recession deals

It’s been several weeks now that one of the local cafés of Camden Town where I buy sandwiches advertises a ‘recession deal’ or ''credit crunch special' offer of the day. For instance 'hot drink and pain au chocolat for £2!' So I guess we are now officially in the thick of it.

As for the consequences on advertising spending – and advertising revenues for media owners – they will be disastrous in 2009. We currently believe that total ad spending will shrink between five and six per cent in 2009 compared to 2008 which was already down [this was before IMF downgraded GDP forecasts from -1.3 to -2.8].

Whatever the economic slowdown, advertising markets will do worse. They are fundamentally volatile and amplify economic fluctuations. Why this relation between advertising markets and the economy? I see at least three fundamental reasons.

First, marketing spending is the easiest cost to cut in the short term when managers are anxious to limit operational losses. Among marketing expenditure, this is especially true for brand display advertising, whilst, on the other hand, direct marketing may be maintained as a way to support sales in tough times; and online search may grow even further because of its superior scalability and accountability. Mediabuying agencies try their best begging advertisers to hold their nerves in adversity, warning that dropping brand advertising could jeopardize years of brand-building investments and leave the way to competitors; quoting virtuous stories of marketers who kept investing during a slump and came out stronger. This has little or no effect on and they are being judged by general on their ability to cut or optimise the advertising costs during such a period. The maths are obvious: if your revenues fall by ten per cent and all other costs (rentals, payroll etc.) are fixed in the short term, one of the few disposable expenditures is advertising, and, since it is relatively small at the scale of the company, the cut has to be much higher than ten per cent to make any significant impact on the bottom line.

It’s tempting to be cynical about this and say that if marketers did really believe in the power of advertising they would actually increase spending in tough times, instead of cutting. However big brands actually fight for market shares rather than for volumes. Therefore marketing managers are being rational in cutting adspend when they anticipate – as it is the case - that their brand competitors will also cut their marketing spending, and the shares of voices will remain unchanged. That is a classic case of cross-expectation and me-too behaviour pattern fuelling spiralling deflation

The second reason behind the volatility of advertising is that ad spending is concentrated around a limited number of big consumer brands in a handful of BtoC sectors, and these are disproportionately affected by the recession. Anxious consumers cancel new cars, new couches and new TVs; they go for no-brand products and hard discount stores.

In the US in 2008, automotive advertising alone (dealers and manufacturers) accounts for approximately 25 per cent of broadcast television’s revenues. A combination of fuel inflation and then credit crunch have hit sales like never before in 2008, resulting in 20-25 per cent cuts of advertising spending.
In the UK, the retail sector has maintained advertising expenditure in the first half of 2008 but since Q3, following the collapse of Savvi and Woolworth and the weakness of M&S, things are going to get much tougher in 2009 ; it was indeed anticipated that retailers would reduce their spending but if it turns out that some them simply disappear, we are reaching deeper waters in terms of ad recession. In any sector with major casualties, surviving brands will certainly not increase their own spending and so compensate for the dead - quite the opposite if they see the level of competition reduced.

A third reason is that advertising is essentially a fixed-capacity, fixed-costs activity like air transport. Whether they carry ads or not, TV channels and outdoor billboards cost about the same to produce and maintain. Therefore the volume and price of ad bookings is subject to yield management and volatile prices, despite facial rate cards. In periods of weak demand many media owners are tempted to drop prices while advertisers and their agencies are good at negotiating bargains.

In this context, how are ad-funded businesses likely to fare the storm, compared with other media/entertainment sectors? There are three categories of media/entertainment companies: those living on subscription-based services like pay TV or broadband; those living on discrete consumer sales, like theatrical exhibitors and DVD publishers/retailers; and finally those living on audience and advertising sales.

The first category, although not entirely immune from recession effects, is likely to be better off because subscribers are cannot leave overnight and face exit barriers ; and staying at home and watching football or movies on Sky – for which you are already paying every month anyway - is after all the cheapest way to spend a family evening. BSkyB reported excellent results in the last quarter of 2008, and announced it would hire 1,000 new staff in 2009.

The second category, living on discrete consumer sales have more to worry about: going out or buy yet another DVD is the kind of small luxuries that are easy to cut. When your PVR is full of recorded movies you haven’t watched yet, why buy yet another DVD?

Compared to these, we would argue that the worst place to be these days is the third category: being a media owner exclusively or predominantly financed by advertising revenues.
And the best place to be these days? Perhaps a cheap café in Camden Town.