Facebook's New Shopping Tools Should Boost Its E-Commerce Ad Sales

The social media giant is betting that its Facebook Shop platform will give merchants an incentive to spend more on Facebook and Instagram ads.
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Facebook’s  (FB) - Get Report newest tools for helping businesses sell on its platforms should strengthen an e-commerce ad business that has been a bright spot for the company during the current downturn.

Unlike existing Facebook tools for merchants that work specifically on either the core Facebook platform or Instagram, the Facebook Shops service, which was unveiled on Tuesday, lets businesses set up digital storefronts that can be viewed on both platforms.

Businesses can showcase items from their catalogs, while promoting them via Facebook/Instagram business pages, stores services and ads. Facebook is also giving businesses the ability to receive messages via WhatsApp, Messenger and the Instagram Direct service, and the option to support Facebook and Instagram’s in-app checkout features in the U.S. Presumably, the cross-platform Facebook Pay service, which was unveiled last November, will be supported in time.

Facebook also announced that it’s rolling out Instagram Shop, a dedicated shopping section within the Instagram app, this summer in the U.S. And taking a page from Chinese e-commerce apps, Facebook plans to give businesses the ability to tag products from their catalogs when promoting them via live streams.

True to recent form, markets have responded favorably to Facebook's announcements.  Facebook's stock is up 8% over the last two trading days, and has made new highs.

Facebook's moves come at a time when e-commerce activity has spiked thanks to a combination of COVID-19 fears, retail store closures, stimulus payments and lower discretionary spending on dining, travel and entertainment.

They also come three weeks after CFO Dave Wehner indicated on Facebook’s Q1 earnings call that healthy e-commerce, tech and gaming ad sales had allowed Facebook’s ad revenue to remain roughly flat on an annual basis, in spite of major declines in verticals such as travel and auto. Later, Mark Zuckerberg added that Facebook wants to accelerate its e-commerce product development efforts, in order to better support small businesses that want to begin selling online.

However, as Facebook’s 2019 unveiling of Facebook Pay, Instagram checkouts and its Libra cryptocurrency initiative drive home, Zuckerberg's interest in driving more commerce activity on his company’s platforms predates COVID-19. In an early-January Facebook post, Zuckerberg asserted that he wants to integrate Facebook’s payments and commerce tools so that “anyone can sell products through a storefront on Instagram, message and support their customers through Messenger, or send money home to another country instantly and at low cost through WhatsApp.”

By and large, Facebook isn’t looking to profit from such efforts by collecting payment fees or taking a commission on e-commerce transactions. Rather, the company is betting that these moves increase the number of businesses that have an incentive to buy Facebook ads to promote products, and more broadly improve conversion rates for Facebook’s e-commerce ads (and by doing so, motivate advertisers large and small to spend more on them).

In addition, to the extent that they drive greater usage of Facebook’s checkout services, these efforts give the company more shopping transaction data that it can leverage for ad targeting. That could be particularly valuable at a time when Facebook has cautioned that its targeting abilities will be impacted in the near-term by new privacy regulations, Apple  (AAPL) - Get Report and Alphabet/Google’s  (GOOG) - Get Report attempts to limit data-collection on their respective browsers and operating systems and Facebook’s own rollout of new privacy controls.

Facebook, it’s worth noting, isn’t the only major tech company that’s currently trying to roll out new solutions for connecting consumers with online merchants.

A month ago, Google announced that its Google Shopping website, which to date has only featured paid placements, will also support free product listings. And a week later, Shopify  (SHOP) - Get Report unveiled Shop, an app that lets consumers browse products sold by merchants using Shopify’s software/services platform.

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