Marketers, like many in business, found the first half of 2023 difficult. Persistently high inflation, ongoing interest rate hikes and the uncertain economic outlook prompted many firms to cut investments in marketing to protect their bottom lines.
This has knocked the industry’s confidence, according to the Institute of Practitioners in Advertising (IPA), which analyses the sentiments and spending patterns of senior marketers at big brands in its quarterly Bellwether Report. The latest (Q2 2023) report found that a net balance of 12.6% were pessimistic about their industry’s financial outlook. Only 2.6% of respondents were positive about their own firms’ finances, compared with 7% in the previous quarter.
Some concerns have been allayed now that inflation seems to be easing, but the second half still looks uncertain for many marketers. Most will need to do more with less, while trying to get the balance of expenditure right and deal with new challenges, such as AI.
“This year hasn’t been as bad as many thought it would be,” says Dr Grace Kite, business economist and founder of marketing consultancy Magic Numbers. “We haven’t seen a recession or media budgets dropping off a cliff. But there is still significant uncertainty in the economy and the marketing industry.”
Weak advertising growth
The slowdown in the ad market over the past six months has been notable. The phrase “challenging advertising market” appeared four times on the first two pages of ITV’s recently published interim financial report for 2023, for instance. The trend has prompted a slew of firms that rely on ad revenue (including Google and Meta) to cut costs, often through extensive layoffs.
Some analysts believe that the worst is over. Tim Nollen, director and senior media tech analyst at Macquarie, suggests that the “underlying tone is positive”. He believes that one of the best indicators of ad spending is growth in business investment. This was 3.3% in the UK in Q1 (the latest period for which figures are available) – a significant increase on the 0.7% the Office for National Statistics had provisionally estimated.
Nonetheless, growth in ad spending is expected to be weaker in the second half of 2023 than in recent years. In October 2022, Insider Intelligence forecast that spending on digital ads this year would grow by 8.8%. By March 2023, it had downgraded its prediction to 4.9%. The IPA, meanwhile, has forecast a 0.6% decline in all ad expenditure this year in its latest Bellwether Report.
Inflation may be easing slightly, but in the UK it is still at a 30-year high. That is sure to affect marketers in H2. In sectors where products are seen as necessities – groceries, for example – consumers are still spending but shopping around, meaning that firms can’t rely on customer loyalty.
In sectors where consumer spending is more discretionary – electronics, for instance – purchases are being delayed. This means that companies are having to vie for a much smaller pot.
Justin Pahl is co-CEO at marketing agency VMLY&R London, which has clients including Coca-Cola, Intel and Boots. He notes that brands “can’t rely on the economy to propel them into growth. Marketers are going to have to win their share of customers from other brands in an increasingly competitive environment. To win the scrap, they must not only inspire new customers, but do even more to keep their current ones.”
Finding ways to do more with less
The slow growth in the ad market suggests that many companies are cutting back on spending. This means that marketers are in many cases being asked to achieve the same results with fewer resources, according to Claire Humphris, CEO of marketing agency Iris London.
“Rising materials costs, wage inflation and increased transportation expenses have put a strain on profits,” she says. “As a result, marketing budgets are being slashed to rebalance the financials, while the demand for meeting revenue and sales volume targets remains unchanged.”
These budget cuts are set against a backdrop of high inflation in the price of media. Kite estimates that the cost of showing a TV ad 1,000 times rose by nearly 20% between 2019 and 2021, with other channels also becoming more expensive (albeit not as quickly).
“Over time, as evaluations are done, absorbed and acted on, it means that the media mix will alter away from the high-inflation channels,” she predicts. “It’s going to become urgent to find replacements for TV in the media mix. This is one of the reasons why long-view discussions about the future of brand-building are vital.”
With budget growth clearly not keeping pace, marketers are seeing lower returns on investment while advertising is failing to drive higher sales. Marketing chiefs will come under increasing pressure to re-evaluate their spending plans as long as trading conditions remain tough.
A sales promotion renaissance
Those who still have sizable budgets are typically being charged with driving short-term sales, rather than long-term brand-building. Data from the IPA’s latest Bellwether Report shows that “sales promotions“ budgets were up, with a net balance of 13.4% of companies spending more on them – the highest percentage recorded in two decades of survey data.
“Good old-fashioned sales promotions are having a renaissance in reaction to the unprecedented pressures brands are facing to drive sales,” Humphris reports.
While an excessive focus on short-term sales can damage a brand in the longer term, Humphris believes that sales promotions could be the “silver bullet” that businesses need, as long as they keep longer-term goals in mind. She cites the example of Suzuki, which has started offering a seven-year warranty on its cars to reassure potential customers.
“When sales promotions are brand-led, rather than a purely tactical sales-driven response, they can signal a purposeful commitment to easing the pain for struggling customers,” Humphris says. “This enables brands to resonate much more with their target audience and drive sales more effectively, so they can strike the right balance between short-term sales targets and long-term brand growth. I think we’ll see more of this in the coming months.”
But Karl Weaver, senior vice-president at marketing consultancy MediaLink, warns of the dangers of relying too much on discounting. He believes that many marketers are being driven to levels of promotional activity that could damage long-term brand equity.
“The second half of the year will see soul-searching about how much to spend on brand-building and when to shift the emphasis,” Weaver predicts. “We’re already seeing more occasions where the brand strategy is being revisited in light of over-discounting.”
Taking a strategic dive into AI
The emergence of ChatGPT in late 2022 prompted much navel-gazing about the impact of generative AI on business. But marketers aren’t taking a sufficiently strategic approach to the technology, according to Weaver.
In H2, he expects more businesses to explore in greater depth what partnerships they should form, which operating models are likely to be the most appropriate and how experiments and investments should align with their wider commercial strategies
“AI has broken out, as if from John Hurt’s stomach, and is having a good look around. Most businesses urgently need an AI strategy, but we aren’t seeing many yet,” Weaver says. “In the second half, we expect to see growing numbers of companies seeking guidance about the likely impact of AI and assistance in shaping a strategic approach to it.”
Pahl agrees. He suggests that, for any AI strategy to be a success, marketers must urgently educate themselves to understand the benefits and risks of AI and stay abreast of this fast-evolving field.
“This is more than a fad, so marketers can’t be afraid to explore. They will need champions in their organisation to drive this new behaviour and strive to be ‘AI natives’,” he stresses. “We’re already seeing a growing skills gap. But, by investing to get ahead now, they will remain a desirable brand within an evolved economy and at the helm of greater brand innovation.”