Trends in the global economy
Inflation is back and here to stay in many markets, including the U.S. as well much of Europe and Asia, notably China. This is being driven by surges in commodity prices – in some cases by as much as 3-400% – increases in logistics, distribution, and shipping costs, and a global shortage of shipping containers. This, in turn, in increasing costs for corporates, with P&G announcing in its recent results that it faces a $1.8bn headwind in commodity costs in 2021. High inflation is attractive to governments because it can ease the pain of sovereign debt incurred to finance stimulus and recovery during the pandemic.
Higher inflation is being exacerbated by labour shortages. In the U.K. this is most notable with the estimated 100,000 shortfall of HGV drivers and a lack of staff in the leisure and hospitality industries, in part the impact of Brexit. But labour shortages are evident in other markets, too, thanks to both furlough schemes during the pandemic and the surge in demand for e-commerce. Labour shortages in turn have led to wage increases across the board, with salaries going up faster than at any time in the past 35 years.
Despite higher inflation, labour shortages, and wage inflation, corporate confidence is growing across the world. There is a consensus that, despite the lingering impact of the pandemic, we are through the worst of times. Consumer confidence is also high and rising, starting with China and the West and gradually spreading to other economies.
Growing corporate confidence is reflected in share price increases in markets across the world, driven by tech and ecommerce stocks. There have been “more beats than misses” in recent quarterly results reporting. CFOs are now happy to add risk back onto the balance sheets, and there’s increased activity in mergers and acquisitions, as successful sectors look to consolidate at a time of cheap money and sustained low interest rates. Private equity and venture capital funds have capital they need to deploy.
Implications for advertising
Historically, the growth in ad spend closely mirrors the growth of the economy as a whole. Brands that – correctly – view advertising as “intangible capex” will accelerate their sales performance, in part thanks to the enduring strength of their brands. Sustained brand investment during the pandemic has shown strong return on investment – in terms of top- and bottom-line growth and better share performance.
Consumer product houses of goods that have sustained or increased ad spend – including P&G and Unilever, Kellogg’s and Colgate – have all outperformed the market during the pandemic. Meantime, brands that – incorrectly – see advertising as a cost will struggle on the other side of the pandemic, having slashed investment to cut costs. Like tangible capex – plant, machinery and the like – brand owners will realise it costs more to repair the rot that’s set in by not investing during tough times.
In addition to these cyclical, economic factors suggesting a strong period of growth in advertising, there are structural factors that mean the sector is likely to perform better than expected. These include: inflation and price increases; consumers ready, willing, and able to spend post-pandemic, with many having saved money (less work-related travel and fewer opportunities for holidays in 2020/21); and, increased competition in existing markets, from electric vehicles to food and product delivery thanks to the ecommerce boom.
There are still inefficiencies in the advertising market that need addressing. Leakage in digital advertising typically sees between 15-30% of digital ad spend wasted, according to Ebiquity’s always-on digital ad monitoring analysis. This is a figure that – for some brands and with some platforms – can be as high as 45%. With the U.K. advertising market worth approaching £26bn in 2021 and 75% of ad spend digital, wastage is estimated at up to £6bn.
Brands are also over-investing in activation and under-investing in brand building. The gurus of advertising effectiveness, Les Binet and Field, recommend a 60/40 brand/activation, long-term/short-term split. Thanks to an over-reliance in bottom-of-the-funnel channels, most notably search, in the U.K. the ratio is currently 40/60, with activation winning out. This needs redressing to optimise efficiency and effectiveness in marketing spend.
Five trends for the year ahead
- Streaming is increasingly running out of steam: subscriber numbers for subscription video-on-demand services such as Netflix, Amazon Prime, and Disney+ are slowing down, even going into reverse in some mature Western markets. Advertiser-funded streaming is proving attractive – in the U.S., Europe, and Asia – but brands should demand more than the self-reported audience metrics currently on offer. Without better and more meaningful measurement, advertiser-funded streaming is at risk of becoming “the next programmatic” – a sinkhole for investment with no reliable means of assessing ROI.
- The shift to digital is increasing: workplace productivity tools have a rosy future, with profound implications for where people work and when. White collar workers need to be aware that much of what they do may well become automated.
- The distinction between digital and analogue media channels is less meaningful: agencies are decreasingly separating out budgets for TV vs out-of-home vs digital, as all channels are increasingly sold and delivered digitally. To earn its keep, digital investment needs much better attribution models than those available today.
- Tech will become ever-more politicised: from China to the U.S., Big Tech is – and will remain – in the line of fire. The recent Chinese crackdown on digital education firms saw share prices plummet by as much as 90%. Republicans and Democrats are targeting Big Tech in the U.S., with support growing for repositioning tech and data as utilities that should come under the same regulation as water or power.
- TV advertising holds firm: despite media industry obsession with streaming services and developments in addressability via connected TV, for most mainstream consumers, linear live TV remains the norm for family entertainment. This makes it the only medium still able to deliver mass audiences at scale, even if the scale has shrunk in the past decade.