Ad budgets up again but the fat lady's not singing yet

The advertising and marketing industry is continuing its impressive recovery from the depths of Covid despair, with Q3 budgets increasing at the strongest rate for more than four years – direct marketing was one of the strongest performers – but lingering uncertainties around virus cases as we head into winter mean the sector is not out of the woods just yet.

So says the latest IPA Bellwether Report, which reveals the final loosening of pandemic-related restrictions enabled a further march forward in the broader economic recovery.

Total marketing expenditure grew at the fastest pace since the second quarter of 2017, as a net balance of +12.8% of firms registered upward budget revisions in Q3 2021, from +6.0% in Q2.

Approximately one-in-four Bellwether respondents recorded higher spending (25.6%), compared with 12.8% that observed budget cuts. The latest data marked the first time in three years that successive quarters of growth in overall marketing spend has been registered, albeit from last year’s nadir.

Many surveyed firms recognised the need to drive forward with marketing activity in the third quarter, with demand conditions bouncing back sharply and consumers looking to spend pent-up savings as lockdown measures were peeled back. The effectiveness of the UK’s vaccine programme was also a key pillar of support for businesses, and many firms expect its positive impact to continue.

That said, although upward revisions to total marketing budgets were strong, they still fell short of the growth firms initially had predicted for the 2021/22 financial year, where a net balance of +17.4% of firms anticipated expansion, although they were not too far off.

Some surveyed companies still have concerns about how Covid will affect the economy during the winter months while ongoing supply chain disruptions, which some firms mentioned had impacted their ability to carry out marketing campaigns, were also cited as a downside risk.

Main media advertising – which now includes online, video, and TV – was, perhaps unsurprisingly, the best-performing marketing category in the third quarter, with a net balance of +8.6% of firms recording upward budget revisions (from +1.3%), as more firms upped their spending on ‘big-ticket’ campaigns.

Within that, video (+12.6%, from +4.2%) was the main driver, followed by other online (+10.6%, from +11.0%) and audio (+6.0%, from +1.1%). Published brands returned to growth (+5.2%, from -6.1%), although out of home fell again (-2.0%, from -7.5%).

The remaining marketing categories were split between growth and contraction. Direct marketing was the next best performer, improving on the previous quarter (net balance of +5.6%, from +0.7%), while budgets reserved for sales promotions moved into expansion territory for the first time since the end of 2018 (net balance of +4.0%, from -0.7%).

Meanwhile, market research registered marginal growth (net balance of +0.7%, from -9.6%). Events budgets remained under pressure as firms erred on the side of caution with regards to in-person marketing activity (net balance of -3.2%, from -24.7%), while PR (net balance of -1.8%, from +1.8%) and any other paid-for marketing budgets (net balance of -1.8%, from -2.5%) also fell.

There was a further increase in optimism among Bellwether panellists during the third quarter, with improved expectations for growth at both a company-specific and industry-wide level.

A net balance of +37.5% of firms (versus +34.6% previously) were more optimistic about the financial prospects for their own company, which was the most bullish Bellwether panellists had been about their businesses since the first quarter of 2015. Around 48% of firms expect stronger growth than they did three months ago, compared to just 11% who were less optimistic.

Regarding their wider industry, Bellwether panellists also shared a more positive outlook during the latest survey period. A net balance of +22.6% of companies had a more upbeat view compared to three months ago. Although an improvement since the previous survey (+21.1%), it was still below that seen in the opening quarter of the year (+26.2%), which was the highest since the third quarter of 2014.

The UK’s recovery from the pandemic has been much faster than the Bellwether Report predicted this time last year, in part thanks to the success of the vaccination roll-out, but also owing to the positive impact the furlough scheme has had on keeping a cap on the unemployment rate, which has contributed positively to strong levels of demand for UK goods and services.

Bellwether author IHS Markit has revised its GDP growth forecasts for 2021 and 2022 higher since the last Bellwether survey, to 6.6% and 5.1% respectively, from 6.0% and 5.0% given the pace at which consumer spending has bounced back, with the UK’s impressive uptake of the vaccine supporting this.

These factors will continue to facilitate the recovery to pre-pandemic levels of economic activity, and as such, the Bellwether Report anticipates strong adspend growth of 6.6% and 6.2% in 2021 and 2022 respectively to accompany the strong economic expansion.

Beyond the near-term, IHS Markit expects rates of growth in both GDP and adspend to normalise from 2023 onwards. The forecasts for 2023, 2024 and 2025 stand at 2.4%, 1.7% and 2.9% respectively. While the Bellwether adspend forecast for 2023 has been revised slightly lower (from 2.7%), 2024 and 2025 have been lifted up slightly (from 1.2% and 2.4% respectively).

Growth is very likely to slow in 2023 as IHS Markit expects pandemic-related losses to GDP to be fully recouped no later than mid-2022, while tax burdens are also set to rise in 2023, which will adversely impact domestic spending.
Most industry commentators have welcomed the report but recognise there is still some way to go.

VaynerMedia London managing director Sarah Baumann said: “It’s great to see such optimistic projections and this Bellwether reflects what we have been seeing with our clients’ increased commitment and focus on digital. Marketers are beginning to reap the rewards of digital full funnel marketing.

“However not all is rosy, brands may want to spend – especially to make up sales in the run up to Christmas – but consumer experience is likely to be dampened by supply change and haulage issues while labour/staffing crises are affecting retail and hospitality.

“Put that against the backdrop of the climate crisis, Covid and Brexit – not to mention some pretty awful news stories – and consumer confidence is likely to remain quite shaky.”

Meanwhile, FirmDecisions global chief executive Federica Bowman added: “With the UK economy starting to grow as lockdown measures are relaxed, the advertising sector is similarly showing significant signs of recovery. Advertising and media agencies are reaping the rewards as businesses reinvest in marketing and expenditure returns to early 2017 rates of growth.

“But with uncertainty remaining in the economy at large – exacerbated by Brexit-fallout and the persistent health impacts – business conditions will continue to be complex for marketing services agencies.”

Kantar Media’s executive managing director for EMEA Louise Ainsworth said that making the extra spend work hard and directing it to the right areas will be vital if firms want to achieve growth and make up any ground they’ve lost over the past 18 months.

However, she is disappointed to see the drop off in investment in market research during this period. Ainsworth added: “We know that 24.5 million adults believe the pandemic has changed their shopping habits for good, so it’s never been more important for marketers to use data and insight to guide their planning and help them understand how consumer behaviour is evolving.”

Kepler EMEA managing partner of analytics and consultancy James Coulson says marketers need to adapt to an uncertain future.

He commented: “A lack of predictability around the economic future, consumer behaviour, supply chains and the legislative backdrop to digital marketing, is causing marketers to hedge their budgets by investing in channels that allow for agility, data usage and high measurability.

“We saw the same happen after the 2008 financial crash, there was a step change in digital investment, which only continued to grow over the next decade. We expect to see more considered investment in digital media going forward, framed by brands growing technology expertise, first-party data curation and smart platform deals.”

Imagination global chief executive Patrick Reid concluded: “This Bellwether report shows that despite the challenges still facing the UK (and global) economy, businesses are investing in their brands with marketing expenditure growing at the fastest rate since Q2 2017.

“As we come out of the pandemic, consumers are craving high quality, meaningful, face-to-face interactions and brands recognise a greater level of connection can be achieved through world-class, personalised, in-person experiences. We’re seeing renewed investment from progressive clients and a pipeline of activity building across the board.”