Fasten your seatbelts
We’re in for a bumpy ride
HOW BADLY WILL advertising expenditure be hit by the economic slowdown? The outlook isn’t too cheery. Our prediction: media advertising will drop into negative territory by year-end and may become positive in second half 2009. It’s difficult to say whether the calendar year totals will be positive or negative. We suggest a year of close to zero nominal growth that may be rescued by the ad industry’s natural ebullience. That, of course, means when you take inflation into account adspend will be contracting. That last happened seven years ago.
Josh Dovey, MD of South Africa’s biggest media buyer, OMD, concurs. “There’ll be no growth next year,” he says.
Adspend is a sensitive indicator of economic performance that closely tracks private consumption expenditure. However, its growth tends to shoot much higher than consumption growth in the good times and to dive much lower in the bad times. A bit like the people in the industry.
More often than not, adspend moves before consumption, though occasionally their growth rates peak simultaneously – as shown in the accompanying graph, prepared by Econometrix’s Azar Jammine. Over the past nine years, adspend’s peaks and troughs have almost always occurred before those of consumption, suggesting marketing executives act quickly to adjust their ad budgets the moment they sense a change in consumer sentiment.
The habit of spending is probably hard to break. So while shoppers are still merrily spending, canny marketing executives quickly see some factor such as higher interest rates will bring consumers down to earth.
When adspend growth fell into negative territory early in 2001 it was signalling a bottoming of consumption, which occurred in the third quarter. Similarly, the trough of 2003 and the peak of 2004 came three to six months before consumption followed suit.
Due to rate inflation, nominal adspend (not adjusted for inflation) almost always rises. Growth has been phenomenally high over the past six years (see bar chart), but the current trend is firmly downward.
Even more worryingly, the quarterly graph shows adspend growth diving more steeply over the past nine months (to end-June) than at any other time this century. Could we replicate the disastrous year of 2001? What’s working against that? There’s still the Soccer World Cup to cling to. Infrastructure development has created jobs and promotional activity will be stepped up next year. There’s still the fact, pointed out by Keith Shipley last week, that the recession won’t be felt equally in every business sector. Worst hit so far have been banks and vehicle sales,
both interest-rate driven.
And there are still marketers who maintain their spend during the recession in order to win market share relatively cheaply. Examples are the fast-moving consumer goods (groceries and essentials) producers such as Unilever, Procter & Gamble and Tiger Brands.
You must also remember that media adspend is probably less than half of all marketing. The other activities, sometimes referred to as “below-the-line” advertising, may grow.
And online advertising is now growing exponentially, but off a low base. Some participants project 30% growth. But even that kind of growth can’t substitute for the losses in traditional media, as online advertising is ridiculously cheap and because its scale is still small. However, it’s a positive factor that didn’t exist in 2001. The good news is that advertising recessions tend to be short.