Adland hit by surge in direct and promotional marketing

Marketers appear to be ditching advertising spend to plough their budgets into the two classic disciplines which clean up in hard times – direct marketing and sales promotion – with both seeing major upward revisions as brand owners support consumers through the cost of living crisis.

That is the stand out conclusion of the latest IPA Bellwether Report – for Q2 2023 – which will make tough reading for some industry chiefs. Adland has always argued that “brand advertising” is far more effective in the long-term, although naturally promotional and direct marketing experts beg to differ.

Overall the report suggests that the Q1 industry confidence boost has been short-lived, reined in by rising interest rates and stubbornly-high inflation which is set to weigh on the economy for at least the next 12 months.

In fact, firms have become far less upbeat on their own company’s financial prospects, while industry-wide confidence has deteriorated further.

Still, it is not all doom and gloom, as the rise in both promotional and direct marketing meant that total marketing budgets were revised higher. Just over a fifth of survey respondents observed growth in total marketing spend during Q2, more than the 14.4% who registered budget cuts and yielding a modestly positive net balance of +6.4%.

But the latest reading signals a slight softening in budget growth since the beginning of the year (net balance of +8.2% in Q1).

Data split by the different marketing categories monitored by the Bellwether survey displayed mixed trends, with three out of seven registering budget growth.

As already stated, the top performing segment was sales promotions, where the net balance of firms recording budget expansion rose to +13.4% (up from +8.8% in Q1). Notably, the uplift in spending in this area was the most pronounced in over two decades of survey data.

A solid budget expansion was also registered for events (net balance of +9.8% from +6.3%) reflecting the continued appetite for face-to-face meeting and engagements in person. Meanwhile, the expansion in direct marketing spend was the sharpest since the third quarter of 2006 (net balance of +7.3% from +4.2%).

The remaining segments all saw their budgets scaled back, led by so-called “other marketing activity” not accounted for (net balance of -6.8%, from -5.8%). The cut to PR budgets was sharper than previously (net balance of -1.9% from -0.6%) but the decline in market research softened (net balance of -2.9% from -3.2%).

A notable finding from the survey was for the main media segment as marketing budgets here fell for the first time since the third quarter of 2022. The drop in main media and rise in sales promotions spending suggesting a reactive change by UK businesses in response to the economic climate.

Within the main media category, other online (net balance of +8.3, from +10.5%), and video (+3.2%, from +7.9) remained in growth territory, although this was offset by audio (-8.0%, from +1.7%), out of home (-7.1%, from -12.4%) and published brands (-5.0%, from -1.9%).

The Bellwether data reflects a more sombre mood among UK companies with regards to their financial prospects in Q2, dragged down by economic gloom.

Sentiment towards industry-wide financial prospects also dropped. The 28.8% of survey respondents expressing a downbeat assessment for their industry in the coming 12 months more than offset the 16.2% who registered optimism. The subsequent net balance of -12.6% was down from -7.1% previously but was much higher than those recorded throughout the majority of 2022 when the net balance reached deeply negative levels.

Meanwhile, sentiment towards own-company financial prospects edged closer to neutrality during the second quarter of the year. This was highlighted by the net balance of firms who were optimistic in their outlook slipping to +2.6%, down from +7.0% in the opening quarter.

Underlying data reveals that just under half of survey respondents (48.4%) reported no-change in their outlook. The remaining proportion was broadly split between optimists (27.1%) and pessimists (24.5%).

Since the latest survey, report author S&P Global has upgraded its forecast for the UK economy and expects GDP in 2023 to grow by 0.3%. The less gloomy outlook reflects the surprising resilience of consumers throughout a period of double-digit inflation and rising borrowing costs.

Still, the immediate growth outlook remains challenging, particularly with the Bank of England set to raise interest rates even further to tackle an inflation rate which stands well above the 2% target. Overall for 2023, the Bellwether Report consequently foresees adspend declining marginally by -0.6% (compared to -0.9% previously).

Looking onwards to 2024, Bellwether forecasts adspend to be broadly flat on an annual basis, with growth forecast at 0.1% as the effect of higher interest rates starts to weigh on household and business budgets.

S&P Global expects UK GDP to rise by just 0.4% next year, although for 2025 onwards it anticipates a return to much stronger rates of growth in the UK economy and adspend. As such, the Bellwether anticipates adspend growth to improve to 1.5%, 2.0% and 2.1% in 2025, 2026 and 2027 respectively.

IPA director general Paul Bainsfair said it is not surprising to see a dramatic increase in sales promotion in Q2 but warns of the dangers of this being a long-term trend, citing the IPA’s bank of evidence which shows that price promotions damage brands because they lower consumer price references and do not build brand loyalty.

He continued: “While, understandably, brands may think this is the right thing to do for their customers during the current cost-of-living crisis, it is a counter-productive exercise that may generate short-term spikes in sales volumes but will almost never change how consumers think or feel about their brand because they are only interested in the lowest price point.

“What happens next is the eventual erosion of a company’s long-term brand health and profitability. We continue to advocate the well-tested rule of thumb that a 60:40 ratio of brand building to sales activation is the best way to grow business through marketing activity.”

S&P Global Market Intelligence economist Laura Denman, who is author of the report, added: “The survey data highlights the resilience of UK businesses, who appear to have weathered a challenging economic landscape over the past six months a lot better than many had anticipated.

“Surveyed companies continued to expand their marketing budgets in the second quarter despite still-severe inflationary pressures and continued interest rate hikes.

“We’re seeing evidence that UK companies are proactive in their decision making and are adapting to the competitive business environment and challenging economic landscape in a robust manner. This bodes well for more stronger-than-expected results in the second half of 2023.”