As concerns about a looming recession and high inflation rates persist, advertising analysts are revising their growth forecasts and adopting a more cautious outlook for businesses in the sector.
Estimates for the growth of outdoor advertising sellers, advertising agency holding companies, and related entities are being scaled back, with some analysts suggesting that inflation may prompt businesses to reduce advertising spending to offset rising operational costs.
Analysts at Macquarie Research noted in a June report that expecting no changes in advertising budgets throughout the year would be naive.
Here are three key takeaways on how analysts anticipate the situation to unfold:
1. Slowdown May Extend Beyond Brand Marketing:
- In the event of a broad-based advertising slowdown, it is likely to first impact brand marketing, which focuses on building awareness and improving brand perceptions.
- Historically, during economic downturns, marketers tend to reduce ad spending as a percentage of GDP and reallocate budgets to more measurable digital mediums, moving away from traditional formats like print and radio.
- Platforms emphasizing performance advertising and return on investment (ROI) are expected to fare better than those focused on brand-building, as advertisers prioritize measurable outcomes.
- Companies heavily reliant on brand marketing, like Twitter, may be more vulnerable than platforms like Google, which offer more immediately measurable results.
2. Small Businesses May Be More Resilient – For Now:
- Contrary to intuition, research by RBC Capital Markets suggests that small and medium-sized businesses (SMBs) may be less affected by macroeconomic pressures than larger corporations at present.
- Only about a quarter of small and medium-sized businesses in RBC’s study had reduced ad spending, while larger companies indicated more significant, proactive cuts.
- However, this initial dynamic may change over time, as SMBs could face greater challenges navigating economic headwinds compared to larger firms.
3. Pandemic-Driven Growth in Advertising Likely Unsustainable:
- The rapid growth in digital advertising during the pandemic may be a temporary phenomenon, with concerns about long-term growth in the sector.
- Much of the advertising growth during the pandemic was fueled by small and medium-sized businesses, which allocated a significant share of revenues to advertising, often driven by cost savings in areas like travel and entertainment.
- Analysts are skeptical about the sustainability of these ad increases, particularly if profit margins are squeezed by inflation and other rising business costs.
- Factors that contributed to the pandemic-era advertising boom, such as increased e-commerce penetration and the growth of small businesses, appear to be returning to pre-COVID levels.
While a slowdown is anticipated, analysts believe that the shift in consumer behavior towards digital and online advertising is a lasting change brought about by the pandemic, as marketers continue to allocate larger portions of their budgets to reach consumers online.
In conclusion, the advertising industry is facing challenges due to economic uncertainties, inflation, and shifting priorities. Advertisers are likely to prioritize measurable results and efficiency, which could impact traditional brand marketing efforts in the coming months. Small businesses may be more resilient initially, but the long-term sustainability of pandemic-induced advertising growth remains uncertain.
