The $850bn (£720bn) global advertising market faces the prospect of a “car crash” next year, as the cost-of-living crisis forcing households to slash spending means Companies consider cutting their marketing budgets.
The advertising industry remains optimistic about its prospects: the soccer World Cup is forecast to maintain growth at 8.4% this year, while 6.4% remains forecast for 2023, despite growing concerns that the economy it feeds on is headed for recession. .
“Conventional wisdom would suggest that next year there will be a car accident,” said a senior media industry executive. “Consumers are being squeezed more than ever since the 1970s. Many things will become secondary to essential spending, all of which create a nasty cocktail for the ad industry.”
During the last advertising recession in 2009, the doyen of the industry, Sir Martin Sorrell, encouraged brands to keep up spending on marketing, citing evidence that those that did would come out the other side outpacing their rivals in market share.
In practice, advertising budgets are a quick cost-cutting strategy to boost, or at least salvage, a company’s bottom line as demand dries up.
“With the recession looming, the ‘R word’ has marketers considering whether they should cut back on spending,” says Richard Broughton, director of Ampere Analysis. “Marketing is an easy cost to cut and tends to have an instant and immediate impact.”
Earlier this month, WPP, the company Sorrell built into the world’s largest marketing services empire before an acrimonious departure four years ago, saw £700m erased from its market value as Investors were reacting to concerns about ad spending by clients next year as the global economy weakens.
“We are, like everyone else, aware of the economic environment,” says Mark Read, CEO of WPP. “There is skepticism about the prospects for the sector. But we still see no signs of customers cutting back on spending as consumer demand remains strong around the world.”
While some analysts saw the investor response as an overreaction (WPP and its big publicly traded French and US rivals continue to report strong financials, albeit with slower prospects), there are signs of trouble ahead.
Last month, ITV reported that advertising growth of 12% in the first quarter, compared to the same period before the 2019 pandemic, slumped to just 2% in the second quarter.
And earlier this month, online delivery service Deliveroo hit its downgraded goals in part by slashing its marketing budget through “more careful targeting of spending given the more challenging environment for consumers,” an inauspicious omen. of a change in the advertising market.
“BGM has recently changed within the industry,” says James McDonald, director of data, intelligence and forecasting at industry research body Warc. “The forecasts do not look as positive as before. I’m not saying an advertising recession is imminent, but the probability has increased.”
TV has been a winner of the pandemic: last year marked the best amount of ITV advertising in its 67-year history, with advertising costs inflated, World Cup football advertising gold and a surge in spending post-Covid that keeps the market rising.
Globally, however, the cost of buying TV ads has skyrocketed by almost a third since before the pandemic, the steepest rise in more than two decades, according to Warc.
With increased scrutiny of how marketing budgets are spent, TV looks expensive, a problem ITV has tried to address by offering a fifth of the prices of advertising space during what it has dubbed the Christmas World Cup at the end of this year.
“A slowdown is already happening,” says Sarah Simon, an analyst at Berenberg. “[And] brand advertising seems like an obvious cost category where temporary cuts can be made.”
Pressure on TV budgets in particular will increase further with the launch of new ad-supported packages from Netflix and Disney+, as well as the rise of Amazon, Apple and TikTok in the battle for ad budgets.
“TV still delivers,” McDonald says. “It’s not just that brands are questioning whether it’s getting too expensive, but whether they can afford to live without the considerable [audience] scope that gives us for our budget? However, at this time any advertiser, all advertisers, are going to reconsider their budgets.”
Even digital media spending, which for years has diverted marketing budgets away from traditional outlets like television, newspapers, magazines and radio, is not immune to a shift in ad spending priorities.
The once-unstoppable $115bn ad giant that is Meta, the owner of Facebook and Instagram, surprised markets by reporting its first drop in revenue and forecast another drop for the third quarter.
“Pricing pressure is also being felt across the entire online media landscape,” McDonald says. “Facebook’s first loss, underperforming Twitter and Snap, could be the canary in the coal mine for a shift of budgets from brand ads to performance marketing. Compare that to Google’s search arm that earned $41 billion last quarter, its second-highest quarter on record, and Amazon’s ad business that continues to grow rapidly.
Some markets, notably the US, by far the world’s largest ad market, are showing fewer economic warning signs.
“Keep in mind that the global economy is unlikely to go into recession, even if some individual markets do,” says Brian Wieser, global president of business intelligence at WPP’s Group M, the world’s largest buyer of client ad space.
But in the UK, with the cost of living crisis showing no signs of abating (energy bills continue to rise and inflation is forecast to hit 13%), the outlook for the advertising market is increasingly pessimistic.
“Historically, advertising has been closely related to consumer confidence and spending,” says Berenberg’s Simon. “It’s pretty clear that the outlook for the consumer will deteriorate further and as we head into 2023, the economic outlook right now looks very tough.”
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