A slowdown in Q4 2022 has contributed to a lowering of the UK ad spend growth forecast for this year, but there is greater optimism for 2024, and the world's largest agencies are now integrating AI. 

By Simon Ward

The UK advertising industry continued its revival in 2022 with spend up 8.8%, boosted by notable gains in paid search and online display, but a decline in Q4 has stifled optimism, with the country expected to post the slowest growth of the top 10 markets this year.

Meanwhile, in a challenging global macroeconomic climate, the world’s leading ad agencies are also facing barriers to growth, and increasingly looking to technology such as AI to deliver efficiencies.

The Advertising Association/WARC Expenditure Report issued in late April shows that the UK advertising market was worth £34.8bn in 2022, compared with £32bn in 2021, with most sectors up as remaining Covid restrictions were lifted. However, ad spend fell by 5.8% to £8.6bn between October and December 2022, the first decrease recorded in Q4 since 2009, and there was an unprecedented drop in the outlay on social media.

The overall decline, plus indications the slump has continued into the start of this year, prompted the growth forecast for 2023 to be cut from 3.8% in January to 0.5% in April. The reduced expectations for nearly all sectors of advertising reflect the economic headwinds of high inflation, muted growth and talent shortages being felt across the industry.

The report is more positive about the market in 2024, projecting growth of 3.9% to £36.3bn as inflation and stagnation are expected to subside and activity to pick up to a more reasonable rate.

2022 a year of two halves

Revised figures from AA/WARC for the first half of 2022 show that UK ad spend rose by 26%, but this was partly offset by a fall of 5.7% in the second half. The decline can be largely attributed to a falloff in online advertising, which accounts for 75% of the total, with a gain of 30.1% in the first six months contrasting with a drop of 5.7% in July to December.

In the year as a whole, paid search rose by 12.7% to £13.1bn, while online display climbed by 10% to £11.9bn. TV fell by 1.4% to £5.4bn although this figure includes Broadcaster Video on Demand (BVOD), the streaming services offered by broadcasters, which amounted to £845m, an increase of 15.4%.

The areas that enjoyed the biggest growth were cinema, which skyrocketed by 123% to £229m, and out of home, which surged by 31.1% to £1.2bn, albeit there was a low base given the sizeable impact of Covid on these media. Meanwhile, the industry categories with the highest growth were services (including entertainment, media and travel) and industrial products (including business, property and telecoms).

Analysing last year’s figures, James McDonald, director of data, intelligence and forecasting at WARC, said: “The latest verified media data reveals that the UK’s ad market entered recession in the second half of 2022, with clear signs that the downturn has continued into the opening months of this year.

“Sharp and sustained falls in social media spend – the first time this has been recorded in the UK – are likely to have been instigated by reduced advertising activity among the SMEs who comprise a ‘long tail’ of ad volume on social platforms and whose margins are under incredible stress as inflation bites. One in every 202 UK companies entered liquidation in 2022 – the highest rate in seven years – and it is unsurprising to see these pressures reflected to some degree within advertising trends.”

Despite the slowdown in Q4, the UK remains the third-largest advertising market in the world, with a value of $41.5bn (£33.3m), and experienced the third-fastest growth rate of the top 10 markets in 2022, with its 8.8% behind only Brazil, with 9.7%, and Australia, with 9.4%.

Outlook for 2023 and 2024

However, the outlook is less rosy for the full year of 2023, with the major media of paid search and online display forecast to record ad spend growth of only 1.7%, while TV is expected to be down 2%, according to the AA/WARC report.

Cinema looks set to continue its resurgence, with an anticipated increase of 37.2%, while out of home rises by 4.9%. On a less positive note, printed media remains in decline, with projected falls of 5.8% for regional newsbrands, 5.2% for national newsbrands and 3.2% for magazine brands.

With economic conditions thought likely to improve, UK ad spend growth is predicted to rise from 0.5% in 2023, the lowest figure among the top 10 markets, to 3.9% next year.

In 2024, it is claimed that growth rates for paid search and online display will climb by 5.2% and 5.3% respectively, while TV will benefit from a 1.6% increase. Cinema is in line for a further escalation, of 13%, along with out of home, of 5.9%.

Nonetheless, the decline of printed media is expected to continue, with regional newsbrands down 4.9%, national newsbrands down 3% and magazine brands down 2.6%.

Elsewhere, it is anticipated that spending on online classified will shrink by 7.5% in 2023 and 2.7% in 2024, and on direct mail by 6% and 4% in the corresponding years, while radio is forecast to bounce back from a 1.6% decrease this year with a small gain of 0.8% in 2024.

Reflecting on the report and the significance of the advertising industry in the wide economy, Stephen Woodford, the chief executive of the AA, said: “These figures reflect the broader macro-economic environment, with a cautious outlook as the UK economy narrowly avoids recession, but shows very little signs of real growth. Advertising investment is an important barometer of business performance and confidence in the economic outlook. It drives competition and innovation, supporting job creation and livelihoods, returning a ratio of £1 invested generating £6 of GDP.”

McDonald added: “Trading conditions are not expected to improve until the second half of this year, with economic activity and advertising investment both largely flat during 2023 as a whole. The outlook is set to improve next year, however, as the economy returns to growth, inflation falls nearer to the government’s 2% target and consumer confidence lifts, though advertising spend is still predicted to rise below its long-term average in 2024.”

ITV sees silver lining

The prospect of a decline in the UK TV advertising market this year is reinforced by recent figures from ITV showing that its ad revenues were down 10% year on year to £419m in Q1, with the country’s largest commercial broadcaster expecting a further fall of 12% in Q2, including a 14% drop in June alone.

ITV has been impacted by businesses reducing their marketing budgets amid the economic slowdown and cost of living crisis, and said that the outlook is “challenging as expected given the current macroeconomic environment”.

However, chief executive Carolyn McCall claimed that the decrease in ad revenues in the first three months of this year was in line with expectations and better than the wider TV market, and that the network is “looking forward to Q3 with Love Island and the Rugby World Cup set to draw large broadcast and streaming audiences”.

ITV is also upbeat about its streaming services on the back of the launch late last year of ITVX as the successor to ITV Player. This helped drive a 29% increase in digital revenues and a 49% rise in streaming hours in Q1, with large audiences for live simulcast viewing of big shows and sports events, including Love Island and the FA Cup.

There was also a positive impact on digital ad revenues, which climbed by 30% to £87m in the same period, and growth of 20% is expected in Q2, in line with previous forecasts.

McCall concluded: “ITV is successfully executing Phase Two of its More Than TV strategy, despite the current challenging macro and geopolitical environment, as we continue to satisfy the growing demand for content globally and the desire for advertisers to secure both mass reach and targeted digital audiences.”

Bellwether brings cheer

There is cause for optimism from the Q1 IPA Bellwether Report, which showed a net balance of firms registering upward revisions to their marketing budgets of +8.2%, a considerable increase on the +2.2% in the final quarter of last year and the strongest growth since Q2 2022.

The report is based on a questionnaire of around 300 UK companies, and some 21.1% of firms reported increased budgets, as against 12.9% that registered cuts, while 66% recorded no change in spending.

Main media marketing, which includes online advertising activity and budgets for big-ticket campaigns on TV, recorded its strongest expansion in spending since Q1 2022 (net balance of +5.8%, from +4.4%).

There were also notable expansions in online (+10.5%, from +6.3%), video (+7.9%, from +13.7%) and audio (+1.7%, from 0%), but continued contraction in published brands (-1.9%, from -3.9%) and out of home (-12.4%, from -8.8%).

Meanwhile, sales promotions budgets returned to expansion in Q1 2023, with a net balance of +8.8%, from -4%. That represents a rise at the strongest pace in nearly 20 years as companies stepped up efforts to support their customers through the cost of living crisis. Another round of budget growth was seen for events (+6.3%, from 5.7%), while direct marketing spend also rose at the start of the year (+4.2%, from -0.6%).

There were falls elsewhere, albeit at improved levels, including in other marketing activity not already accounted for (-5.8%, from -10.1%), PR budgets (-0.6%, from -1.9%) and market research spending (-3.2%, from -8.8%).

Looking ahead, Bellwether firms are “strongly positive” about marketing budgets for 2023/24, with 36.6% of respondents expecting a greater total marketing spend in real terms, compared with 16.9% anticipating cuts, a net balance of +19.8%.

A net balance of +14.5% of companies foresee events marketing spend to rise over the next year, the greatest level of optimism among the seven categories where budget plans are monitored. There is also confidence in main media advertising (+13.5%), sales promotions (+6.3%) and direct marketing (+1.4%).

However, budgets for PR and other marketing activities are expected to be unchanged, while market research is the only segment where budgets are set to be reduced (-0.7%).

Bellwether authors, S&P Global’s forecast for the UK economy has been marginally upgraded, with GDP expected to decline by 0.2%, instead of 0.8% in the last report. Nonetheless, high inflation and borrowing costs continue to weigh heavy on the economy, and limit the purchasing power of consumers.

Therefore, the report forecasts a decline of 0.9% in ad spend this year, compared with a fall of 0.3% previously, and an improvement next year of 0.5%, compared with 1.2% previously, before expected growth of 1.6%, 2.0% and 2.2% in 2025, 2026 and 2027 respectively.

Joe Hayes, senior economist at S&P Global and author of the report, said: “The latest Bellwether survey once again highlights the resilience of UK businesses who have endured both a pandemic and a period of plunging consumer confidence and multi-decade high inflation. Total marketing budget growth broadened out during the opening quarter, showing that more companies are tapping into their marketing resources to help them successfully navigate through economic turbulence.”

The global picture

The global advertising and marketing industry has resembled that of the UK, with the growth levels seen last year not being matched in 2023.

A report from leading media economist PQ Media in early March found that spending rose by 7.9% to $1.57tn in 2022, with advertising up 7.5% to $714bn and marketing up by 8.2% to $854bn, as the sector continued to recover from the impact of the pandemic. Global digital and alternative media spending climbed by 13% to $746bn, while traditional media spend rose by 3.6% to $822bn.

However, overall growth is expected to come in at 5.3% this year, as challenging macroeconomic and re-emerging secular industry trends hinder the digital and alternative media channels that powered the recovery, with double-digit expansions in both the global and US markets in 2021, following the first spending decline in 11 years in 2020.

PQ Media attributes the slowdown in the second half of 2022 to macroeconomic challenges, including high inflation, continuing inventory and supply chain issues, energy supply shortages, increased interest rates and the emergence of recession fears.

The company’s chief executive Patrick Quinn said: “As a result, some brands cut budgets in the second half of 2022, leading to overall growth tapering into the first quarter of this year. But, while we expect slower full-year expansion in 2023, fears of a broad-based global recession have subsided somewhat. Despite the economic slowdown, many of the top 20 global markets and digital and traditional media platforms had returned to pre-pandemic levels by year-end 2022.”

Agencies and AI

The world’s leading advertising agencies have largely enjoyed growth in the opening months of 2023, while being impacted by cuts in spending by technology giants.

WPP reported total revenue of £2.8bn, an increase of 4.9% year on year, in Q1, helped by new contracts with firms including Ford, Suzuki and Swissport. However, organic growth was lower at 2.9%.

US revenue was hit by lower spend from some technology clients, but the picture was brighter in the agency’s home market of the UK where turnover rose by 7.4% as consumer goods firms invested more in advertising to reach shoppers dealing with the cost of living crisis.

WPP chief executive Mark Read said: “We remain on track to deliver on our full year guidance, thanks to the competitiveness of our offer and our role as a modern, trusted partner to clients in a world further disrupted by technology.”

France-based Publicis exceeded forecasts in posting net revenue of €3.1bn (£2.7bn) in Q1, representing growth of 7.1% on an organic basis. The upturn was driven by digital and data-driven businesses Epsilon and Sapient, which delivered growth of 10% and 11% respectively in the quarter, and the recent banking crisis in the US is yet to have any serious consequences.

Chief executive Arthur Saduon said: “To date, we can see projects that are a little bit delayed, because some of the mid-sized banks want to look a little bit at what’s going on, but our big clients, who represent the vast majority of our revenues are not stopping their transformation.”

Publicis' annual organic growth is expected to be in the top half of the 3% to 5% range previously forecast.

Omnicom generated total revenue of $3.4bn in Q1, with organic growth of 5.2%, which chairman and chief executive John Wren regarded as “a solid start to the year,” adding: “We took operational steps this quarter and have further plans in place to mitigate the impact of potential macro headwinds on our profitability, while continuing to deliver attractive returns.”

The UK proved to be one of the agency’s most productive markets, with organic growth of 5.9%, compared with 5.1% in the US and 5.4% in Europe. Omnicom is forecasting global growth of between 3% and 5% for 2023 as a whole.

Interpublic Group was the only one of the major western agencies to register a fall in revenue in Q1, with a total of $2.2bn, down 2.3% on a year ago, and down 0.2% on an organic basis, which has been attributed in part to cutbacks by technology clients. However, the company continues to expect full-year organic growth at the midpoint of a range between 2% and 4%

Chief executive Philippe Krakowsky said: “In our first quarter, the services and capabilities that have led our substantial multi-year growth, notably media, healthcare and data-informed practices, continued to perform well, with strong growth that was offset by certain areas of softness, notably among marketers in the technology sector.”

The agencies are increasingly integrating AI into their businesses, including in the development of creative campaigns, with WPP working with Cadbury’s and Bollywood actor Shah Rukh Khan to produce personalised ads for local businesses in India.

Read said: “Our focus on AI over the last five years is paying off, with many examples of our work with clients, using the main AI platforms, in-market today.”

Publicis is also looking to step up its use of the technology, which has been part of the group’s operations for some years through the Marcel AI platform, created in 2017 via the relationship with Microsoft, and more recently through a partnership with ChatGPT owner OpenAI signed in 2022.

Sadoun said: “Our data is optimised every nano-second and this is done by artificial intelligence, so we are able to know that if you have already bought a shampoo on Walmart.com, the challenge is not to offer you another shampoo, but an after-shampoo.”

Omnicom, for its part, has already embraced AI and ChatGPT3, with Wren saying: “All of the automation we’re looking at enhances capabilities and makes the jobs easier for our best and brightest people, and it eliminates a lot of the otherwise mundane projects or activities that we also get paid for. We think it’s good for our smartest people, and therefore, it’ll be good for the work they do on behalf of our clients.”

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