Chinese retail marketplaces Temu and Shein have spent heavily on ads as they race to court US shoppers, greatly disrupting the digital ad market.
Their activities have created a revenue pop for ad giants like Google and Meta, but it's also caused competitors like Etsy to say they're getting priced out.
Ad industry insiders expect the retailer ad spend to continue through much of 2024, before tapering off by next year. Far from being a new category of heavy ad spenders, experts expect the spike from retail marketplaces to be short-lived, like the temporary surges created by the cryptocurrency and buy now, pay later firms a few years ago.
Temu, which will run its second consecutive Super Bowl ad this year, was the fifth-largest digital advertiser in the US during the fourth quarter of 2023, upping its spending 280% from when it was the 65th biggest advertiser a year prior, according to Sensor Tower.
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And Shein was the 16th largest US advertiser by digital spend during the same period, a 120% year-over-year increase from being the 48th-largest advertiser.
This spending spree has greatly benefited Meta — which cited this spend as a major growth area in the third quarter, and nabbed 46% of Temu's total ad spend and 44% of Shein's ad spend in the fourth quarter, according to Sensor Tower.
The influx of spend is also making Google's ad auctions more competitive. Based on reports that Google provides to ad buyers, the ad agency Tinuiti found that 90% of its advertisers are competing with Temu to buy Google Shopping ads, said Mark Ballard, director of research at Tinuiti. Those retailers now view Temu as a competitor that ranks with Amazon, Ballard said. He expects Temu's spending spree on Google ads to run through at least the first half of 2024.
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But ad industry insiders don't believe this level of spending from Temu and Shein is sustainable.
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"This is a short-term shock, and the platforms shouldn't get used to it," said Eric Suefert, founder of Mobile Dev Memo and industry analyst. While he expects Shein and Temu to continue aggressively spending on advertising throughout 2024, he expects a plateau or decline in 2025 because their marketplace sales are contingent on aggressive advertising.
The e-commerce marketplace Wish, for instance, sunk millions of dollars into Meta ads for years promoting inexpensive products, Seufert noted. When Wish stopped buying ads, sales nosedived.
For these companies to maintain sales without constantly buying ads, they will need to build marketing products using their shopper data, like an email database targeting products to existing shoppers, Seufert said.
"If you gather behavioral data and promote high-inventory items, you don't need to advertise as much," he said.
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Another reason this level of ad spend is unsustainable because of the high percentage of revenue going to marketing activities, according to Kate Scott-Dawkins, global president of business intelligence at GroupM.
PDD Holdings, Temu's parent company, spent 42% of revenue on marketing in 2022, the company disclosed in an SEC filing. Shein is a private company that reportedly filed paperwork for an IPO, but its financials are not yet public. This is a significantly higher percentage than, for example, CPG advertisers' median percentage of 5% in 2022, according to ad agency GroupM.
"I don't know the extent that 40-50% of revenue is sustainable — for a lot of industries that's not sustainable," said Scott-Dawkins.
To be sure, Temu's and Shein's impact on the digital ad ecosystem will continue to be felt in the near term, not just by other online marketplaces competing for ad space, but also by consumers who will likely be bombarded by more retail ads this year.
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"A lot of it this year will be spending more to get the same users," said Juozas Kaziukenas, founder and CEO of e-commerce research firm Marketplace Strategy.
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