The $850bn (£720bn) global advertising market is facing the prospect of a “car crash” next year as the cost of living crisis forcing households to drastically cut back on spending triggers companies to consider slashing their marketing budgets.
The advertising industry remains bullish about its prospects – the football World Cup is forecast to keep growth at a gloom-defying 8.4% this year, while 6.4% remains pencilled in for 2023 – despite mounting concerns that the economy it feeds off is heading for recession.
“Conventional wisdom would suggest that next year will be a car crash,” said one senior media industry executive. “Consumers are being squeezed harder than at any time since the 1970s. Many things will become secondary to essential spending, all of which creates a nasty cocktail for the ad industry.”
During the last advertising recession in 2009 the industry doyen Sir Martin Sorrell encouraged brands to maintain marketing spend, citing evidence that those that did would come out the other side trumping rivals for market share.
In practice, advertising budgets make for a quick cost-cutting strategy to boost, or at least salvage, a company’s balance sheet as demand dries up.
“With recession looming the ‘R-word’ makes marketers look at whether they should be cutting spend,” says Richard Broughton, director at Ampere Analysis. “Marketing is an easy cost to cut and it tends to have an instant and immediate impact.”
Earlier this month, WPP, the company Sorrell built into the world’s largest marketing service empire before an acrimonious departure four years ago, saw £700m wiped off its market value as investors reacted to concerns over client ad spending next year as the global economy weakens.
“We are, like everyone else, aware of the economic environment,” says Mark Read, chief executive of WPP. “There is scepticism over the outlook for the sector. But we are not yet seeing signs of clients cutting back spend while consumer demand remains strong across the world.”
While some analysts saw the investor response as an overreaction – WPP and its big publicly-listed French and US rivals continue to report strong financial results albeit with slowing outlooks – there are signs of trouble ahead.
Last month, ITV reported that advertising growth of 12% in the first quarter, compared with the same period in pre-pandemic 2019, slumped to just 2% in the second quarter.
And earlier this month, the online delivery service Deliveroo hit its downgraded targets in part by cutting its marketing budget through a more “careful targeting of spend given the more challenging environment for consumers” – an inauspicious augury of a shift in the ad market.
“The mood music has changed within the industry recently,” says James McDonald, director of data, intelligence and forecasting at the industry research body Warc. “Forecasts are not looking as positive as they were. I’m not saying an advertising recession is imminent but the likelihood has increased.”
TV has been a pandemic winner – last year marked ITV’s best ad haul in its 67-year history – with ad-cost inflation, the advertising gold of the football World Cup and a rise in post-Covid spending keeping the market buoyant.
However, globally the cost of buying TV ads has soared 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 is looking expensive, an issue ITV has attempted to address by offering a fifth off prices for ad slots during what it has dubbed the Christmas World Cup later this year.
“A slowdown is already happening,” says Sarah Simon, an analyst at Berenberg. “[And] brand advertising seems an obvious cost category where temporary cuts can be made.”
Pressure on TV budgets in particular is will mount 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 does still deliver,” says McDonald. “It is not just a case for brands of questioning whether it is getting too expensive, but can they afford to live without the considerable [audience] reach it gives us for our budget? However, right now any advertiser – all advertisers – are going to be reconsidering their budgets.”
Even spend on digital media – which has for years hoovered marketing budgets away from traditional outlets such as TV, newspapers, magazines and radio – is not immune to a shift in ad spend priorities.
The once unstoppable $115bn advertising behemoth that is Meta, the owner of Facebook and Instagram, stunned markets by reporting its first ever drop in revenue, and forecast another decline for the third quarter.
“Price pressure is also being felt across the online media landscape,” says McDonald. “Facebook’s first loss, Twitter and Snap underperforming, it could be the canary in the coalmine for a shift of budgets away from branding ads towards performance marketing. Contrast that with Google’s search arm making $41bn in the last quarter, its second highest quarter in record, and Amazon’s ad business continuing to grow rapidly.”
Some markets – notably the US, the world’s biggest ad market by some distance – are showing fewer economic warning signs.
“Keep in mind the global economy is unlikely to go into a recession, even if some individual markets will,” says Brian Wieser, global president, business intelligence at WPP’s Group M, the world’s largest buyer of ad space for clients.
But in the UK, with the cost of living crisis showing no sign of ameliorating – energy bills continue to soar and inflation is forecast to hit 13% – the view on the prospects for the ad market is becoming increasingly bearish.
“Advertising has historically been strongly correlated to consumer confidence and spending,” says Berenberg’s Simon. “It’s pretty clear that the outlook for the consumer is set to deteriorate further and as we head into 2023 the economic outlook at the moment looks very difficult.”