As Q4 gathers pace, the ad industry braces for long-lasting economic trauma
Don’t overestimate the coronavirus recovery.
The worst might be over for the economy, but the future doesn’t look so promising either. While free money is being given away through economic stimulus schemes, it isn’t being spent. That brings both opportunity and danger, especially for an ad industry inextricably tied to the flow of that money into their margin-based businesses.
Start with the good news. While ad spending over the last quarter was uneven and fragile, generally it wasn’t as bad as expected. Five of the six largest holding networks beat estimates for earnings in the third quarter or at least generally met them. The consensual view from those results was that the third quarter represented an uptick in advertising that will quicken throughout the remainder of the year.
“Economists have wildly different views on how long the recovery will be but the fundamentals remain the same,” said CJ Bangah, a partner at PWC. “As long as people are able to pay the majority of their bills, and the large banks have made appropriate provisions for bad debt, then you’re not looking at a cliff — it’s just the continued challenges in a broader economic environment.”
Moreover, online media owners like Snapchat and Pinterest held up surprisingly well, with advertisers choosing to concentrate what limited cash they do have on those areas in rude health. Consumers’ pivot from in-store retail into e-commerce has accelerated and, unsurprisingly, Google, Facebook and Amazon were among the biggest beneficiaries of this trend over the summer. Rinse and repeat for the final quarter.
That said, significant change is in the offing in the near-term quarters.
“Marketers are going to have to think differently about brand marketing because consumers simply aren’t spending the time in some of the other places that were the primary brand marketing vehicles in the past,” said Banagh.
Now for the not so rosy bit. As the latest forecasts show, many economies are essentially registering no growth, or are even shrinking. With private-sector confidence shattered, and the struggle to best the virus far from over, the risks of extensive and long-lasting economic trauma are on the rise.
“Given the tightening of Covid-19 restrictions around the world and uncertainty in the global economic outlook, we remain cautious about the pace of recovery, said WPP CEO Mark Read on the company’s latest quarterly results.
Take France, where a nationwide lockdown has been imposed through December. The government there has calculated that 60 billion euros ($69) will be hacked off economic activity for every month in which a lockdown is imposed. Bars, restaurants and other non-essential businesses have closed, forcing marketers to reconsider how much they should be advertising to reach a population in lockdown. Similar debates will happen in Germany where non-essential businesses will be shut down for four weeks starting 02. November.
“If businesses need to close then they may decide to advertise less, which means inventory is cheaper because there’s less demand for it,” said Mathias Chaillou, global deputy managing director at Zenith. “It’s a double jeopardy scenario where you have a risk of strong price deflation and declining overall ad spending. I’m worried about what happens to the ecosystem if those contractions occur.”
There will be casualties if Chaillou’s fears materialize. Some media owners, particularly newspapers, scraped through the first lockdown. Now, for those businesses, a full recovery is a distant dream. The festive season, usually a period of opulence in the industry, is facing a 10.5% dip to 6.2 billion in ad spending in the U.K., per the latest Advertising Association and Warc’s expenditure report. And like the 2008 financial crisis, this downturn is as pervasive as as it is staggered.
“We’ve had deliberations about scaling back our own ad businesses,” said a publishing exec in Europe who spoke on the condition of anonymity. “One of our titles, which is one of the biggest papers in print, and one of the most visited sites here, is seriously considering pulling out from our advertising tech stack and implementing a very small-scale non-cookie-based advertising solution for the minimum of campaigns.”
To be a media buyer right now is to be in the eye of the storm. Nationwide lockdowns, global health crisis, record unemployment and protests. These headwinds are starting to swirl, leaving media buyers bracing for choppy economic climes and closely watching indicators — namely, what happens to media prices should consumer spending remain in free fall. If this week’s grim third-quarter earnings reports from both Visa and Mastercard are anything to go by — as reported by the Financial Times — the future isn’t bright.
“If you have a huge allocation of consumers who are going from being middle-class to being now lower-class at the same time as the upper-class, who are actually benefiting more than anticipated from the crisis, then you have this re-orientation towards luxury, higher-priced inflationary goods,” said Bob Regular, CEO of ad tech firm Infolinks. “It reorientates the advertising market.”
That doesn’t bode well for the whales of the ad industry — CPG marketers. The crisis has already forced a pause in low-performing products, pruning of pack sizes and consolidation of shipping units and ingredients. Fewer shoppers will put even more pressure on those low-margin, high volume businesses. And when those businesses hurt so do agencies. CPG advertisers account for around a quarter (26%) of all WPP’s revenue, for example.
As Regular explained: “If you’re a media buyer for those clients then there’s less horsepower available for you to move the needle for them. It makes the places where you can do that increasingly competitive. And that will only continue as the channels where those businesses can drive performance are reduced to a handful of partners.”
These aftershocks will reverberate for years. And as the economy adapts so to will the ad industry it fuels.
The spread of the coronavirus pandemic coincided with, and to an extent accelerated, the decline of the agency holding group model built on media buying margins — the agency industry expected to grow just 1% after the pandemic, according to Credit Suisse.
Whether it’s being disintermediated the likes of Google and Facebook, challenged by upstarts like S4 Capital or seeing more of their services go in-house to clients, the coronavirus has inflicted deep wounds in the agency model’s death by thousand cuts.
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