and give them more control over their expenses.

“What CFOs want is profitable advertising, profitable growth,” Tipograph said, “and they want to know that they are driving incremental growth.”

Ryan Flannagan, CEO of e-commerce marketing firm Nuanced Media, said that as Amazon’s ad business has grown, so has the competition to run “premium copy and visuals.”

Companies that aren’t investing in Amazon ads are “basically losing market share, because they’re not defending themselves,” Flanagan said.

Amazon has plenty of work ahead to keep its ad offerings attractive enough for brands to continue forking over bigger portions of their budget. But for now, companies like Loftie are happy with the returns they’re getting from Amazon, given the challenges with Facebook.

The way Hassett sees it, even with the rising expenses and associated risks, Amazon is providing enough value to justify the headaches.

“I think you have to be there,” he said.

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