Marketing budgets fall under heavy scrutiny as risk of prolonged slowdown in 2023 rises

Marketers are already being required to justify their investments. For many of them, 2023 will feel a lot like a recession.

It’s not all doom and gloom. Some of those marketers surveyed (28%) claim they will invest more next year, per the study. Which really reinforces one overriding aspect of economic downturns: they affect everyone, but some more than others.

That was clear at a gathering of senior agency execs organized by Digiday earlier this month. Some of the execs were confident their clients would spend their way through the downturn, many others though were concerned they’d do the opposite. Everyone agreed tighter financial conditions are unavoidable. As one attendee put it: “We’re having some tough, awkward conversations with clients about 2023.”

Further signs: Deloitte’s quarterly CFO study revealed that over half (55%) of CFOs have tilted to defensive strategies, with cost reduction and cash control as their top two priorities. Spoiler alert: advertising is always cut in prolonged downturns because it is a variable cost that can be quickly halted. It’s a cliche for a reason.

And for the eternal optimists out there, here’s a more sobering view courtesy of Daniel Knapp, chief economist at IAB Europe: “The economic situation may account for 10 to 20% of the current advertising slowdown. That won’t change before the end of the year. There are still big cyclical drivers of advertising to come. The real winter of discontent will start in the first quarter of 2023.”

The prelude to 2023

Everything so far — the renegotiated media deals, rationalized social spending, even the pivot to short-termism from SMEs — has been a prelude to what’s in store once the economic turmoil catches up to marketers. The contraction in ad dollars up to this point has been less to do with the widespread inflation, high inflation rates and more to do with structural factors.

Think about it: The Facebook slowdown? Less down to recession-wary marketers, more the direct to consumer craze slamming into reality. Digital ad prices up, accuracy down? Blame the loss of data, not inflation. Absent automotive advertisers? They don’t have enough stock to advertise thanks to supply chain woes and microchip shortages.

There was always going to be an ad slowdown — just not an economically-induced one. If it had been, the reverberations of it would’ve been more widely felt.  Squeezed agency fees would’ve been lamented more loudly. Slower advertising would’ve hit TV broadcasters harder, not just the platforms. Consumers would’ve balked at price inflation across the board. 

Instead, the slowdown hit one side of the market more than the other; the part underwritten by small to medium-sized advertisers — i.e platforms. Growth had to take a backseat to profit in those marketing departments.They’re grappling with rising Facebook ad prices, waning ad measurement, inflated shipping costs, newly-sober public markets and smaller than predicted customer appetite for D2C spending. 

In the meantime, the big advertisers continued to spend. The earnings of the agency holding groups so far this year have said as much. Growth rates of the six largest ones have all increased quarter on quarter this year. Not that this should come as a total surprise. These groups are, after all, built on advertisers that are not as sales driven as SMEs and so aren’t as quick to revise budgets.

It does, however, show that the state of the ad economy has become a tale of two narratives: Ad dollars are being spent, but they’re also being cut. Next year, those fault lines won’t be so clear. If anything, it will be the same ad slowdown story told in many different ways. 

Why then and not sooner? Remember those revisions the larger advertisers are currently making to upfront deals and longer term media commitments? Well, they won’t kick in until next year. And when they do it’s safe to say they’re going to be more conservative than they have been over the last two years. But even if those revisions could happen sooner, chances are marketers wouldn’t want to make them. Not when there’s the small matter of the World Cup soccer tournament and the midterm elections in the U.S. — both big cyclical drivers of advertising — before the end of the year. 

“It will be the re-negotiations of these upfront agreements and strategies from the larger advertisers over Q4 that are happening now that will determine — at least in part — the fate of ‘23,” said Knapp. 

But that’s just part of the story. Smaller advertisers (think those in the direct-to-consumer category) are also going to pump the brakes harder on advertising next year. Bad as things are for these businesses (and they are bad), people continue to stomach price increases from them. That can only go on for so long, especially if more sections of society start to get sucked into the economic storm. The more this happens, the more these marketers will look to focus on profit over growth. Ad dollars rarely come off well in that pivot.

Even so, it makes no sense to turn off advertising completely. Do that and sales will go away. Really, these cuts are going to be about finding a balance between continuing to have sales and reducing advertising. There are profit margins to think about, after all. As The Wall Street Journal put it: price increases come easily for big businesses, but inflation still squeezes profits. Advertising could offer some wriggle room there. 

“Brand advertising is essentially intangible CAPEX, not necessarily a cost,” said Ian Whittaker, an equities research analyst at Liberty Sky Advisors at an event hosted by Ebiquity. “So just as firms spend on a factory to produce cars because they know it will drive future sales, they should also do the same for advertising. Yes, you’re spending money now but the argument is that doing so will drive growth over many years.”