On May 8, a news release confirmed a partnership between two seemingly unlikely candidates: The Walt Disney Company (NYSE: DIS) and Walmart (NYSE: WMT). The former is one of the great media companies; the latter is the world's largest retailer. And yet, the two can help each other out when it comes to digital advertising.

Despite taking market share from traditional advertising for some time now, digital advertising has still struggled to "close the loop." And this is the problem that Disney and Walmart intend to solve.

What is the "loop" that needs closing?

With traditional advertising, data on engagement and efficacy is hard to collect. There's often no way of knowing who saw an ad and if it made any difference.

Digital advertising is a step up. Internet browser histories, social media, and more can all be used to tailor which ads get shown to which people. But it often still shares a shortcoming with traditional advertising: An advertiser can't be sure a person did anything after viewing an ad. It's hard to tell if the right consumers are being targeted.

Consumer-packaged goods (CPG) companies (like Procter & Gamble) sell products through Walmart. For its part, Walmart has customer data available. Now, the CPG company can pick which Disney audiences should be viewing its ads, based on Walmart's shopper data.

When sales data connects to marketing data, it's known as closed-loop advertising, and it's a big deal.

How both companies are focused on the trend

For years, Disney has exclusively used supply-side advertising platform Magnite to help sell digital ad slots for its streaming services. Disney dived deeper into ads at the end of 2022 when it added an ad-supported tier for its popular Disney+ service.

Earlier this year, Disney took another step forward by partnering with Alphabet's Google and demand-side platform The Trade Desk to increase advertiser demand on its streaming services.

Walmart has also been quietly focused on digital advertising. The company generates $100 billion in annual e-commerce sales now, giving it a large digital platform that was able to generate $3.4 billion in advertising business in fiscal 2024 (ended Jan. 31). Management expects ongoing growth in advertising to be an important profit driver in coming years.

Both Disney and Walmart are growing their respective digital advertising businesses, and by working together, they can mutually benefit.

This is the future

The Walmart and Disney partnership is the perfect example for where this space is headed.

Advertisers want the loop closed so they can use their limited advertising dollars with greater precision and a better return on their investment. Retailers such as Walmart are happy to leverage consumer data they already have to make more money. Media companies such as Disney also want to maximize revenue per ad slot. Making ads more effective through consumer-shopping data is a way to do that.

To be clear, the Walmart and Disney deal isn't the industry's first marriage of media and retail. Walmart already made a deal with connected-TV platform company Roku (NASDAQ: ROKU) to make ads shoppable in 2022.

Indeed, Roku is actually ahead of many of its competitors when it comes to closing the loop for advertisers. Not only does it have Walmart as a partner, it also signed a deal with grocery chain Kroger in 2020. Then, in 2023, it secured a deal with Cox Automotive, owner of the popular Kelley Blue Book website.

Roku can close the loop for grocery purchases as well as vehicle purchases. With its existing deals and potential deals in different product categories, Roku is putting itself in a position to increase what it charges for ads.

Disney will now be able to close the loop for certain kinds of purchases at Walmart, and the media giant should end up making more announcements like this. In the fiscal 2024 second quarter, Disney's streaming services were finally profitable, and advertising likely played a part in this.

Media companies partnering with retailers to close the loop and optimize their advertising is a strategy investors should expect to see much more of in the future.

Should you invest $1,000 in Walt Disney right now?

Before you buy stock in Walt Disney, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Walt Disney wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $550,688!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of May 6, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jon Quast has positions in Magnite and Roku. The Motley Fool has positions in and recommends Alphabet, Magnite, Roku, The Trade Desk, Walmart, and Walt Disney. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.

How a Surprising Partnership Between Disney and Walmart Highlights the Future of Digital Advertising was originally published by The Motley Fool