Fas­ten your seat­belts

We’re in for a bumpy ride

Finweek English Edition - - Advertising & Marketing -

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.

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