Fears of recession and scorching inflation are leading some investment analysts to clip their predictions on advertising growth and to temper their outlooks on companies they consider particularly exposed.
Growth estimates for outdoor ad sellers, ad agency holding companies and other firms in the space are being ratcheted down, with some analysts saying inflation could cause businesses to trim ad spending to offset rising costs in their operations.
“We think it would be naive to assume there will be no change in advertising budgets as the year rolls on,” Macquarie Research analysts wrote in a June note.
As marketers and their business partners brace for the months ahead, here are three things to know on how analysts expect things to pan out.
A slowdown might not stop at brand advertising
If there is a broad-based ad slowdown, it will first be seen in brand advertising, the kind of marketing generally designed to achieve goals like generating awareness or improving perceptions, some analysts say.
In past recessions, marketers cut back on ad spending as a share of gross domestic product and shifted budgets to more “efficient and measurable mediums like digital and away from traditional categories like print and radio,” MoffettNathanson analysts wrote in a May research note.
“We believe platforms that are focused on performance advertising and can prove ROI will be more resilient than those focused on hard-to-measure brand-building capabilities,” they said, referring to the return on investment for ad spending.
That would mean that Twitter,
which gets about 85% of its ad revenue from brand advertising, might be more exposed than Google, whose search ads show more immediately measurable results in the form of clicks.
But while marketers under pressure might opt for ad spending more purely focused on ROI, that strategy could create pain over time because it can neglect finding new customers.
Some brands, singed by inflationary prices on top of supply-chain snarls, are focusing on their business with repeat customers at the expense of attracting new ones, said Nick Drabicky, a senior vice president and general manager of client services at January Digital, a strategic consulting and digital media firm.
“But it can give way to short-term gains, versus long-term erosion,” he added.
And some analysts suggest all ad budgets will eventually be hit.
“Our industry conversations suggest softer near-term trends, particularly within brand spending, but we believe direct response is not far behind,” JP Morgan analysts wrote in a June note.
Small businesses might be more resilient spenders — for now
It might seem intuitive that macroeconomic pressures hit small and medium-size businesses hardest. But RBC Capital Markets said its research on agencies that focus on those clients showed the inverse appears to be true — at least at present.
In a note last week, RBC analysts said only about a quarter of small and medium-size businesses in their research had cut ad spending, while larger companies appear to be suggesting steeper, more proactive cuts.
But that initial dynamic might not last. Though small and medium-size companies have been major drivers of online advertising, they may be less able to navigate economic headwinds than the largest corporations, MoffettNathanson analysts wrote.
The proliferation of small businesses advertising on digital platforms appeared to be moderating, the analysts said, citing the number of those businesses spending on Facebook.
“It appears that active advertiser growth on Facebook, and likely for the digital advertising industry broadly, has slowed from the rapid increases in 2020,” MoffettNathanson analysts wrote.
… But pandemic-era ad growth was probably not sustainable anyway
The hyper-growth in digital advertising during the pandemic may soon be a thing of the past. MoffettNathanson analysts said they were concerned over longer-term growth in the segment.
“Advertising growth since the pandemic has been primarily fueled by the long tail of SMBs [small and medium-size businesses] which are spending a record share of revenues on advertising, ”they said. “We believe this has been fueled by Covid-related savings on travel and entertainment, real estate and other corporate expenses which have driven margin expansion especially over the past year.”
But the analysts didn’t see those ad increases continuing, especially if profit margins are shaved by inflation and corporate expenses, like travel and real estate, as the economy reopens.
The tailwinds that sent digital advertising rocketing in the pandemic — the rising penetration of e-commerce and growth of small business — appear to be falling back to pre-Covid levels.
That is not to say that business is headed back to the pre-coronavirus world. By forcing people to spend more time at home, the pandemic pushed forward a lasting shift in the way ads are bought and seen. And marketers are spending bigger chunks of their budgets online to reach consumers where they are.
“A slowdown is coming, but I do think that shift in consumer behavior is absolutely permanent,” he said. Drabicky said.
Write to Megan Graham at firstname.lastname@example.org
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