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ALF Insights

23 Nov 2023

Festive Cheer in a Challenging Year

Simon Ward
Record ad spend expected for Christmas 2023
Advertisers are expected to shell out a total of £9.5bn in the UK in Q4 2023, ensuring a positive end to a year in which wider economic conditions have been a barrier to growth in the sector.

UK advertisers are on course to break festive records with a near 5% increase in spend this Christmas season, providing a welcome boost for an industry where growth has been curtailed by economic pressures in 2023.

There is cause for optimism in forecasts showing that the ad market is slightly outperforming the wider economy, with growth for the full year predicted to be in the order of 2.6%, driven in large part by major online formats, with the figure rising to 3.9% in 2024 as other channels return to growth.

This will provide cheer for the likes of ITV, which has been impacted by what it describes as a “challenging advertising environment” this year, and agencies that have been contending with the global tech downturn.

Recent figures from the Advertising Association and WARC indicate that Q4 spend will amount to £9.5bn, up 4.8% from £9bn in 2022. TV advertising is expected to account for £1.5bn, albeit this represents a slight fall of 0.2% year on year.

The announcement coincided with the launch of Christmas ad campaigns by leading retailers including Aldi, Asda, Boots, John Lewis, Marks & Spencer, Sainsbury’s and Tesco, many featuring prominent celebrities.

Asda has recruited Canadian singer Michael Bublé for its ad, M&S' new commercial features comedian Dawn French and Hollywood duo and Wrexham AFC owners Ryan Reynolds and Rob McElhenney and Sainsbury's has engaged with 1980s pop star Rick Astley. John Lewis has released its now traditional festive ad, the first created by new agency partner Saatchi & Saatchi, while TV presenter Graham Norton appears in sister retailer Waitrose’s campaign.

The positive impact of Christmas ads is borne out by research from AA revealing that 48% of adults credit them with helping to spark gift ideas, while 70% of young adults aged 25 to 34 find them to be the ultimate festive mood booster.

However, with traditional media treading water, the highest growth in ad revenue is expected to be from Broadcast Video on Demand, up 20.2% to limit the overall fall in TV advertising. Other sectors in line for significant rises include cinema (11.5%), out of home (10.3%), online display (9.1%) and search (6.6%). Indeed, search and online display are now by far the largest contributors, with projected revenue of £3.5bn and £3.4bn respectively in Q4.

Categories set for declines include direct mail (-9.5%), online classified (-7.4%), regional newsbrands (-3.1%), national newsbrands (-2.4%), magazine brands (-1.4%) and radio (-0.3%).

The importance of the final quarter, and by definition seasonal advertising, is shown by the fact that AA/WARC is forecasting that it will add £430m to the total market value in the UK in 2023, compared to £486m for the first nine months of the year, making it responsible for 47% of all growth this year.

Reflecting on the latest research, Sharon Lloyd Barnes, commercial director of the AA, said: “Christmas advertising is an integral part of the festive season. From offering gift ideas to inspiring holiday cheer, the annual display of brand creativity consistently entertains and warms hearts. One of advertising’s major roles is to help people choose between products and services. Whether it’s an outdoor ad for a local fair, or a big budget campaign for a high street brand, advertising is there to help people know about the options available to them.”

UK ad growth levels maintained

At the end of October, AA/WARC had announced UK ad spend of £9bn for Q2 2023, with the year-on-year increase of 1% being in line with the July forecast of 0.9%. By comparison, ONS figures for the same period showed that GDP rose by just 0.6% as interest rates continued to climb in response to high inflation.

In the first half of 2023, the ad market was worth £17.5bn, again up 1%, from £17.3bn in the January-to-June period a year earlier. With higher growth expected in the second half of this year, it is projected that the market will be valued at £35.6bn for 2023 as a whole, with the anticipated increase of 2.6% matching the forecast in July.

This is against the backdrop of another limited year-on-year rise in GDP for Q3 2023, of 0.6%, and 14 consecutive interest rate increases by the Bank of England to a 15-year high of 5.25% in August. However, the rate has been held for the last two months, and there was a significant fall in inflation to 4.6% for the year to October, down from 6.7% in the previous month and the lowest figure in two years.

In terms of advertising by sector, online channels have continued to prosper, with search up 5.3% and online display up 5.8% year on year between April and June 2023, according to AA/WARC. Taking on board Q4 estimates, growth for the full year is projected to be 5.6% and 7.4% respectively.

TV suffered a downturn of 12.8%, but this would have been worse but for a 5.6% increase in BVOD, and, boosted by sporting events in the second half of the year, notably the FIFA Women’s World Cup and Rugby World Cup, and the return of Big Brother, on ITV, the decline for the year as a whole is projected to be only 5.8% (with BVOD up 16.1%).

Out of home continued its recovery from the pandemic downturn, with growth of 4.4% in Q2 2023, and is expected to be up 7.7% in the full year, and while cinema was down 7% in the quarter, the success of blockbuster films Barbie and Oppenheimer is predicted to help boost revenue by 7.6% over the 12 months.

There are continued downward trends for online classified (-11.6% in Q2; -11.1% forecast for 2023), direct mail (-15%; -12.8%), national newsbrands (-9.9%; -5.7%), regional newsbrands (-14%; -10.1%), magazine brands (-7.4%; -5.3%) and radio (-6.2%; -5.9%).

Commenting on the findings, James McDonald, director of data, intelligence & forecasting at WARC, said: “The UK’s economy continues to skirt with recession as households make cutbacks in the face of stubbornly high inflation and unemployment slowly ticks upwards as activity in the private sector cools. It is therefore encouraging that, amid this backdrop, the UK’s advertising industry was able to grow during the first six months of 2023, and that the market is on course to be 2.6% larger this year overall.

“It should however be noted that this growth is concentrated in certain corners of the industry, with broadcasters and publishers bearing the brunt of an unfavourable trading climate while digitally native platforms largely prosper.”

Office worker on laptop

2024 outlook and global situation

With indications of an improved UK economy and major events on the horizon such as the general election, AA/WARC expects the ad market to grow by 3.9% to reach £37bn in 2024, with the increase revised down slightly from 4% in July.

Online advertising will continue to be the driver, with search in line for a rise of 5.2% and online display for one of 6.6%, as they together account for almost 80% of all spend. While macroeconomic headwinds remain challenging, other media channels are set to perform better or cut revenue losses next year, thanks in part to their online and digital businesses.

TV is projected to achieve nominal growth of 0.4% (including BVOD up 12.4%), as the sector benefits from events including football’s Euro 2024 taking place in Germany in June and July. Meanwhile, radio is expected to return to growth, in the order of 1.5%, while out of home and cinema continue their recovery with gains of 5% and 3.5% respectively.

Categories set for further, albeit reduced declines, include online classified (-3.6%), direct mail (-5%), national newsbrands (-2.6%), regional newsbrands (-2.4%) and magazine brands (-1.3%).

Assessing the state of the industry, Stephen Woodford, CEO of the Advertising Association, said: “Advertising continues to show itself as a weathervane for the UK economy, with the advertising market expected to grow slightly more than the economy, with both barely in positive figures. Looking ahead to 2024 we expect to see more channels experience growth again, as the ad market grows to £37bn for the year.

“As we anticipate the general election next year, the Advertising Association will continue to demonstrate advertising’s contribution to a strong economy, not least that brands that continue to invest in advertising during a downturn are more likely to post better returns when emerging from tough conditions.”

On a global scale, WARC is forecasting that ad spend will grow by 4.4% this year and by 8.2% in 2024 to top $1tn (£810bn) for the first time. However, Europe is lagging, with a projected increase of just 0.6% in 2023, rising to 3.6% next year as economic conditions improve.

The importance of online advertising in major markets is reinforced by WARC analysis showing that just five companies – Alibaba, Alphabet (parent of Google), Amazon, Bytedance (parent of TikTok) and Meta - are in line to account for 50.7% of global spend this year, a figure that is set to climb still further to 51.9% in 2024.

ITV overcomes linear ads decline

ITV, the UK’s largest commercial broadcaster, saw advertising fall by 7% year on year to £1.23bn in the first nine months of 2023, and has warned that the decline could be 8% for the full year given tough comparisons with 2022, and the weakness of the linear TV market.

The network generated total revenue of £2.98bn between January and September, up 1% from the same period last year, with the 9% rise in income at ITV Studios, from £1.39bn to £1.52bn, only just making up for the 7% decrease at Media & Entertainment (M&E), which includes advertising, from £1.56bn to £1.46bn.

While the FIFA Women’s World Cup and men’s Rugby World Cup provided a boost to ITV’s ad revenue, these events could not compensate for losses elsewhere, and the broadcaster will be thankful for the 25% jump in digital advertising revenue, from services such as ITVX, to £283m.

In Q4, ITV will cash in from popular shows such as Big Brother and I’m A Celebrity… Get Me Out of Here, but it faces a challenge to match the same period in 2022 when the men’s FIFA World Cup helped it generate the second-highest annual advertising revenue in its history.

Nor can the network rely on strong performance from ITV Studios, with the division poised for income growth of only 3% in 2023 as a whole, down from 19% last year, amid lower demand from free-to-air broadcasters in the difficult ad market and the impact of the Hollywood strikes.

These factors have influenced the decisions to strip out £15m of cost savings in 2023, delay £10m of original content spending into 2024, and further diversify revenue streams in the coming years.

Speaking after this month’s Q3 trading update, ITV chief executive Carolyn McCall said: “ITV continues to make good strategic progress despite the challenging macro environment which is impacting the advertising market and also the demand for content from free-to-air broadcasters in the UK and internationally.

“Studios and M&E digital revenues both grew strongly in the nine months to the end of September, more than offsetting the expected decline in linear advertising, delivering total group revenue growth of 1%.”

She concluded: “It is evident that our strategy of growing the Studios and M&E digital business is helping ITV to offset the current headwinds and we remain confident in delivering our 2026 targets, when we expect two-thirds of revenue to come from these growth drivers.”

Big Brother ITV2 Logo

Bellwether shows refocus on main media

The latest IPA Bellwether Report, covering Q3 2023 and published in October, showed UK company marketing budgets up for the 10th successive quarter. However, the difference between companies that increased budgets (21.1%) and reduced budgets (15.8%) was only +5.3%, which compared unfavourably with the net balance of +6.4% in Q2, making it the weakest quarter of growth since Q4 2022.

However, industry observers were heartened by survey results demonstrating increased investment in main media, including online advertising and big-ticket campaigns on TV, which was the strongest segment, with a net balance of +7.4%, up from -2.5% in the previous quarter.

Within media, the biggest uplift was in other online (+9.1%), ahead of video (+0.9%) and published brands (+0.8%), while there were sizeable negative net balances for audio (-10.8%) and out of home (-12.1%).

Last time round, the best-performing segment was sales promotion, with a record net balance of +13.4% as firms felt the need to support cash-strapped customers facing cost-of-living pressures, but that flipped to -1.5% in Q3, matching that of market research.

Elsewhere, there was further evidence of growth in budgets for events (+5.9%) and direct marketing (+4.3%), while PR was back in positive figures (+4%), as spending rose at the strongest pace in five years. However, other marketing activity still had a significant negative balance (-7.9%).

The Bellwether data for Q3 showed companies to be more optimistic about their own prospects than the wider industry, reflecting the prevailing economic climate.

Some 25.4% of firms were upbeat on their financial outlook, while 20.2% signalled weaker confidence and 54.3% reported no change, resulting in a net balance of +5.2%, up from +2.6% in Q2. Meanwhile, only 12.1% were positive about the outlook for their sector, compared with the 24.9% who were downbeat, producing a net balance of -12.7% that was similar to the -12.6% in the previous quarter.

Report author S&P Global Market Intelligence expects the UK economy to grow by 0.3% in 2023, unchanged from the previous Bellwether Report, but revised its growth forecast for 2024 from 0.4% to -0.1% in light of inflationary pressures, thereby anticipating a shallow recession over this period.

Based on these figures, ad spend was expected to fall by 0.6% in 2023 and by 0.4% in 2024, with the industry not returning to growth, in the order of 1.3%, in 2025. However, it is possible that the latest economic figures will prompt these figures to be revised upwards after Q4.

Commenting on the most recent survey, IPA director general Paul Bainsfair said: “Against a backdrop of economic stagnation and ongoing elevated levels of inflation in the UK, coupled with increasing global geo-political volatility, the trading environment for companies is unquestionably tough.

"But instead of seeing a re-run of last quarter’s slightly concerning results where companies revised up their short-term sales promotional activity to record amounts while reducing their main media spend, this time we are buoyed to see a more considered reverse state of affairs.

"This quarter, those companies that can are heeding the evidence that in general, investing more in main media will help to steady them through the uncertain times and help to ensure the longer-term health and profitability of their brands.”

Generic Charts and Graphs

Agencies review targets

The tough economic climate continues to weigh on leading ad agencies, with particular challenges for those with a high proportion of technology clients given the reduction in spend in that sector, although others are enjoying respectable growth.

Last month, UK-based WPP issued its second profit warning of the year after reporting a 1.8% fall in revenue (or 0.6% in organic terms) to £3.5bn for Q3.

The agency cited the slowdown in spending by US tech giants such as Meta, Google and Microsoft, all of which it counts as clients, and a downturn in China, although it did win accounts from Estée Lauder, Hyatt, Lenovo, Nestlé and Verizon, ensuring net new business performance of $1.4bn (£1.1bn).

WPP has cut its forecast for growth in 2023 to 0.5-1%, from 1.5-3% before, but will be hoping for better results in 2024 following the merger of creative entities Wunderman Thompson and VMLY&R to form VML.

WPP chief executive Mark Reed said: “In a world being rapidly reshaped, we need to continue to evolve our offer to clients and simplify our business. I am excited by the creation of the world’s largest creative agency, VML, and the continued evolution of GroupM. Both these developments will strengthen our offer to clients, simplify the integration of our services and maximise the returns on our ongoing investments in AI and technology.”

There is a similar story at S4 Capital, the tech-focused agency headed up by former WPP head Sir Martin Sorrell, where revenue was down 10% in Q3 compared with the same period in 2022. This has prompted the company to reduce its full-year earnings margin guidance still further to 10-11%, from 12-13.5%.

Sorrell said: "Trading in the third quarter was difficult, reflecting the global macroeconomic conditions with continued client caution to commit and extended sales cycles, particularly for larger projects and to some extent clients in the technology sector."

Another agency that has been negatively affected by the tech spend downturn is Japan-based corporation Dentsu, which reported net revenue of Yn279bn (£1.5bn) for Q3, up 1.6% year on year, but organic revenue down 6%, prompting it to further downgrade its full-year outlook to a decline of 5%.

Dentsu, which is undergoing a restructure, with management changes and cost savings in line with its One Dentsu strategy, anticipates that the trend of reduced ad spend will continue until the middle of next year, but sees some evidence for optimism.

Chief executive Hiroshi Igarashi told analysts: "We hope that there will be a recovery from the second half of next year. But having said that, for some tech companies in the second half of this year, there are signs of recovery of advertising spend. Therefore, this could stimulate the overall sector to lead to momentum in advertising expenditure. We hope that will be the case."

Elsewhere, US giant Interpublic Group generated net revenue of $2.3bn (£1.9bn) in Q3, an increase of 0.6%, but an organic decrease of 0.4%, missing analysts’ forecasts in the process.

The agency, whose clients include Google and Samsung, was another victim of the tech and telecoms downturn, which particularly impacted on subsidiaries such as R/GA and Huge. It is now predicting organic growth of only 0.5-1% in Q4 but claims to be on track to achieve its margin goal for the year of 16.7%, representing expansion relative to 2022.

Interpublic chief executive Philippe Krakowsky said: “Revenue performance did not measure up to expectations yet we continued to demonstrate disciplined management of the business and to see positive contributions to growth from our media offerings, the health care sector, sports and experiential marketing, and public relations.”

Omnicom Media Group had a better Q3, posting total revenue of $3.6bn (£2.9bn), representing organic growth of 3.3%. The US company, which oversees the likes of BBDO Worldwide, DDB Worldwide, TBWA Worldwide and DAS Group, recently made its biggest-ever acquisition in the shape of digital commerce business Flywheel from Ascential for $900m (£725m).

Meanwhile, notable account wins have included the global media business of Uber and the retention of the valuable HSBC global media account.

Omnicom chairman and CEO John Wren said: “We are pleased with our strong organic revenue growth of 3.3%, with notable performances in our advertising and media, precision marketing, and healthcare disciplines. Our year-to-date organic growth of 4% remains in line with our full-year expectations, which reflects the resiliency of our business even in periods of economic uncertainty.”

However, France-based Publicis Group continues to outperform its rivals, with revenue growing by 5.3% in organic terms to €3.2bn (£2.8bn) in Q3, ahead of forecasts. In Europe alone, the growth was an impressive 10.7%. As a result, and in spite of international "economic and social tensions", the group is now expecting overall organic revenue growth of 5.5-6% for 2023, up from a previous forecast of 5%, and an increased operating margin of 18%.

Media was particularly strong in the most recent quarter, with “high-single digit” growth, and prominent account wins in this area have included Pfizer, LVMH and Kimberley-Clark in the US.

Publicis chief executive Arthur Sadoun said: “Today we have a differentiated go-to-market proposition that allows us to gain market share; a uniquely balanced revenue mix that makes us more resilient to business cycles; and a platform organisation that enables us to post industry-high financial ratios.”

Omnicom Flywheel

By Simon Ward – Insights Editor

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