Global ad spend may dip 5.5%, likely to pick up by year-end

Advertising and marketing industry worldwide is to face challenging times as global ad market will contract by 5.5 per cent this year, according to a recently-released special report by JP Morgan.

While marketers all over the world are falling victim to the overall economic gloom, the advertising industry in the US, the largest player in the world, will also suffer from additional impact of large headwind from the stronger dollar. The US will see almost nine per cent decline, the report said.

Elsewhere in the world, Europe is expected to go down by 6.9 per cent and emerging markets are also expected to account in the same region.

However, figures for the region are expected to be four times as much.

"Drop in advertising is expected to pick up by the end of the year, but by my estimation, the overall drop in advertising is nothing less than 35 per cent," said Aldrin Fernandes, Chairman of Concept Group

The report also defined that cutbacks are much more pronounced in auto and financial categories and some segments in retail are also aggressively pulling back. Other sectors like consumer package goods, restaurants and pharma have held up relatively well so far, but these segments are expected to cut further in the months ahead.

In the UAE, real estate was hit the most and that is expected to catapult the entire industry to more than 35 per cent drop, believe industry observers here.

While market is alerting and adjusting to the drop recorded in the first quarter of this year, the report dictates that real weakness will likely come in Q2.

JP Morgan expects economic growth in the UK and continental Europe to turn down sharply in 2009, and expects ad spending will follow in similar fashion as in the US. This will likely apply to much of central, eastern and western Europe.

JP Morgan European Media Research projects ad spending declines ranging from 6.5 per cent in Italy to 9.2 per cent in Spain in 2009, with the UK, France and Germany all expected to be down seven per cent to eight per cent.

By contrast, as long as GDP is positive ad spending is also expected to be positive in many emerging markets, albeit at notably lower rates than last year. For example, JP Morgan economists expect China to grow seven per cent in 2009. India and Brazil are forecast to grow double-digits.

While advertising in the UAE saw a phenomenal growth of up to 32 per cent in the first quarter of 2008, in comparison, ad spending saw a premium growth rate to nominal GDP, in 2004, since the last downturn in 2001.

"We believe secular challenges in the industry (ongoing fragmentation of the audience and proliferation of new media) gave more leverage to the advertiser, limiting pricing inflation in any one place. This trend, combined with the hole left from the dotcom bust and declining ad spend in the important auto segment, has had a deflationary effect on the overall ad market," said the report.

Advertisers are also reluctant to reduce spending, as in most industries it has a very direct correlation to sales.

"We have just launched our new showroom in Oasis Centre – our flagship carrier – and to maintain a positive sales growth we continue to advertise," asserted Reena Bedi, Marketing Manager of Shoe Mart.

"We are not cutting down on our advertising spent, but spending it cautiously keeping an eye on our expected results. We may even increase our ad spend, if the strategy needs a revision, but that needs to be evaluating on regular basis," said Bedi.

The report also defined the challenges that the conventional players in the media industry would be facing once the gloom is over.

"Once this downturn is behind us, much of media will still be challenged from declining audiences resulting from the ongoing fragmentation of the ad market.

While ad dollars have been relatively sticky to traditional media in this downturn, we would assume the share shift to new media such as digital will pick up again in a more stable market," said the report.

As dollars shift from traditional media to digital areas, the advertising and marketing services companies are in a position to assume a larger portion of the total advertising budget.


Probable trends

The special report compiled by JP Morgan highlights certain points that are likely to define the future trends and lead to renegotiations among the players of the industry. 

- Organic revenues at the holding companies are expected to weaken in the first quarter and remain very soft through most of 2009. A four per cent decline is likely across the industry with seven per cent decline in organic revenues in Q1. 

- Margins will likely provide some buffer to earnings growth pressure in 2009. The high level of variable costs gives management some flexibility in a decelerating revenue environment.

Modest margin deterioration (70-150 basis points) is expected across most of the ad holding companies in 2009. 

- Risks for the stocks: There are some risks to the stocks as well, with the most obvious one being the state of the global economy. If the economy were to weaken more than anticipated, it would likely see negative earnings revisions across the industry.


Recovery hopes

There are three generally discernible stages of ad recovery: 

- Direct and promotional spending increases. Usually, this is the first area to see increased spending, as marketers like the proven return on investment and customers are encouraged to purchase a product. Direct and promotional spending did indeed increase at a faster pace than the industry overall in the early stages of the most recent recovery, albeit at a slower pace than broadcast TV. 

- New products enter the market. Companies try to boost sales by launching new products. This is supported by an increase in traditional advertising dollars. Examples of new products in 2003 and 2004 included the Motorola RAZR and new product extensions such as Coca-Cola Zero. 

- Branding campaigns emerge. With improving profitability, firms develop campaigns to develop or support brand images. Big new branding campaigns emerged in 2003 and have continued till now. Examples include McDonald's "I'm Loving It" campaign in 2003.

Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.

Follow Emirates 24|7 on Google News.